Hello everybody, it's Sam from Financial Samurai. I'm currently on sabbatical, which is why I haven't been recording many episodes. But I've been spending a lot of time with my insurance company, updating my umbrella policy and my auto insurance policy and my homeowner's insurance policy. And I think all of you guys have to do the same thing as well.

We've been in a bull market, a surprising bull market that has lifted our returns in the stock market, bond market, real estate market, cryptos, whatever it is, since the beginning of 2020. And I'm assuming that most of you guys are much wealthier now, or at least have all time high net worth since the start of 2020.

As a result, we need to update our insurance policies to protect ourselves, to protect our wealth, and to protect our family members. Let's first talk about the umbrella policy, which sits on top of your auto insurance and homeowner's insurance policies. For example, let's say you get into an automobile accident and cause bodily harm to a pedestrian.

The pedestrian sees that you drive a fancy 7 Series BMW that costs $90,000 and decides to sue you for $500,000. The irony is that if you drove a beater car, the pedestrian might have only sued you for $50,000 or nothing at all. So this is an important reminder that there are some big downsides to having nice things that the public can see.

So in this situation, when he decides to sue you for $500,000, your auto insurance policy has a $300,000 liability coverage with a $1,000 deductible, for example. And let's say you have a million dollar umbrella policy with a $300,000 deductible. So if the pedestrian successfully wins the $500,000 lawsuit, your umbrella policy kicks in to cover the remaining $200,000 over your $300,000 auto insurance liability.

So why is this important? Well, it's important because let's say you spend 20 years to build a net worth of $500,000. Well, you need the auto insurance liability coverage and it's great to have that umbrella policy to protect you because you don't want to go backwards. You want to go back to zero.

The reality is accidents happen all the time, whether it is your fault or not. Just having this lawsuit bear on top of you is really, really stressful. So having this umbrella policy provides a tremendous amount of peace of mind. We always want to be going forward on our financial journey, not backwards.

So let me share more examples of why you should get an umbrella policy if you're not convinced. The first example or situation is if you have a teenager or multiple teenagers at home. An umbrella policy covers members of your household. So all the members of your household. So if you have more members of your household who are going out into society and risking doing funny things, your risk of an accident goes up.

Having teenagers, I think, is the biggest one. It puts your household at significantly higher risk of liability. Not only are they inexperienced drivers, they sometimes experiment with drugs, alcohol, and all these other things that impair their judgment. And accidents do happen. I remember when I was a teenager in high school, I tried a ton of stupid things.

I remember one time after tennis practice, there was a tennis teammate of mine and he smoked marijuana and he drove. And it was pretty dangerous because he drove right through a red light. And who knows what could have happened if there was another car. We could have t-boned the car or that car could have t-boned us.

A lot of injuries could have happened and our households could have been sued. So really, if you have a teenager driving around everywhere, you got to get an umbrella policy because your teenager could literally bankrupt you. The second example of why you need an umbrella policy is if you plan to retire early with young children.

One of the reasons why I've been saving and investing so much, especially during the pandemic since we've been locked down, is that I want to make more passive income. So if there's a lawsuit where I lose a chunk of my wealth, that means I lose a chunk of my passive income.

And what's the point of my passive income? The point of my passive income is so I can spend time with my children before they don't want to spend any time with me. I know I've got until at most 18 years old until they no longer want to hang out with me.

In reality, to the parents that I've talked to, my kids probably won't want to hang out with me after, I don't know, 13 or 14 years old. They want to hang out with their friends. Therefore, for me, having an umbrella policy is really about protecting the time I want to spend with my young children.

And so for you, you've got to translate what that money and that passive income means to you. What do you want to do with your time and your money? That is really what an umbrella policy will help protect. Another example of why you might need an umbrella policy is if you're a multiple tenant landlord.

The more properties you have, the more you run a risk of messing something up with your tenant. Who knows? Things happen all the time. You don't know exactly what is functioning in your property, even though everything could be done up to code and to permits. Maybe an electrical wire sparks fire and catches flame to the insulation and the house burns down.

You just don't really know. What you should do, obviously, is make sure that all your tenants have a renter's insurance policy and have a really, really solid lease that describes what happens in case of certain events. But at the end of the day, you just don't know. Another example of why you need an umbrella policy is if you're a small business owner who sells a physical product or if you're a doctor.

If you talk to any doctors out there, man, their liability medical malpractice insurance is a lot. It squeezes their profitability. It's one of the reasons why I think health care costs are so high. Let's say you operate a chocolate store and one of your employees has a psychotic breakdown.

He decides to beat up a customer who is extremely rude and impatient. Well, that customer, let's say he injures his neck or something, could sue you for negligence and that's where an umbrella policy would protect you. Or maybe you run a restaurant that is already struggling to survive thanks to COVID.

To boost revenue, you open an outdoor dining area where cars used to park on the street. You see that everywhere in big cities now. Less parking, but more outside areas for dining for safety. Then one unfortunate evening, a car barrels down through the outdoor dining area causing injuries to your diners.

If the diner decides to sue you, well, that's where the umbrella policy kicks in beyond your business insurance. And finally, if you're a high profile individual, let's say you're a celebrity, politician, sports star, any type of high profile individual, getting an umbrella policy is very important. Risk is a numbers game.

The more people who know you, the greater the chance that someone might sue you, whether you did something or not. You know, it's a lot of he said, he said, or he said, she said, or whatever. You just never really know. So it's another vote for stealth wealth, being modest, being kind to people, and just not getting into too many conflicts.

Now maybe after you've listened so far, you're still not convinced you need an umbrella policy. Well, that's true. Not everybody needs or wants one. If you are driving a car, you probably have auto liability insurance. Or if you own a home, you have homeowners insurance policy with liability coverage.

So if your net worth is below the liability coverage of your auto insurance policy or homeowners insurance policy, then perhaps you don't need an umbrella policy. Now let's say you drive a $40,000 Ford F-150 and you earn $70,000 a year. You're also married and have no children yet. And you've got credit card debt and you've got car loan debt.

And at age 30, your net worth is about $70,000. Well, if your auto insurance policy liability coverage is $100,000, well, you're covered in case of an accident. So you don't need an umbrella policy. But in general, you should have an umbrella policy that is equal to slightly more than your current net worth because over time, your net worth tends to grow.

Just look at your own net worth over the past six months, one year, two years, five years, 10 years. It's generally growing bit by bit as you save more and your investments do better. So you want to have that little buffer. At the same time, you don't want to have too large of an umbrella policy because too large of an umbrella policy might attract a lot more unwanted attention.

Personal injury lawyers have the easy ability to figure out what your assets are. You just go to court. They summoned you in court. They ask you what your assets are. And boom, you got to tell the truth because you're under oath. And if you have, let's say, a $500,000 net worth, but a $5 million umbrella policy equal to 10 times your net worth, well, I think the personal injury lawyer will be more motivated to say that you inflicted way more damage and suffering than reality and go after more of that liability coverage.

Besides, if you get too high of an umbrella policy, you're paying unnecessary premiums. And speaking of umbrella policy premiums, it's not that expensive, folks. I just checked with my insurance carriers and a couple more. And for my household, two driving household, it's only about $150 to $200 a year per million dollars of umbrella policy coverage.

Now, I've seen other surveys that go up to like $300 to $500 per year per million. It depends on how big your household coverage is, how many products you have with that one insurance company. So if you want to save on your umbrella policy or all your other insurance policies, you should probably bundle your auto, your personal belongings, homeowners, umbrella, and so forth, all with one carrier.

It's more efficient, first of all, and the carrier will probably give you a discount for being a multiple product customer. Now, there's something very important to consider that a Financial Samurai reader gave. He's an attorney, but he's not your attorney. So ask your attorney for professional advice. But what if there's a situation where someone hits you or kills you and they are underinsured or don't have insurance?

Then what? So the reader said, well, you should consider getting an umbrella underinsured motorist coverage, UIM. This gives you umbrella UIM protection above the regular UIM limit you have on your policy. He says normal umbrella coverage only covers the injuries of people you injure through your negligence. The more likely scenario is that you and your family are injured by someone else.

The average liability coverage that drivers have is only about $50,000 and many drive without insurance. Losing your family of three is hit by a driver with only $50,000 in coverage, killing the main breadwinner and seriously disabling the other two. In a normal scenario, you would be limited to recovering the $50,000 and whatever UIM coverage you have on your regular policy, say $300,000.

So a total recovery of $350,000 would not even begin to cover the lifetime of lost earnings for the deceased and the daily in-home nursing care for the disabled. Umbrella UIM would kick in above the $350,000 and provide your family another million or more in coverage. As an attorney, the most common scenario I see is that there is rarely enough insurance coverage to cover the losses in a serious accident.

Wow. All this time, we've been thinking about what we might do wrong to cause an accident, but we didn't think about what other people might do to us. And in this crazy big world of ours, not everybody is as responsible as us. Some just don't have insurance or some just have the state required minimum.

And let's say you make, I don't know, $200,000 a year and you're dead. What is your family going to do if the underinsured motorist pays nothing or only has $50,000 in auto liability coverage? $50,000 is not going to get your family very far at all. So I immediately, after reading this comment, called my insurance carrier and said, "Hey, do you have the Umbrella UIM that I could pay for?" And they said, "No." They said, "No, unfortunately." And you should check your own carriers and see if they have that.

So the solution I came up with, that we came up with, is to increase my auto insurance liability coverage, which also increases my uninsured bodily protection coverage. It's a one-for-one increase. So I had $300,000 and $500,000. $300,000 per person and $500,000 per accident in terms of bodily injury coverage or uninsured motor liability coverage.

So my solution was to simply raise that uninsured liability coverage from $300,000 to $500,000 to $1,000,000. So in this case, if I were to die in an accident and it was not my fault, but an uninsured or underinsured motorist killed me, then hopefully my family will get $1,000,000. So it's $1,000,000, $1,000,000, so $1,000,000 per person and $1,000,000 total for the accident.

And that's the best that my insurance carrier could do. I feel better about getting this new policy. It only costs me an extra $25 every six months. So to me, that's a no-brainer. However, unfortunately, it's not an automatic that my family will get $1,000,000. Just like with any kind of insurance policy that is at this level, it's going to require a lot more involvement with the lawyers and so forth.

But I'm hopeful that the policy will pay out and protect my family. And finally, the other solution to this type of unfortunate scenario is to get an appropriate amount of life insurance. The appropriate amount of life insurance is probably a term life insurance policy that covers all your debt and covers all your family's expenses until your kids become independent adults.

So that's about it, folks. I hope this episode has encouraged you to review your umbrella policy, auto insurance policy, homeowner's insurance policy, and any other type of insurance policy. This bull market has been a real boon for us investors. However, we need to protect our wealth and we need to protect our family.

The more money we have, the more we have to lose. And if you are a parent, it is our ultimate responsibility to protect our children and our family. Thank you very much. And if you enjoyed this episode, I'd love a positive review on wherever you listen to this podcast.

Take care, everyone. And I'll try to do more episodes. But again, I'm still on sabbatical until the end of August. And then I should have some more free time. But for now, I'm trying to enjoy life a little bit more. I went up to Sonoma to spend time with my family and it was so awesome.

Take a vacation, folks, if you can. Get out of the city. Go to a place where there's not a lot of people. I really believe your mental and physical health will improve. It'll tick upwards as it has for me. Thanks again, everyone. Take care. Take care.