What physicians should know about umbrella insurance

Asset protection is a term that gets tossed around quite a bit when we discuss how long and difficult the journey is for doctors to establish their careers.  You always want to protect what you’ve worked hard for, right? The principles for asset protection apply not only to doctors but essentially anyone who wishes to have some sort of security for their assets. The key is to make sure you don’t over insure, but have enough to get your family by in case disaster strikes.  If you ever get to a point where you are financially secure, it is okay to reassess whether you actually still need the coverage.

Umbrella insurance can essentially be viewed as added protection onto your auto and home insurance.  For instance, if your auto insurance covers $250,000 in liability and you lose a suit for $1 million, you may be liable for the difference.  If you aren’t able to pay up, then your creditors can try to go after your savings.  Now there is a semantic argument about how unlikely it is that someone will go after your bank for that much money, but in theory, it could happen.

Why I didn’t buy umbrella insurance for many years

Umbrella insurance exists to cover what is in excess of what your existing auto and homeowners policy already covers.  So for instance, if your home is covered for up to $300,000 in damages, you would want to have an umbrella policy underwritten that begins in excess of $300,000 until the limit that you decide to purchase.  It is possible to have a gap in coverage if your policy is written incorrectly.

Most umbrella policies have a minimum coverage requirement that you have to purchase in your auto and homeowners policy.  Depending on how much your other policies cover, you may have to increase your base coverage beforehand.  As a resident, I owned a 16-year-old car that was insured for $10,000 in liabilities.  The premium each year was no more than $100!  A base umbrella policy for $1 million would likely have a premium of several hundred dollars a year but would have required a $250,000 minimum auto coverage.  To bring up my auto policy to those minimums would have raised my premiums to several thousand dollars!

So for a resident with a wildly negative net worth, limited liability, and only future earning potential on hand, I made the decision not to have umbrella coverage. Was it the right decision? Maybe, maybe not.  You will have to decide for yourself and your family.

Considerations when you purchase umbrella insurance

Umbrella insurance is likely the least expensive insurance that any doctor will buy, but that doesn’t mean that you should over insure yourself.

Thank goodness for laws and government. Some of your net worth is protected by law:

  • Employee-sponsored retirement plans that qualify under the Employee Retirement Income Security Act (ERISA) such as 401k’s and profit-sharing plans are protected from creditors.
  • Non-ERISA retirement plans such as IRAs can be protected from creditors depending on the state that you live in.
  • Cash-value life insurance plans (Gasp!)

Take the amount that you have in your 401k and IRAs, and subtract that out of your net worth.  Check to see if you live in a Homestead state that protects your primary residence from lawsuits as well.

Aspects about your home that could increase the liability (read: cost) of umbrella insurance include:

  • Home is used for commercial purposes (business).
  • Presence of swimming pool.
  • Presence of trampoline.
  • Presence of pets (Yes, Sparky can knock over that oil-filled lantern and set your entire home on fire!).

Consideration for your umbrella insurance premiums shouldn’t be a reason not to get a swimming pool or trampoline, but there are financial consequences to luxury.

“Smart Money, MD” is an ophthalmologist who blogs at the self-titled site, Smart Money MD.

Image credit: Shutterstock.com

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