If you don’t have comprehensive insurance, it’s time to get one. This is especially true for high net worth individuals, wealthy families and heirs.
That’s because comprehensive insurance can provide additional liability protection beyond your current coverage. And as your net worth grows, creditors and predators are more likely to chase your assets.
Unfortunately, the wealthy are largely underinsured, despite being attractive targets for lawsuits. Among those with assets of at least $5 million, One in five does not have a comprehensive policy, according to an ACE Private Risk Services report. Of those who do, nearly 25% report having coverage below their net worth.
If you don’t have comprehensive insurance or aren’t sure if your coverage is full, here’s a look at what it covers, how it works, and when to buy it.
What is comprehensive insurance?
Comprehensive insurance is liability insurance that provides protection beyond current coverage. It becomes more valuable the richer you are, as you are more likely to be the target of expensive lawsuits.
Your homeowner’s insurance policy will provide liability coverage up to a certain amount. However, comprehensive insurance expands that coverage to much higher limits.
Let’s say a visitor has injured themselves on your property, for example, and is suing you for an amount that exceeds your homeowner’s liability coverage. Comprehensive insurance will then protect your entire personal assets, assuming you are fully insured.
what it covers
Comprehensive insurance covers you and your family against liability claims that exceed the limits of your other insurance policies. This generally includes:
- injuries to others.
- Damage to property owned by other people.
- Some lawsuits related to libel, defamation and slander.
- Personal liability cases.
For example, let’s say you’re hosting a party at your house. One of your guests accidentally falls down the stairs and gets hurt, so they sues you to cover their medical bills. Once you exhaust your homeowner’s liability policy, your comprehensive insurance begins to cover the rest.
Alternatively, imagine your teen is at fault in a car accident that resulted in a five-car pileup. Some other drivers suffer serious injuries, resulting in higher medical costs and lost wages. If your car insurance isn’t enough to cover the extent of the damage, your umbrella policy will cover the extra amounts up to your policy limit.
Comprehensive coverage often applies anywhere in the world. In some cases, it may extend to certain rental items such as boats, RVs, or cars.
What it does not cover
There are certain things that comprehensive insurance will not cover. Examples:
- intentional acts. If you intentionally cause harm, injury, or injury to another person or their property, comprehensive insurance will not cover you.
- business losses. Comprehensive coverage does not extend to your business, even if you run it from home.
- Your injuries or damage to your property. While comprehensive insurance covers injuries to others and damages to property of others if you are responsible, it generally does not cover your own injuries and property damages.
How it works?
Once you have purchased comprehensive insurance, your protection is in place. If you are involved in an accident or lawsuit and find your liability, your umbrella policy will cover you on top of your current liability coverage.
Consider the following worst-case scenario:
You turn on a stop sign, crash into another car and collect it. In addition, some passengers were injured as a result.
The other car has $50,000 in damages, and the medical bills are $400,000. Meanwhile, the driver of the other car is a cardiologist and will not be able to work for four months due to a broken hand. It’s charging you $300,000 in lost profits.
In total, you are responsible for $750,000. Unfortunately, your car insurance only covers up to $250,000. With adequate coverage, your canopy policy will cover an additional $500,000. Otherwise, you will be responsible for paying the difference.
When are you thinking of buying?
In general, you should consider purchasing comprehensive insurance when your assets exceed your current liability coverage. For most people, this happens when their personal assets exceed approximately $250,000 – the average liability limit for auto and home insurance.
Your tolerance for personal risk and exposure to risk may also determine whether you need comprehensive coverage. For example, if you want to host and entertain guests, you are at greater risk of someone getting injured in your home, which could lead to a costly lawsuit. Plus, if you have teenage drivers, comprehensive insurance can help protect your nest egg in the event of an accident.
You may also want to consider purchasing an umbrella policy if:
- You coach youth sports,
- You are a real estate owner or a public figure,
- You serve on the board of a nonprofit organization, and/or
- You own property, pools, trampolines, guns, or dogs.
What is the price?
according to Insurance Information InstituteThe cost of coverage is approximately $150 to $300 per year for every $1 million in coverage.
Most insurance providers will require you to get the maximum coverage amounts on your car and homeowner’s policies before they will allow you to purchase comprehensive coverage. Depending on your current coverage, this may increase your current insurance rates, and thus increase the overall cost of adding comprehensive coverage.
How much do you want?
Policies are typically sold in increments of $1 million, and coverage limits start at $1 million. While every situation is unique and coverage needs will vary, a good rule of thumb is to purchase comprehensive insurance that is enough to cover your current assets less than your current liability coverage.
Brian Littlejohn, MBA, CFP®, CFA is the founder of Sherwood Wealth Management, a registered, independent investment advisory firm. He lives in Woody Creek and works with clients in Roaring Fork Valley and beyond.
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