Managing Liability Risks - Get an Umbrella

Most individuals are covered for personal liability under their homeowners and automobile policies. There are limits, however, to the amount of protection these primary policies provide. Since these limits are lower than a typical client's wealth, they may well be exposing their assets (or future income) to risk of loss due to a lawsuit.umbrella
Naturally, your personal exposure is highly uncertain and depends on many factors, some of which include:
  • the risks you face (what activities you engage in)
  • your ability to pay - which is driven by your wealth (relative to the liability claim)
  • how your assets are titled (joint, individual, type of trust)
  • who causes the claim (your child, you, or your spouse)
  • laws of your state
  • the aggressiveness of the plaintiff and their attorney
  • sentiment of the jury
  • facts of the case
  • the nature of your assets (qualified plan, IRA, or individually owned asset)
Umbrella Liability Coverage as a Simple, Low-Cost, 1st Step Practical Solution
With all of these uncertainties and your potential exposure, Umbrella Liability Coverage is one simple way to provide the coverage you might need (beyond the limits provided under your homeowners and automobile policies) in order to protect your assets and future income. If there appears to be more you should do to limit your risks (re-titling assets, purchasing business liability insurance, etc.), this should be discussed with an attorney.
Umbrella Liability Insurance as a Form of Ransom Protection
The plaintiff's attorney understands that time is money and really wants to settle cases as quickly as possible because they only get paid a percentage (~33%) of the final case amount.  If they settle, it will be quicker, incur limited expense to try the case, and they will not worry about having the jury come back with a bad verdict, unfavorable negligence ruling, or a small payout.
So the plaintiff's attorney will look at the case, determine the potential payout, and look at the insurance coverage first and foremost.  If you are a high net worth client and have the appropriate coverage (considering your net worth/income), then they will just look to have the policy pay.  However, if you are wealthy and have limited coverage, and the case is of sufficient value, the plaintiff will not only go for the policy (if any) but ALSO look at personal assets/income. In that case, they will take the risk of going to a jury to get at your personal assets.  Juries don't have much of an issue sticking it to the wealthy.
So the moral of the story is to have enough liability insurance to incentivize the plaintiff's attorney to settle with the insurance company and not put any of your personal assets at risk. 
How much Umbrella Liability Insurance should you have?
  • For most clients, we recommend a minimum of $1,000,000 in umbrella liability coverage. However, your total umbrella liability protection should be equal to the higher of the following:
    • $1,000,000
  • The total of the following:
    • Your Net Worth (e.g., $1,500,000) , PLUS
    • 2 Years Income (e.g., $250,000/yr)
    • ≈ $2,000,000
In this example, $2 million is the higher amount. However, have your agent also consider the following: 
  • Underlying liability coverage requirements. Most umbrella liability policies require certain minimum underlying coverage from your homeowners and automobile insurance policies. Confirm with your agent that you have the required amount of underlying liability coverage required by your umbrella policy for your home, cars, and other insurable property.
  • Extension of coverage. Your umbrella policy must specifically state the insured interests covered. Confirm with your agent that your umbrella policy extends coverage to all of your real estate and cars.

With all of these uncertainties, purchasing an Umbrella Liability Policy would be a simple, sensible, low cost (~ $200-$400/yr.) way to provide the protection you may need.

Do the Opposite!


Jump to 1:45 seconds once video begins.....enjoy!


Rising markets have two very negative and interconnected effects. First, a rising market facilitates unrealistic hopes and high expectations about future stock returns. Second, a rising stock market actually lowers the future expected returns. This is because (to some extent) these recent returns are the result of expectations of future growth which drives up prices. Therefore, higher prices today reflect borrowing of returns from the future.


Yet what do people do when markets rise? Investors buy; and that act of buying results in locking in poor future returns. In other words when markets rise, "curb your enthusiasm", and when they fall, "do the opposite" of what everyone else is doing and buy!
The most comfortable investment advice will always be short-term oriented. "Go to cash". "Get out now, until things look better". "Everyone is making money....I better get in now". Uncomfortable advice (which is the opposite of what you want to do) is typically long-term oriented, yet best for your financial future. "Emerging markets have been hammered and are on sale". "I better take some profit by rebalancing my portfolio". 
Warrren Buffett has used an analogy of two business partners where one is highly emotional and the other is unemotional. The business' chief competitor is always trying to buy their business for the fair price of $10/share. When the partners' business gets a huge order from Walmart, the emotional partner wants to buy out the unemotional partner for $15/share. Then, when the order gets cut the next week, he fears he will lose everything and is willing to sell for $5/share. If the unemotional partner remains calm, he simply waits for the emotional partner to become fearful so he can buy his shares for $5 each, then sells them to him for $15 each when he becomes euphoric. This is what contrarian investors do. They do the opposite of the emotional partner. They simply sit back and wait for the market to price stocks for less than they are worth (in the long run) so that they can buy and lock in higher future returns.
In other words, instead of following your emotional instincts, which are wrong,do the opposite! While our instincts are there to help us in time of danger (such as an attack by a lion), our instincts betray us when it comes to investing.
Let's take a look at what our instincts can do to our future returns.
Future stock returns are driven in large part by the prices at which you buy today. If you buy when prices are emotionally high (think tech bubble), you are locking in poor 10-year future returns. If you buy when prices are emotionally low (think the financial crisis), you are likely locking in good 10-year future returns. Investing is not about winning today, this month, or this year. Investing is about earning the LONG-TERM returns you deserve given the risk you have taken. When markets are cheap, they give us great future returns. But the only way to capture these returns is by doing the opposite of your instincts.
If you followed your instincts and invested at the peak of the tech bubble (in the S&P 500), your 10-year returns were -3% annualized. If you followed your instincts and bailed out of stocks in the midst of the 2008 financial crisis, you would have missed out on to-date annualized returns of 13.83%.
We know that investors' instincts are wrong because studies show they move into top performing funds/markets after most of the good returns have been realized. These investors then bail out of the funds/markets after most of the losses have been incurred. These studies generally find that investors earn 30%-50% less than the investments themselves due to bad instinctive behavior.
The problem is that you have to have the guts to do the opposite. In the video, think of how George Costanza drummed up the nerve to approach the attractive woman in the coffee shop. He had the guts to do the opposite and it paid off!
If it feels like a good and comfortable time to buy stocks, you are going to pay a premium, and will likely get poor long-term returns. When things are unpleasant in the world and people are scared, then markets are priced to give you very good future returns. Do you have the guts to do the opposite, buying when others (and you) are fearful and selling when others (and you) are euphoric? 

As Jerry famously said, "If every instinct you have is wrong...then doing the opposite must be right!"



Layering Life Insurance

term layersd

There are two basic categories of life insurance: term and various forms of cash value life insurance. Today, I am going to talk about term life insurance and ways to use it more creatively to not only obtain a more appropriate amount of long-term protection, but also to save money.

Term life insurance is simple. You pay a fixed annual premium in return for a promised amount of protection from the life insurance company during the term of the policy. The face value of the policy is paid to the named beneficiaries only if the insured person dies during the specified period. So, term life insurance is similar to homeowners insurance in that if nothing happens (during the term), you continue to pay the premium, and if something happens, the insurance company pays the claim. Term life insurance policies are generally quite affordable because most people buy and hold them during periods of youth (say under age 60). Therefore, since the risks are lower, the costs are lower.

Naturally, if you are 30 years old and buy a $1million 5-year term life insurance policy, the annual premium will be lower than if you were to buy a $1 million 10-year term life insurance policy since younger ages are covered during the period.

Another important aspect about life insurance need is that it declines as you age. This makes intuitive sense because insurance is designed to provide instant wealth needed to replace the lost future income, or to cover future expenses that the insured’s income won’t be able to cover. The younger you are, the more insurance you would need to replace future lost income. However, as you age and begin to build wealth, the less need there is for life insurance.


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