Cheap Insurance that is Really Worth It - Umbrella Policies (DailyFinance.com)

Umbrella Insurance Policies: Why You Might Want That Extra Protection

by Michele Lerner Jul 5th 2013 5:00AM

Dan Ramsey, an independent insurance agent with Brandt, Ramsey and Associates in Alexandria, Va., says the most memorable claim on an umbrella insurance policy he was involved in was made by a small business owner who had purchased a $2 million policy.

"After attending a Christmas party, my client got involved in a fatal auto accident where the other driver was killed," says Ramsey. "My client was given a breathalyzer on the scene and exceeded the legal alcohol limit. He was sued for something like $1.25 million by the claimant's family and was legally liable for the damages, which were paid by the umbrella policy. The client was otherwise an upstanding citizen with no past history of these kinds of events."

Protection Beyond the Usual

While its easy to assume that only a rich person could need that much insurance coverage, you'd be surprised at how important an umbrella policy can be for an average member of the middle class. For example, if you have a car insurance policy with liability coverage, you may think you have enough protection in case of an accident. But a lawsuit like the one described above could quickly exceed the $100,000 or $300,000 insurance payout.

An umbrella policy provides an additional layer of insurance, typically $1 million or $2 million, above your auto insurance and your home insurance liability coverage. Consider the following scenarios where an umbrella policy would have been helpful:

• A $1.2 million settlement in New Jersey where an underinsured driver hit a policeman who was completing paperwork at a traffic stop. The driver had to pay legal fees for his defense as well as the settlement.
• $1.76 million was awarded to a mother and her 8-year-old child in Florida after a wave runner accident injured both of them. The mother needed corrective surgery after the initial injuries were treated.

Although 85 percent of umbrella insurance claims are related to car accidents, the policies offer protection against accidents that occur at your home, too -- for example, in case someone falls down your stairs and sues you, or your balcony collapses during a party. Many people opt for an umbrella policy because they have a pool or a trampoline on their property and fear the consequences of a child getting injured.

Then there's coverage for incidents you may not have even considered, such as accidents while you're driving in another country, or while you're on vacation and have rented a boat or Jet Ski.

Another important feature of these policies is protection in a lawsuit against you for slander or defamation of character, or for decisions you might have made as a volunteer member of a nonprofit board. If you regularly blog about controversial topics or rant on Facebook, an umbrella policy just might be a good idea to protect your assets from a litigious individual who believes you've damaged their reputation.

That may sound unlikely, but it's not unheard of. In 2009, a high school student sued four other students and their families for $3 million because of derogatory comments the other students made about her on Facebook. While the lawsuit was eventually dismissed, reaching that verdict took two years and required considerable expenditures by the families. An umbrella policy can cover expenses related to such lawsuits.

You Have More to Protect Than You Think

You may be assuming that if you don't have $1 million to lose, you don't need an umbrella policy. Unfortunately, if you are sued by someone who falls down the stairs at your home or whom you injure in a car accident, you can be sued for more than just what you have in the bank.

Your retirement funds, investments, savings and even your future earnings are at risk if a judge allows someone to garnish your wages to pay off a settlement. In some states, the equity in your home can be part of the judgment and you would be forced to sell your home to pay someone who sues you.

If you own a house and have a retirement account or other investments, an umbrella policy of $1 million or more should be part of your financial plan. Most insurance companies offer these plans in increments up to $5 million, and some go up to $10 million.

Insurance companies require specific levels of liability coverage on your auto and home insurance policies before they will approve an umbrella policy, typically:

• $300,000 per occurrence for personal liability, bodily injury, and property damage liability on your homeowners insurance policy
• $250,000 per person for bodily injury and $500,000 per accident on your car insurance policy
• $100,000 per accident for property damage on your car insurance policy

The average cost for a $1 million policy is $200 annually -- which you might find a relatively low price for the peace of mind and security it offers.

Michele Lerner is a contributing writer for The Motley Fool.

Shielding Your Assets from Creditors (NY Times)

April 2, 2009
Protecting Retirement Accounts From Creditors
By DEBORAH L. JACOBS

RETIREMENT accounts remain among many people’s most valuable assets, even at today’s depressed values. That means you need to protect them from creditors, a category that can include former spouses or people who have won lawsuits against you.
The asset protection strategies available to you depend on the type of account you have, where you live and whether you inherited the assets or amassed the funds yourself, among other factors.

You can start by understanding the exemptions in federal or state laws that may protect your retirement accounts. The good news is that most employer-sponsored plans, including 401(k)’s, are covered by the Employee Retirement Income Security Act, known as Erisa, and are completely protected from creditors — except when those creditors are former spouses or the I.R.S., said D. James Gehring, a lawyer with Seyfarth Shaw in Chicago.

The bad news is that individual retirement accounts are not covered by Erisa. If you have filed for bankruptcy, federal law protects up to $1 million in an I.R.A. that you contributed to directly, and protects the entire account balance if the money was rolled over into an I.R.A. from a company plan, said Jonathan E. Gopman, a lawyer with Cummings & Lockwood in Naples, Fla. So it’s important to keep careful records tracing the funds.

For anything short of bankruptcy, state law determines whether I.R.A.’s (including Roth I.R.A.’s) are shielded from creditors’ claims, Mr. Gopman said.
Most states, including New York, New Jersey and Connecticut, exempt 100 percent of the assets while they are in the account. But laws in other states vary widely on whether withdrawals are covered, whether protections extend to inheritors as well as the initial owner and whether former spouses can reach the funds.

Some states limit how much is exempt — Nevada caps it at $500,000 — while California and other states exempt only what is “reasonably necessary” to support the owner and her dependents. Such wording is, inevitably, an invitation to lawsuits.

In deciding whether, under California law, an I.R.A. can be attached by creditors, courts look at the owner’s age, earning ability and other assets, said Alex M. Brucker, a lawyer with Brucker Morra in Los Angeles. If someone had a $1 million company plan that was fully protected from creditors, a court might find that a $500,000 I.R.A. was more than what was reasonably necessary and thus should not receive the same protection, he said. And in some states, an innocent misstep could leave retirement assets vulnerable to creditors’ claims.

If, for example, you have been laid off or are retiring, rolling over assets from a qualified plan, like a 401(k), into an I.R.A. has estate-planning benefits. However, if you live in or are moving to a state where I.R.A.’s are not protected from creditors, you would be better off leaving the assets in the company plan, Mr. Gehring said. So you should consult a lawyer familiar with the rules of the state where you plan to live.

If you have at least $5,000 in the plan, the company must allow you to leave the money there until you are 65, but it is not required to let you take partial withdrawals or borrow against the account, Mr. Gehring said. “If the company goes bankrupt, your money is perfectly safe,” he said, because the business must keep retirement funds in a separate trust where its own creditors can’t reach them.

If you are leaving a company that has a cash-balance pension plan, you should resist the temptation to withdraw the money in a lump sum, Mr. Gehring said, unless you need the money to live on. Upon withdrawal, the money would be exposed to creditors’ claims, and you would have to pay income tax on the full amount.

As with money coming out of a 401(k), you can defer the income tax until you make withdrawals by rolling over the money into an I.R.A., but, again, your protection from creditors will depend on the state where you live.

For example, you might be returning to work after a period of unemployment and have rolled over an I.R.A. when you left your previous employer. Most companies will allow you to transfer that money directly into their plans as you come on board, Mr. Gehring said. You might want to do that either for asset protection or to take advantage of investment offerings. This strategy also works for people who are starting their own businesses and setting up 401(k)’s, Mr. Gopman said.

Note, however, that under federal law an I.R.A. that has been converted to a Roth I.R.A. cannot be rolled back into a company plan, Mr. Brucker said.

Be aware that state and federal laws against fraudulent conveyance prohibit transfers intended to hinder, delay or defraud creditors.
As a rule, such transfers must be in place before there is even a hint of potential trouble, said Gideon Rothschild, a lawyer with Moses & Singer in New York, to be sure they are protected.

If you plan to leave at least some of your I.R.A. to your family, remember that the assets may not be protected from your beneficiaries’ creditors, depending on where the beneficiaries live.

But you can shield the assets by leaving an I.R.A. to a trust, Mr. Rothschild said. To do that, you must name the trust (which in turn benefits certain people) on the beneficiary designation form on file with the financial institution that holds your retirement account. You should be sure not to withdraw the money from the account and put it in a trust; that would make the money subject to income tax.

protecting your assets from creditors

FLORIDA ASSET PROTECTION - Statutory Protection

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Much of the asset protection benefits for Florida residents is contained within the Florida Statutes. These exemptions are available to people who permanently reside in Florida.

Salary or Wages

Wages, earnings or compensation of the head of household which are due for personal labor or services, including wages deposited into a bank account (provided they are traceable and identified as such) are exempt from garnishment under Section 222.11 of the Florida Statutes.

Life Insurance Policies and Annuity Contracts

Cash value in insurance and all annuities are protected from creditors’ claims by Florida Statutes. While a Florida resident is alive, the cash value of any insurance policy he owns on his life or on other Florida residents is exempt from creditors claims. The protection afforded to the cash surrender value of a life insurance policy is only for the benefit of the owner/insured. Death benefits are not protected from the creditors of the policy beneficiary.

Perhaps the most popular financial product for asset protection planning is annuities. Florida courts have liberally construed this statutory exemption to include the broadest range of annuity contracts and arrangements. Private annuities between family members are entitled to the exemption as are the proceeds of personal injury settlements structured as an annuity. Additional protection is available by purchasing international annuities. Particularly, Switzerland and Liechtenstein have laws which guard annuities from attack by creditors for outside countries including the United States

The protection of cash value insurance and annuities extends to proceeds withdrawn by the owner. Florida courts have held that funds withdrawn from a cash value insurance policy and annuity payments received by a debtor remain protected as long as the funds can be accurately traced to a bank account readily accessible to the debtor.

Pension and Profit Sharing Plans, IRAs

To prepare for retirement and to defer income taxation more and more individuals direct significant wealth into IRA accounts and other tax qualified retirement plans. In Florida, retirement money not only defers income taxation, but is protected from creditors as well. Florida Statute 222.21(2)(a) provides that any money or other assets payable to participant or beneficiary in a qualified retirement or profit sharing plan is exempt from all claims from creditors of the beneficiary or participant. Florida Statutes specifically include under the protection umbrella pension plans designated for teachers, county officers and employees, state officers and employees, police officers, and firefighters. Disability Income

Disability income benefits under any disability insurance policy are exempt from legal process in Florida.

Automobile Exemption

Florida residents may protect up to $1,000 of equity in an automobile. The fact that a debtor need his automobile to go to work does not protect the vehicle from creditors to the extent that the debtor's equity (value less loan amount) exceeds $1,000.

Prepaid College Plans

Florida prepaid college tuition plans and Florida's 529 college saving plan are protected from creditors by Florida Statute 222.22.

Miscellaneous Exemptions

Florida Statutes include several narrow asset exemptions such as professionallly prescribed health aids, qualified prepaid college tuition, hurricane savings accounts, medical savings accounts, and unemployment benefits.