Many of my clients who are retired tell me that they want to simplify things. Their children have grown; their careers have wound down. Now that they’re living off retirement savings, many start to look for expenses that can be cut back.
Since they have a fair amount of life savings and there are no more dependents, life insurance may not be as important as it once was. The thousands of dollars of annual premium payments may no longer be necessary or in the budget, so policies might be terminated or cashed in.
Professional and trade memberships aren’t useful anymore, so they’re discontinued. Business lunches aren’t part of the daily routine. The country club membership up north isn’t used much anymore, so it’s discontinued in favor of the golf membership here in Florida.
Cars might be leased instead of bought. Eating out at restaurants might be curtailed.
Some money magazines even suggest cutting back on your homeowner’s liability, automobile and umbrella liability policies. But that would be a big mistake.
The answer is simple. Because if you get into a car accident that is your fault, you might find yourself responsible for damages beyond the liability protection that you’ve cut back to under your car insurance policy. If the injured party sues you after the accident, and a judgment is entered against you, then the plaintiff could go after your life savings to make up the difference between what your automobile liability policy pays and the amount of the judgment.
Assume, for example, a terrible scenario where you are involved in an accident that severely injures someone – crippling them for life. The liability that you may be held responsible for could certainly be more than a $250,000 limit one finds on many automobile insurance policies. Medical costs, lost wages, pain and suffering, the loss of the injured person’s ability to enjoy life among all of the other damages could be in the millions.
The same holds true for your homeowner’s liability insurance. If someone is injured on your property and you are deemed to have been somehow negligent, then you could find yourself at the wrong end of a judgment and have to pay damages over the amount that your homeowner’s liability insurance policy covers. A pool, for example, is considered under the law to be an “attractive nuisance”. If a neighborhood toddler should wander onto your property and drown in the pool, you may be held negligently liable even though the child was not invited onto your property.
So even if you are retired, you remain subject to many of the same risks and liabilities that everyone else must guard against. Nevertheless, I’ve heard all sorts of excuses why retirees shouldn’t purchase maximum liability protection. But to counter those all you have to do is turn on the television. How many personal injury attorney ads do you see? And each one essentially asks the viewer, “isn’t there anyone we can sue for you?”
Liability insurance is so important not only for the amount of protection that it offers, but because it also pays for attorney fees to defend you in case you are simply accused of negligence. Even if it turns out that you are not negligent the costs of defending a claim might take a big chunk out of your life savings if you don’t have a policy that also serves to pay these expenses.
Then there’s the mistake that some make with regard to their estate planning. Some wrongly assume that if they have placed all of their assets inside of a revocable living trust, then they’ve protected the trust assets from liability. This isn’t the case. In almost all revocable trusts – the trust and its assets are legally yours – which means that you can do anything that you want with your trust assets. Because you have that much dominion and control over the assets, your judgment creditors can demand restitution from your trust assets.
So what should you do? The best practice is to increase the liability coverage on your home and car and then purchase, in addition to those policies, an “umbrella” policy. The “umbrella” policy covers liability up to its stated policy amount over and above the home and car policies.
A $2 million umbrella policy might cost a couple thousand dollars annually (or perhaps even less) which is a great investment to protect you and your hard earned savings from the claims of a judgment creditor. Not only will this provide much needed coverage, it should also give you peace of mind.
If you value what you’ve worked so hard to accumulate over the course of your working career, consider making a visit to your liability insurance carrier to review whether your coverage adequately protects you.
©2019 Craig R. Hersch. Originally published in the Sanibel Island Sun.