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How to protect your hard-earned assets from litigation

Financial planning is not only about accumulating wealth but also protecting it. There are three ways that many people — other than you, that is — believe they can get rich quick: inheritance, hitting the lottery and litigation.

That neighbor of yours who comes to your barbecue, has too many cocktails and then falls on your driveway? He could sue you. Have a teenage driver or a pool? Many accidents involving either can happen, after which someone may try to benefit off your hard-earned savings. Is everyone out to get you? Of course not. But you need to protect yourself.

Here's the good news: There is a cheap solution that can offer you big-time protection. It's called personal umbrella liability insurance.

Umbrellas protection
Thomas Peter | Reuters

Personal umbrella liability insurance, or umbrella insurance, kicks in when you reach the underlying liability limits on your homeowners, condo, rent or auto policies. It can even cover you for such things as libel and slander. In today's extremely litigious society, an umbrella liability policy is a must-have for anyone holding $250,000 or more in assets.

Let's start with some important information that underlies this type of insurance:

  • Personal injury liability settlements and awards reach $1 million or more in 13 percent of cases.
  • Roughly 20 percent of families worth more than $5 million do not have umbrella policies.
  • Approximately $380 annually can provide protection for $1 million to $2 million.
  • Liability through auto and home policies often fall below $500,000.

There are minimum liability limits that one must have on property and casualty insurance to get umbrella policies.

"Make sure that you aren't opening yourself up to the risk of someone using you as their get-rich-quick scheme. Do not ignore how important it is to protect the assets you've worked so hard to accumulate."

As an example, say you have a trampoline in the backyard that your kids and their friends often play on together. One day Timmy from across the street falls off the trampoline and breaks both of his legs. Timmy's dad is a well-known personal injury attorney and decides to sue you. Your homeowners policy has a liability coverage limit of $400,000.

Timmy's dad sues you for $750,000. If he wins the case, you will need to come up with $350,000. However, if you have an umbrella policy for $1 million, that policy will cover the rest of the lawsuit settlement and you won't need to deplete your savings.

For a couple hundred bucks a year, it is a must-have for responsible families.

Umbrella policies provide coverage for personal injury or property damage, which may be caused by you [or] your family or by potential hazards on your property for which you are liable.

This includes attractive nuisances, such as trampolines and swimming pools. Personal umbrella liability insurance also features coverage for incidents that occur away from your home — for example, if your dog bites a neighbor.

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Umbrella policies also offer extra protection for your vehicles beyond your auto insurance policy. And they cover slander, libel, wrongful eviction or false arrest. Lastly, it covers lawyer fees should you need to defend yourself.

For a few hundred dollars a year, you can protect your family — and your future nest egg. If you have substantial assets or own a pool, a trampoline or jet skis, or if you have teenage drivers, etc., make sure that you aren't opening yourself up to the risk of someone using you as their get-rich-quick scheme. Do not ignore how important it is to protect the assets you've worked so hard to accumulate.

(Editor's note: This guest column originally appeared on Investopedia.)

— By Nick Vail, financial advisor at Integrity Wealth Advisors