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April 02, 2018 at 01:22 PM
Hard as it may be to believe, overlooking a client’s backyard trampoline could pose a serious risk to all your carefully crafted financial plans and your client’s retirement savings.
Considering the time and effort you spend speaking with clients about the risk of rising inflation and market corrections, to cite just a few financial risks, it’s important to know that some risks to your clients’ portfolios pop up in areas where you might least expect them.
One risk area that financial advisors often overlook involves liability risks. And something that you and your clients may not even think twice about — such as that backyard trampoline — could pose major financial risks.
Consider the case of a couple we’ll call Rick and Sue Smith. They have a net worth of $1.75 million — $275,000 in home equity and $1.475 million in investable accounts.
While playing on that backyard trampoline, one of their friend’s children is severely injured. The child’s parents sue Rick and Sue for $2 million in medical damages and negligence, and they collect. The Smiths have $100,000 in homeowners’ liability coverage and a $1 million umbrella policy to cover losses over the policy limit.
Because their insurance covers only $1.1 million of the $2 million in losses — not to mention hefty legal fees of $500,000 over the course of the lengthy case — the Smiths must come up with $1.4 million! If you’re assuming the couple will have to deplete their $1.475 million investment accounts, you’re right.
The solution would have been for the Smiths to have had a larger umbrella policy that also covered legal defense costs outside of the policy limit. A $5 million umbrella policy of that type would have covered the entire judgment and the Smiths’ legal bills — and left their savings, investment accounts and children’s college portfolios untouched. And while such a policy would have cost more than their original $1 million umbrella coverage, it probably would have cost just a few hundred dollars incremental annually.
