By Rich Best
Business owners often view their business as their most valuable asset, and, for the successful ones, it usually is, which is why many business owners take specific steps to protect it from liabilities. However, over the course of building a successful business, business owners can also accumulate substantial personal assets that are often left unprotected.
While there are several strategies that can be employed to shield personal assets from business liability claims, many business owners are still vulnerable to a direct assault on their personal assets. For instance, establishing a Limited Liability Company (LLC) is a popular strategy for separating business assets from personal assets and liabilities. However, an LLC will only protect a business owner’s personal assets in the case of a business liability claim. If the business owner incurs a personal liability claim, the LLC provides zero protection.
Successful business owners, like high-profile executives, entertainers, and professionals, are more likely to become targets for people who understand the “deep pockets” nature of personal liability claims. Most people are just a banana peel slip away from losing their assets to a liability claim. However, the more successful or high profile you are, the more the risk exposures can mount up and the size of the claims increase. In some cases, claimants have successfully gone after both the personal and business assets of business owners.
Business owners have a choice in how they can protect their personal assets from liability claims – they can either “lawyer up” or they can purchase sufficient personal umbrella liability insurance. One can cost tens of thousands of dollars, while the other just several hundred dollars.
Don’t “Lawyer up” – “Layer up” on Personal Umbrella Liability Coverage
Regardless of the legal protections business owners have, the foundation of a risk management plan should be laid with sufficient personal umbrella liability protection. What’s sufficient? Many risk management specialists recommend buying as much personal umbrella liability insurance as you can get; but it should at least be sufficient to cover the total value of your personal assets, including the value of your home, personal property and non-qualified investments. And, as your personal wealth increases, additional coverage should be layered on abundantly.
Relative to its capacity to protect your financial life, personal umbrella liability insurance is the most cost-effective insurance you can buy. $1 million of coverage can be purchased for as little as $300 per year. For an additional $75 or $85 you can add $1 million dollar increments to your coverage. The best part is that, when you are subject to a claim, no matter its size, the claimants will virtually ignore you and direct their attention to your insurance company, which will litigate the claim on your behalf.
There’s just no way around it. People who do well in life are increasingly targeted by those who seek to redistribute their wealth. Business owners have much more at stake than most people because they have two sets of assets to protect. Nothing short of a comprehensive risk management plan anchored by ample personal liability insurance and business liability insurance will provide the protection they need in today’s highly litigious society.
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, director of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank.