If you look at your current auto insurance policy, you might see liability limits of $250,000 per person and $500,000 per accident. To most people, a quarter of a million dollars sounds like a massive amount of coverage. You might assume you're perfectly safe.
But there is a specific legal precedent in Wisconsin that changes the math completely. It's called the Collateral Source Rule, and it is a primary reason why a standard auto policy is often not enough to protect a family's financial future.
The Billed vs. Paid Reality
Imagine you cause a severe accident on I-94, and the other driver requires extensive surgery, a hospital stay, and physical therapy. The hospital generates a total bill of $150,000.
Normally, health insurance steps in. The injured driver's health insurance company negotiates with the hospital and settles the entire claim for a contracted rate of, say, $50,000.
Logically, you would think that if you are sued for causing the accident, your auto insurance would only have to pay out the $50,000 that was actually spent, right?
Not necessarily.
In this scenario, even though the hospital accepted $50,000, you could still be exposed to claims based on the higher billed amount. That means your liability exposure may be much higher than expected, especially when combined with claims for lost wages, pain and suffering, and other damages, causing that $250,000 auto limit to be exhausted quickly.
What Happens When the Limits Run Out?
Once your auto insurance pays out its maximum limit, the insurance company's job is done. But if a court awards the injured party more than your policy limit, you are personally responsible for the difference.
This is where an Umbrella Policy steps in. It provides an extra $1 Million to $5 Million (or more) of liability coverage that sits on top of your home and auto policies. If you don't have one, courts can pursue your personal assets to satisfy a judgment if your coverage is insufficient.
The Asset Checklist: What's at Risk?
A common misconception is that if you don't have a million dollars in the bank, you don't need a million-dollar umbrella. But courts don't just look at your checking account; they look at everything you own and everything you may earn.
Highly Exposed Assets
- Future Wages: Courts can garnish a portion of your wages (subject to federal and state limits), and judgments can remain enforceable for many years if renewed.
- Home Equity: Any equity in your home above Wisconsin's homestead exemption.
- Savings & Investments: Standard brokerage accounts, mutual funds, and checking accounts.
- Secondary Properties: Cabins, rental properties, or vacant land.
- Toys: Boats, RVs, and classic cars.
Generally Protected
- Qualified Retirement: Employer-sponsored ERISA plans like 401(k)s and 403(b)s are heavily protected.
- IRAs: Traditional and Roth IRAs are often protected from creditors under Wisconsin law, subject to certain limits and exceptions.
Note: Asset protection laws are complex. Improper handling or withdrawals can reduce or complicate the protections of these accounts.
My Job is to Guide. You Decide.
When I sit down with a new client, my job is not to blindly copy the limits from your old policy. My job is to explain the risks—like the nuances of the Collateral Source Rule and potential wage garnishment—so that you can make an educated decision about your own family's financial security.
An umbrella policy is often the most cost-effective peace of mind you can buy. Whether or not you decide to purchase one is entirely up to you. But as your advisor, I want to make sure you fully understand what is at stake before you decide.
Are your assets properly shielded?
Let's take a look at your current auto and home limits. We can review what you have built and see if an umbrella policy makes sense for your specific situation.
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