One way to keep clients' portfolios sound and healthy is by checking their insurance coverage, and making sure that they're protected against catastrophic lawsuits or liabilities that could end up leaving them penniless. Even such mundane areas as car insurance can leave major holes in coverage, if not periodically reviewed.
Yet if you have same-sex or unmarried couples as clients, there's a chance that, even if you review their policies regularly, you may be costing them money and protection. According to Tim Schaefer, of Schaefer Insurance Services in Germantown, Maryland, few planners review clients' policies in light of a "spousal situation." This can mean that clients are overpaying to have dual car insurance policies that nonetheless can leave one another uncovered if they drive each other's cars; their homeowner's insurance may not cover damage to one partner's furnishings; or umbrella policies may have holes in coverage large enough to drive a Hummer through.
Joshua Hatfield Smith, a planner with SPC Financial Services in Rockville, Maryland, addressed these issues recently at the PridePlanners Conference in Washington, and actively advocates the review of client insurance coverage with an eye toward risk management for unmarried couples. There are many different ways, he says, that risk can manifest itself in a couple's coverage, starting with car insurance. To begin with, having two policies costs more. But it goes beyond that.
For instance, in the case of a couple with a significant age difference, "what people will do," he says, "is list the older as the insured driver because it's cheaper. The second person is then a listed driver." This can cause problems even when renting a car, he points out, because "if you're a listed driver, you're listed to drive the primary automobile, but not beyond that." Taking it a step further, he adds that if they have two separate policies, they may not "have the right types or enough coverage."
Schaefer agrees. "There are liability issues if two people have two policies," he says, "particularly if you have the same insurance company with two policies and two vehicles and have an accident." If Person A has an accident in Person B's car, and the policy for Person B pays the claim for Person A's accident, "then how do they increase the policy for the person at fault when it's the other person's policy paying the claim?" In the past, he adds, insurance companies "never looked at it as a spousal situation," despite the fact that unless someone exclusively drives her own car, "whoever parks in the driveway first takes that car" and people end up driving each other's cars all the time.
Another issue, of course, concerns life insurance and the tax ramifications. Hatfield Smith points out that unmarried couples can have unique problems. Many people, he points out, get group term life insurance at work, but the surviving partner may not get the proceeds tax free; instead, the whole value may be "added back into the taxable estate." A way around this is for the advisor to recommend an absolute assignment of benefits, or an irrevocable beneficiary designation. Advisors should also look at policy ownership and possibly also trusts or restricted beneficiary designations.
Unmarried partners must have an "insurable interest," he says, for insurance companies to recognize the relationship. With property, it's not so much of an issue, since it can be looked at as a business relationship if both names are on the deed. The insurance company will view it as the partners buying a piece of property for investment, not as a family unit.
Marlene Y. Satter is a freelance business writer based in New Jersey. She can be reached at firstname.lastname@example.org.