Many families and their wealth advisors use January to review their financial plans. Unfortunately, few include their personal insurance—i.e., home, auto, watercraft, valuable collections, and umbrella liability insurance—as part of the process. Most are content to let their policies continue unchanged without much thought. But just as failing to rebalance an investment portfolio can lead to unintended levels of risk, so too can neglecting to adjust an insurance program each year.
Here are four check points high-net-worth families and their advisors can use to work with an insurance agent and update their program.
Issue #1: Do you have the proper types and correct levels of liability insurance?
High-net-worth families are most likely to be underinsured for liability insurance, according to an ACE survey of 600 independent insurance advisors. While jury awards and settlements for spinal cord and brain injuries often equal $15 million to $20 million, many wealthy families carry $2 million or less in liability coverage. They would be more prudent to carry an amount at least equivalent to their net worth. Moreover, they must make sure they have the right types of liability coverage.
If the family employs household staff or if one of the family members serves on the board of a charitable organization, they may be exposed to lawsuits that would not be covered by basic liability coverage in their auto, home and umbrella policies.
Issue #2: Will your insurance cover the entire cost of rebuilding your home?
Many families think their homeowners’ policy will pay to fully rebuild their home in the event of a total covered loss. Based on a study of 2009 values by Marshall & Swift/Boeckh, a provider of building cost data and estimating technology, 64% of homes in the U.S. are estimated to be under-insured. While standard policies offered by mass-market carriers may provide a buffer of 20% to 25% above the coverage limit, it is often not enough—especially when natural disasters cause widespread damage and spike construction costs. Instead, seek policies that offer “full replacement cost” coverage. They will rebuild the home with similar quality materials and craftsmanship no matter how much it costs in relation to the coverage limit in the policy.
Issue #3: Are all valuable collections insured, and are the levels of coverage adequate?
Most wealthy families are avid collectors. But as ACE’s recent study on passionate investing found, nearly 40% fail to insure all of their collections with a valuables policy (also known as scheduling). That failure may be due to the fact that they don’t realize homeowners policies restrict the amount they will pay for items such as jewelry, silverware, rare stamps and coins, or breakage of fragile items such as marble statues and bottles of fine wine. Besides making sure all valuable items are scheduled, families must ensure that the amounts of coverage are adequate. An 18-karat gold bracelet purchased for $5,000 ten years ago could be worth more than four times that amount today. The value on the insurance policy should keep pace.
Issue #4: Would higher deductible amounts be tolerable to reduce premium costs?
Many wealthy families pay a high amount of premium because they have deductibles of $1,000 or less on their homeowner and auto insurance policies. Ironically, when a minor accident occurs, they won’t file a claim. Why? They worry their insurance rates will go up, and they can afford to pay the entire cost of repairing the damage. Instead, they should consider a higher deductible amount to achieve substantial savings. For instance, insuring a million-dollar home with a $2,500 deductible instead of a $500 deductible could save about $900 each year for a typical ACE client. Since ACE’s typical client files a homeowner claim only once every 21 years, the total premium savings could be $18,900, far outweighing the higher deductible risk.
These four checkpoints are only a few of the adjustments a qualified independent insurance advisor or broker might recommend, but they will cover the most common and serious mistakes made by high net worth individuals in keeping their family, home and assets safe.