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Financial Planning > Tax Planning > Tax Loss Harvesting

Protecting the Family Jewels

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Some clients have a fondness for tech stocks. Others like real estate. Still others prefer to devote a considerable portion of their net worth to more personal investments: fine art, classic cars, rare vintages or jewelry. Diamond firm DeBeers reported that sales were up 26% last year—despite the fact that the company raised prices 29% in 2011.

Escalating, if sometimes volatile, prices for gold, platinum and precious stones have resulted in many collections being underinsured—or perhaps not insured at all—and you, as an advisor, need to be wary on behalf of your clients.

Even if clients haven’t padded their portfolios with precious metals or investment-grade stones—the latter of which is something Janece White, vice president of Chubb Personal Insurance, says they “must be very wary of” and “willing to sit on for the long term”—heirloom pieces, or even jewelry they bought before the run-up in precious metals, could make up a significant portion of their net worth.

Making sure that such significant assets are adequately protected is more of a challenge than it used to be, as pieces that were formerly uninsured because of relatively low value may have seen substantial increases in replacement costs. With the price of gold outpacing the price of platinum, advisors should consider discussing with clients whether they have both up-to-date appraisals and adequate coverage in place.

Precious metals are not the only factor that should concern you. The prices for investment-grade stones have seen steady increases over the past several years as well. For example, a three-carat flawless diamond of D color selling in 2006 for $42,000 per carat would now fetch $99,800 per carat—an increase of 135% in six years. Says White, “One-carat diamonds are up 19%; two carats are up 15%; three are up 18% and five carats—it’s a seller’s market.”

Even if your client isn’t systematically investing in jewelry, she may be sitting on a large and underprotected cache of wealth. White points out that advisors who neglect to protect such hoards could be leaving themselves open to E&O claims in case of loss—or at least the loss of the client to a more attentive advisor. “Depending on the client,” says White, “there could be a considerable amount of their net worth tied into these collections.” She adds that while advisors always worry about conventional assets such as a client’s home and car, they may overlook collections, which—particularly if they happen to sparkle—can turn out to be worth more than a client’s home.

The obvious need is insurance, but less obvious is the need to make sure the client has the pieces inspected and repaired, if necessary. While White cites FBI statistics that in 2011, a total of $1.5 billion in jewelry and precious metals was stolen from stores and private individuals, she adds that for consumers, “most things aren’t stolen, but kind of lost. One minute there was a stone in the ring, and the next minute there’s not.”

She says, “If [clients haven’t gotten jewelry] reappraised either to get a better idea of their value and also to make sure clasps and prongs” are in good repair, advisors should prod them to do so lest pieces disappear because of broken fastenings.

The right type and amount of coverage is important. White says that a homeowner’s policy or renter’s insurance is inadequate for anyone who owns a good quality engagement ring. Most cover between $1,000 and $5,000 of loss, minus the deductible. “When the average cost of a diamond engagement ring last year was $5,000,” she says, “if you have $5,000 in coverage and your ring was worth $6,000, you don’t have enough.” She adds that that’s for an average one-carat engagement ring—without the wedding band. Add the band, a pair of diamond studs, Grandma’s pearls or an expensive watch, and a jewelry loss will be costly.

Standalone policies and riders or floaters can cover jewelry, and items can be covered as a group with a blanket amount, or scheduled individually. The former is good for gold chains and bracelets that add up to a substantial amount, but by themselves are not very expensive. Scheduled pieces are more special.

Options are important. Says White, “Make sure that when there’s a loss, you can go to your jeweler of choice” to replace the item.

Coverage that will take care of out-of-date appraisals is important, White says. And last but not least, she concludes, is choose a company for the ease of doing business. Clients will not appreciate hassles, whether the claim is for a ring that cost $5,000, $500,000, or even $1 million.


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