Assessing tolerance for risk has long been a key step in building a personal financial plan. But too often the same discipline is not applied when constructing a personal insurance program for affluent individuals and their families. As a result, their plans leave them exposed to catastrophic risks that could devastate their lifestyle, while over-protecting them against minor losses that could be easily absorbed.
The problem grows especially acute when affluent consumers insure their homes and automobiles with mass-market policies—unfortunately a mistake most make. In such cases, according to a recent survey of 600 independent insurance agents and brokers, the affluent are most likely underinsured against liability lawsuits. At the same time, they're typically overinsured against harmless fender benders or household mishaps because of low deductibles on their policies.
Protecting Against Multi-Million-Dollar Lawsuits
Many affluent clients assume the liability coverage in their home and auto policies will protect them from liability lawsuits. They're right—up to a point. These policies rarely cover more than $500,000 for liability. However, suits for millions of dollars are not uncommon. According to the latest data from Jury Verdict Research, 14% of personal injury awards exceed $1 million, and 4% exceed $5 million. In one instance, $9.5 million was awarded when a 14-month-old child became permanently paralyzed in an auto accident involving a stalled vehicle. Affluent clients can be forced to relinquish their homes, their savings and investments, and even a portion of their employment income if they don't have enough liability insurance.
To avoid putting all of their assets at risk, affluent families need an umbrella liability policy. It takes over when the home or auto policy coverage has been exhausted. Coverage usually starts at $1 million, and can go as high as $100 million when purchased from a carrier that specializes in serving high-net-worth clients. Surprisingly, the cost per million dollars in coverage can amount to only a few hundred dollars per year.
Saving With Higher Deductibles
The cost of umbrella liability coverage can frequently be offset by choosing higher deductibles in the home and auto policies. For instance, consider someone who insures a million-dollar home with a policy that has a $500 deductible. Raising the deductible to $2,500 could save $900 per year in premium. Essentially, the homeowner takes on the risk of paying an extra $2,000 in deductible, if there's an accident, for the certainty of saving $900 each year. It's a good bet. Our average homeowner files a claim only once every 11 years, so they will probably save almost $10,000 over that period and only have to pay the higher deductible once–a gain of almost $8,000.
Homeowners can further stack the odds in their favor by installing the latest safety devices available, such as a system that automatically detects water leaks and shuts off the water supply before serious damage occurs. These systems not only help customers feel more comfortable with having a high deductible, they earn substantial premium discounts. The credits for a combination of systems—fire, burglar, water, gas and others—can reduce the policy premium by up to 30% or more.
Using high deductibles and safety systems to accept more risk for minor losses and then redeploying the savings to guard against multi-million-dollar lawsuits is just one of the many strategies a qualified independent insurance advisor can recommend as part of a thorough risk review.
See video below: "Are you overpaying to be underinsured?" for more details.
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