As wealth advisors work with financially successful families to refine their financial goals for 2014, one key aspect of family finances cannot be overlooked: their home, auto, liability and other property and casualty insurance coverage.
These families are typically overpaying for insurance that leaves them exposed to significant risks, a trend that has worsened since 2010, according to a recent ACE Private Risk Services survey of more than 600 independent insurance agents and brokers.
Because wealthy families often overlook savings opportunities, many high-net-worth clients are unaware that rebalancing insurance programs can strengthen protection, often without significantly increasing premiums, and sometimes it even lowers payments.
Fifty-one percent of agents said they typically see a premium reduction of 5% or more when they rebalance their clients’ insurance program and place them with a carrier that specializes in servicing high-net-worth families. Another 12% said they typically keep the change in premium within plus or minus 5%.
The benefits derived from breaking down high-net-worth clients’ insurance coverage represents an opportunity for financial advisors, who should pose property and casualty insurance as an issue that clients need to address. By understanding the most common insurance mistakes high-net-worth clients make and having a relationship with an expert agent, advisors can improve client loyalty and fulfill their fiduciary duty.
Here are six strategies wealth advisors can use to help families with substantial assets better manage, and even reduce, insurance premiums and ensure adequate coverage:
Increase Homeowners’ And Auto Deductibles
Many wealthy families carry deductibles of $500 or less yet only file claims for many times that amount because they can afford to absorb smaller losses.
They also worry that filing for small claims will increase their premiums. Families should consider how much they could pay for a loss without it significantly affecting their lifestyle, and then ask their agent to estimate the premium savings they could achieve with a higher deductible. The premium savings are often worth the risk of paying more in the event of a loss.
For instance, the owner of a $1 million home insured by ACE could save $900 a year by increasing the deductible from $500 to $2,500. Because the homes ACE insures typically suffer damage resulting in an insurance claim about once every 20 years, the family would likely save $18,000 over that time period and only have to pay the additional $2,000 for the higher deductible once—a net gain of $16,000.
Families with more expensive homes benefit even more with this strategy. Increasing the deductible on a $3 million home from $5,000 to $10,000 could save $1,800 per year and achieve a net gain of $31,000 over a 20-year period. The same logic applies to auto insurance.
Choosing a high deductible becomes even more attractive when the high-net-worth-market carrier offers a disappearing deductible—a feature that reduces the deductible on the first claim for each consecutive claim-free year on the policy.
Seek Premium Credits For Safety Systems
Half of the agents in the ACE survey said homeowners likely overlook premium credits they could receive for installing safety systems such as burglar alarms, water leak detection systems, battery backups for sump pumps and automatic standby generators. When combined, these credits can reduce premiums by 30% or more. Families with older homes can also earn premium credits for rehabilitating the plumbing, electrical and heating systems—perhaps by up to 5% for each system that’s upgraded, depending on how recently the work was completed. Families that install safety systems may then become more confident in increasing their home deductibles. Thus, the two savings tactics reinforce each other. Used together, they can reduce homeowner premiums by up to half.
For automobiles, safety systems such as theft alarms, fuel cutoff switches and location transponders can reduce premiums from 5% to 20%.
Store Infrequently Worn Jewelry In A Safe-Deposit Box
Wealthy families often have large collections of fine jewelry that are insured with a valuables policy since homeowner policies place strict limits on the amount of coverage for jewelry and other types of items. If expensive items are worn infrequently, it might make sense to store them in a bank safe deposit box instead of at home. The rate for insuring jewelry stores this way can be five to six times lower, and it can still be worn at the occasional gala. In exchange for this significantly reduced rate, most high-net-worth-market carriers only require that they be notified in advance when an item will be leaving the bank so they can adjust coverage.
Wealthy families should also be aware of the differences between valuables policies. Insurance carriers that specialize in serving high-net-worth clients typically include market value coverage, which provides up to 150% of the amount listed on the policy if the cost of replacing an item just prior to loss has increased. This creates a buffer against short-term increases in value. Policies from high-net-worth-market carriers also include a blanket coverage option for a group of items such as art, fine wine or crystals, eliminating the tedium of estimating the value for each item.
Bundle Policies With One Carrier
Savings opportunities advertised by auto insurance carriers may sound tempting, but spreading home, auto, boat and umbrella liability policies across different carriers can cause potential gaps in coverage. It can also eliminate package discounts of 10% or more. Families should choose an insurer that allows for the package discount to cover the most insurance policies possible, such as home, auto, valuables, umbrella liability and watercraft. The best solutions allow the policies to be written as a portfolio with common term dates and one consolidated bill, saving the client time and money.
Bundling can also make the claim process easier if an accident triggers coverage from multiple polices. For example, if an auto accident results in a serious injury requiring lifelong medical care, the cost of care could exceed the liability coverage in the auto policy and trigger coverage under the umbrella liability policy. If the auto policy is with one carrier and the umbrella policy is with another, the family will have to deal with two legal teams in an already stressful situation. Moreover, having the auto and umbrella policies with different carriers increases the potential for a gap in coverage. For instance, the auto liability coverage might stop at $300,000, but the umbrella coverage might not start until $500,000, leaving the client responsible for the $200,000 gap between the two amounts.
Examine The Need For Additional Liability Coverage
Inadequate protection against personal liability lawsuits is considered the most common deficiency in wealthy families’ insurance coverage. Jury verdict awards and settlements involving serious injuries due to an auto accident or swimming pool mishap can exceed $10 million. Yet a study commission by ACE found that 40% of families with a net worth of at least $5 million, not including their primary home, have less than $5 million in umbrella liability coverage, including 21% who have no coverage.
Umbrella liability coverage adds critical protection over and above the amounts provided by auto and home insurance policies, which rarely exceed $500,000. Without adequate umbrella coverage, high-net-worth families could be forced to give up their savings and investments, the equity in their homes and even a portion of future income to pay damages.
The safest route is for the family to purchase enough umbrella liability coverage to match its net worth and future income stream. The affordability of such coverage often surprises people. The first $1 million in coverage may cost a few hundred dollars, and the cost per million decreases at higher levels. In many cases, the savings from a higher deductible can more than pay for adequate levels of liability coverage.
It is important to recognize that not all umbrella liability policies are alike. Mass-market carriers may be unwilling to offer much more than $2 million or $3 million in umbrella liability coverage. Carriers that specialize in the high-net-worth market usually offer up to $100 million in coverage.
Moreover, policies from the high-net-worth carriers typically do not count legal defense costs as part of the liability coverage limit, and some even provide coverage for having a public relations firm protect the family’s reputation. They may also include optional coverage, such as uninsured/underinsured liability, employment practices liability for domestic staff and directors and officers liability for serving on the board of a local charity.
Get An Annual Insurance Checkup
Perhaps the most important step advisors can recommend to their clients is to regularly consult with their insurance agent or broker. Many families neglect to do so as they accumulate substantial assets and only find out they are overpaying to be underinsured when they suffer a significant loss. If the agent hasn’t called or sent a letter for an insurance review within the last three years, advise your clients to call him or her—or refer the client to a new agent who understands the complex risks that confront high-net-worth families. Any insurance agent who serves your clients should have a thorough risk review process and have access to at least one high-net-worth-market insurance company. Wealth advisors can best serve their clients if they have these referral relationships established in advance.
Personal property and casualty insurance is an often overlooked yet critical piece of every high-net-worth family’s financial picture. By using these six strategies, wealth advisors and their wealthy clients can better manage, and possibly reduce, insurance premiums while better protecting the wealth they have worked hard to build.
David Spencer is senior vice president at ACE Private Risk Services.
