KEY TAKEAWAYS
- Even families with umbrella insurance coverage often don’t have enough of it.
- LLCs and trusts need to be named on insurance policies in certain cases.
- High-value assets such as art collections and rare automobiles need their own special coverage.
It is quite easy for affluent families to make big mistakes with one of their largest assets: their homes. That means it makes sense to examine your own situation to determine whether there are issues that you need to address before they become problems that can’t be solved. In some cases, there are important issues that simply get overlooked. Often, however, the problems stem from an improper assessment of how much insurance you need—the result being insufficient coverage. That might be your fault, or it might be the fault of a property and casualty agent you work with. Regardless, you will end up being the loser if something bad happens and you are underinsured.
The five the most prevalent and often most significant mistakes affluent families make are:
- Failing to have enough liability insurance
- Failing to ensure cohesive coverage on multiple homes
- Failing to list trusts or limited liability companies on their homeowner’s policies
- Failing to address—or to adequately address—unique home features or building materials
- Failing to provide proper coverage for high-value assets
Let’s look at each one of these more closely.
Failing to have enough liability insurance
Do you have an umbrella policy? If you do, is your net worth greater than or less than your umbrella policy? While many (but not all) affluent families have umbrella policies, we find that a large percentage of them do not have enough coverage. Specifically, if your net worth is greater than your liability coverage, you might want to look into increasing the coverage. Umbrella policies are often the most cost-effective and least expensive form of asset protection you can get.
Example: An affluent family has a net worth of a little over $10 million. But they carry only a $1 million umbrella liability policy. There has been no communication between the family’s property and casualty agent and their financial advisors in years. Because of asset positioning and planning done by the financial advisors, the amount of their assets that would be attachable in a lawsuit totals around $6.5 million. Therefore, because they carry only the $1 million umbrella policy, more than $5.5 million of their net worth is unprotected.
Pro tip: It’s best to determine the amount of assets attachable in a lawsuit and then set your umbrella limits to cover either that amount or your entire net worth if you have done only minimal planning. Also be sure you name all items that should be named on the policy.
Failing to ensure cohesive coverage on multiple homes
Some affluent families have multiple homes—their main residence and a summer cottage, for instance—and these homes are often in different states. Such a scenario can lead to complications, particularly if the homes are covered by policies from different insurance companies.
Example: A family whose primary residence is in New York state also owns a beach house in South Florida and a ski home in Aspen. The family has coverage on all homes, but each home has a different policy and different agents. Ideally, for cohesive coverage and cost savings, all the policies should be written with one high-net-worth insurance company.
Another issue: The family failed to list their Aspen home on the umbrella policy. Therefore, even though the family carries a $15 million umbrella policy, it does not currently extend to the Aspen home. The New York insurance agent who wrote the original New York home and umbrella policies knew about only the Florida property, not the Colorado home. The result is that the family is lacking what could be very necessary coverage.
Failing to list trusts or limited liability companies on their homeowner’s policies
Astute affluent families, often working with their advisors, regularly update their estate plans as their situations change and as new laws affecting estate planning are enacted. Many affluent families make smart use of trusts and limited liability companies as part of their estate plans.
However, a significant portion of these same families fail to identify the trusts and limited liability companies as additional insured—a mistake that can work against them.
Example: A retired Chicago businessman and his wife relocated to South Florida for health and tax reasons. Once there, they established residency and had a new estate plan drafted. They put their new Florida primary residence in a limited liability company and also moved their vacation home in Maine to a limited liability company.
In the off-season of the following year, a caretaker in the Maine home had a serious fall with injuries due to a loose banister. He sued. But the limited liability company that was created (which now has beneficial ownership) was never named as an insured on the homeowners or umbrella policies. The end result: The client paid the settlement out of pocket, racking up a substantial loss.
Failing to address—or to adequately address— unique home features or building materials
Some affluent families have historic homes that have unique construction and were built using expensive materials. In some cases, the architecture is unique. By not attending to these factors, the rebuilding costs (in case of, say, a devastating fire) could easily be far, far greater than the coverage.
Example: A wealthy Florida couple purchased a stately old Palm Beach mansion with marble floors, handcrafted plaster accents and an old wood known as pecky cypress throughout the home. Pecky cypress was once used in Florida homes because of its durability and resistance to rot and termites. It is very rare today—and extremely expensive to replace.
The new owners did not use a quality high-value insurer who could evaluate and properly insure the unique building materials. So, naturally, they didn’t realize that the replacement costs of the marble, plasterwork and pecky cypress would be so much higher than those of regular building materials. A fire that occurred during a kitchen and bathroom renovation resulted in massive out-of-pocket costs for the couple.
Failing to provide proper coverage for high-value assets
Some affluent families have significant collections of art or particularly expensive cars. A select few might own planes or yachts. Still others might own horses.
Example: A California couple with a love of art had been buying pieces for more than 30 years. They knew that many of the items had become valuable, but they lacked current appraisals and had no idea about the total value of the collection. They erroneously assumed that if something happened, they would simply make a claim on their homeowner’s policy.
When a small piece suffered damage during a rehanging, they found out the item had an extremely high value. They also discovered that the personal property coverage on their homeowner’s policy was not enough to replace it. They quickly contacted an agent referred to them and individually insured each piece of art—as should have been done at the outset. A scheduled art policy means that the values are protected even with an increase since the last appraisal, and there is no deductible. The insured is compensated for the entire loss.
This same standard applies to collections of jewelry, automobiles, rare guns and so on. These high-value assets need their own policies that insure the proper values and are not subject to deductibles.
Make sure you are properly covered
It is easy to be underinsured when it comes to your home and your high-value assets. The odds of needing to use your insurance are relatively low, so these concerns often get moved to the back burner. But of course, the very nature of insurance is to provide you with protection when something severe but that has a low probability of happening does indeed occur.
Just as you need to assess and fix up your roof and gutters from time to time, you might also need to evaluate and repair your home insurance situation.
If you are worried that you may be underinsured when it comes to your home (or homes) and its possessions—or even if you’re just not fully confident that you’re set up for success—you can take an important step. A stress test will help you identify any gaps in coverage so you can take steps to protect yourself to the full extent you think is necessary.
Stress tests are conducted by many of the world’s wealthiest families—but they aren’t an exclusive tool of the 1 percent. You can have your current property and casualty coverage evaluated by an expert who will take into account your needs, preferences and concerns.
The stress-testing process is one you can oversee yourself, or you can have one of your trusted advisors manage the process. Either way, you can potentially gain more clarity about your insurance situation—and avoid these five big mistakes.
This information is provided for general purposes and is subject to change without notice. It has been obtained from sources considered to be reliable, but it is not guaranteed. The information does not represent, warrant, or imply that services, strategies, or methods of analysis offered can or will predict future results, identify market tops or bottoms, or insulate investors from losses.
ACKNOWLEDGMENT: This article was published by the VFO Inner Circle, a global financial concierge group working with affluent individuals and families and is distributed with its permission. Copyright 2020 by AES Nation, LLC.
Securities offered through Geneos Wealth Management, Inc, Member FINRA / SIPC Pazera Capital Management, Inc., a registered investment advisor.