As our purpose at MCS is to Manage Risk to Increase WealthTM, we wanted to talk about the importance of property, casualty and liability insurance in your financial plan.
Before we get started, you may want to check out our other blogs on:
Is your insurance keeping up with your changing life?
If you are like many of our clients, the process of growing your wealth has created transitions in the advisers you hire.
- As your income grew, you may have moved from doing your own taxes (or using TurboTax) to working with a CPA.
- As your net worth grew, you may have hired an estate planning attorney.
- As your investment balances grew, you may have moved from a discount brokerage to a full service broker (operating under the “best interest” standard of care) to an investment adviser (hopefully a fee-only advisor) providing a fiduciary standard of care.
Your insurance provider is another candidate for this transition. There are two things to consider here. First, does your current insurance provider understand your changing needs and have they adjusted your policies to keep up with these changes? Second, have your life circumstances outgrown the standard insurance forms offered by your current provider, and do you need to seek the help of a high net worth insurance broker?
Mind the gap
Insurance “gaps” happen when your policy coverage no longer aligns with your risk exposure. An example of this is when clients move ownership of their homes to asset protection and/or estate planning entities, but don’t realize that they must list those entities on their insurance policies. In one policy I reviewed, the client had moved the ownership of their home to a trust and out of their name, but didn’t change the ownership of their insurance policy. Damage to the home would have triggered a payment back to the client and defeated the purpose of the trust. In another case, the entities that owned the homes were not protected by the liability coverage wrapped into the homeowner policies.
Gaps in insurance coverage often occur with high net worth families, who are more likely to own multiple high-value homes, have unique assets, and employ sophisticated estate planning entities.
Property and casualty insurance, business entities, and your estate plan
If you or your attorney(s) have created trusts, LLCs (limited liability companies), FLPs (family limited partnerships), or other vehicles for estate planning or asset protection purposes, then it is important to make sure that these entities are covered for the property they own and the liabilities they may incur.
For one client, I created a table of all of their entities and then cross-referenced that with how they owned properties and who was covered by their supplemental liability policy. It turned out that the homeowner policies named the husband and wife as insured entities, but not the LLCs and trusts that owned their properties. Their $6 million supplemental liability policy did not name the entities either, so they could have been completely unprotected if someone had initiated a personal liability claim against the LLCs or the trusts rather than against the couple.
High net worth property casualty insurance: lifestyle considerations
Finally, are the additional coverages and benefits offered by high net worth policies a better match for your lifestyle than the standard form insurance policies, and do they give you value?
High net worth policies can include enhancements that add protection from theft, fire, flood, earthquake, and other risks. Some policies offer on-site assessment of wildfire risk that include fire mitigation recommendations. A good broker will be able to provide you a complimentary vulnerability assessment of your property to identify ways you might benefit from these enhancements. These policies can also include benefits that cover the cost of private counsel (rather than relying on the insurer’s counsel) to defend you in liability suits.
Another example is that high net worth insurers can offer more coverage for emergency cash. The limits below were valid in Oregon as of April 2022:
|Insurer||Standard||Maximum*||Note||State Farm||$200||$500||Money, coins, and metal|
|MetLife Home & Auto||$5,000|
|Pure||$2,500||$10,000||Higher limit if stored in a safe or bank vault|
Are you a candidate for high net worth property and casualty insurance?
Should you consider high net worth property and casualty insurance? Ask yourself if one or more of the following describes your situation:
- Your primary residence is valued at more than $1,000,000 or includes unique, difficult-to-replace features
- Your net worth is over $2 million
- You own two or more homes (vacation, investment)
- Your homes or other properties are titled to entities for asset protection or estate planning purposes
- You employ private staff, such as a nanny, a housekeeper, or a personal assistant
- Your lifestyle involves private collections, extensive travel, a plane, or a yacht
- You are a board member for non-profit organizations
- Your family’s wealth is managed through a family office
How does a high net worth individual find the right property casualty insurance?
First, if you are working with a financial advisor to review your property casualty insurance, we strongly advise you to find a financial professional who is compensated for the service they provide rather than on the commissions they earn from their recommendations. A financial advisor may have affiliates that sell insurance, which can create a conflict of interest. It’s best to ask these questions of anyone you interview.
Your advisor should help you to understand your insurance coverage and find the gaps that need to be filled. Make sure you work with someone who will take into account how your property and casualty insurance impacts your estate and your overall financial plan. What many people do not realize is that a niche of property and casualty (and personal liability) insurance professionals provide services geared specifically to high net worth individuals. Choosing the right insurance intermediary who can offer these services is important.
Captive agent vs. independent agent vs. insurance broker: key differences
If you are a high net worth individual seeking a property and casualty insurance policy, you should understand who you are working with. Here are the differences between a captive agent, an independent agent, and an insurance broker:
- Insurance agents represent insurance company interests before your own, and there are two types:
- A captive agent works for one insurance company and will be able to offer only that company’s products to address your family’s needs
- An independent agent may choose from among various competing products and insurance underwriters to find the solution that best fits your needs
- Insurance brokers represent you as the buyer, so their first duty is to you
We recommend that our high net worth clients engage an independent insurance broker. These brokers have access to multiple underwriters and policies, and their first duty is to the insurance buyer and not to the insurance company(ies). Independent insurance brokers may also provide claims servicing, so they will not be in the position of having to service claims against their own employer, mitigating that conflict of interest.
Get your property casualty and liability insurance reviewed
We hope our blog on property casualty insurance and financial planning was useful. We are a fee-only, fiduciary wealth management firm based in Bend and Eugene Oregon, serving clients across the country.
We can evaluate your property and casualty and liability insurance as part of a financial plan. If you’re interested in engaging with us further, please reach out and set up a time to meet. If now isn’t the time to make this move, we hope you’ll at least join our newsletter. If there is a topic you’d like us to consider for future newsletter, please let us know through our feedback form.