Top 5 Insurance Mistakes Made by Ultra-Wealthy Individuals and How to Avoid Them
Having the right insurance coverage is critical to protecting your estate against potential financial pitfalls. For those with ultra-high-net-worths, however, basic insurance policies may not provide enough coverage to protect their entire estates. As a result, they may be unknowingly exposing themselves to potential risks, like lawsuits and costly out-of-pocket expenses.
Here are five of the top insurance mistakes I’ve seen some ultra-wealthy individuals, and their families make, as well as insights on how to avoid them.
Mistake #1: Neglecting to Review Coverage Regularly
As you acquire more assets, your estate will grow steadily over time. Depending on how your current insurance landscape looks, it’s possible those assets are covered under various policies—auto insurance, boat insurance, high-value home insurance, collectibles insurance, etc.
Work with your advisor regularly (say once a year or so) to review all current policies and coverage plans, and compare them to your inventory of assets. It’s possible that you may find gaps in your current coverage (meaning certain assets lack adequate coverage). The opposite could also be true—you may be overpaying for superfluous policies.
While the latter may mean spending more on policy premiums than necessary, having less-than-adequate coverage can lead your family into a financial danger zone. Depending on what the underinsured assets are, you could be at risk of paying sizable out-of-pocket expenses should a claim be made or if you must cover the cost of repair or replacement on your own.
Mistake #2: Lacking Excess Liability Coverage
Umbrella insurance policies are add-on excess liability policies to your standard homeowners or auto insurance. Once the coverage in your homeowner's policy has been exhausted, the umbrella policy kicks in.
Generally speaking, an umbrella policy is worth considering for high-net-worth families with sizable net worths, as well as those who interact with the public or engage in particularly risky activities.
Common scenarios in which someone might consider an umbrella policy include:
Owning a pool or trampoline
Owning certain dog breeds
Being a landlord
Volunteering with or serving on the board of a non-profit organization
Participating in high-risk sports like skiing or hunting
Umbrella policies typically provide around $1 million to $2 million in coverage, capping at around $5 million.1 For many high-net-worth families, this may be an adequate amount of coverage. But for ultra-wealthy individuals and their families, a $5 million limit may not be nearly enough to protect their entire net worth.
Rather than opt for a traditional umbrella policy, you may want to research policies specifically geared toward ultra-high-net-worth families with much higher coverage limits.
Mistake #3: Not Protecting Your Non-Profit Involvement
Just like a for-profit business, not-for-profit organizations are at risk of lawsuits too. Unfortunately, most nonprofit organizations don’t have the funds to purchase large liability policies. In the worst-case scenarios, board members who aren’t properly protected could lose their personal assets and savings to a large lawsuit.
Anytime someone (a donor, employee, government regulator, etc.) sues a nonprofit, they have the option to sue the board members personally in addition to the organization itself. While some organizations may obtain a nonprofit directors and officers (D&O) liability policy, you may benefit from having your own liability policy in place as well. Again, this is the type of risk a high-limit umbrella policy can help you protect against.
Mistake #4: Not Considering the Potential for Employment-Related Lawsuits
It’s possible your family employs individuals to assist in managing your estate. These may include house managers, personal assistants, chefs, housekeepers, landscapers, child care providers, personal trainers, and other professionals.
Just as any traditional business needs to consider employee-related lawsuits, you may want to speak to your advisor about the potential risk of having employees working at your home. For example, having non-family members on your property regularly is risky. Not only could they get injured while working for you, but they could damage valuable property as well.
If you employ people full-time, you may be at risk of employment-related lawsuits as well, such as discrimination, sexual harassment, and unlawful termination. Again, having the right coverage in place can help protect your family against these employment-related lawsuits.
Mistake #5: Protecting Property Owned by Another Entity
Depending on your estate plans or tax mitigation strategies, some of your property may be owned by a corporation or trust. If that’s the case, it’s important to review your policies carefully and ensure everything is still covered—even if it’s technically no longer a part of your personal estate. Otherwise, you may hit some hurdles when trying to file a claim that includes property technically owned by another organization or entity.
The Importance of Protecting Your Wealth
As an ultra-wealthy family, you will likely need to work with a specialist to develop custom policies that cover your entire estate, as well as certain lifestyle considerations (such as frequent traveling, nonprofit participation, etc.).
If you’d like to learn more about your options, I can review your current coverage together. I’d be happy to help you find opportunities to optimize your coverage while mitigating your risk against lawsuits and out-of-pocket expenses.
Learn more by scheduling a meeting with me today.
Source:
Rob Edwards is a Managing Director and Senior PIM® Portfolio Manager at Edwards Asset Management. Rob is a nationally recognized advisor who helps millionaire families navigate the complexities of their wealth. The firm has offices in Naples and Fort Lauderdale, Florida.
Wells Fargo Advisors Financial Network does not provide legal or tax advice. Be sure to consult your own tax advisor and investment professional before taking any action that may involve tax consequences.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Edwards Asset Management is a separate entity from WFAFN.
