High Net Worth Insurance
Why You Still Need Insurance As A High Net Worth Individual
High net worth individuals have their own set of opportunities and challenges as they make the transition to becoming wealthy and as their wealthy continues to grow. Just because they have wealth doesn't mean all their problems suddenly disappear. The problems simply change.
The definition for high (HNWI), very high (VHNWI), and ultra high (UHNWI) individuals are as follows:
- HNWI is a person who has investable assets over $1 million (excluding their primary residence)
- VHNWI is a person who has at least $5 million in investable assets
- UHNWI is a person who has at least $30 million of investable assets
With wealth in these amounts it is easy to wonder why they would need insurance at all.
Insurance is one of those things you inherently know you need, but hope you never use. It provides piece of mind, freeing up your mind to do more of the things you are passionate about while also protecting the downside from the worst-case scenario.
Some may argue that high net worth individuals don’t need insurance, and instead self-insure since they have significant assets.
The purpose of this article is to illustrate how just because you may be wealthy doesn't mean you shouldn't continue to use insurance. My friend and colleague, Ryan Waite, and I will list out why insurance should still be considered regardless of how much wealth you have accumulated.
Transferring Risk and Leveraging Your Money
Insurance, regardless of type, is simply a transference of risk to an insurance company in exchange for the premiums you pay. In other words, it is leveraging your money.
For example, if you pay $100/month for auto insurance for a collector car that is insured for $100,000. That is leverage. $1,200 a year in premiums for $100,000 of protection. This is leverage.
Doesn't it make more sense to use insurance than to set aside $100,000 in case something happens to the car? At this premium rate it would take just over 83 years for the premiums you paid to equal the value of the car, assuming of course no increase in your insurance and no increase in the value of the car.
Insurance protects against catastrophic loss. It is one thing to insure against a loss that we can peg a specific value to, but another when the loss can be extreme and hard to quantify. Insurance is a much more efficient way to protect against these types of risks. The insurance company knows, with statistical information backing them up, the expected odds of a catastrophic event happening to any one person at any given time. This is how they make money, since the odds are in their favor, but this is also how they can protect you from large losses, since they can plan for them.
Self-insuring means you are taking the full responsibility for risks that theoretically could be unlimited. Sure, you save the premiums, but now you shoulder all the risk. This seems like a stressful way to protect your life, valuables, etc.
Leveraging one’s money can be very powerful. Most successful (wealthy) people understand the concept of leverage and have almost certainly used it to help them become wealthy. So why would you stop using it because you are wealthy? Well, most high net worth people don’t stop using it.
The problem is that the insurance industry has done a very poor job of educating consumers that insurance is more than just the transference of risk, but that it is essentially leverage. Where else can you get hundreds, if not millions of dollars of protecting for only pennies on the dollar?
High net worth people understand how to use leverage to their advantage, the challenge is to understand that insurance and leverage go hand-in-hand, and to not think about it in a vacuum.
The Need for Life Insurance After You Are Wealthy
For people just starting out in life it is easy to understand the value and need for life insurance. It can be used to pay off your debts, protect your business, set aside money for your kid’s education, replace your income, etc.*
But for people who have become wealthy, regardless of age, they may wonder why they need it at all. This is understandable since they probably don’t have any more debts and have enough money saved up for all the things they would like to do.
Well, although they may not need it for paying off a mortgage or their kid’s education, they now have new challenges that life insurance can play a role in. Things like:
- Federal and State Estate Taxes
- Estate Equalization
- Business Continuation
- Used as an Alternative Asset Class
- Freeing up of Assets Earmarked for Specific Purposes
Instead of tying up large amounts of your wealth to pay for things like we just listed, life insurance can be used for a fraction of the cost to accomplish the same outcomes.
Life insurance is certainly not a one-size fits all solution and should be carefully designed and considered before implementing. But the fact remains that it can be robust resource if used for the right reasons in the right situation.
The Need for Catastrophic Property & Liability Coverage After You Are Wealthy
Though transferring risk has been touched on above, it is important to understand there are options to create an insurance portfolio that fits your financial situation. A HNWI can create their own internal deductible if they’d like to self-insure for the “small” claims to save on premium and keep claim frequency low. For example, a client may choose to put Liability Only coverage on autos worth less than $20,000. They consider $20,000 or less a small property claim that they could pay out of pocket. It’s important to understand the severe claims would be coming from the liability side, like lawsuits after an at-fault car accident.
Considering property insurance on homes, it still makes monetary sense to carry insurance after you are wealthy. Let’s say a HNWI has a $1MM home and they pay $2,000 in premiums each year. If their home is ravaged in a tornado, that insurance company is paying out $1MM (or more) to rebuild the home. What a deal! Even if those premiums were paid for 30 years it would still be getting $1MM to rebuild your home by paying only $60,000 over those years.
To keep premiums lower, there are extremely large deductible options to choose from if that makes sense given the HNWI’s cash reserves. Speaking to an insurance professional who deals with the unique risk profiles of HNWIs is the most efficient way to leverage money when it comes to property and liability insurance.
Broader Insurance vs. Higher Limits
An umbrella is sometimes thought of as a “catch-all” coverage but in reality, most times it’s simply additional limits stacked on top of the auto and homeowners liability limits. Those policies have exclusions and adding an umbrella doesn't typically protect you from those gaps in coverage; it simply protects you for larger losses coming from those same covered claim scenarios.
The only way to broaden coverage is to make sure you’re with an insurance carrier that understands the unique risks of a HNWI. For example, Cincinnati Insurance and Chubb are both carriers that have catered programs specifically tailored to the HNWI. Here are just a few HNWI endorsements they offer:
- Employment practices liability for clients that hire domestic staff
- Blanket jewelry coverage for clients that frequently buy new jewelry but may forget to insure it
- Coverage for wine or fine art collections
- Kidnap & ransom coverage
- Free access to Wildfire Defense Systems if a clients’ home is in a designated wildfire territory
- Guaranteed Replacement Cost of the home
If a HNWI has been with the same insurance carrier since before they became wealthy, they likely need a second opinion on their insurance situation.
The Importance of a Proper Insurance Review
A consistent and thorough insurance portfolio review is equally important to the actual insurance coverage itself. HNWIs often mix business ventures with pleasure and can make large purchases without blinking an eye. This increases their chances of an uninsured loss and these individuals have a great amount to lose. Depending on the situation and spending habits, reviews could be set up annually all the way down to monthly check-ins.
People with wealth have unique and challenging insurance needs, thus the importance of working with experts who not only understand all the nuances of insurance, but how working with people who have wealth look at risk through a different lens.
As with any service related business, we encourage you to seek out experts who have experience and familiarity with a niche market. Thank you for taking the time to learn a little about a topic that is not talked about enough.
Derek Notman & Ryan Waite