Many successful families think they are protected because they purchased some form of insurance; however, they often purchase policies with the wrong features, leaving them exposed to significant risk. This sub-optimal protection can manifest itself in three ways.
First, families buy some amount of coverage, but not enough to adequately protect themselves. Second, they overpay for costly policy features they don’t need. And third, they leave money on the table by not taking advantage of discounts.
These three behaviors are in large part a result of successful families buying standard policies, with standardized features, instead of customized policies that address their specific needs.
1. Many families have some coverage, but not enough to fully protect their assets.
This may be caused by three issues: insufficient valuation updates; standard policies that don’t address the unique needs of successful families; and standard policies that underestimate the total exposure in certain areas. Standard insurers don’t provide sufficient valuation updates. In many cases, asset values are not updated regularly, homes are not insured to full replacement value, and personal property and valuable collections are under-protected.
This can be a significant issue down the road, given that claims are typically paid on the reported value, not the actual value. Coverage often follows the pro rata condition of average, in which claims paid out are discounted by the amount an item was under-insured. The best defense against this is to have an accurate assessment performed regularly, which is often provided free of charge by insurance companies and/or brokers that specialize in providing premium service to successful families. Most successful families and individuals do not take advantage of this service: In our survey, 70% of families said they never or rarely had a professional assessment done, and 16% indicated that they do not know the replacement value of their possessions at all.
Mass-market products use heuristics/assumptions that are could be grossly inappropriate for financially accomplished families’ unique situations.
One area where this is common is in “other structures” coverage within a homeowners policy, i.e. all of the edifices/elements of a home other than the primary dwelling such as a pool house or detached garage. Standard policies often assume that other structures should be valued at 10% of the value of the primary dwelling, instead of sending an appraiser to accurately assign a value. For many families, 10% may not be nearly enough protection.
Standard policies do not accurately estimate the total exposure of certain risk categories.
A good example of this is expanded liability protection. Limits are often set at $1 million or $2 million, based on a rough guess, or because that is the maximum allowed by the standard insurance company. To estimate how much expanded liability protection is necessary for a financially successful individual, a quantitative approach should be used that includes insurable assets, investable assets, and a number of years of income.
2. Many successful families are inadvertently paying for features they don’t need, including low deductibles that they don’t use and limits of coverage that are too high.
Many financially accomplished individuals have low deductibles on their standard homeowners and auto insurance policies. This may have made sense when they were young professionals; however, as their risks evolve so should their coverage. They often pay substantial additional premiums for these lower deductibles, but may not even file a claim after a minor accident; instead they may elect to pay out of pocket to avoid impacting their premium or having to go through the hassle of filing a claim. In our study, 38% of successful families didn’t file a claim after some losses to avoid a premium increase, and 18% said they select plans with the lowest or very low deductibles xiii. Raising their deductibles to amounts better calibrated to their risk tolerance could result in substantial savings.
Financially accomplished individuals may also purchase limits of coverage that they don’t need for some products. In Rick and Sue’s situation above, we showed how standard carrier assumptions could lead to under-insurance. In other cases, these assumptions can lead to limits that are too high. For example, the standard 10% coverage for other structures coverage may be appropriate for a standard home, but may be too high for a high-value home with no other structures e.g., a semi-detached home in Chicago.
3. Many successful families are not realizing substantial premium savings because they are not taking advantage of loss prevention credits or package discounts.
Many successful families invest in safety equipment to keep their homes and families protected, i.e. burglar or fire alarms, water and gas leak detection systems, backup generators, etc. They may not realize, however, that they could receive loss prevention credits from their insurance company, that could substantially reduce their premiums. In addition, successful families often shop around for their auto and homeowners insurance, thinking they are being financially savvy by searching for the best premium for each policy. However, they may find that their discount is more substantial (10% or more) if they place all of their policies with one carrier.
Content provided in partnership with Chubb Insurance.