Laura Scharr-Bykowsky lives near an earthquake fault line. A financial planner in Columbia, South Carolina, she always urges clients to carry enough property insurance to cover the full value of their homes and valuable possessions, even though the city hasn’t experienced significant quakes in recent years.
Her pitch usually isn’t successful. “Many of my higher-income clients won’t go for it, even though they have a huge percentage of their wealth tied up in real estate. You really need to protect those assets.”
Under-insurance is an especially acute problem with retired and pre-retirement clients, Scharr-Bykowsky says. “There’s less time to recover in the event of a big loss. People tend to buy their insurance when they’re young and don’t adjust it as they get older, so they can really come up short.”
Health and long-term-care insurance are part of most retirement plan conversations between advisers and clients. Yet other forms of insurance can fall through the cracks -- especially property, life and disability insurance.
Hurricane Sandy offers just the latest reminder of the importance of adequate property/casualty insurance protection. It’s an especially significant consideration for high net worth households who may have more than one residence—perhaps in areas prone to natural disasters such as floods. Life insurance adequacy sometimes also is overlooked even for mass affluent clients.
PC—Not That PC
Seniors tend to have the highest rates of equity in their homesamong all age groups. Yet they often are under-covered for full replacement value and/or high value collections of fine art, jewelry or other high value items. Research by insurer ACE Private Risk Servicesfound that nearly half of high-net-worth homes were underinsured, and the average amount of underinsurance was $600,000.
Basic replacement coverage provides funding only up to the coverage limit of a policy; extended replacement cost coverage usually add another 25 percent over the coverage limit. Either approach can fall short of actual replacement cost, especially for very expensive homes where replacement requires high quality materials and craftsmanship.
Scharr-Bykowsky recommends a property-casualty insurance check-up for clients once every three years, with a particular focus on making sure clients have sufficient coverage to fully rebuild (full replacement coverage is available in most states). She recommends talking with local realtors or developers to get a ballpark estimate of per-square-foot costs.
“It’s especially important to look at replacement cost,” she says. “If I have to build a brand new home, what will it cost to do with current building codes?”
At the same time, ACE recommends holding down the cost of coverage for wealthy clients by increasing deductibles. Loss prevention systems such as burglar alarms and sprinkler systems also will earn premium discounts from insurers.
Flood insurance also should be considered in high-risk areas -- although the cost of this coverage is rising rapidly as the frequency of super-storms such as Sandy rises. Most homeowner policies don’t include flood protection -- and the only game in town is the the federal government’s National Flood Insurance Program. But premiums will start to jump as much as 25 percent next yearunder legislation passed recently to shore up the program’s shaky finances.
Umbrella liability is another important form of protection; coverage should match the value of assets at risk of liability suits. Forty percent of wealthy households carry less than $5 million in umbrella liability coverage ACE research found.
That’s leaves them vulnerable, ACE argues, to liability lawsuits from causes ranging from car accidents to slips and falls at home or a range of other situations. “We’ve found with our retired clients that they might be doing some charity work or have a hobby -- even a trade they pursue from their homes that can incur liability risk,” says Mary Boyd, senior vice president at ACE.
Older clients may not need as much life insurance as they did when they were younger, but it’s important to carry enough coverage to replace lost income sources for survivors, notes Laurence Kotlikoff, a professor of economics at Boston University and president of Economic Security Planning, which markets ESPlannerpersonal financial planning software.
It’s often overlooked: LIMRA reports that 67 percent of consumers at 55-64 own any sort if life insurance; for consumers over age 65, the figure is just 58 percent.
The cost of coverage rises with age -- a good reason to urge younger clients to buy policies while they’re cheaper -- but the protection can be an important source of tax-free income, and it offers a flexible tool to cover expenses such as estate taxes, pay off a mortgage or fund college tuition. (See related article on our website, WealthManagement.com, http://bit.ly/Sd8X8e.)
“You want to try to insure yourself to the point where your survivors can maintain their standard of living, so that means replacing any recurring income sources,” he says. Kotlikoff urges planners to pay special attention to the impact of lost Social Security income. Although a survivor can step up to 100 percent of a deceased spouse’s higher benefit, net household Social Security benefits will decline. Other income sources to consider include pension benefits (in cases where there isn’t a joint/survivor provision), or alimony payments.
The aging of the workforce also points toward the need to maintain higher life insurance amounts at higher ages, he adds. “I’m 61, and I expect to work until 80 or 85,” he says. “I have young kids, so I just increased my life insurance.”
Disability insurance is another overlooked area, especially for clients in their 50s who might have 10 or 20 years of productive working years ahead. About one-third of workers become disabled sometime before age 67, according to Social Security Administration data.“They may have had group disability coveragethrough work, but I’ve seen cases where people lose their jobs and then face a disability,” says Scharr-Bykowsky. New jobs, she notes, often come with slimmer benefit packages. Workers covered by Social Security can file for disability coverage, although the approval process can be painfully slow.
Disability insurance is expensive, especially for older clients. Scharr-Bykowsky recommends adding a commercial policy for clients when they’re younger.
Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to Morningstar and the AARP Magazine. Mark is the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living (John Wiley & Sons, 2010). He edits RetirementRevised.com. Twitter: @retirerevised