August 3, 2017
California Affluent Insurance
Think things are different for the 1%, imagine their insurance scenario.
Unlike most Americans, Affluent Americans need to consider insurance from a much different angle.
A typical middle class american may use insurance to cover both the financial loss and the financial cash flow, but for affluent Americans this may not be the best play.
What exactly is a cash flow scenario? An insurable cash flow scenario is one in which the client may have the funds to cover it themselves, but the money that would cover it is tied up in some other investment such as say a 529 college savings account. The truly affluent really do not need to insure cash flow, at least at the $20K level. Once they build up a short term savings account, that is liquid and hence easily accessible with say $100,000 US Dollars, than many forms of insurance become either obsolete or different.
In this short article, California Affluent Insurance, we will focus on their changing needs.
The Different Liability Mentality for Affluent Consumers:
Assuming that you have at least $100,00 in a short term savings account (bank or similar) and have a overall net worth of maybe about $1,500,000 your liability considerations ought to really change. There are two principals of liability protection that I would like to review with you concerning this:
Changing Liabilities for Wealthy Americans:
Many wealthy Californians start engaging in more dangerous activities but it may not seem more dangerous to them. Attending ritzier fundraisers, buying a house with a pool, adopting an unwanted dog with a bite history, getting involved in more political activity, serving on non profit boards, etc. Many of these things might not sound dangerous, but your lawyer may have to disagree with you.
Obviously a pool carrier increased risk. A low risk, but the risk is there. A dog with a bite history might be something that you have never considered, but often these types of animals are un-insurable. Certain kinds of speech, although never intended to hurt someone, could cost you tens of thousands in legal fees. Everyone says you can be sued for anything, the truth is you probably can. That does not mean that its a legitimate case, but would you risk not hiring a top rate attorney when you go to trial just because you think the charges are “BS”?
The truth is, the more you entertain, drink, get involved, speak out, etc the more liability you and your family incur.
Speaking of your family leads me to the lecture on kids. Ill just skip to the answer = Yes Even well meaning kids are liability claims waiting to happen.
Same liabilities but the Damages Could Be Much More Severe:
After discussing the increased need for property liability protection from under laying insurance and over laying umbrella policies you need to understand the fact that they more money you have the more like you are to be sued.
Imagine two men that get into a bar fight who are both drunk. Both men are in the wrong and besides it does not matter. They both sue each other. Who wins? What if I were to tell you that one of those men had a net worth of $8. The other man’s net worth was $10MM. The answer is that the $8 guy probably wins, likely because he can find a lawyer who will take the case for free and besides what does he have to lose. What does the $10 million dollar man have to lose?
Now imagine a similar scenario where both men are not drinking and neither is drunk. But they get into an auto accident were both are injured and both to blame. Not focusing on the injuries, who financially losses?
The Dangerous Cocktail:
The third point here is that when you combine “increased liability activities” with “increased net worth” you get a dangerous cocktail. Lets call it the Affluent Liability Conundrum. The ALC basically says that wealthy people are far more likely to be sued because they participate in more dangerous activities AND they have more money.
Affluent Property Considerations:
Most smart California Affluent Insureds know to raise their deductible. I have described the issue with low deductibles countless times on this blog. Needless to say its rarely worth your time to file small insurance claims when you are guaranteed of seeing higher insurance rates because of it. If you have already raised your deductibles – great.
But… there are other things to modify. Here are a few. Make sure you have Personal Property Replacement Coverage. Inquire into mold both property and liability coverage. Confirm you are with an A rated carrier.
Lastly makes sure you home structure is properly covered. Most California Affluent Insurance consumers live in nicer towns and the home rebuild values in these towns often seem outrageous to insurance companies. Many insurance companies will not accept $400 a square foot, that is why you may need to look around. The gold standard for California is a company that will guarantee 100% extended rebuild. Look for it and ask for it. In place of this a 50% may be adequate.
Recently with the past horrific fires that have struck the Santa Rosa area in 2017, there has been a call out for consumers seeking this type of enhanced home insurance coverage.
Catastrophic Property Considerations for Wealthy Consumers:
When I say catastrophic property insurance considerations, I am referring to the excluded catastrophes that are generally coverable either via endorsements or separate polices. The most possible uncoverable events, so far as I know are War, Nuclear, Riot, and Pest. Although pest you can protect yourself from pest by hiring a service. There are other ones such as Acts of God, etc. Read your own insurance policies.
The catastrophes that are not generally covered by a typical insurance policy are: Flood, Earthquake, and Landslide. All three of these can be insured against.
Wealthy Considerations for Flood Insurance:
Flood does more damage than just about other insurance claims combined. Now a flood, does not mean your toilet overflowing or a pipe bursting. I could bore you with the technical FEMA definition being about two connected properties or two or more acres, but that does not change the fact that floods destroy houses all the time. A flood does not need to take your house down the river for it to cost a bundle. A typical house is composed of hardwood floors, drywall, and framing; at least at the lowest levels. Only one of the components may be salvageable after sitting in water for 24 hours. The drywall and hardwood floors will likely be ruined.
The primary issue for affluent consumers, is that FEMA flood insurance only covers you for a max of $250K on a single family home. That is not a tone. However if you live in the Bay Area and qualify for preferred pricing you may be able to buy a FEMA plan for say $500 or so. Over 30 years, not adjusted for inflation, that will only cost you $15K total – for $250K in coverage.
Now, I know lots of smart people that do not believe that there house will ever flood. If you think this, ask yourself this question = Do I believe in global warming? If you do, I don’t understand the inaction of buying flood insurance. I have met countless people that have donated far more than $500 per year to help lower carbon emissions, but have not spent any money fortifying what could be their biggest investment.
Second, historically speaking a giant flood has already come to California. This county is surrounded by three sides by water. California has a history of droughts and horrible deluges. Google California historical floods. Likely it will come again.
Perhaps you don’t need the $250K in coverage because you consider yourself self insured, that is a different matter.
Wealthy Considerations for Earthquake Insurance:
If you have declined flood insurance because you are self insured, then consider what more people seem to be worried about: Earthquake. A standard Earthquake Unendorsed Home Owners policy does not cover you for earthquake damage. Earthquake policies typically have HUGE deductibles. Often 10%,15%,20%, and 25% are some of the options. On a $1MM home, that is $100K, $150K, $200K, and $250K. Those are both huge deductibles -but they cover you from a lot.
For the wealthy, many have successfully paid off their house. Congratulations! However now, more than ever is the time to insure what may be your greatest investment. I cannot stress enough the need to buy earthquake insurance. Earthquakes have come in the past and they will come again. There is just no amount of strengthened and reinforced building codes that can protect every house. Your house does not even need to topple over for you to buy earthquake insurance.
Often after a quake – city or county officials go and inspect every home and they have the right to red tag (or yellow tag) your home and they may not allow you to move back into your home until it is fully repaired. This may cost you $500,000. Although for the affluent consume they may be able to afford this, what will this do to their balance sheet for retirement’s sake?
Landslides:
It may or may not be possible to insure your house from the danger or landslides. But you should know that this peril exists and it can take out your home.
Life Insurance Considerations:
As a general rule of thumb, I do not really believe all that much in using life insurance for anything other than for pure insurance. I realize that all sorts of insurance agents pitch whole and universal life insurance as a great way to save for college, retirement, and to bequeath wealth to your heirs. However, I have rarely found that this makes much sense for wealthy folks to consider unless, they are exceedingly wealthy. Deca-millionaire territory here. But even people worth $15MM might not find a whole life insurance policy advantageous.
So why should the wealthy then consider life insurance?
I believe that most wealthy families should consider simple level term life insurance plans for both spouses, working or not. Forget about the ten times earning rule. Get the term insurance, just for the value of filling a temporary and shocking financial void. Say $500K for each., or perhaps a $1,000,00 policy. That likely will be able to see either spouse through a temporary and sad time in their life. That much term insurance is really inexpensive. And for the affluent its really just pennies in cost. Be careful assuming and relying on having group life for this. With people changing jobs, there can be unintended lapses.
For those of you that have managed to read this entire article you might notice that my advice on Term Insurance is really a suggestion to use Life Insurance for Cash Flow needs, which is a violation of one of my own rules. If you noticed this, good for you. However I believe that in many scenarios that play out this type of cash flow insurance at this level is well worth the money.
Want some convincing? What happens if someone tied to your estate contest it? What will your non working spouse live on?
Don’t Forget that Small Business:
If I had a nickle for every time that I advised someone to buy an insurance policy that cost more than the business made in profit each year Id have a couple of dollars. That sounds insane right? It is, but so is starting a small business with no insurance. The only thing crazier than that is someone starting a small business with no insurance when they are rich.
My advice for California Wealthy Insureds is: 1. Don’t start small businesses or 2. Get Insurance on them from day one.
Is it possible for your home insurer to cover you business? Yes technically. IF THEY KNOW ABOUT IT AND APPROVE IT, but generally they will, sadly not.
Get insurance when you start a small business and do not be lured into the false thinking that your business is protected by being in an S corp. It may or may not. If you are relying on this, see your attorney and ask what happens when you place of business is done in your home.
Thanks for reading California Affluent Insurance.
