Finding more time for family, travel, favorite causes and hobbies are just a few of the things people in or near their retirement hope to enjoy. The transition to retirement, however, also requires complex decisions about insurance. While health and long-term care insurance usually top the list of concerns, personal property and casualty insurance, including homeowners’ automobile and liability coverage, also deserve a thorough review.
Personal insurance plays a key role in two overriding issues during retirement: wealth protection and expense management. Personal insurance is an important wealth protection tool for older clients, who have less time to recover from an uninsured or underinsured loss. Poor protection against multi-million-dollar liability lawsuits or underestimating the cost of rebuilding a damaged home could put retirement plans on hold and force a drastic change in lifestyle.
From an expense management perspective, many people overlook savings opportunities in their personal insurance program, such as raising their policy deductible amounts and combining policies with one carrier.
To help financially successful people prepare for and thrive in retirement, here are steps to strategically address risk with a personal insurance program:
1. Purchase enough umbrella liability insurance to match assets at risk. Most people retire when their assets are at a peak value. Unfortunately, these assets represent an attractive target for liability lawsuits. Jury awards and settlements arising out of auto accidents and slips and falls at home can exceed $10 million. Yet many high-net-worth individuals remain poorly protected. More than 40% of wealthy households have less than $5 million in umbrella liability coverage, including 21% who have none at all, according to research commissioned by ACE. Umbrella coverage offers protection over and above the liability coverage offered in homeowner and auto policies, safeguarding savings, investments, homes, valuable collections and future income.
2. Seek full replacement cost coverage for the home. Wealthy people in or near retirement usually have exclusive homes representing a significant portion of their net worth. A sound wealth protection plan should insure these homes for their full value. For the safest solution, homeowners should secure full replacement cost coverage for the home structure.
Available in all but a few states, this coverage will in most cases pay to rebuild the home with similar quality materials and craftsmanship, even if the cost exceeds the coverage limit in the policy. Surprisingly, many people incorrectly assume they have this level of protection. Most people have policies that cap the amount of coverage at the coverage limit or perhaps up to 25% above it. Such coverage can be insufficient, because most homeowners and their carriers undervalue replacement costs.
3. Ensure that the homeowner policy includes sufficient coverage for building code upgrades. Retirees who have lived in their homes for decades are particularly at risk if their insurance lacks sufficient coverage for the cost of bringing a damaged home into compliance with the latest building codes. Complying with codes can add up to 50% to the cost of rebuilding, but standard policies might provide only 10% of the coverage limit to account for the additional cost. For a home valued at $1 million, that’s a $400,000 gap. Homeowners should ask their agent to add an endorsement that allows them to choose a higher percentage limit for these upgrades, or purchase a policy from a carrier that specializes in serving high-net-worth families. Policies from these carriers typically include coverage for building code upgrades, without setting a percentage limit, along with the benefit of full replacement cost coverage.
4. Take an inventory of home contents and make sure the coverage limit for personal property matches its replacement cost. Standard insurance policies typically set contents coverage as a percentage of the replacement cost of the home structure—usually between 50% and 70%. These percentages may be inadequate for people in or near retirement because people usually increase the quantity and quality of their personal property as they age. An ACE analysis of 400 homes valued between $2 million and $7 million confirmed that people born before 1940 were more than twice as likely as those born after 1970 to be underinsured for their homes’ contents. The average amount of underinsurance was $600,000. To avoid becoming underinsured, people should estimate the replacement cost of everything they own and make sure their coverage limit matches their estimate. Or they can hire a company that will do it for them.
5. If the home is part of a property association, make sure the homeowner’s policy includes ample coverage for loss assessments. Upon retirement, many couples move into golf communities or similar recreational property associations. These associations often have the power to assess members for losses that exceed the association’s insurance.
For example, if the clubhouse burned down and the insurance could not pay the entire cost to rebuild, the association could force members to pay the rest. Such assessments can reach well into the tens of thousands of dollars per member.
Unfortunately, standard insurance policies rarely provide more than $1,000 in coverage. By contrast, homeowner policies aimed at high-net-worth individuals can include up to $100,000 for property association assessments due to a covered loss.
6. Name trusts and LLCs on insurance policies. To maximize the transfer of wealth to future generations and protect assets, many retirees place homes and valuable collections in family trusts. They may also set up trusts for charitable foundations to manage their donations in a tax-efficient manner. In addition, they may form an LLC to manage a jointly owned asset and limit their liability exposure. Families and their advisors should list these entities on the appropriate insurance policies to guard against liability lawsuits. For instance, consider someone who transfers ownership of his or her home to a trust but forgets to have the trust named on the homeowner’s policy. If a visitor suffers serious injury on the property, the visitor may sue both the individual and the trust. The individual would be shielded by the homeowner’s policy but the trust would not, leaving the home vulnerable to defense costs and settlements associated with the case.
7. Increase homeowner and auto deductibles. Wealthy families should consider increasing their deductibles on homeowners and auto policies to save potentially thousands of dollars a year in premiums. Consider a couple living in a home insured for $1 million by ACE with a deductible of $500. If they increase the deductible to $2,500, they would typically save $900 in annual premiums. In three years, the cumulative savings would outweigh the risk of paying the higher deductible due to a loss, as shown in the table. Since the typical home that ACE insures experiences a claim only once every 21 years, the homeowner has a good chance of saving almost $17,000.
8. Bundle different policies with the same carrier. Package discounts can be 10% or higher when retirees place their home, auto, valuables, umbrella liability and other insurance policies with one carrier. When used across many policies, the combined savings can exceed the savings from using the cheapest carrier for one type of policy, such as auto. In the best cases, the carrier will also be able to coordinate the different policies within a single insurance program with common term dates and one consolidated bill, saving both money and time.
9. Get credits for loss prevention systems and upgraded plumbing, electrical and heating systems. Most insurers offer premium credits for safety and security systems installed in homes and automobiles, but many people fail to take advantage of them. Examples of home safety systems include burglar alarms, temperature monitoring and gas leak detection. Auto safety systems include theft alarms, ignition cut-off switches and hood locks. The combined credits for such systems can exceed 30% of the base homeowners’ premium and 5% to 20% of the comprehensive auto coverage premium. Moreover, people who have lived in the same home for many years have likely upgraded their home systems, such as electrical, plumbing and heating. Premium credits up to 5% can be rewarded for each rehabilitated system, depending on how recently the work was completed.
10. Insure classic cars with special contracts, not a standard auto policy. For many people, retirement is a time to rediscover a car from their youth, such as the Porsche 356 or Corvette Stingray. If they only take these classics out for an occasional spin, they can save on their auto insurance premium by seeking a carrier that can offer a tailored policy. A few insurance companies understand these cars are driven only rarely and very carefully, and can therefore offer protection that costs less than a standard auto policy.
David Spencer is vice president of premier client services at ACE Private Risk Services.