While insurance can be an important risk management tool, determining how much and what types of insurance are needed can prove challenging. Insurance needs also evolve over time as life circumstances and net worth change, adding another layer of complexity to the analysis. The right coverage matters; people often pay too much or too little, or have holes in their coverage, which could have significant implications if something were to happen. With adequate insurance coverage and regular reviews, you can rest easier knowing your family and assets are protected. At Freestone, we’re here to help. In this article, we’ll discuss general considerations and tools used to determine appropriate amounts of coverage for several policy types that are most significant for high-net worth individuals and families.
Excess Liability (“Umbrella”) Insurance
Sometimes called Umbrella Coverage, this insurance will pay out in the event a claim goes above your base coverage amounts on homeowner’s and/or auto insurance. This coverage should always include personal liability and uninsured motorist coverage. If the client has domestic employees or serves on any boards, consider adding “employment practices liability” and/or “directors and officers” coverage for further protection.
When assessing how much coverage is enough, a general guideline is to ensure aggregated coverage limits are approximately equal your net worth, although this is also dependent upon individual circumstances. When reviewing coverage levels, your underlying homeowner’s and auto limits should also be considered. For business owners or certain professions requiring separate liability coverage, the amount should be enough to cover personal assets. It’s important to re-review coverage levels every few years to ensure limits are keeping up with your net worth as it increases.
Note: Middle-market carriers may not have the ability to write excess liability policies over $5-$10 million and may be more expensive with high amounts. Completing a full Property & Casualty coverage review can assist in making these determinations. Your Freestone Client Advisor can help coordinate a complimentary full review with one of our trusted insurance partners.
The most common reasons for purchasing life insurance are income replacement, debt payoff, and for estate liquidity to help cover final expenses and estate taxes. Life insurance policies fall into two general buckets:
- Term life insurance is lower cost, used for short-term needs (10-30 years) and offers guaranteed premiums during the specified term.
- Permanent life insurance incorporates several types of products. The appropriate choice will depend on the goal of the coverage, but when properly structured and funded, all products provide lifetime coverage. Policies may pay dividends and/or may build cash value over time. Although typically more expensive than term insurance, permanent coverage will generally be the best option for estate liquidity needs.
Term Life Insurance: How Much?
Factors in determining appropriate amounts for term coverage include:
- Income – If you’re married or in a domestic partnership, do both of you work? If so, you should both have some level of coverage for income replacement.
- Debt – What is the lump sum that the survivor of you would need in order to pay off all debt? Consider mortgages, student loans, car loans, credit cards, etc.
- Assets and savings – Do you already have significant savings, or are you just starting to accumulate assets? Do you live within your means and save a lot? What other items might you need liquidity for? Consider childcare needs, education expenses, home maintenance, and other miscellaneous expenses.
- Timeline – Term insurance is generally only needed during working years, or until assets are enough to support the survivor of you through your life expectancy. Income tends to increase as we age, while debt tends to decrease, so coverage may not be needed through the entirety of your working years or until debt is 100% paid off.
Permanent Life Insurance: How Much?
Factors in determining appropriate amounts for permanent coverage include:
- Determine the goal of the coverage: Is it for Estate liquidity? For a couple or an individual? Is access to cash value in the future important? Do you want to have a certain dollar amount set aside for your children/heirs?
- Use the goal to determine the appropriate type of policy: In the case of Estate liquidity, for couples, this is often used to earmark funds to pay estate taxes and is frequently structured as a second-to-die policy with a guaranteed death benefit. For an individual, a guaranteed death benefit for an adequate length of time is important. To ensure adequate coverage for estate taxes, you’ll want to review your financial plan and consider any estate tax in your state of residence. This type of analysis is best done in your 50s, as part of broader estate planning discussions, and while premium rates are likely to still be manageable. A variety of premium payment structures are typically available.
- For other goals, the appropriate type of permanent policy will depend on a variety of factors, so consulting with an insurance expert to discuss options is imperative.
Disability insurance is frequently overlooked as it can be complicated, and most employers offer some level of coverage in the form of a group policy. Employer plans will typically provide a benefit of up to 60% of income, up to a specified monthly maximum. These benefits will begin paying after a predefined elimination period, or time period before payments begin (typically 30, 60 or 90 days).
Supplementing a group policy with an individual policy may be necessary in certain cases, such as for careers where income is expected to increase substantially over a short time period, or when your field is very specialized and a disability could force you into other work that would not pay as much. For example, consider a surgeon whose hand is injured and no longer able to continue operate. She may still be able to teach others, but the impact to her income would likely be substantial.
When evaluating individual disability policy options, it’s crucial to consider the following factors and discuss them with an expert to ensure you’re purchasing appropriate coverage for your situation:
- “Any occupation,” “modified own occupation,” or “own occupation” definition of disability
- Partial or recurrent disability coverage
- Inflation protection
- Length of elimination period
- Current liquid assets available to supplement disability benefits
- Potential for additional costs related to disability (home modifications, extra medical costs, etc.)
Long-Term Care Insurance (LTC)
Completing a financial plan is the best way to determine whether you can self-insure, or should purchase LTC insurance. Just because you can self-insure won’t always mean you’re comfortable doing so because there are emotional considerations. The right solution often falls somewhere between fully self-insuring and purchasing a policy to fully cover your projected need.
When considering LTC, use the following considerations as general guidance:
- Review current LTC costs in your area of residence (or the area in which you intend to retire)
- Review your employment benefits to see if LTC coverage is included. If so, review the coverage level and determine whether you can increase coverage and/or take the policy with you once terminate employment.
- Assume 3-4 years of care will be needed, based on current averages.
- Account for inflation when considering the amount of coverage needed. Policies will offer a variety of inflation options which will impact pricing.
- Consider a hybrid policy that functions more like life insurance than a traditional LTC policy. Premiums are guaranteed and may be structured under limited-pay options, whereas traditional policy premiums are not guaranteed, and are very likely to increase substantially over time. With a hybrid option, a return of the premium may be available if you decide to surrender the policy later, and a death benefit will typically be paid to a named beneficiary if the LTC benefits are not used or are only partially used whereas traditional LTC policies are “use it or lose it.”
- A permanent life insurance policy with a LTC rider may also be a good option, depending on your situation. This option will allow you to accelerate the death benefit to be used for LTC needs and will reduce the death benefit accordingly.
At Freestone, we believe risk management is an important aspect of your financial health. Whether it’s for liability, life, disability or long-term care, we can work with you and a trusted insurance partner to determine appropriate coverage types and amounts based on your unique situation. Once identified, we can also assist you placing appropriate insurance coverage in any of the areas discussed in this article so you can focus more on what truly matters to you.
Important Disclosures: Nothing in this document is intended to provide, and you should not rely upon it for, accounting, legal, tax or investment advice or recommendations. We are not making any specific benefits or insurance recommendations and you should not make any decisions regarding your benefits or insurance based on the information in this document. The intention of this document is educational, and it is intended only to discuss limited aspects of benefits and insurance coverage. This document is not a comprehensive or complete summary of insurance considerations. Each individual is in a different situation and has different items to address, and the options in this document are not appropriate for everyone. Please consult your Freestone client advisor regarding options specific to your needs.