Why Wealthy Families Need More Insurance?

Although many people assume wealthy individuals and families have nothing to worry about, they do have to worry about being targeted with significant liability lawsuits.

Unfortunately, many wealthy families do not have ample protection against such lawsuits. They also underestimate the cost of potential damages and how affordable protection is in comparison with those damages.

A recent study by ACE Private Risk Services found that half of the people interviewed thought the worst lawsuit they could possibly face would be less than $5 million in liability.

But, the reality is that lawsuit awards for serious injuries are often much higher than that amount. And if the plaintiff finds out that you are a high-net-worth individual, they can increase the amount they are seeking from you.

Individuals interviewed for the study had more than $5 million in assets. ACE's study sought to uncover the threat perceptions of these wealthy families. It found that:

• Rich families feel they are increasingly targeted for lawsuits.
• 80% of wealthy individuals believe their money puts them at a higher risk.
• More than 65% feel that the nation's view of the wealthy has become more negative in the past decade.
• Almost 40% feel they are more likely to be sued over the next few years.

The Risks

The survey found that more than 50% of these families have household employees. Gardeners, housekeepers, and nannies are all staff members who could become disgruntled enough to file a lawsuit.

In many cases, the allegations may not even be true. Sexual harassment, wrongful employment practices, wrongful termination and discrimination are common allegations in such suits. 

Wealthy individuals who serve as trustees of charitable organizations must also consider the organization's directors and officers coverage, which may not be significant enough for individual protection.

Auto accidents, dog bites, character defamation, and slander are also common lawsuit allegations.

Umbrella coverage

Most primary policies like auto and homeowner's insurance usually cap liabilities at a relatively low level, like $500,000.

To augment that coverage and protect their assets, wealthy individuals need to secure an umbrella policy that has appropriate limits for their net worth. Unfortunately, many are woefully underinsured. The ACE study found that:

• More than 40% of the survey participants reported carrying less than $5 million in umbrella liability coverage.
• More than 20% said they did not have an umbrella policy at all.

In the event an incident exceeds the liability limits of the base policy, an umbrella policy provides crucial extra coverage.

There are several companies specializing in umbrella policies for wealthy families whose net worth is beyond $1 million. These insurers offer policies covering between $5 million and $100 million.

Premiums are quite reasonable for the coverage, and policyholders can reduce the premium by increasing their deductible. But the key is to buy a policy with enough coverage.

If you're worth $2 million, a $2 million umbrella is not going to protect you from a $4 million legal judgment, since it would still be worth a lawyer's time to go after your personal assets. So even if your net worth is below $4 million, you should consider a $4 million umbrella. We recommend securing coverage that is at least equal to your current net worth. That said, if coverage falls short, a judge could order you to pay up, forcing you to liquidate savings and investments, real estate and personal property - and even garnishing your wages.

For more information, feel free to Contact Neptune Financial to schedule an appointment.

Basic Understanding

This blog is being provided for informational or educational purposes only. It does not take into an investment objectives or financial situation of any individual, family, prospect, client, or prospective clients. The information is not written or intended as investment advice and is not a recommendation about managing or investing your retirement savings.

An individual seeking information regarding their investment or retirement needs should contact a financial professional.

Neptune Financial, and their financial professionals do not render tax and legal advice. Please consult your tax and legal advisors regarding your personal tax or legal concerns.