Five Ways Homeowners May Be Putting Their Wealth and Well-Being at Risk

Affluent families often pay close attention to their investable assets, looking for ways to both protect and grow wealth. But too often, those same families overlook important financial safeguards for two of their largest assets: their house and the contents within it. It’s easy to pay attention to more exciting areas of our financial lives and assume not just that our home is our castle, but that our castle will always be there.

As a result, some families could be needlessly putting a key component of their wealth and well-being at risk. Therefore, it makes sense for you to examine how you’ve incorporated your home into your planning to determine whether there are any issues you need to address—before they become major problems that damage your wealth and can’t be easily fixed.

In general, the more significant problems in financially protecting a primary or secondary residence stem from insufficient insurance coverage due to an improper assessment of how much insurance is really needed. Regardless of why that coverage is insufficient, you will end up potentially losing big if something bad happens and you are underinsured.

Five of the more prevalent—and often most significant—mistakes we see affluent families make with their homes are:

• Failing to have enough liability insurance
• Failing to ensure cohesive coverage on multiple homes
• Failing to list trusts or limited liability companies on their homeowner’s policies
• Failing to address—or to adequately address—unique home features or building materials
• Failing to provide proper coverage for high-value assets

Let’s look at each one of these more closely.

Failing to have enough liability insurance

Do you have an umbrella policy? If you do, is your net worth greater than or less than your umbrella policy? While many (but not all) affluent families have umbrella policies, we find that a large percentage of them do not have enough coverage. Specifically, if your net worth is greater than your liability coverage, you might want to look into increasing the coverage.

Umbrella policies are often the most cost-effective and least expensive form of asset protection you can get.

Example: A hypothetical affluent family has a net worth of a little over $10 million. But they carry only a $1 million umbrella liability policy. There has been no communication between the family’s property and casualty agent and their financial advisors in years. Because of asset positioning and planning done by the financial advisors, the amount of their assets that would be attachable in a lawsuit totals around $6.5 million. In other words, because they carry only the $1 million umbrella policy, more than $5.5 million of their net worth is unprotected.

Pro tip: It’s best to determine the amount of assets attachable in a lawsuit and then set your umbrella limits to cover either that amount or your entire net worth if you have done only minimal planning. Also be sure you name all items that should be named on the policy.

Failing to ensure cohesive coverage on multiple homes

Some affluent families have multiple homes—their main residence and a summer place, for instance—and these houses are often in different states. Such a scenario can lead to complications, particularly if the homes are covered by policies from different insurance companies.

Example: A hypothetical family whose primary residence is in New York state also owns a beach house in South Florida and a ski home in Aspen. The family has coverage on all homes, but each home has a different policy and different agents. Ideally, for cohesive coverage and cost savings, all the policies should be written with one high-net-worth insurance company.

Another issue: The family fails to list their Aspen home on the umbrella policy. Therefore, even though the family carries a $15 million umbrella policy, it does not currently extend to the Aspen home. The New York insurance agent who wrote the original New York home and umbrella policies knew about only the Florida property, not the Colorado home. The result is that the family is lacking what could be very important coverage.

Failing to list trusts or limited liability companies on their homeowner’s policies

Astute affluent families, often working with their advisors, regularly update their estate plans as their situations change and as new laws affecting estate planning are implemented. Many affluent families make smart use of trusts and limited liability companies as part of their estate plans.

However, a significant portion of these same families fail to identify the trusts and limited liability companies as additional insureds—a mistake that can work against them.

Example: A hypothetical retired Chicago businessman and his wife relocate to South Florida for health and tax reasons. Once there, they establish residency and have a new estate plan drafted. They place their new Florida primary residence in a limited liability company and also move their vacation home in Maine to a limited liability company.

In the off-season of the following year, a caretaker in the Maine home has a serious fall due to a loose banister—and he sues. But the limited liability company that was created (which now has beneficial ownership) was never named as an insured on the homeowners or umbrella policies. The end result: The couple pay the settlement out of pocket, racking up a substantial loss.

Failing to address—or to adequately address—unique home features or building materials adequately

Some affluent families have historic homes that have unique construction and were built using expensive materials. In some cases, the architecture is unique. By not attending to these factors, the rebuilding costs (in case of, say, a devastating fire) could easily be far, far greater than the coverage.

Example: A hypothetical wealthy Florida couple purchase a stately old Palm Beach mansion with marble floors, handcrafted plaster accents and an old wood known as pecky cypress throughout the home. Pecky cypress was once used in Florida homes because of its durability and resistance to rot and termites. It is very rare today—and extremely expensive to replace.

The new owners don’t use a quality high-value insurer who could evaluate and properly insure the unique building materials. So, naturally, they don’t realize that the replacement costs of the marble, plasterwork and pecky cypress would be much higher than those of regular building materials. A fire that occurs during a kitchen and bathroom renovation results in massive out-of-pocket costs for the couple.

Failing to provide proper coverage for high-value assets

Some affluent families have significant collections of valuable art or particularly expensive cars. Still others own horses, while a select few might own planes or yachts.

Example: A hypothetical California couple with a love of art have been buying pieces for more than 30 years. They know that many of the items have become valuable, but they lack current appraisals and have no idea about the total value of the collection. They erroneously assume that if something happens, they could simply make a claim on their homeowner’s policy.

When a small piece suffers damage during a rehanging, they discover that the item has an extremely high value. They also learn that the personal property coverage on their homeowner’s policy is not enough to replace it. They quickly contact an agent referred to them and individually insure each piece of art—as should have been done at the outset. A scheduled art policy means that the values are protected even with an increase since the last appraisal, and there is no deductible. The insured is compensated for the entire loss.

This same standard applies to collections of jewelry, automobiles, rare guns and so on. Such high-value assets need their own policies that insure the proper values and are not subject to deductibles.

Make sure you are properly covered

It is easy to be underinsured when it comes to your home and the high-value assets within them. The odds of needing to use your insurance are relatively low, so these concerns often get moved to the back burner. But of course, the very nature of insurance is to provide you with protection when something severe but that has a low probability of happening does indeed occur.

Just as you need to assess and fix your roof and gutters from time to time, you might also need to evaluate and repair your home insurance situation.

Best bet: If you are worried that you may be underinsured when it comes to your home (or homes) and its possessions—or even if you’re just not fully confident that you’re set up for success—identify any gaps in coverage so you can take steps to protect yourself to the full extent you think is necessary.