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Risk Management

by Jay D. Eich, CFP®, CPA

Risk Management for high-net-worth families involves cost-effectively transferring risk in order to minimize the financial damage of a catastrophic, unanticipated event.  A high-net-worth individual is faced with the added decision of whether to self-insure or purchase insurance coverage.  Some of the vital components of managing risk are medical, long-term care, disability, life, and property and casualty insurance.  Each of these areas has numerous products sold by a multitude of different providers.  Often the complexity of the products serves as a roadblock to purchasing coverage. At Trust Company of the South, we do not sell insurance policies. We do, however, help our clients identify potential areas of risk and then partner with firms who specialize in each individual area. Below are some issues to consider.

Life Insurance

Life insurance products can be categorized as either term or permanent.   In the case of term insurance, you purchase coverage for a set period of time.  The policy distributes proceeds only on the death of the insured.  On the other hand, permanent life insurance products, which include whole life, index universal life, and variable universal life, build cash value each year which can be withdrawn, in addition to protecting your family from lost income or assets via a death benefit.  High-net-worth individuals may also use life insurance to minimize estate tax (typically with second-to-die coverage), protect against the loss of a business partner (via a buy-sell agreement), and tax efficiently save additional assets.

One area that has received recent attention is life settlements – when a policyholder sells his or her policy to a third party for a lump sum cash payment.  More often, however, an unwanted policy is allowed to expire, or sold back to the life insurance company for a fraction of what could be received from a third party.

If you already have an existing policy, it is important to have an independent policy review to validate that the policy is performing as intended.

Medical Insurance

If you are an employee or business owner, your medical insurance will typically be through a company-owned policy.  Usually there are only a few coverage decisions to make, such as how high your deductible will be and whether or not you should combine your plan with a health savings account.  In 2020, that will change.  In 2020 companies will be able to provide employees with tax-free dollars to purchase an individual policy rather than offering participation in a traditional group health plan, thereby generating many more coverage options.  If you are self-employed or no longer working, there are already numerous coverage decisions to make including which Medicare plan to select.

High-net-worth individuals need to pay careful attention to coverage when travelling abroad. Many of our clients own second homes in remote areas and need to consider additional coverage such as Medivac transportation.  Many also purchase concierge medical service coverage.  Concierge medical coverage occurs when there is a relationship between a primary care physician and a patient when, in exchange for enhanced care, the patient pays an annual fee or retainer.  The annual fee allows the physician to reduce his or her patient load and thus have more time with each patient.

Disability Insurance

Many individuals focus on providing for their beneficiaries in the event of death, and often underestimate the impact of a significant drop in income. When evaluating disability insurance, points to consider include whether or not disability income is taxable (it will depend on the policy) and how much income is covered.  Often high-net-worth individuals receive significant bonuses which they use to fund living expenses, but many disability policies cover only the loss of salary, not bonuses.

Property and Casualty Insurance

As wealth increases, the need for more customized property and casualty insurance solutions becomes necessary.  Assets may include multiple luxury residences, often remote, private air and watercraft, classic and exotic automobiles, jewelry and art. A review will often reveal that clients are underinsured, usually because they are using a provider who does not focus on the needs of high-net-worth families. We typically see clients underinsured in the area of umbrella insurance, which provides coverage in excess of the limits specified in other policies.

Long-Term Care Coverage

Long-term care insurance encompasses care not covered by health insurance, Medicare, or Medicaid. Coverage begins when one can no longer perform the activities of daily living such as eating, dressing, or bathing.  According to the Administration for Community Living, part of the Department of Health and Human Services, roughly seven in ten people turning age 65 today will need some type of long-term care services.  On average, care is needed for three years, but in many instances can be longer.  High-net-worth individuals typically prefer to receive care at home. Cost for in-home care or care at a high quality facility can easily exceed $100,000 a year.

Long-term care polices can be sold separately or combined with a life insurance policy.  While high-net-worth individuals have the asset levels to self-fund, there can be situations, both financial and emotional, in which they should consider purchasing a long-term care policy.

At Trust Company of the South, we believe in a holistic approach to wealth management; effective wealth management is much more than managing money.  We work with our clients to analyze and provide solutions to minimize the risks they face related to loss of income, health and property. Please contact us if you are interested in a review of your risk management plan.