High-net-worth individuals (HWNIs) face unique insurance challenges and tend to gravitate towards different insurance products. Wealthy families have relatively more complicated risk management needs and relatively less obvious needs for catastrophic insurance coverage. The real risk might be overinsuring against minor threats and underinsuring against major ones. The benefits of a high-net-worth insurance policy are largely centered around smoothing out the relationship between needs and coverage.
At-Risk and Underinsured
HNWIs often have expensive possessions and hobbies—wine collections, art, racehorses, yachts, and old cars—that are easy to forget to insure. Even if they are insured, most don't do the leg work to find out what a possession's actual market value is; the insurance doesn't fit the possession.
A good high-net-worth insurance agent diligently notes all hard-to-replace possessions, finds a way to appraise them accurately, and offers an insurance solution that covers the right risks.
Good high-net-worth insurance policies can safeguard against cleaning accidents or theft by the cleaning staff. In fact, HNWIs might want to cover their assets against a suit from an employee or service agency. This is known as employment practices liability coverage, or, more colloquially, nanny coverage.
Most high net worth carriers don't offer life insurance. Many HNWIs don't actually believe that they need life insurance; after all, if they die, their estate is probably large enough to financially protect their children and spouse.
It's easy to overlook the obvious benefits. The not-so-obvious benefit of life insurance is that it helps save on estate taxes. For a HNWI, it can save hundreds of thousands or millions of dollars.
Estate taxes for the wealthy are incredibly high. Standard rates are up to 40% of net worth, and those who improperly protect their possessions or fail to name beneficiaries can lose a lot more than that.
If, for example, an individual died in 2016 with $10 million in assets without any life insurance, the entire balance might have been subject to estate taxes. Five million dollars or more were at risk. However, federal law allowed up to half to be passed on, tax-free, to the spouse or children. In this case, only the remaining $5 million would have been subject to estate taxation at 50%. This could have saved the HNWI $2.5 million in taxes. The 2017 Tax Cut and Jobs Act increased the exclusion amount and to more than $11 million until 2025 and reduced the highest tax bracket to 40%. Therefore, at current rates, the entire $10 million in assets could be passed on, tax-free, to the spouse or children.
High Value Homeowners Insurance
Even for a HNWI, the home tends to be the most valuable asset and the most important to cover. In most states, high value homeowners insurance coverage contains an allowance for jewelry or other lost valuables. HNWIs should maximize their benefits whenever possible within fewer insurance products, if only for simplicity.
Those with multiple homes in multiple markets should probably find individual coverage for each property. State and local ordinances, regulations, and homeowners associations all influence the possible and necessary benefits required in a policy.