Your client has spent decades accumulating an asset base that they hope to carry them through retirement, and to ensure their children’s needs are met. It would be a shame if all that hard work disappeared overnight because of insufficient property and casualty insurance protection.
According to P&C experts and financial planners, it isn’t too far-fetched a notion that most clients could fall victim to just such a scenario, as the dynamics of the P&C industry today may leave them exposed to both common and uncommon hazards due to a lack of adequate protection.
“In the last 10 years, I don’t think I’ve seen a new client where we didn’t recommend some fairly significant revisions in their property-casualty coverage,” Kevin Gahagan, of Mosaic Financial Partners Inc., told the Financial Planning Association. “It’s quite common to find clients who really have not looked at their property and casualty for an extended period of time.”
Why are so many clients underinsured, and why aren’t brokers being more proactive in opening a discussion on P&C coverage and financial planning?
“Financial planning people may say, ‘Buy an umbrella policy,’ and that’s pretty much the extent of their recommendations,” says Clark Randall, a 20-year veteran of the financial services industry with Lincoln Financial Advisors. “They completely ignore the property and casualty needs of their clients.”
The risk of losses due to litigation, natural disaster, or theft may be no less than the risk of losses due to a bad investment strategy, says Randall. (continued.)
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“And the more wealth they have,” he points out, “the greater the likelihood that they’re going to have some pretty significant gaps” in their insurance coverage.
On a practical level, financial planners may be better suited than traditional P&C agents to identify those gaps – which it should be pointed out is not the same thing as filling them. That’s because by virtue of deciding to work with a financial planner, clients have decided to bare their financial souls in a way they may not choose to when talking to a traditional P&C professional.
For Gahagan, there appears to be a reluctance to review the adequacy of coverage.
“Even with high-end clients, many property-casualty agents simply do not periodically review the adequacy of their coverage,” he says. “One reason may be that often insurance agents working on a commission model are looking to make a sale, and will look for what can be sold. Nobody wants to pay more than they have to for insurance, so there’s a hesitance, at times, to go back to the client and say, ‘You really need more insurance.’”
Some of the points for brokers to open a discussion with clients can include:
Appraisals - If a home is particularly valuable or has special decorative or architectural features, have it appraised by an appraiser approved by the insurance company, rather than simply relying on standard replacement-cost formulas tied to square footage or neighborhood real estate prices.
Contract language - Pay attention to contract language specifying whether a damaged or destroyed home will be fixed with “similar” or “like-kind” materials. That may mean the difference between having plaster walls replaced by drywall or plaster, like the original. (continued.)
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Extended coverage provisions - Every policy makes a provision for what is called extended coverage. It’s supposed to provide an additional benefit under extraordinary circumstances, such as a surge in construction costs that could occur in the wake of a natural disaster in which the demand for construction services spikes. But policyholders should not underinsure on the basic policy amount in the hope that extended coverage will bridge the gap. Your client needs to maintain the appropriate level of core coverage.
Personal property replacement - Some carriers may offer some form of cash settlement, while others will reimburse the client if they go out and buy the lost items. They are two very different things, and clients should be made aware of the difference.
Miscellaneous limits - On high-end homeowners policies, you won’t find as many limits on reimbursement for damage caused by such hazards as backed-up sewer lines. Such distinctions can make a big difference in some situations.
