Shepard on Insurance Current events and feedback on insurance

On the heels of Irene and then Sandy it is clear that insurance companies are a bit "clueless" on the future regarding pricing of homeowner insurance coverage in the Northeast. If you could predict the weather you would have a better chance of understanding the future of homeowner insurance premiums.  But the #1 underwriter of home insurance in Fairfield County is giving it a stab:

Here is how it's going to look!

Nineteen different pricing tiers based on 3 primary factors:
 1) Your insurance score - (more later)
 2) Your claim history - not including major storms typically referred to as cat (catastrophe) claims
 3) The size of the home

What is an Insurance Score ?

 Every company has their own model on scoring, but it’s a variation on a credit score. It could include:
  - your current level of debt
  - your credit history/performance
  - any recent new credit
  - type of credit used
  - how often and timely you pay your insurance premiums

Here are some points to consider in making the decision:

 - try to stay with same company and earn loyalty discounts
 - where it makes sense bundle coverage and get discounts
 - policies are becoming more flexible, so find an agent who invests in seeing the property and knowing your needs & wants
 -  credits increase due to protection devices so alarms, generators, etc are beneficial
 -  take a larger deductible to avoid using your policy for small claims and you will be rewarded with long term lower rates

It's complicated, but a good agent who invests the time can sort it out and find the right place for you.

Irrevocable Life Insurance Trusts are a valuable planning tool to assist clients in protecting life insurance benefits from Estate Taxes. The typical insurance vehicle for use in an ILIT is term life insurance. Fairly simple coverage that you can normally fit under the annual gift allowance.

But is this really the best choice of product for the Trust?

Using term insurance, usually with a 20 year fixed cost, while an option, may not be the best option or the optimal solution in estate planning. If the insured dies during the term period, then the term option proves to be the best choice.

But all our clients are still with us, and that creates a problem we call the Term Insurance Trap.

- The 20 year term policies are expiring, or resetting at an unacceptably high premium
- The client is now 20 years older
- Some may have developed medical issues
- Almost all of them would like to keep the insurance if it wasn't so expensive
- Estate taxes still exist
- Most clients never used their full gift allowance

We might have a better way, which we call Maximum Funding

The focus on insurance in a trust has always been first on the need for coverage, and secondly the tax shelter of the death benefits. But this sequence overlooks one of the most important aspects of a life insurance policy, tax deferral. If you reorganize the focus and add a future aspect to the equation, you add asset transfer to the need and tax shelter focus.

Let me break it down

Let's assume you have a 40 year old high net worth, high income client needing $5M of life coverage. Use of an ILIT would be a wise step, and then 20 year term insurance for $5M with an annual premium of $4,400. This seems simple and straight forward planning. But this client is highly likely to be alive at age 60, and if his success continues he has a bigger problem

- With continued good health you can reissue another 20 years for $32,775/yr
- If it's a tax exposure that will never go away permanent coverage can be issued at $86,490, again based on good health
- But what if the insured has developed some medical history? It could make the cost of insurance exorbitant

This is the problem we have with nearly every life policy we have implemented in a trust. Executing plans without a long term view.

So here is an alternative.

Taking that same 40 year old, if you filled the need with permanent life insurance for $5M that premium on a Preferred Non Smoker basis would be roughly $32,000. But insurance rules allow you to contribute about twice that sum without losing the tax deferral. But who would pay $64,000? Someone who recognizes that they will more than likely build a substantial estate, and is looking for a plan that takes care of today and bites off a bit of the future problem. Here is how that transfer charts:

(Based on $5M Universal Life, Issued Preferred Non-Smoker with current interest rate of 4.5%)

So in year 20 nearly $2,000,000 of cash will be transitioned into the ILIT, the death benefit is now 35% higher, and you are not faced with passing a physical to keep your insurance.

It is more than likely that your 40 old client may not be ready to maximum fund the $5M of life insurance. But if he needs $5M of life insurance it is highly likely he can afford more than $4,375 to start taking advantage of the tax deferral rules of life insurance to transfer assets to their beneficiaries in a structured intelligent method.

Don't get caught in the Term Insurance Trap!

The key number for domestic employees is 26

It is relatively common place these days for a homeowner to have a cleaning lady, a yard helper, or even a handy man they employ to help keep up with those homeowner duties. But who is responsible if that part time labor is suddenly injured?

Here is what you need to know to be prepared for that unfortunate event!

All home insurance policies exclude coverage for domestic employees, where there is a legal requirement to provide Workers Compensation insurance.

So, when is a homeowner legally required to provide coverage? That requirement would come when your domestic employee surpasses 26 hours of labor per week.

But, many of these domestics are paid in cash! So how does that work?

Unfortunately the first concern is when your domestic employee is injured, even if they are not a US citizen, they can always find a lawyer!

What is the best thing to do?

First, determine the number of hours each employee works. If it is more than 26 you need to stop paying cash, and start running your employment like a business. Most domestics will not like this because it will force them to pay taxes. Once you have your records set you can buy a Workers Compensation policy that gives you full protection. If you continue to pay cash you will be unable to buy this coverage.

Second, if your domestic works less than 26 hours per week your homeowner's policy may provide coverage between "medical payments" for the medical costs, and bodily injury liability for the loss of time. One large caveat, at Shepard Insurance we predominantly underwrite with premium home insurance companies who have demonstrated the effort to defend and pay these claims. We have not reviewed the language on a basic home policy written by most insurers, but we have been advised the coverage restrictions are enforced.

And finally, even if your domestic employee works less than 26 hours a week, keep payment records of money and hours worked. If the employee contends that they work 30 hours to qualify for Workers Compensation, and you have no records, you may have a problem.

*Please note that these rules apply to insured's in the state of Connecticut. Rules and regulations vary from state to state; it is best to check with your agent to see how coverage is determined. *

The worst time to figure out if you have chosen the best home insurance policy to meet your needs is when you have suffered a large loss. So, here are some pointers to help you be certain you have made the right choice for you and your family.

Critical Points

With the recent storms we have experienced in the Northeast the first point to consider is to view your insurance as a vehicle to address large claims. Figure out how much you can personally handle as a small loss, and use this as your deductible, keeping your premiums and claims to a minimum.

1. A traditional home insurance policy has two key values that drive your coverage.

Dwelling Replacement Cost - the amount it would take to rebuild your home in the event of a fire.

Contents Replacement Cost - most policies provide 70% or 50% of your dwelling replacement cost as automatic coverage and this may be more that you need. Lowering contents will save money on each year's premium.

2. Premium or Basic Coverage - a basic policy has strict limits on coverage in comparison to a premium contract, where the guarantee to rebuild is without a cap.

3. Deductibles - with all the storms the deductible is becoming a more important issue. Deductible credits used to be capped (limited), but to encourage insured's to accept the responsibility for small claims, caps are being removed. Start with a deductible of 2% of the dwelling and consider moving it to 5% to save on premium long term, but make sure you look at all deductible options.

4. Insurance Company - buying a home in Fairfield County is unique. You can not use a company that specializes in insuring homes that rebuild for $250,000 and expect they are a long term option for a $5 million dollar home. Secondly, many insurers seem to only stay in a line of business if they can make a profit. In our region, home insurers have had 3 straight years of losing money, so make sure you find a stable partner with financial depth.

5. Ask for credits - below is a list of credits that will help discount your cost:

• security and fire detection system
• generator
• new home
• renovation
• leak detection
• gated community
• sprinklers

6. Limits and Exclusions - are found in all home policies, such as: $5,000 coverage limit for jewelry, or flooding and earthquake coverage being excluded. Ask your agent for a list of your policy limitations and exclusions to know where you do not have coverage.

7. Meet with your Agent- it is very important for you to know your agent. Meet with them so that he or she has a full understanding of your circumstance. At the same time you can judge their capacity in protecting what is your most significant asset.

FLOOD is an excluded coverage on all home insurance policies. If you need, or want coverage for water damage from outside your property, you will need to purchase it separately on a flood policy. But while a flood policy provides insurance for water exposed property, it is not at all like your Home Insurance Policy.

Here is what you need to know:

 COVERAGE

1. Flood Insurance is issued primarily through the National Flood Insurance Program (NFIP) that is governed by the  Federal Emergency Management Association (FEMA).

 NFIP provides for very limited coverage:

$250,000 for Building 

 $100,000 for Contents

At no time during a claim is more than $250,000 for the dwelling or $100,000 for contents paid regardless of special NFIP language. If you need more coverage many times you can buy Excess Flood coverage, but not through the NFIP.

2. If you have a mortgage and you are in a designated Special Flood Hazard Area (SFHA), you are required to have flood insurance. NO EXCEPTIONS

3. You do not need to be in a Special Flood Hazard Area to purchase flood insurance; it is available for all properties. 

4. The premiums for basic flood coverage are determined by your Flood Zone, which is identified by FEMA, and generally confirmed by an elevation certificate. The important number is the elevation of the lowest floor of your house in relation to the Base Flood Elevation.

5. Here is the first critical difference in Flood Coverage. The dwelling has replacement cost coverage and the contents are limited to Actual Cash Value, but it is not a replacement cost contract. If your property is damaged by flood, your recovery is reduced by depreciation; in other words, the value is reduced by how long you have owned the items. Items of unique or special value such as antiques or art are not recognized for their real value. YOU WILL NEVER BE MADE WHOLE FOR YOUR FLOOD LOSS!

6. If any part of your dwelling is located in a higher Special Flood Hazard Area, the zone and rate determination for your property defers to the higher zone.

7. If your garage is used to only house your vehicles, 10% of the building limit can be applied to garage damage. If you use it for an office, or there is an apartment above, it is not covered under the home flood policy. You have to write a separate policy to insure it or other detached structures like a pool house.

8. Most property below the residence primary living area of a home is not covered, so other than your mechanicals in the basement or lower level (below grade) there is no coverage. There is no building coverage for a finished basement.

9. A building needs to be 51% above ground to be eligible for flood coverage.

10. Residential flood coverage can insure a 1-4 family house, but only the owner can buy building coverage. Renters may buy coverage for their contents.

CLAIMS

11. If you suffer flood damage, claims have to be reported within sixty days (for Superstorm Sandy they extended that limit to one year).

12. Your selected deductible will apply separately to your building damage claim and then also to your contents claim.

13. VERY IMPORTANT - For a NFIP flood claim to apply, the water damage must have occurred to at least two adjacent properties or affect an area of more than two acres.

14. There is NO consequential coverage on a flood policy, such as Additional Living Expense (ALE) that is found on a regular home insurance policy. If you are forced out of your home due to flood, the cost of alternate housing is not covered.

16. There is no debris removal coverage, unless the debris is in the house or leaning on it.

17. Flood insurance will pay $1,000 for sand bag reimbursement and $1,000 to safeguard property but this is part of the total policy limit.

18. If you suffer damage that incurs an increase cost of construction due to building code the community must issue a substantial damage designation, and then there is up to $30,000 of additional coverage applicable (but never more than the policy limit). 

19. Building claims for repairs are limited to two feet above the high water mark of the flood.

Or Why You Might Want an Umbrella

Last year we had a client pull out of a driveway, across traffic colliding with another vehicle while trying to merge. Our client thought the other vehicle had stopped to let him in. It was dark out, I guess not.

This seemed like a pretty straight forward accident. There was about $10,000 of damage to our client's sports car, and $5,000 to the other vehicle, a small economy car. But NO- there's more.

The other driver went to the medical clinic complaining of back pain. The next call was to a lawyer, after which, the other driver immediately started therapy with a chiropractor.

Our client’s insurance company reached out to the claimant’s attorney 90 days after the accident for an update, and was advised the claimant had herniated (bulges) 5 discs in the cervical lumbar area. Based on a discussion with the attorney, our insurance company set up a $30,000 reserve for the claim. Further investigation of claim history showed 2 previous auto injury claims in 2000 and 2004 both head/neck/back related; with different insurers.

Working into the five month gap since the accident, our client’s insurance company spoke by phone with the claimant's attorney and was advised the injured party had already spent more than $200,000 on medication and therapy.

After seven months, the claimant’s attorney submitted documents requesting payment of the full policy limits of $500,000. They claimed: past meds and pain & suffering of $450,000, and future expectations of additional meds and pain & suffering of $650,000, for a total of $1,100,000.

Eight months after the accident the claim was settled for $400,000.

One critical side note - this car was registered out of state at a vacation property with an underlying policy limit of $500,000. The insured had a $3M umbrella policy in Connecticut that the claimant’s attorney did not source. The claimant's attorney advised that if he knew of the umbrella he would have worked for a larger settlement.

The moral of the story here is don't have a fender bender with a claimant with spinal issues and insurance history. Or realistically, make sure you have a substantial umbrella to protect yourself against these unforeseeable losses.

COMING SOON "ASK SHEPARD"!

 Managing Future Home Insurance Premiums

1) HIGHER DEDUCTIBLES - Consider accepting more personal risk in the form of higher deductibles. At the same time, be more diligent on preparing your property against storm losses. Going forward, claim free credits will become the single largest value in controlling future premium costs.  Take a more catastrophic view for the long haul and you will save. 

2) BUNDLE COVERAGES - Where you can, bundle coverage's such as: auto, valuables, umbrella and even watercraft with your home coverage, to get premium credits and lower your cost.   There will be times where it does not make economic sense to combine coverages, but where you can, give the insurer more incentive by combining personal insurance coverage's. 

3) COMPANY LOYALTY - Beyond the loss free credit, the second largest credit will be loyalty.  The longer you are with the insurance company the better. Your premium credits will be based upon your tenure with the same insurance company. 

In the last 5+ years, with all the storms, reinsurance cost has grown by nearly 400% on coastal properties (within a mile of the shoreline) and as mentioned the wind & water issues are beginning to resemble Florida.  So, as the home insurance industry charts its future path the mantra for homeowners in the Northeast should be “prepare and prevent" to control long term costs.  

Coming Soon "Ask Shepard"

As this storm bears down on us, we anticipate that power will be out, so we have listed the phone numbers of the insurance companies to call in a claim.

Chubb: (800)252-4670 Website

ACE: (800)945-7461 Website

Utica: (800)216-1420 Website

Travelers: (800)252-4633 Website

With the size of this storm it may be difficult to reach the insurer so we have listed our office contacts below. It may be best to send us a text to make sure you do not get hung up in very heavy phone contact. As always, you may contact our emergency phone number at: (203) 517-8185.

Kate Friis - (203)403-3576- katherinefriis@sbcglobal.net

Lisa Grieco - (203)550-9901 - lisagrieco@rocketmail.com

Kyle Shepard - (203)536-9526 - kshepard@shepardinsgrp.com

Steve Shepard - (203)912-6822 - sshepard@shepardinsgrp.com

Beth Bolton - (203)984-5553 - ebolton@shepardinsgrp.com

Don't forget any last minute supplies and preparations!

-Secure anything the wind will blow outside

-Get ready for a power outage

For some suggestions on preparing please visit: blog.shepardinsgrp.com.

For more information and for claims reporting you may visit www.shepardinsgrp.com or contact emergency@shepardinsgrp.com

Thank You

Hurricane Sandy is rapidly approaching.  Residents of Connecticut and New York should consider preparations they still need to make to help protect their property and families. Sandy has the potential to inundate coastal properties with flooding, cause structural damage to homes including the lifting or peeling of roofs. As you prepare yourselves for the impending storm please keep this advice in mind and this information at hand.

Gather supplies you might need. In the event there is an extended loss of power it is recommended you acquire: a battery operated radio, a surplus of batteries, flashlight, candles, a portable/camping stove with extra fuel (usually propane or butane), matches, first aid kit, a hand operated can opener, plenty of canned food, a cooler and ice, enough water to last at least 3 days. Make sure to fill your car’s gas tank in advance and, if applicable, gas for your generator. It is also worth noting that if power or data transmission lines are damaged, ATMs will not work, therefore, withdrawing some extra cash in case of an emergency is a good idea. It is also wise to get a backup battery but at minimum, make sure your phone’s battery is charged.

Prepare your home and property. Large shrubs and tree branches that are close to your house and windows should be trimmed. Branches, especially dead ones, can easily be blown through windows or damage the exterior of your house and make sure the curtains are drawn. Removing loose objects from your lawn, patio or deck is very important. Items such as potted plants, lawn furniture, toys, and ornaments can be turned into missiles in high winds that can easily damage your home. Also remember to protect important documents and photographs by putting them in a waterproof container, bag or safe. Making sure rain gutters are free of leaves and other obstructions will also help protect your home by diverting water away from the building reducing the possibility of flood damage. It is also a good idea to check the batteries on basement sump pumps.

While it remains to be seen to what extent Sandy will affect Fairfield County or the metropolitan area, the destructive power of hurricanes should not be taken lightly.

We would also like to remind our clients that we have taken measures to ensure we will always be available when we are needed.

For emergencies please call our office at (203)637-6655 and press “5”. For your convenience, emergency support is offered on weekends and after business hours. If there is a power failure, the direct number for our claims phone (emergency line) is (203) 517-8185.

The following is contact for filing claims:

For more information or claims reporting you may visit www.shepardinsgrp.com or contact emergency@shepardinsgrp.com

After reading an article recently about ideas on how to protect wealthy families from a personal security CEO, I thought it was informative enought to forward along. The suggestions ran from extreme (like creating a panic room) to very informative (taking stock of your staff). The following detail I found to be very helpful. 

1.) Take stock of your staff - often times people don't know who their gardner, landscaper, etc. are they come based on referral from a friend. Just knowing the referral is from a friend is not good enough. Gathering as much information about who is doing the work on your house is critical. Knowing who your workers are and making sure they know you know is beneficial. In some cases picture IDs are helpful and if it makes you more comfortable fingerprint them too.

2.) Build physical barriers - a fence around the property is ideal, or even difficult to penetrate shrubbery. Replace the delicate glass in french doors with laminate or polycarbonate glass, which is alot more difficult to break.

3.) Lockdown - use a safe that sends you a text, email, or phone call if it has been open for longer then 10 minutes.

4.) Secure your collections - there is a system that uses a frequency based on the EZPASS that will inform you if your painting has moved from the 2nd to the 1st floor.

All of these as well as checking your alarm system for upgrading capabilities are handy suggestions when you have alot to protect.