Income Protection in the High-Net-Worth Market

The common definition of a high-net-worth individual (HNWI) among economists, bankers and financiers is someone with liquid or investable assets of at least $1,000,000.  That certainly doesn’t encompass most Americans, but unrecognized by many in the financial services industry, it does include a broad swath of prospective clientele, everyday searching for additional financial protection options and more-well-rounded, balanced insurance portfolios.

In my opinion, the usual HNWI definition is in itself misleading and quite limiting.  It can be a turn-off to brokers and advisors spending most of their time marketing outside that space.  “I work in the middle markets, my clients don’t make that kind of income” or “I work with white-collar individuals, but these days they often don’t have liquid assets of that level” are common excuses.  My advice is to resist being discouraged or turned away by definitions in a book or trade journal.

The HNWI definition needs broadening as it pertains to a very important facet of personal financial protection and that is disability insurance – now commonly referred to as income protection as well as the more evolved millennial label of “paycheck protection.”  Disability insurance (DI) is arguably the greatest financial safeguard to any employed person, no matter compensation level, occupation, age or socioeconomic demographic.  The traditional HNWI definition fails to address and fully represent those that fall into gray areas like persons with substantial annual earnings, but lacking historical holdings of liquid assets.  As it pertains to disability insurance, the definition should be augmented to a more forgiving nature aimed less at liquidity and savings volume and directed more at annual income level.

My definition of a high-net-worth individual is an employed person making over $250,000 annually.  Simple as that.  We’re not only talking about professional athletes, hedge fund managers, Hollywood movers and shakers or CEO’s of Fortune 500 companies.  I want to dispel those misconceptions.  We are also talking about insuring accountants, physicians, attorneys and mid to upper level management employees that probably many of you know and work with already.  HNWI are not necessarily “pie in the sky” prospects that you may think are out of your league.  I’m talking about everyday working individuals with nice incomes that frequently need more insurance.  Many HNWI clients are certainly within your business marketing striking distance. 

The reasoning behind my “madness” and tangent from that traditional HNWI definition is that most Americans making over $250,000 a year cannot typically find sufficient disability resources solely amongst the ranks of domestic disability insurers.  The prescription of a traditional group disability policy and/or a comprehensive individual income protection policy from one or more domestic carriers rarely satisfies the entire need of someone at higher earnings levels.  Income participation limits for domestic carriers commonly lands in the 40% to 60% of income range for a HNWI.  Those breakpoints are unacceptable to most economists and disability income specialists, and it should be unacceptable to your HNWI clients. 

To maintain family expenses and comfortable lifestyles, every working American needs at least 65% to 75% (dependent upon benefit taxability) of his/her income covered by DI.  And just because an affluent person might have more of a nest egg and savings to fall back on in case of an unforeseen disablement and inevitable loss of income, that doesn’t mean they have less to lose.  They have more to lose, which is why the dutiful insurance advisor’s attention should eventually turn to foreign specialty markets like Lloyd’s of London to fill in the financial protection gaps with excess, high-limit disability plans.

The ancient and historic Lloyd’s marketplace has been pioneering personal insurance products for the HNWI space for almost a century, and they are the champion when it comes to supplemental disability insurance.  Administered by U.S. underwriting and marketing firms, Lloyd’s programs, backed by insuring corporate syndicates, tend to be shorter term in nature when compared to domestic DI products, but allow for substantial additional “own occupation” income benefits demanded by the HNWI market, especially those underinsured by traditional carriers.  

Benefit packages are frequently prescribed as a combination of a monthly income payments after a short elimination period followed by a substantial lump sum benefit, coordinating with the insured person’s salary and underlying disability benefits.  Various policy riders are available in the market including inflation adjustment and residual/partial disablement benefits.  Interestingly, Lloyd’s has also developed a very important, but lesser known corporate stock option indemnity plan that is specific to the HNWI space.

Certainly in today’s global atmosphere, adverse economic, social and health concerns are at the forefront of everyone’s mind.  The ongoing COVID-19 pandemic has negatively affected every country on this planet in one form or another.  Many international high finance and insurance institutions have been forced to make corrections that trickle down to the consumer level.

COVID claims in the non-appearance, contingency, business interruption and event cancellation insurance spaces have had severe impacts on carriers the world over, and we are seeing a slight to moderate “hardening” of various life, health and accident markets on the home front as well as across the pond.  Carriers are facing actuarial pressures to increase rates, shorten policy terms, strengthen policy wordings, fix possible wording loopholes and lessen benefit periods.  Yet the demand for insurance solutions in the HNWI space continues to thrive as marketplace dynamics ebb and flow in response to the evolving pandemic concerns.

One field of the HNWI market that analysts and actuaries are keeping a close eye on is that of doctors and surgeons.  Historically, medical professionals have been known to be prime income protection targets.  They are learned and tend to value the critical nature of insuring one’s income as an integral asset.  Yet in recent years, gargantuan benefit limits, specialty-specific definitions of disability and wildly popular guaranteed-issue, multi-life benefits platforms have prompted higher instances of long-term disability claims.  The pandemic’s stifling effect on the profitability of private medical practices has further exacerbated the glaring claims problems.

On the other hand, the field of private equity is burgeoning.  Despite volatility in global economies and fears of recession prompted by the pandemic, mergers and acquisitions among many corporate industries are rampant, and the need for raised capital continues to expand, resulting in higher incomes and additional insurance needs for those involved in private equity companies.  They are the newest rock stars, and their lofty compensation schedules are demanding more participation from income protection carriers.

Another interesting facet of the HNWI market that always begs for attention is that of the collegiate and professional athlete space.  Sports salaries and compensation packages continue to increase and set new bars, yet underwriters are facing pressures to address design flaws in certain disability products that have allowed for substantial and questionable claims histories.  The sales of previously popular products like “loss of value” insurance in both the college and pro arenas has been curtailed and policies redesigned by many market specialists to provide fairer claims thresholds.

Beyond personal DI, business insurances are extremely relevant in the HNWI market.  These individuals are frequently business owners and/or “rainmakers” that carry with them the extra burden of not only maintaining corporate profitability and their own financial successes, but the job sustainability of the persons whom they employ.  High-limit disability products like key person insurance, business overhead expense coverage and buy/sell insurance are requisite income protection vehicles for prudent business and succession planning.

The HNWI market has fared relatively well during the COVID-19 era, and the need for high-limit income protection is more obvious now than ever.  More Americans, lacking sufficient income protection, are fitting into the HNWI category.  Fortunately, the combination of prescribing disability benefits from both domestic and foreign carrier resources in a tiered-benefit fashion is easily attainable.

-Published with permission from Broker World Magazine