The Insurance Mistake That Can Make The 'Upper Class' Bleed Money

There's no denying that insurance serves an important purpose. It protects you from unexpected hardships or events that could take a serious toll on your finances. So, it might seem logical that if you're affluent and can afford multiple policies, you should take out as much coverage as possible. But doing so may be a mistake. While having an abundance of insurance may be a sign that you're in the upper class, piling on excess coverage can result in unnecessarily high premiums, which could take a toll on your finances without offering a meaningful benefit.

"I've worked with many high-net-worth families who were surprised to learn that their biggest financial leaks weren't market losses or bad investments but the silent, recurring expenses they barely noticed," Chris Heerlein, CEO of REAP Financial, told GOBankingRates. One common example of this, he said, is insurance — or more specifically, having too much of it. So how do you know if you're paying for more insurance than you actually need? Start by determining how much it would realistically cost to cover potential losses to your home, car, health, or to support your loved ones in the event of your death. Then review all of your policies to see whether your coverage exceeds what's really necessary.

When reviewing your policies, first check to see whether you have any duplicate coverage, where multiple policies are providing the same or overlapping protection. "I've met clients paying for multiple umbrella policies or excessive life coverage because it once felt safe," Heerlein told GOBankingRates. Umbrella policies, which provide additional personal liability coverage beyond what's offered through primary home and auto policies, are particularly important for high-net-worth individuals, who are often more likely to be targets of lawsuits. While it's logical to want the reassurance of knowing you're financially protected — for instance, if someone is injured on your property and sues you, or you're responsible for a car accident — having two umbrella policies doesn't automatically mean you have twice the protection. 

While you can purchase primary insurance and supplement it with an excess policy, in many cases, it's simpler and more cost-effective to buy a single policy with a higher amount of coverage. Life insurance is another type of coverage you may be paying for unnecessarily. For example, if you receive life insurance through your employer, and it meets all your needs, paying premiums for a similar individual policy could be an unnecessary financial drain. When taking inventory of your existing coverage, it's also a good idea to make sure there haven't been any changes to your policies that you're unaware of, as there are several things insurance companies don't want to cover anymore.

Once you have a good sense of your existing insurance coverage, the next step is understanding what you actually need. To determine whether you have enough homeowners insurance coverage, you will need to have an idea of how much it would cost to rebuild your home and any other structures on the property, as well as to replace the belongings inside. Meanwhile, for auto insurance, you should have enough liability coverage to protect your assets in the event of an accident. For upper-class households, standard home or auto policies may not have high enough liability limits, which is where an umbrella policy would come into play.

In terms of life insurance, figuring out how much your survivors would realistically need — and how much you would want to provide for them — can be trickier. You will need to account for your total assets, outstanding debts, including a mortgage, and any potential future obligations, such as college tuition or living expenses. To get a ballpark idea, some people estimate coverage by multiplying their current annual income by the number of years their family members would need that income replaced. That said, for upper-class families, which often have a higher cost of living, the required coverage amount can be substantially higher. Ultimately, the safest bet is to work with an experienced insurance or financial professional who can help you get the right level of coverage without bleeding money on policies you don't really need.