Truck driver David Johnson confirmed last week he is the sole winner of the December 26 New York Powerball drawing. The 56-year-old, who emigrated from Jamaica when he was 16, quit his job at Iberia Foods and plans to live on the estimated $114 million he will collect after taxes.
Johnson’s plans also include buying a new family home in Brooklyn and his dream car — a Porsche, “a red one so everyone can see me when I drive on the street,” he told a local TV reporter.
Like most lottery winners, Johnson’s net-worth changed overnight. So did his risk profile. Newfound wealth requires an expertise in financial planning and specialty insurance that many winners might not have tapped into previously.
Insuring high-net-worth individuals is complex. They are often underinsured or have inadequate coverage, so to address these unique risk profiles, the Private Client industry offers a range of specialty insurance products and insurance companies designed specifically to meet the needs of affluent clients.
The high-value assets and high profile exposure of affluent clients also necessitates higher limits and customized coverage available through various Specialty Personal Property and Personal Umbrella policies, said Bill Gatewood, Corporate Vice President, National Practice Group Leader, Personal Insurance, Burns & Wilcox, Corporate Headquarters.
Big-ticket, luxury items like David Johnson’s red Porsche could require a specialty automotive policy or Collector Car coverage, depending on the year and model; similarly, a high-end boat would need to be covered by Yacht Insurance. A Personal Articles Floater policy can cover valuable items like fine wines, artwork and jewelry.
Lottery winners always make for good headlines
The odds of winning the Mega Millions or Powerball, two of the largest U.S. lotteries, are around 175 million to 1. But many beat the odds, most often splitting a larger prize with other winners. A Kansas resident won a combined $35,000 this month with two different instant tickets.
Former White House chef Roberto Mendoza recently collected a $250,000 prize from a Hit $500! scratch-off ticket he purchased, at his mother’s urging, from a North Carolina 7-Eleven. Mendoza is donating the $176,876 he netted after taxes to his foundation, which is building a cafeteria for the homeless in his native Dominican Republic.
And then there are winners like Michigan retirees Jerry and Marge Selbee, who recently described to 60 Minutes correspondent Jon Wertheim how they used mathematics to exploit a lottery loophole, amassing $26 million in prize money over nine years.
The person holding the single winning ticket for the October 23, 2018 Mega Millions drawing has yet to come forward to claim the $1.5 billion jackpot, the second largest in U.S. history. The prize can be claimed through April 20, 2019, but the mystery surrounding the ticket holder’s identity has led to speculation that either the winner is unaware of his or her sudden wealth or has deliberately waited to come forward for tax reasons.
Once the initial shock wears off, lottery winners would be wise to consult financial and insurance experts to help them manage their financial assets, assess their risks and ensure that they and their family members, as well as any new property they acquire, are protected, Gatewood said.
Sudden affluence creates new property risks, liabilities
While coverage for any newly acquired assets is readily available, high-net-worth individuals may find it challenging to get certain insurance policies, according to Gatewood. Lottery winners, professional athletes, entertainers and inheritance beneficiaries, all of whom come into substantial money quickly, also become immediate litigation targets, said Gatewood.
“As insurance professionals we often see younger people buying expensive cars and boats they aren’t trained to handle, or houses they give away to friends or family members,” Gatewood said.
Wealthy public figures can be accosted by unscrupulous individuals hoping to engage them in an altercation that could result in a lawsuit. That’s one of many reasons why insurance carriers are more concerned about insuring an individual rather than assets, Gatewood said.
Depending on the visibility of the insured, Kidnap and Ransom Insurance or other unique coverages might be needed as well.
To get a sense of how a prospective client will manage their wealth, insurance brokers consult the individual’s other advisors, including sports agents, wealth managers or attorneys. Those conversations can help establish a risk profile that impacts the availability and cost of insurance policies.
“Maturity and experience are important criteria to evaluate. A more mature person may not drastically change how they live, so their risk may be less,” Gatewood said. “Insuring property is not the issue – it’s the person who owns the property that drives the solution.”
One of the ways a high-profile affluent individual can ensure that he or she obtains adequate personal coverage is to work with an insurance broker who specializes in Private Client policies. Insurance carriers have a greater level of confidence working with a broker or agent experienced in this area.
“An experienced private client broker knows what questions to ask and how to develop a risk management plan that protects the client,” Gatewood said. “His or her goal is to protect the assets and lifestyle of that person because suddenly they have more to lose.”
Experts help instant millionaires adapt to, maintain wealth
Family disagreements may be one of the biggest threats to financial independence after an inheritance, which further strengthens the notion that partnering with trusted advisors is warranted.
A money manager can help alleviate the pressure a newly-minted millionaire may be under from friends and family by setting an allowable budget, said Craig J. Snyder, CFP, President and CEO of America Group Retirement Strategy Centers. He has worked with lottery winners and has observed that, on average, a steady financial pattern emerges about five years after someone receives sudden wealth.
“We often keep their investments somewhat liquid so that we can adapt to their lifestyle,” Snyder said. “Like with any client, we figure out what they want to do with the money and what their risk tolerance is. We need to understand what keeps them up at night.”
Those who come into newfound wealth are at risk of losing half of their money to inheritance and estate taxes, so they are encouraged to develop a strategy of preserving wealth for future generations, said Gerald Morello, Jr., President and Managing Partner of Morello Law Group, P.C. Morello, an elder law, probate administration and estate planning attorney, said creating an irrevocable trust can help avoid future estate taxes.
Based on current tax laws, creating foundations and charitable trusts – or donating to an established foundation like former White House chef Mendoza – can also protect an individual’s funds, Morello said.
Assembling a team of professionals to proactively shepherd someone completely unaccustomed to wealth through the creation of a charitable trust and instituting other high-net-worth financial and insurance strategies might be the most important decision one can make, Snyder said.
“You have to remember that if you decide to make financial decisions yourself you’re in essence hiring yourself – a very part-time person with little to no experience in the field – to care for your money,” Snyder said. “Your maturity level will help determine how much you rely on the guidance of professionals who have your best interests in mind.”
Sudden wealth does not necessarily bring financial ruin
While some experts maintain lottery winners commonly lose everything, the majority of winners don’t go broke, said Snyder. A recent study in Sweden backs him up. “Telling a story about how a lottery winner went broke is a good headline but your lack of discipline is why you would go broke after coming into money,” Snyder said.
A critical part of responsible asset management is investing in expert guidance and comprehensive protection, whether your net worth is $100,000 or $10 billion. That can be especially difficult for people whose newfound money comes with intense public scrutiny.
“If you suddenly win $300 million and you’re in the news, chances are you’ll be getting phone calls from groups and people asking for money every day,” Morello said. “Getting people (with newfound wealth) to understand how substantial this money is and getting them to act in a way to preserve it is a big part of our job.”
“They need to become comfortable with relinquishing some control of their money and trusting others,” Morello added.
Having the proper insurance can help build this trust and is an essential component of effectively safeguarding millions of dollars.
“We have written limits of up to $100 million on Personal Liability Insurance policies,” Gatewood said. “The key is that that no matter what your new net worth is, you don’t want to be underinsured.”
As with any coverage need, an insurance broker or agent must be consulted. Click here to forward this article to your insurance broker or agent to ask if you need this coverage, or share this with clients to start the conversation and ensure proper protection.