When people hear Lloyd's of London, they often think of insuring fabulously well-known celebrity body parts, whether it's JLo's well-photographed derriere, Dolly Parton's trademark DD's, or soccer star David Beckham's legs — once insured for a $100 million.
Caught up in all the glitz and glamour, it's easy for advisors to overlook how the powerful resources of Lloyd's can protect their best clients — from executives managing billions of dollars of assets, to partners executing powerful buy-sell agreements, to highly-compensated individuals whose livelihoods require unique income protection resources.
Case in point: We recently worked with an advisor tasked to provide succession planning directives for a Southern California-based asset management and investment firm managing a portfolio of $17 billion. The chief investment officer was critical to the success of the firm, wearing multiple hats—CIO, president, chief investment officer, market strategist—as well as overseeing all the firm's U.S. equity and hedge fund strategies. Under his control, the firm's assets under management had risen from $3 billion to $17 billion within 10 years, thus underscoring the overall importance of his responsibilities.
In this scenario, the firm's investment agreement included an "accelerated divestiture clause," which would allow investors to accelerate the rate at which money can be drawn from their funds if the fund manager dies or becomes disabled. To protect the firm, the board of directors requested $50 million of key-person life insurance and $50 million of key-person disability insurance.
While obtaining a $50 million key-person life insurance policy is a reasonable request and a relatively straightforward process in U.S. markets, a request for $50 million of key-person disability is not such a simple task. In fact, key-person disability for successful businesses and corporations is a significantly underserved market. Most U.S. disability carriers do not offer these policies, and those that do oftentimes have limitations on availability in certain states (i.e. California, Florida, New York, Vermont). In the event a domestic solution is offered, benefits are "capped" to provide less than $1 million, a figure that proves to be insufficient when protecting a business' highly successful human capital.
Thanks to the Lloyd's market, key person disability products are available with extraordinary benefit limits to U.S. businesses and individuals through certified Lloyd's of London coverholders. In this case, a product was designed to deploy the requested $50 million key-person disability insurance policy, payable to the company in a lump sum after 12 months, should the CIO be unable to perform his duties. Traditional insurance would have capped this coverage at around $750,000, hardly enough to throw a blanket of protection over a $17 billion investment firm.
In U.S. markets, key-person disability coverage is just one of the shortcomings of traditional insurance. Buy-sell disability insurance has its limitations as well. Traditional disability carriers generally cap coverage at $2.5 million of benefit, and when partners have an age gap considered to be too far apart, it's common that no coverage is made available at all. This is often an issue in family-owned businesses. By way of Lloyd's buy-sell disability coverage, clients can obtain more than $100 million of benefit per person. Furthermore, these policies can be tailored to fit the company's buy-sell agreement and solve the dilemmas presented in traditional markets.
