Fixing things is my fun

One of the reasons I enjoy what I do is because I get to find mistakes and fix them.  It’s the research, the puzzle, and finding the right answer that provides the greatest job satisfaction for me.  And I’m fortunate to be able to apply these elements for the benefit of others.  Stewardship is my motivator.

Fortunately (or unfortunately, depending upon how you look at it), I see LOTS of mistakes in how my industry relates to consumers, so I always have a lot to do.  And since I enjoy the projects of research so much, I keep statistics on what I find.  Here are the big findings covering the last 1,000 insurance reviews I’ve conducted:

  • 951 families had material, yet fixable, errors in their insurance
  • 853 families had unnecessary, duplicated, or wasted coverages and premiums
  • 747 families had under-insured net worth by an average of just over $2M
  • 705 families had under-insured real estate
  • 403 families had under-insured tangible assets
  • 261 families had risk exposures completely missing from their insurance
  • 168 families had prior claims with no help or advocacy from their agent

Not everyone wants to believe that problems exist in their insurance, and not everyone is motivated to fix them, but I like investing in my education and experience for those who are.


Emergency Reserve Funding

Why do you need an emergency reserve fund?  Every financial plan has a reserve-fund component, but few planning discussions go so far as to detail what scenarios might cause you to actually need one.

If you wrote down a list of what those scenarios could be, you’d probably group them into three categories – those that involve the loss of income, those that involve the loss of an asset, and those that involve the introduction of a new expense.

In order to pay for those scenarios you’ll need to use some combination of income, savings, and insurance.  Deciding on the right mix of those can be difficult, which is why we strongly advocate going through the exercise of planning for the possibilities with your financial advisor.

The best way to control your insurance expense

Deductibles.  You might be surprised to realize how much of your premium is predicated on the smallest amounts of insurance you can buy.  I just helped someone who called our office save 25% on their home insurance by increasing their deductible from $500 to $1,000.  That means that 25% of their premium was to cover $500 worth of loss!

It seems obvious that the more you agree to self-insure and keep away from the insurance company, the less you’ll pay for the insurance.  But I don’t think people realize how much it can affect things.  This is true not only for home insurance, but it’s the same for the Collision and Comprehensive coverages on auto policies, too.

There comes a point of diminishing returns, however, so you’ll want to arm yourself with all the info so you can choose a deductible that’s best for you, but the concept applies to everyone – why would you ever buy insurance for something you can take care of yourself?

How to compare agent A to agent B

Insurance agents don’t send their customers a bill for their services.  I bet if we were allowed to do so it’d actually be better for consumers because then there’d be a metric for measuring and comparing value-for-cost between different agent options.  The good ones would thrive and the bad ones would need to adapt.

But even though agents are required to accept revenue only as commissions from the insurance company, you can still choose an agency based on the value you get from their work.  I feel that comparing that value should hinge on the following:

Knowledge  They should have a deep combination of book smarts, experience, & street smarts.  New people tend to fizzle out in this industry and long-experienced ones tend to have many fascinating stories that probably relate to what you need to consider.  When they tell you X and recommend that you follow their suggestion, are they right?  Is it the best possible answer for your situation?

Action  Who does the work?  Will it be the person who knows you best, or will they assign tasks to people who don’t know you?   When the agent promises something will happen, does it?  Will the agent be available when you want them to be, or will they only talk to you when they need to sell you something?

Growth relationships  Will the agent be there for as long as you need them, or will you be training new agents on what’s important to you?  Has the agent ever chosen what’s best for their client vs. what’s best for them?   Can you see yourself being proud to recommend them to family and friends?

Another way to NOT talk about insurance

Yesterday an industry friend and I were talking about improving the manner in which we talk about what we do for a living.  We figure if we can better describe the role insurance plays in good financial planning, consumers might take it more seriously and they’ll be able to ignore the irresponsibility of so many messages our industry sends out to people.  I’ve talked about this before in an earlier post.

I explained yesterday to my friend that my philosophy is that insurance is the only financial product that provides resiliency against sudden financial shocks.  My friend added a bit more, believing that insurance can be the engine to drive a financial plan when a sudden shock interrupts the desired methods of achieving that plan.

I think that’s a good way to put it.  If the inputs to a financial plan’s technique are time and capital and there’s an interruption to either of those, insurance can put the financial plan on its back and keep going.  I like that.

The reason to ponder this isn’t for brochures or blogs, it’s to encourage families to take their insurance planning, insurance scrutiny, and insurance standards more seriously and to filter the noise that might otherwise lead them astray.

Liability coverage – how much do you need?

Well, I don’t know you so I don’t know.  But I can tell you that it should be unique to your situation and only after a discussion with your agent (and most definitely with your wealth manager).  I just don’t ever understand buying off-the-shelf insurance, so be sure it’s a customized approach.

I also believe that most people (experts included) talk too much of the odds/chances that something really bad will happen when choosing a limit of liability coverage.  Do the odds of having a house fire affect the amount insurance on your home?  No.  So why make it a factor in choosing a liability limit?

The chance that something bad will happen is the insurance company’s worry.  It’s partly how they calculate the premium they’ll charge.  So most people can put aside things like odds/chances* and instead focus on something more urgent in the decision – how bad would the consequence be if you did suffer a bad liability loss?

Should you insure your entire net worth?  What about future earning potential?  What would you do if your insurance limit didn’t match the value of the loss?   I think these are more pertinent and constructive questions.

*In another post I’ll mention why some families will actually want to include a consideration of unique exposures to loss, so this isn’t a hard & fast rule.

The gray line between business and personal

Many business owners consider the line between what is commercial business and what is personal business quite gray.  The cars they drive personally but pay for through the business, the personal errands run by company employees, the use of company equipment/technology/inventory borrowed for personal use (and vice versa) are all examples.  And there are plenty more.

Many business owners don’t consider their lives divided between personal and business and instead see it all as just “them”.

It’s impossible to script “the way things should be done” when it comes to drawing a line between what is insured personally and what is insured commercially.  But it does matter because the quality of insurance differs greatly between the two and you’ll want to get it right.

With good listening skills and a committed work ethic, a plan to divide the insurance between business and personal is something that good agents are not just able to do, but they are also able to explain it so that you’ll understand and agree.

One way to improve your coverage: customize the Other Structures limit on your home insurance

Most home insurance policies provide a limit of insurance for Other Structures – things that are permanent, but not attached to the home.  Maybe fences, gazebos, sheds, etc.  In most cases, the limit of coverage for Other Structures is a flat percentage of the limit for the home.  So if your home is insured for $500,000, your limit for Other Structures might be $50,000, for example.

I’ve never found a client who has a need for Other Structures coverage in the exact amount provided by the off-the-shelf provision.  And yet most agents make no effort to customize that limit for the specific need of the customer.

I’ve seen a $200,000 Other Structures limit for a home with no fence, no gazebo, and no shed.  Wasteful.  I’ve also seen a $100,000 Other Structures limit for a detached garage with a gorgeous guest suite on top of it that was constructed for $700,000.  Oops!

Most people are paying more for coverage they don’t need, but there are cases of severe under-insurance.  Either way, the mistake comes in not relating your coverage to what you need.

4 methods of boosting your financial resilience

Addressing the chance that at some point in the future you’ll be confronted with some hit to your financial capacity sounds like a pretty negative exercise.  Talking about the things that can go wrong in your life will make you sound like Chicken Little, but sound financial planning demands we act like grown ups and deal with it.

We’ll talk some other time about the process of identifying risks to your wealth, but let’s first put titles on the 4 ways you can improve your resilience to those risks.

  1. Avoidance.  This method involves you not doing something that would expose you to risk.  Don’t want the neighbor kids suing you for them breaking their legs on your property?  Don’t buy the trampoline.  Don’t want to be subjected to the chance you get sued for wrongful eviction by a tenant?  Don’t become a landlord.  Pretty simple.
  2. Mitigation.  This approach tries to reduce either the severity of a risk (how bad it can be), and/or the frequency of a risk (how likely it is to happen).  Instead of buying a 1000cc motorcycle as your first bike, maybe start with a scooter.  Fire extinguishers, suppression sprinklers, and exterior brush removal are good examples, too.
  3. Financing.  This is insurance.  Paying someone else a manageable sum in exchange for a promise that they’ll pay an unmanageable sum for a pre-agreed set of risks is the concept of insurance.
  4. Transfer.  This is where someone else takes responsibility for the consequence of your loss.  This is not insurance.  A hold harmless agreement, an indemnity agreement, an additional insured position are common examples.