Is insurance a hedge?

In finance, holding a long position means you profit if a security you own goes up.  By contrast, holding a long position means you lose if the value of the security goes down.

Admittedly not exactly the same, but I like to generally use the long-position analogy to refer to your ability to earn an income, to the value of your tangible assets, and to the preservation of your net worth. You’re financially probably all good if your income rises, or your tangible assets remain intact, or your net worth isn’t attacked in a lawsuit.  So you hold “long” positions in those elements of your financial status (to be clear, those things are not securities and this is just an analogy).

If you no longer had the ability to bring home a paycheck, or you lost your tangible assets to an unfortunate event, or you owed someone money because of a lawsuit, that “long” position means you’ve just lost to an occurrence you didn’t prepare for.

Insurance works similar to any other financial product that aims to limit the impact of certain risks to your financial position.  It’s not a short because there’s no profiting from insurance, but it’s predictably able to reduce the consequence of loss on “long” positions.  My point is that the smartest consumers think of their insurance this way because it defines the scope of how they make their insurance-buying decisions.

A right answer

One of the most difficult questions to answer when designing your insurance is “how much should I insure my home for”?

The right answer is that you should choose a home limit that will exceed the total loss of your home by $1.  Duh, right?  But what actually seems to happen is that agents spend no time getting to know your home, spend no time sharing with you actual construction costs of recent claims, and spend no time educating you on the methodology, importance, and impact of selecting such a limit.

I bet if you showed your current home insurance policy to an agent other than yours they’ll probably quote the exact same limit as you have now.  Try it!  But if you’re serious about defending your real estate asset, please work with an agent who will visit your home, counsel you on recent experiences, and educate you on all the things that will help you make the best decision for you.


Things Do Happen

I’m a little squeamish about telling insurance horror stories because trying to motivate thru fear isn’t cool.  Unfortunately, bad things do happen and giving real-life examples of everyday scenarios that put wealth at risk can be a good counterpoint to apathy and an unwillingness to believe that anything bad will ever happen.

So here are just three actual claims where, had the families not carried a sufficient umbrella, they’d be liquidating other assets to satisfy a judgement of negligence.

A babysitter left a 5 month old infant unattended in a walker. The infant toppled the walker, struck her head on the floor and suffered brain damage. The parents of the infant sued the teenage babysitter and her parents. The court awarded the infant’s parents $11,000,000.

An insured’s daughter hated math class as well as the teacher. The daughter made several “disparaging” and false remarks about her teacher online. The teacher sued the parents for personal injury and $750,000 was paid.

The insured’s tenant claims she became ill from carbon monoxide poisoning resulting from a faulty furnace. The tenant claimed permanent brain damage and demanded $750,000.

Bundling, and other red herrings

Most of the insurance advertising budget is spent on things that don’t do anything to help you get what you need.  Pricing tool.  Accident forgiveness (which is basically just you paying for your accident ahead of time, thank you very much).  New vehicle replacement (again, they’re not doing this for free).  Bundling.  Do you know if any of these good for you?

Next time you see or hear an insurance commercial, ask if it relates to helping you select what’s best for you or whether it addresses their agenda of mass producing insurance policies at prices and with coverages they’ve already figured are good for them.

I’d immediately fall in love with an insurance company who’d say something like “Did you know our insurance policy puts a restriction on how much you can recover for theft of your jewelry, and that it doesn’t cover jewelry at all if you lose it?  We’ll help you decide if that’s okay for your situation, or whether you need to add a special schedule of coverage.”