Countering “it won’t happen to me”

I often get questions like “why would anybody need liability insurance?”  Here are just a few real-life cases I’ve personally been involved with where liability insurance has saved the bacon of Seattle-area families.

Accidentally trimmed the neighbor’s trees – $125,000

Dog bit the neighbor’s 4 year old in the face – $450,000

Condo’s downstairs neighbor alleged “too loud – made me lose sleep” – paid all legal & court costs and eventually won the case after 3 years.

Son flipped the car with his friends inside, sadly killing all four – $2 million.

Several hundred of no-damage-to-the-other-car injury claims – cumulatively, probably into the millions of dollars.

Dog killed neighbor’s dog in a fight, lawsuit for emotional distress – paid all legal and court costs.

Ex-nanny suing for wrongful termination and slander – paid all legal and court costs, small settlement.

Fortunately, the probability of anything really bad happening to you is infinitesimally small.  But in my 26 years in the industry I’ve seen hundreds more cases where weird things pop up and risk interrupting a family’s financial plan.  That’s why we believe you plan for the consequence of the severity, and not the probability.

Photo:  Mt. St. Helens, WA

#1 Insurance Mistake

The most common mistake when buying insurance is not buying enough of it.  But don’t take my word for it:

  • Lawyers tell me that their clients don’t buy enough no-fault medical coverage or uninsured motorist coverage.
  • CPAs tell me their clients don’t buy enough business-interruption insurance to replace profits after a loss to a business.
  • Contractors tell me that their customers don’t buy enough home insurance to get their homes rebuilt correctly without skimping on the details.
  • Jewelers tell me their customers don’t buy enough special-valuables insurance to replace their jewelry when they lose it.
  • Business-sale consultants tell me their clients don’t buy enough post-transition insurance to protect proceeds from comeback lawsuits.
  • Wealth managers tell me their clients insure only a portion of their net worth against liability and allegations by people targeting the rich.

People don’t buy enough insurance for 5 reasons: 1) they don’t realize how expensive loss recovery is going to be, 2) they don’t believe the insurance agent trying to sell them more coverage, 3) they weren’t given information or more options to consider, 4) they don’t believe anything will happen to them, 5) they think they’re saving money.

The consequence of an insurance policy that comes up short is the most expensive insurance policy you can buy.  That’s why we believe in listening to experts, in being educated about the risks and the alternatives to financing loss, and then customizing the insurance to fit your needs

Photo: Rachael McGraw, – Siena, Italy

Finding an insurance company’s talent


One thing we’re trying to do a better job of is pushing the underwriters with whom we work to describe for us what their ideal client looks like.  Insurance is not supposed to be a consumer good like an iPhone or a refrigerator, it’s supposed to be a customized financial arrangement where one party pays for the losses of another.  And I think in an agreement like that both sides should know the other side as much as possible.

Some insurance companies are better at predicting future losses for large groups of drivers (more stable premiums), others are better at concierge claims (only a very few, unfortunately), others are better at being flexible in their underwriting tolerance (old-school common sense), and others are better with technology and customer-facing efficiencies.

No insurance company is good (yet) at all of those. But they all think they are.  So the point of us asking them about it is to create a level of accountability to our office and to our clients.  We’d actually love it if one were honest enough just to say “we aren’t efficient yet, but we’re the best at claims adjusting”, or “we’re pretty generic with claims, but we’re the most affordable”.  At least then we’d feel in partnership because we could match consumers and what they need with the stated strategy of the insurance company.  Matched expectations are always best.

We’d love to tell you what we think each insurance company really stands for if you’d like, and we’ll tell you what we think we’re good at, too.  Now we’re trying to see how honest insurance companies can be with their own self-reflection.

Photo: Joshua Tree, CA

How to plan for the cost of loss

In the tenets of risk management there are just four strategic initiatives: prevent loss, mitigate loss, transfer loss, and finance loss.

Some losses can’t be avoided and there’s usually no one else willing to take it from you, so once that loss has happened all you’ve got left is figuring out how to pay for it.  And for that there are really just three financing options: using personal assets, taking out a loan, or using insurance.

So when you and your financial planner are working on your financial plan, incorporate a discussion on how you plan to pay for the consequence if you suffer an unexpected loss from the major categories of risks.  It can be made easier by following this template:

“If we face (insert loss scenario here) we’ll deal with the financial impact by turning to our (insert your personal asset, your access to a loan, or your insurance here).”

Now you’ve got something to work with because you can audit, measure, and test ahead of time whether your asset/loan/insurance will be sufficient, broad enough in scope, and efficient in its cost.  And if in doing so you find any part of your plan to be insufficient, you’ll have to decide whether you’re motivated enough to do something about it.

Photo: Rachael McGraw, Seattle


Better will be coming

I keep stats on the incidences of mistakes I uncover when reviewing a family’s insurance portfolio.  I reported those last year in two earlier posts (Fixing Things and Annual list of insurance Red Flags).  It’s frustrating because it’s been the same result year after year and the problem will continue for as long as three things continue to happen:

  1. Insurance companies investing in math and predictive modeling and divesting in manufacturing and delivery.
  2. Agents devolving away from being wise advisors and toward being transaction-collectors.
  3. Consumers accepting of 1 & 2 above.

I’m not calling for a massive revolution, but instead for small incremental changes in attitude about whether it’s important for consumers to have an insurance portfolio that actually works.  That’s the point of this blog.

If the consequence of bad insurance is just some wasted premium, it wouldn’t be so critical.  But the impact on a family for not having the right way to pay for an unfortunate event, a lawsuit, or a recovery after someone took something from you can be life-altering.  I’ve seen it, unfortunately, and it’s heart breaking.

But we’re committed to doing it better, to evangelizing the reasons why it’s important, and to encouraging others to follow and speak up.

Photo:  Rachael McGraw, Seattle

Wanted: more consumer pressure

The battle “rages” in the insurance industry between the two primary methods of insurance companies conveying their products to consumers.  The first is to outsource product sales and service through agents, and the second is to skip the middleman and relate the insurance company directly with the consumer.

There are pros and cons to each, and experiences good and bad of each, and I’m sure insurance companies perpetually debate which is best.  But I think a day is coming where the consumer will demand a third method, and I can’t wait.

Frankly, I don’t think the industry as a whole does very well with either method, or else the whole insurance experience wouldn’t feel so soul-sucking.  The reason it’s hard to find consumers who value their insurance portfolio like they value their 401(k) is because our industry doesn’t give them reason to feel that way. We’ve done an extremely poor job of thinking like and talking like someone who values what we produce.

But I feel we’re closer to a time when the same old conversations and same old interactions will be abandoned for real value and real impact.  I’m working on it as a small voice in the wilderness, but I think I’ll find a tribe soon enough.

Photo: Rachael McGraw, Seattle Aquarium

When work isn’t work

A risk of being in the risk business is that you become overly skeptical, suspicious, and hypersensitive to all the possible bad things that can happen.  We see all of the accidents, losses, and lawsuits and it’s easy to become the “Chicken Little” of the financial team.

But I don’t feel that way at all.  I find good risk management in a financial plan to be liberating, actually.  Building a responsible approach to handling risk means you can focus on going after things that excite you, that reward you, and that you would prefer to see and do.

Complaints like “insurance is expensive” or “you only buy insurance because you have to” are totally misreading the opportunity to use risk-financing as a license to pursue great things.  And I am so happy to be in this corner of the financial world where I can protect important things so families can do important things.

Photo:  Rachael McGraw, Reykjavik, Iceland

Ignorance can be expensive

Have you ever known someone who worked at a restaurant who has said, “if you knew what I know about what goes on in that kitchen, you’d never eat there”?  Would you want to know?

The insurance industry is not good at educating consumers on the workings of a rather complex financial product, a confusing contract, and all of it underwritten and priced on the insurance company’s ability to predict the future.  Instead, our industry promotes itself and sells its product with a “come on down for the best price in town” pitch.

But if there were someone you knew who said, “if you knew what I know about your insurance, you’d never do business with them”, would you want to know?

More money is made by mass marketing insurance to find consumers who fit the insurance company vs. the other way around.  And the consequence of that is that there’s no value and no benefit to you.  If you’re okay with that, you’ll be rolling the dice with your wealth just as you’ll be rolling the dice with your health if you continue to eat at that restaurant.

But we say instead, slow down the process, ask for a different opinion, expect customization, and align with an educator, not a salesman.

Photo:  Rachael McGraw, Paris

Insurance is not risk management

An insurance policy is to wealth protection as a mortgage is to home ownership.  There are no inherent benefits to owning an insurance policy or owning a mortgage.  But in both cases they are funding mechanisms that accomplish the goal with the real value – protecting your wealth and owning a home.

A common mistake among consumers is that they believe insurance is somehow protection against risk, or some transfer of risk.  It is neither.  And this mistaken belief can lead to the bad choice of not creating a more comprehensive plan to deal with losses before they happen (for example, I’d be rich if I had a dollar for every time in trying to settle a lawsuit I heard someone say “I should’ve had that in writing”).  In my experience, the most devastating financial losses have occurred because people assumed their insurance would address it – when it didn’t.

So instead, make a comprehensive plan for protecting wealth that incorporates how you’ll control risk, how you’ll find someone to whom you can transfer risk, and how you’ll finance risk with insurance and/or some other source of funds.  The more complete your approach in this regard, the less likely you’ll come to learn first-hand how many holes there are in an over-reliance on just an insurance policy.

Photo: Rachael McGraw, Gullfoss, Iceland

The RIGHT way to use insurance

The most important thing you can do with your insurance portfolio is to use it as the license to go take some risks for the betterment of you, your family, and other people.  I’m not talking about uncalculated or irresponsible actions where harm is a likely result, I’m talking about behaviors and decisions that aim to benefit yourself and those around you.

We seem to be a society consumed by fear and risk aversion.  We counsel our kids that college is for job training, not a season for exploration.  We want government to regulate our safety (and conversely, use litigation to punish those who didn’t protect us).  We stay in jobs we hate because leaving them is scary (how many times have you heard someone say they’re in it for the health insurance).  We don’t start our own small businesses anymore because so many fail.

What good is theft insurance if you sit at home with the alarm set?  Set the alarm, go on vacation!

What good is disability insurance if you sit at a cubicle and then on the sofa?  Go skiing!

What good is company health insurance if you hate your job for which you have no passion or talent? Go to school online, volunteer off-time at a non-profit, start a side business!

What good is insurance in general if you hoard wealth for the sake of hoarding?  Free and loosen your hold and use your wealth to leverage betterment!

The nobility of insurance is not in its existence, it is in your intent and your use of it to go do the things that you should.

Photo: Rachael McGraw, Paris, France