#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

5 Elements of a good portfolio

A good risk and insurance plan has the following characteristics:

  1. It’s customized.  Along many points of your insurance portfolio you should be able to point to them and say “yeah, that was made for me and my situation”.
  2. There’s an advocate.  Sometime you’ll need someone who will argue on your behalf with an underwriter who won’t give you coverage, an insurance company who won’t adjust a premium, a claims adjuster who won’t see your side, a mortgage company who won’t accept your policy, or some other agent who’s trying to sell you something that benefits them and not you.
  3. It’s flexible.  You likely don’t have the same insurance needs as you did 10 years ago, so your insurance portfolio needs to be able to pick up the pace to keep up.
  4. It’s frequently reviewed.  Dusty insurance portfolios are dangerous portfolios.
  5. You understand it.  If the reason for building a firewall with insurance is to give you freedom to use your capital for other things, then it’s hard to imagine you feeling peace of mind if you don’t understand what it does, how it will work, and why you bought it in the first place.

We consider it our responsibility to be sure that these 5 elements are included with every portfolio we design, no matter what the plan ultimately looks like.

Photo:  University of Montana, Missoula

Justice – why we do it

Justice: guided by truth, reason, and fairness, and made according to principles and equity

How you use and apply what you know in the service of others is your final label and seal of quality.  Most mistakes or ignorance can be fixed and forgiven, but acting without justice rarely is.

Most people are not intentionally unjust, but it takes extra effort to really prove just and worthy intelligence.  What I see a lot are agents trying to win business by quoting apples-to-apples against existing policies, hoping that the lower premium wins the client.  But what if they don’t examine whether the limits of coverage are at the best level for the client?  What if they could’ve reduced coverages for unnecessary items and reduced the premium?  What if they should’ve explained why a different umbrella policy would protect the children better?  Missing such opportunities leaves the scales of reliance and conduct unequal, to the detriment of the family.

The approach that we adhere to is slowing down the process, asking more questions, sharing the entire truth, relating it to the personal needs of the family, and exhausting the opportunity to give away what we know for the benefit of the consumer.  This is when we feel best about what we do.

Photo: Wild Horse Island, Montana

My mom and the drive for betterment

I’ve said before that one of the ways I test whether I’m doing the right thing is to consider whether I’d want what I say and do to be said and done for the benefit of my mom.  Would my mom be best served by following the advice that I give?

The reason I mention this is to draw-out something unique in that test.  Most people are genuine and honest and would say that they also only give advice that they’d want their mom to follow. But what I see so often is that the quality of the advice given, even with good intentions, is just so poor.

If the advice is well-intended but poor in quality, then it’s not good advice.  And when people who give advice aren’t committed to the mastery of their craft, then you wind up getting well-intended poor advice that does the same amount of damage as ill-intended advice.

The point: don’t always listen to people just because they’re nice and honest.  Those should be minimum standards.  And don’t buy stuff from people just because you like them.  Look for gravitas.  Look for wisdom.  Test for mastery and the boundaries of where that mastery stops.  Look for an advisor who invests in continuous learning and who plans on being better tomorrow than they are today.

Photo: Rachael McGraw, Santa Monica

Next-generation insurance intelligence

Insurance companies would have you believe that you’re the customer.  They promise savings and discounts and good coverage and print-your-own-ID-cards if all you do is spend 15 minutes to move the garbage insurance you have now to the garbage insurance that they’ll give you.

What they don’t tell you is that you’re actually the seller in the relationship, subjected to the judgments of both the artificial intelligence systems and the humans that make up their Underwriting and Product Development departments.  The criteria used to determine whether you are offered a policy and the price you pay for it is a closely-guarded secret at most insurance companies, but it goes beyond your driving records, the age of your house, or your deductibles.

One insurance company we work with reports over a million factored possibilities in deciding whether you qualify and calculating the premium.  And that’s before a human being gets ahold of it and looks at it even closer.  Among the variables that affect how much you pay or whether you can get the coverage you need in the first place, do you know how you can improve your position?  In other words, do you know what you can do to improve your “insurance credit worthiness” and reduce your premium?

Some factors are logical enough to most people, but many others would surprise you because it’s hard for most people to fathom the relevance between being in an accident you’re not at fault for and paying higher premiums, for example.  Or how long between the date you received a quote and the date you decided to buy (the longer the gap, the better, believe it or not).  Or how you made the money you used to buy your house.  Or whether you’re gifting assets to the next generation.  Yeah, stuff like that.

We think the next generation of insurance intelligence isn’t advising what coverage is needed, it’s how to convince the insurance company that you deserve it.  As noted above, there are a million things to pay attention to.

Annual list of insurance Red Flags

Each year we post a list of the most common factors that give rise to errors in personal insurance portfolios.  These are listed in no order of frequency.

  • Assets held in Trusts/LLCs
  • Strong net worth with no (or not enough) liability protection
  • Special-value asset collections (jewelry, art, wine, collectibles)
  • Domestic employees (nannies, gardeners)
  • Home remodeling projects
  • Home-based businesses or employment
  • Boats & motorized toys
  • Young drivers and dependent children away at college
  • Volunteer activities at non-profits
  • Multiple residences
  • Short-term rental homes (VRBO, Air bnb)
  • Classic cars
  • Company car custodians
  • Older homes
  • Low deductibles
  • Closely-held corporations or business owners contemplating the sale of their business
  • Vacations taken outside of the U.S. or Canada

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.


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.


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?

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.