Trivia: Do you know that Ben Franklin set up the first insurance company in America?
Some common misconceptions about insurance:
- It’s a waste of money
- All insurance is the same, so you should look for the cheapest price
- Insurance is easy to understand, so why would I need a broker?
- One of the biggest errors people make in purchasing insurance is that they do not understand the complexities of the product, and so pay for scant coverage which may very well NOT offer you the kind of coverage you THINK you are buying.
SO- LET’S COVER SOME BASICS ABOUT PERSONAL INSURANCE HERE:
What is Insurance?
- Insurance is a product that allows you to transfer a future, unintended/ unexpected risk to a third party (a carrier).
- Insurance ‘indemnifies’ damaged parties (that is, they return a ‘damaged’ party to the state of being they were in prior to experiencing damage caused by you).
The insurance company is giving you an opportunity to access large quantities of money that you may not have lying around to protect yourself and/ or your loved ones from financial ruin, in return for a (comparatively) much smaller premium. (a monetary installment paid either monthly or annually)
Why do I need insurance?
Insurance companies spend an unearthly amount of money on collecting large data and in keeping legal counsel on staff. This benefits you because if you are thinking about insuring something, the carrier has already investigated just how risky of a thing/ activity what you are insuring is. Secondly, the insurance company, beyond settling damages for you, retains the right to represent you in the event of a suit brought against you for damages. This is a huge benefit, as typically the lawyers working for insurance carriers are not your tech-college variety, but highly qualified professionals with access to major resources.
If you are an individual who owns anything that is valuable- either monetarily valuable (like a Rolex GMT Master) or emotionally valuable (like your life!), you may need two kinds of insurance:
This is going to replace your assets if they are lost, stolen or damaged. If you are financing a high-ticket item (like a car or a home), the person or the institution who holds the lien on that item may REQUIRE you to carry insurance so that the collateral on the loan they have given to you is covered.
This is very often the most fundamental piece of insurance for most people without their realizing it. If you own any assets, insurance is the most cost-effective way to protect those assets. WHY? In the event that you cause damage to a third party unintentionally, that damaged party needs to be ‘indemnified’. Very often, when you cause damage to a third party, it is easy to overlook just how far- reaching that damage can be. E.g. You hit someone in your car. Say it’s just a nudge- it happens all the time- they’re adrenalized, they see that the damage to the vehicle is only minor. They feel fine, they get back in their car and they leave. The next morning, they can’t move. Now, during this development you’re back at your own home, relieved that you dodged a major incident. The injured party needs to take the day off from their job to go and see a chiropractor. The chiro tells the patient that they need an x ray to determine the extent of the damage. They find out that the damage is actually a lot more serious but they can’t quite pin-point what the issue is. The patient is in pain, they go to their doctor. Extensive diagnostic tests are performed. They determine that a surgery is needed to remove damaged tissue. The date for that surgery is in a month. Meanwhile, no work. During this, the patient’s employer determines that they can’t keep on an employee who isn’t at work, so they let that person go. This is the big kicker. Now that person is not only out thousands of dollars in medical care, but they’re out of a job, with no way to secure another means of income. They have bills, they descend into a depression. Now, who is responsible for all of that monetary expense and pain? Even though you had no intention of things escalating that way; it’s YOU. One day, six months later, a lawyer knocks on your door and presents a bill for not only all of the lost wages, medical and ancillary suffering- but also his own legal fees. The total comes to a whopping one hundred thousand dollars.
In this scenario, you have a couple of options:
- Fortunately, you have the money on hand. Good for you, you pay the man out of pocket and everything goes away. Now you start back up from scratch.
- You refuse to pay. The lawyer files a suit, the judge orders you to liquidate all of your assets and holdings. You’re still twenty thousand dollars shy, so he puts a lien on your future income. The injured party does, after all need to be indemnified for injuries he/ she was not responsible for inflicting upon themselves, after all!
- You had a mild suspicion that sometimes things go wrong in life that are beyond your control. You’ve been paying for auto liability insurance at a rate of about $1,000 a year for the past five years. You draw on the policy and pay out the $100,000. He goes on his merry little way, the lawyer forgets you ever existed, and you get to sleep in your warm bed that night- you’re still up $95,000.
Liability insurances for individuals are available in three distinct forms:
- Your auto policy: Most states require liability coverage at a bare minimum, just to have your vehicle on the road. It covers any damages that are construed as bodily injury you cause to ‘others’ while you are driving.
- Your Home Owner’s OR Renter’s policy: When you own a home, you are obliged to maintain a safe and habitable area so that others may visit you without potential of harm or damage. A home owner’s liability policy can be very versatile in its application of coverage.
- Your Umbrella Policy: This is a supplemental line of liability insurance that extends from either your home or your auto liability coverages, so that you can cover any excess damage you may have caused, that the underlying policy affected cannot cover on its own. An umbrella policy is ideal for individuals who own assets that they do not want to be put at risk in the event of a suit being brought against them for damages.
How much insurance should I have?
You have no way of knowing how much damage you could create. Anything is possible. You could look at your phone for a second while driving and cause a twenty-car pile up on the freeway that kills a handful of people who were responsible for providing for their families, and either partially or totally disabling many other. That would be an enormous amount of damage. Depending on the ages of the people, you could be looking at tens of millions of dollars owed to various families and people for loss of life and loss of income, with loss of property to boot.
On the other hand, you might well go through your whole life and never cause any damage to anyone, ever.
Analyze your risk exposures. What is your lifestyle? In the example above, do you look at your phone while you drive? Do you drive fast? Do you take the freeway often? Do you live in an area where there are a lot of affluent people driving expensive cars who can employ the services of very expensive lawyers? Are there a lot of young drivers on the road?
Take stock of your monetary liability. What is your net worth? You always want to carry at least as much liability insurance to cover the value of your assets and holdings. That means that if you own two homes with $250K of equity in each, three vehicles you own outright valued at $10K each, and you hold $100K in a brokerage account, you should cover all of that ($630,000) with various liability policies. In the event of a large claim, a lawyer will very easily be able to determine what your net worth is, and they will always seek at least that amount. In a situation like that, where you have caused damage to a third party who can demonstrate that they need (for example) $1mn to be indemnified, a court will order you to liquidate your holdings. This can be heartbreaking and very easily avoided. You’ve worked hard for the things you own, don’t let one unforeseeable accident wipe everything out. Most auto and home owner’s liability policies are limited to $500K. if your net worth is more than that, you should carefully consider an umbrella policy that tops up the deficit to whatever your net worth is. A common amount of liability carried by financially secure Americans is $1mn, but you can purchase any amount of liability. We have clients who carry tens of millions of dollars in liability.
The cost evaluation is very easy to do: pay a thousand dollars for liability coverage in return for one million dollars of liability coverage. You don’t have to be very good at math to see the benefit in that.
I don’t need Insurance. Bad Things Don’t Happen To Me
Insurance for individuals is really an exercise in personal finance. I always think of the personal economy as consisting of four main components:
- Income generation: how you make your money.
- Income growth: how you grow your money (usually by investments, in America)
- Monetary accountancy: where does your money go? How much do you retain, how much do you spend?
- Income protection: how do you insure your assets?
If you don’t pay any attention to the fourth component, you really are undermining the first three. You’ve basically found the stones, you’ve built the castle, you’ve determined the value of building the castle and accounted for everything inside it, but you haven’t put a moat or a drawbridge on it. Merlin waltzes in and wipes you out!
Insurance is only a waste of time and money if you never use it. Unfortunately, none of us have a crystal ball, and the fact that we share this wonderful world with billions of other people- all of whom have some kind of effect on our personal lives- means that we can never be 100% in control of our own daily outcome. There is no way to know how many drunk (or, in WA) stoned drivers you share the road with. There is no way of knowing that someone visiting your home won’t see the wobbly stair at the top of your porch that you’ve come to be familiar with. There is no way of knowing how many people will target your cyber records. There is no way of knowing what will or will not happen to you in your life.
When you are improperly insured, it is a bit of a statement: I don’t care enough about the time I’ve spent accumulating all of the things I want in my life. That could be assets, that could be wealth, that could be your family’s well- being.
It is typically un- or under- educated, and the young who are un- or under- insured. Often, it is a mentality of ‘bad things won’t happen to me’. It is closely followed by a mentality of not seeing the value in spending money on premiums to protect what you have.
At our brokerage, we have at times heard from people who are frustrated and disheartened when they experience a very financially burdensome situation- and it always comes down to the same thing: they’re upset at themselves because they didn’t think that ‘something like that’ would happen to them.
This is also a very large part of why it is important to spend your money on an insurance that actually does what you think it will. So many people think that all insurance is equal and that carriers are legally obliged to perform/ respond in the same way to certain situations. That simply is not true. You have high- quality insurance products, and you have junk. Our brokerage only deals with carriers rate ‘A’ or higher by AM Best. That way, we can be assured that the coverage will be there for our clients if/when they need it.
If you’re curious about what makes an insurance carrier good, great or trashy, give us a call. We always have time to talk you through desirable characteristics of insurance and how to access those types of markets.