How to Avoid Being ‘Insurance Poor’
Following an un-roped ascent of the final 400 feet on the Mountaineer’s Route of Mt. Whitney in 2010, a 60-degree pitch involving mixed, technical climbing, I became disturbed by the amount of risk I had just willingly assumed to my life. Months later I inquired of Rick Wilcox, a highly accomplished mountaineer from North Conway, NH, of his opinion of risking a fall on such treacherous terrain, to which he calmly replied, “that’s climbing; if you’re not willing to assume the risk of a fall, don’t climb”. Investing and planning your family’s financial future requires a degree of risk-taking; consider the following insurance principles to avoid allocating a counter-productive number of your investable dollars towards the insurance of unavoidable risks.
Consider insuring catastrophic risks only. Why waste precious capital on negligible and improbable risks? That’s like setting a fixed rope to ascend a 30 degree hill. Interestingly, a bunch of climbers died on K2 in 2008 after making that very mistake, later lacking the ropes required on the much steeper terrain above. Your investable capital is like a climber’s rope in that you only have so much of it. If you have ample emergency savings, for example, and are willing to drive defensively, why not skip the collision coverage on your auto insurance policy, especially if your vehicle is older, and invest those dollars instead? Scrutinize every risk with these questions: what is the financial risk? What is the adverse probability? What is the opportunity cost to insure the risk?
Insure all catastrophic risks. Failing to insure a catastrophic risk is synonymous with playing roulette with your family’s financial future; don’t do it. I think of insurance as existing solely to cover catastrophic risks, just like my climbing rope, and I look to identify and insure those risks. Examples include: making sure dependent children are provided for in the case of your early death, protecting a spouse before your retirement is fully funded (especially when in debt), protecting against high costs of future care, protecting the family business from estate taxes, and covering liability risk in a wrongful car accident.
Buy the right type of insurance. Of all the life insurance policies clients have asked me to review over 34 years, I’m guessing close to half were the wrong type of policy, given the nature of the risk. Buy temporary (term) life insurance to cover temporary risks, and permanent life insurance to cover permanent risks. Understand the risk, and the solution will emerge more clearly.
Buy the right amount of insurance. Never trust an insurance company’s assessment of your financial risk; do your own assessment, or have a fiduciary assess it for you.
Use an independent insurance agent, and shop around. Always consider multiple providers and policy solutions. Never pay more than you have to for insurance. Do this by making companies compete for your business through an independent agency or exchange.
Watch your rates. My auto insurer low-balled the quote on my Jeep, but at renewal raised my premium by twice the inflation rate! When I confronted them, they brought the rate back down. Always play hard ball when dealing with insurance companies; that’s what they’re doing with you. Always be ready to replace a policy to save money.
I hope these principles are a blessing to you. Think about it, Shaun.
“The prudent sees danger and hides himself, but the simple go on and suffer for it”. ~Proverbs 22:3
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.
All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss.
Please keep in mind that insurance companies alone determine insurability and some people may be deemed uninsurable because of health reasons, occupation, and lifestyle choices. Guarantees are based on the claims-paying ability of the insurance company.
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