“We insure against what can go wrong to acquire the luxury of investing for what can go right.”
Nick Murray
Insurance is not a topic most people want to talk about. Who wants to consider awful hypotheticals about your own mortality, a crushing liability lawsuit, a serious illness, or your home burning down? Plus, insurance can be complex, and nobody likes paying for policies that, hopefully, will never be needed. Despite this, insurance planning is at the core of financial security. Our clients tend to be executives or business owners in mid-career. Their lives are hectic, busy, and ever-changing. When they start working with us, they often have a grab bag of insurance policies, acquired over the years, without any clear, overarching structure. Typically, they have policies which are either unnecessary, needlessly complex and expensive, or have failed to keep pace with their changing finances. More concerning, many have large uninsured risks, which pose a legitimate risk to their families' assets and financial security. Insurance planning must be the first step in developing an overall financial and investment plan. It isn’t logical to plan for retirement, for example, if there are large uninsured risks which have the potential to cause catastrophic financial losses well before you ever get to retirement.
A core question we ask throughout our planning process, but particularly with regard to insurance planning, is: “What could go wrong?” Take a hypothetical, 42 year old business-owner, with a wife and three children under 10, whose main financial goals are paying for his kids’ education over the next 15 years, and saving for his retirement in 30 years. He has a sound, and well-thought out savings and investment plan which will allow him to achieve those goals. But what if his assessment of the future is wrong? What if this man is out for his morning run tomorrow morning, and is struck and killed by a texting driver? Of what use are those long-range retirement plans then? If he didn’t engage in comprehensive insurance planning, it’s quite possible he had far too little life insurance. Perhaps what life insurance he had, combined with investments are enough to pay off the mortgage, fully fund the kids’ education, with enough left over for a couple years of family living expenses. But what does his family do after that?
Let’s take it a step further. What will happen to the valuation, ownership and control of the husband’s business now that he’s gone? Was there any key man insurance, a succession plan, or a buy/sell agreement. The ownership of the business represented a major component of the family’s net worth. What is that equity worth now? At a time when his family will be dealing with the shock and grief of losing a husband and father, they will also be forced, at the worst time, to confront considerable financial insecurity.
We do a comprehensive analysis of the risks clients face, and how best to protect them. We look at all of their current insurance policies (health, property & casualty, liability, life, disability, business insurance-everything). We determine what insurance the client needs and which current policies should be dropped or augmented. We walk clients through potential worst case scenarios, and while not enjoyable, it focuses clients on the importance of and need for risk management and insurance planning.
It is common for new clients-smart, successful business people-to make two common mistakes with their insurance and risk planning. First, they tend to over insure smaller, high frequency risks. They know, for example, that they will have medical bills for routine check-ups, or that they will have minor fender benders, and they want to insure against those and limit their out-of-pocket. We urge clients to increasingly retain, or self-insure these risks. This could mean choosing high deductible health care plans, or raising deductibles across the board in their policies, often meaningfully. The second mistake is underestimating the risk and the impact of infrequent, but high magnitude financial events. The likelihood of that 42 year old client dying or being disabled tomorrow is, from an actuarial perspective, quite small. But the magnitude of the financial impact on his family and their financial security is profound. Like a game of Russian Roulette, no matter how small the odds of losing, it isn’t a game worth playing.
Are you absolutely convinced and confident that your insurance coverage is proper given what you’ve just read?
If not, you owe it to yourself to get a second opinion, particularly from a comprehensive financial advisor who isn’t paid to sell you insurance.
Protect what’s important to you today.