“What’s it for?” is a question that people seem unable to answer when the “it” is something commonplace.
Casualty insurance broker Tim O’Brien has shared my experience albeit in a slightly different space. His blog Private Risk Adviser is often interesting. In a recent post he said,
“The power of product advertising has robbed us of the ability to ask ourselves the larger questions. Questions like “Why am I buying this product?”
Why buy insurance for your home? Why buy insurance for your car? When I ask these questions of my clients, I often receive an expression suggesting puzzlement, annoyance, or both.”
I have found that few can provide a good answer to “What is financial planning for?” or “What is estate planning for?”
No one makes good decisions when they do not understand clearly what it is they are trying to accomplish.
As Tim points out in his article, car or house insurance provides money to replace what was damaged or destroyed. All insurance follows that general idea.
The problem is that people see the insurance product in terms of what it is (a premium) rather than in terms of what it does. Thus the confusion.
Never buy insurance for what it is, buy insurance for what it does.
- Provide cash to replace something you lost.
- Provide cash to replace income lost to death or disability.
- Provide cash at death to prevent the liquidation of hard to sell assets.
Insurance always protects assets. Sometimes it is money to replace the asset. Sometimes it is so you do need not use up savings set aside for another purpose. Sometimes it is money to prevent a forced sale in a difficult market.
All catastrophes create a need for money. People have choices on how to deal with losses.
- They can do without that which was lost
- They can replace it using other assets they already own
- They can make a claim on an insurance policy
The problem will be resolved one way or another. Choices 1) and 2) are the defaults. You must act to have option 3) available.
People who own assets have usually acquired them for a purpose. No one wants to sell their house to pay medical bills or make up for lost income. No one wants to raid the education fund to replace a car. No one wants to cut their lifestyle spending by much. No one wants to sell a business for too little to meet taxes due at death. Does “estate sale” mean “bargain” to you? It does to me.
People should look carefully at the price of their default solution. Doing nothing usually has a large price tag.
If people looked at the effect of a loss instead of at the premium to make that risk go away, insurance would fit into their plan with less resistance. Insurance advisors can help everyone, including themselves, by making the choice easier for the client.
Help clients to understand what insurance is for in terms of how it prevents the do nothing choices.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.