How Much Insurance is Enough?
Have you ever thought about how much insurance a person should buy?
If you ask the agent, she might tell you that they should buy as much as they can afford.
If you ask the underwriter, he might tell you that they should buy as much as he will approve.
If you ask the customer, she might tell you that she wants only as much as she really needs (or the law requires, or she can get away with.)
If you ask an insurance advertiser… wait. Don’t do that. They don’t know anything but what they’re told, and they give unreliable information anyway. Forget them. Don’t ask them anything. Ever. They came up with cavemen and an emu.
When people are buying property insurance, it’s complicated, but straightforward, to come up with a value of the property and buy insurance to cover that risk. When people are buying coverage for damage to their own vehicles, that’s also kind of simple. There aren’t a lot of options, unless there’s something unique about the vehicle, but that’s another subject.
What about liability exposures? How much insurance is enough? How much is too much? Can a real case be made for minimum liability limits? Is there such a thing as too much insurance? Let’s see if we can answer a few of these questions.
Insurance needs change over time.
What worked when we were young won’t work when we are in the middle of our working lives, and none of that will work when we reach the golden years. You know, those years when we all move to Boca, spend our mornings at the golf course, afternoons at the diner, and evenings asleep in the recliner. Or something like that.
A younger person who is in college has clearly different insurance needs than a family of ten does. The hobby farmer has different needs than the commercial farmer. Over our lives, our insurance needs continue to change. We buy newer cars. Our incomes change. Our careers change. We add to our families. Our family dynamics change.
Insurance is meant to protect our assets.
If you ask 100 people why they buy insurance, you’ll get answers like, “I have to have auto insurance, or they’ll take my license,” or “my bank made me buy insurance to get a mortgage,” or “my mom and dad told me to buy this policy from our agent,” or “I just like Lemonade.” Those are all terrible reasons to buy insurance.
The number one reason that we buy insurance is that we don’t have the cash on hand to replace the asset covered by the policy. Don’t by homeowners’ insurance because the bank, your agent, or I tell you to. Buy it because you don’t have the money to replace your house or the things in your house if Hurricane Josh takes them into the ocean, or a tornado takes them into the next county.
If a customer has a clunker car, do not tell them that they definitely don’t need physical damage coverage for that vehicle. Don’t tell them that they definitely do need it, either. Ask them a few questions.
- If that car was destroyed, do you have access to cash to replace it, or another vehicle that you can use to replace it?
- If a rock hits the windshield, do you have enough money to replace that windshield?
When a customer selects a deductible, explain what it means, why it’s there, and what they need to do because of it. Encourage people to make sure that they can find the cash to cover their deductible. One insurance company recently launched a plan where they finance their customers’ homeowners’ deductibles. If there’s a loss, the insurance company doesn’t offset the claim payment by the deductible amount. They just wait and bill the insured for it later.
If the insured elects to go without coverage, at least they can’t (legitimately) say that no one told them that coverage was available or that a policy could cover an exposure.
So how do we pick liability limits?
That’s a harder question than anything so far. A house has a tangible value. You can count the amount of wood, blocks, bricks, panes of glass, and other items that go into rebuilding a house. A car has a value that you can calculate. The laptops, televisions, cell phones, and record players in the house all have a specific cost to them.
Liability limits are a bit harder to pin down because we don’t always think about what we’re protecting with it. Liability insurance helps to protect the items that make up the net worth of an individual, a family, or an organization. Liability insurance protects us when we are somehow involved in someone else’s loss or damage. We own the home where they tripped over the skateboard and fell down the stairs. We invited them over to dinner and served those steaks that smelled a little off. We drove the car that created the accident.
The question that the customer wants answered is how little can I buy and get away with it? In my mind, the only answer to that is how much risk do you want to take? It is important to keep in mind that once the liability limits are exhausted, or when there is no coverage, the customer can become personally responsible for those damages.
So, the question isn’t usually how little do I need, but what will properly protect me if something happens? In answering that question, it is important to know who you’re dealing with. What is their situation? Do they have retirement savings that could be forfeited in the event of a catastrophic liability claim? Do they earn wages that can be garnisheed? Do they have property that can have a judgment lien placed on it? The other side of the coin is worth exploring, too. There are some people that don’t make a lot of money. They own next to nothing. They don’t have any savings, property, or other assets. They might be a in position where a judgment means little. A judgment could be entered, but what are they going to get?
Personally, I’m not going to recommend to anyone that they get the minimum limit they can find. I’m also not sure that everyone needs the most that they can afford. Finding the right limit including looking at the assets at risk today, then projecting those assets into the future 3-5 years. Look at the current income and project that into the future 3-5 years. Look at their life and project that 3-5 years. That should give everyone a good idea of how much coverage someone needs.
I told you it wasn’t an exact science. I forgot to mention that you’re not going to be able to do this kind of review with everyone. Some customers just you to get them the emu policy and leave them alone. If the customer doesn’t want help, don’t force it. You might ask them to sign a document that says that you tried to help them, but they didn’t want any help. Others simply need insurance. They need it simple. They need it inexpensive. They still need your help.
In the end, it’s all about meeting the customer’s needs and understanding that they don’t always know what they need. That’s a part of our jobs as insurance professionals.
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