Chapter 2

Buying Insurance

IN THIS CHAPTER

Looking at the dangers of buying insurance based on price alone

Identifying the two components of a great insurance program

Finding a top insurance adviser at no extra cost

A great insurance program has two key components:

• Your program is in balance in all major risk areas.
• Each policy that you buy is well designed with high limits for major loss coverages and with all the right endorsements that customize your policy to cover the risks in your life that would not otherwise be covered.

You’ll have a better chance of accomplishing both goals if you take time to locate a highly skilled insurance agent who’s an expert on every type of personal insurance that you need.

Yes, the cost of insurance is important. You want your costs to be competitive and manageable. But the true cost of your insurance program is not only what you pay upfront in premiums but more importantly what you have to pay out-of-pocket at claim time. Most people who shop for insurance put all the emphasis on the front-end costs — the premiums — and then may end up having to pay thousands or hundreds of thousands of dollars in uncovered claims later.

When it comes to insurance costs, it’s far better to pay a little too much in premiums than to pay for an uncovered major claim later.

Understanding What Makes a Balanced Insurance Program

You face several major risks regularly throughout your lifetime that, if they occur, can cause your financial ruin: major medical bills, major damage to or destruction of your residence, major lawsuits and the cost of defending them, long-term disability, premature death, and — especially for those over age 40 — the risk of extended long-term care.

Your insurance program is in balance if each of these major risk areas is equally well covered and you’re not spending too much on one area and too little on another.

Many people have major-loss coverage that’s out of balance. They may have a good medical plan with high limits but no coverage for long-term disabilities. They may have $1 million of life insurance on the breadwinner but none on the homemaker. Their home may be fully insured, but they have only $100,000 of coverage for lawsuits and no umbrella liability policy.

A highly skilled agent can help you identify imbalances in your insurance program and suggest the corrective action needed, which is why taking the time to find the right agent is so important. Most people who buy insurance don’t take the time to find the right agent for them. They let whoever answered the phone and gave them the quote be their agent, without any knowledge of that person’s skill level. And, in the end, they get a less-skilled agent than they could have had for the same price.

For more information on finding the right insurance agent, see “Choosing Your Professional Adviser,” later in this chapter.

Customizing Each Policy to Meet Your Unique Needs

The ideal insurance policy is a single page that simply says, “If you have a loss — no matter what the cause and no matter how high the cost — we will cover it in full.” No exclusions. No 20-page policies. Wouldn’t that be wonderful?

Because that policy isn’t going to be available anytime soon, you want to get as close as possible to that ideal using a combination of several policies.

One of the key guiding principles from Book 3, Chapter 1 is: “Don’t risk more than you can afford to lose.” That means having all major risk areas in your life well covered. To accomplish that objective, you should work with a highly skilled professional agent.

Choosing Your Professional Adviser

Automobile, home, boat, umbrella, and other personal policies, as they’re sold off the shelf, rarely, if ever, cover all your major property and liability risks. But they will cover most, if not all, of those major risks if they’re customized to your needs with proper coverage limits and appropriate coverage endorsements. Customizing a policy requires a great deal of coverage expertise and care. And that’s why, for most people, locating and hiring the best possible adviser has to be the very highest priority when it comes to buying insurance.

BARGAIN-BASEMENT BRAIN SURGERY

Suppose that you’ve been told you need brain surgery. If you shop for it the way many people shop for insurance, here’s what you do: You start by calling around town, getting quotes over the phone. You probably aren’t exactly sure what kind of brain surgery you need, so you decide to get a price for the type that you think you probably need. You get quotes from all over — from surgeons, clinics, hospitals, and even medical-school interns. You’re not concerned about skill — just price. After all, it’s only brain surgery.

You find a clinic that will do the surgery you think you need for the lowest price. You sign up for the brain surgery. The intern who answered the phone when you called does the surgery, even though one of the top brain surgeons in the area works for the clinic and would do the surgery for the same price as the intern. The intern, lacking the expertise to diagnose the exact type of surgery you need, performs the surgery you asked for in the quote. The top brain surgeon would have known enough to recognize that what you requested was the wrong procedure for you and would put you at risk for serious brain damage. She would have recommended a different, more expensive, but much more helpful surgery instead.

Insurance isn’t brain surgery, but it isn’t a commodity, either. The moral of the story is that if you shop for insurance like this, you’ll probably end up with the wrong diagnosis, with possible serious side effects, and with a less-skilled adviser than you need and could have had for the same price.

Understanding how agents get paid

In almost all states, agents selling personal insurance get paid the same commission as every other agent representing that particular insurance company — usually about 10 percent to 15 percent — regardless of the agent’s experience, the agent’s skill level, or the quality of the insurance plan that the agent designs. This payment structure is both good news and bad news for you.

The good news: Getting an expert for the price of a novice

Although the flat commission compensation system is anti-consumer (rewarding quantity of sales rather than quality), you can really benefit from the system in one way: You can buy the very best talent for not a penny more than you would pay for the worst possible agent! Can you see how ridiculous it is to select your agent based on the warm body who gives you the quote? The vast majority of the time, the person you talk with the first time you call a company will not be one of that insurance company’s most skilled agents.

Almost all insurance buyers see an insurance premium as buying them one thing — an insurance policy. In reality, the premium pays for much more than that. The policy, the coverage, and the insurance company make up about 85 percent of the premium. Professional advice, policy service, and help from a professional agent when there is a problem make up the other 15 percent. Spend that 15 percent wisely! Get the best agent that you can find.

The more complex your lifestyle and the more of a lawsuit target you are, the more important it is to take the time to find an agent with the most expertise that you can.

The bad news: Finding a needle in a haystack

The “everybody gets paid the same” rule for agent compensation has one big drawback: The marketplace pushes agents with greater skills away from smaller, personal insurance policies and their small commissions into business insurance, where the premiums and commissions more appropriately compensate the best agents’ greater expertise. The current compensation arrangement makes finding agents with great personal insurance skills a difficult task.

Knowing what you want in an adviser

Okay, so you’re sold on the idea of finding the best adviser that you can for the commission dollars that you’re spending. Where do you look for candidates? And when you find two or more candidates, how can you select the one that’s best for you?

Build a checklist of what you want in your agent. Ask yourself the following questions:

• Do I want my life, health, disability, long-term-care, and other coverages with the same agent? You’ll have the best-designed program if you can find one agent with the expertise to oversee your whole program — expertise in every kind of personal policy. At the very least, it’s wise not to have more than two agents that you work with.
• Is a regular, yearly review important to me? If so, add this to your shopping list. Do regular reviews. A well-designed insurance plan starts to rust with coverage gaps if it’s not polished up every year or two.
• Do I have a home business? If so, you must find someone with small-business insurance expertise. Add that to your list.
• Are top claim skills important to me? Do you want the best possible claims coaching, to maximize your claim when you file it? Do you want an agent skilled enough to fight, successfully, for your rights if your claim is unjustly denied or underpaid?

Then use the answers to these questions to screen potential candidates.

Searching for candidates

You’re looking for an agent to probe your needs, identify coverage gaps, solve problems, help you resolve claim disputes, do annual reviews, and, in short, provide greater expertise. Here are some possible sources for candidates. Try to get at least two to three prospects.

Word of mouth

Word of mouth is always one of the best sources when seeking a professional of any kind. But be careful not to fall into the price trap. Because so many people buy their insurance solely on price, when you ask for a referral for a good agent, you might get: “Call Bob. He’s a good guy. He saved me $200 a year. And he always remembers my birthday.” So you call Bob, get his quote, save your $200 or more, and end up with a good price for the wrong coverage (and an annual birthday card). And you’ve done nothing about your uninsured coverage gaps.

To avoid the price trap, be specific when asking for a referral. You don’t necessarily want the best salesman or the one you’d most like to go to a ball game with. You want the person who will give you the best professional advice.

Professional societies

An insurance agent can earn a number of advanced insurance designations by completing a series of courses and passing the exams. Here are just a few:

• Chartered Property Casualty Underwriter (CPCU)
• Certified Insurance Counselor (CIC)
• Certified Life Underwriter (CLU)
• Accredited Advisor in Insurance (AAI)

Many other designations exist as well. Anyone earning any insurance designation has to spend 100 hours to 1,000 hours (for the CPCU) in the classroom and studying on her own as well as pass national exams. These people have gained additional expertise in certain areas and have a commitment to professionalism and ethical behavior. Don’t choose an agent based solely on professional designations, but weigh these designations (or the lack thereof) heavily in your decision.

MANAGING RISK WITH A PERSONAL RISK MANAGER

When it comes right down to it, buying a bunch of insurance policies, even from very knowledgeable agents who customize all the coverages to your particular needs, still leaves you wanting. For example, you may need help sorting through your group health insurance options at work to pick the plan that offers your family the best all-around coverage for the least cost. If you’re married and both you and your spouse have group options from your respective employers, you may need help determining which plan is best to insure your children. What about your group options for additional life insurance? Should you apply for that if you have diabetes or other health issues? How much do you need? If you’re 65 and still working, should you apply for full Medicare now or stay on your employer’s group plan? The list of questions is endless… .

Personal risk managers are insurance agents who are highly skilled in every type of personal insurance policy. They help consumers identify and manage the risks in their lives — not just those covered by policies the agents handle — in exchange for a value-added, annual, risk-management fee in addition to any commission earned by the agents.

There is no society of personal risk managers — at least not yet. You find one by first finding an agent highly skilled in every type of personal policy and then offering them the job. Offer to pay them an annual fee in exchange for helping you manage all the risks in your life — not just those covered by those policies that the agent handles for you.

Insurance companies

If you already know you want to be insured with a particular company, go directly to that company for agent referrals. You can also go to the insurance company for agent leads if you’ve shopped ahead for a certain type of insurance and found one or two insurers that are the lowest priced.

All you know at this point is that they’re the lowest priced for the coverage you shopped for but not necessarily the coverage you need.

What you need to find out from the insurer is who the company’s best, most knowledgeable agents are. The insurance company knows who these agents are, but the company is unlikely, for legal and other reasons, to give you their names. So here’s an idea: Call the local company office and ask them to fax or email you a list of all their agents in your state who have a CPCU or CIC designation. They may not have a list at their fingertips, but they can get it for you. Whichever method you use, it should yield a small supply of quality prospects.

Making the choice

At this point, you’ve narrowed down your choice to one or two candidates for your “job opening” for an agent/adviser. You’re probably thinking, “How do I, with limited knowledge, make this choice? I don’t even know what to ask.”

Start by requesting a face-to-face meeting for the purpose of doing an insurance review for every policy that you have, including your group coverage at work. You’ll be able to tell by your gut feel whether this is the person for you.

If you’ve narrowed your field to two candidates, have both of them do the insurance review for you. The agent with the greater expertise and greater care for your well-being will stand out.

The job of protecting you from financial ruin caused by property or liability claims is an important one. Approach it as seriously as you’d approach choosing a doctor, lawyer, or accountant.

Don’t get quotes at this stage yet. If you’re comfortable and she has the expertise you’re looking for, ask her to design a program for you with all the right coverages. Then have her quote what she recommends and meet with her a second time to review the quotes and get her help making choices. Once all those changes are implemented, you should have satisfied both the components of a great insurance program. How about that!

When you’ve completed the reviews, ask about the agent’s background, his educational and practical experience, and the kind of ongoing help you can expect — both in terms of regular fine-tuning of your program and in terms of the kind of assistance you’ll get in a serious claim or dispute. Don’t consider any candidate who doesn’t offer you the big three:

• The expertise to help you design a great protection plan with the least possible gaps
• Ongoing reviews and regular contact about new developments so your plan stays current
• Outstanding assistance at claim time, both coaching you and being a strong advocate for your rights in a dispute

Choosing an Insurance Company

A good agent can advise you on both the financial strength and the quality of claim service of any insurance company that you’re considering. If, however, you’re buying direct without advice or you just want more information on a particular company, go to www.ambest.com.

A. M. Best analyzes and rates insurance companies based on their overall quality and financial strength. It gives insurers grades, much like school — A++, A+, A, A–, B+, B, and so on. (For more details on each of the grades, go to www.ambest.com/ratings/index.html.) The higher the rating, generally, the safer you are from the risk of the insurance company closing its doors and not being able to pay your claim.

Don’t buy insurance from any insurance company with an A. M. Best policyholder rating of less than A unless you have no other choice.

The larger your exposures and the greater your coverage limits, the stronger the insurance company rating you should seek. For example, if your income and/or assets make you a target for lawsuits, you’ll probably buy an umbrella policy (see Book 3 Chapter 4 for more information on an umbrella policy). The A. M. Best rating for that umbrella policy should, ideally, be an A+ or A++. Picking an insurance company can be a gamble. Fortunately, organizations like A. M. Best help improve your odds.