The insurance system as it exists today does not adequately meet the needs of consumers. Over 90 percent of consumers have at least one and more likely 10 or more major gaps or inconsistencies in their insurance program—any one of which, if it happens, could prove financially disastrous.
How do I know? I know because I have audited scores of insurance programs for people over the years, and virtually every single audit has anywhere from 10 to 20 significant gaps/inconsistencies in coverage.
Illustrating the Problem
When I audit the insurance program of a typical family of four, this is what I usually find:
Auto and home insurance with one agent. Life insurance (and occasionally disability insurance) through a career life agent. Both agents tend to be specialists in their particular fields but rarely is there an effort to make sure that all the client's major risks are dealt with, leaving the customer with certain areas of risk in his life that are either not covered or inadequately covered.
Health insurance through work with no personal coaching available as to which of the work options is best. Perhaps the plan chosen by the uninformed consumer fails to include the ability to self-refer to top specialists such as the pediatric surgeon that your child might need following a serious head injury. Or perhaps one of the group insurance choices has an unlimited major medical benefit which costs 5 percent more than a plan with a $1 million lifetime benefit.
No long-term disability insurance, unless the employer provides it. Even when it is provided, group insurance benefits are usually covered for 60 percent of earnings and are taxable, leaving the employee with perhaps 45 percent of their pre-disability earnings after taxes. Most people need some kind of additional supplemental disability policy.
A $50,000 cash value life insurance policy taken out in college or as a young adult before any dependents. Now, some years later, with a family of four, the head of the household needs $1 million of total of coverage and limited means from which to pay the premiums.
A $100,000 group life insurance policy, paid for by the employer, which usually stays with the employer when the employee leaves.
An optional $100,000 of additional group life insurance purchased by the employee, which typically costs a healthy non-smoker employee 30 to 100 percent more than he would have to pay in the private insurance marketplace. Plus, even though the employee has paid for the coverage, he can't take it with him when he leaves the firm (other than a high-priced conversion policy).
A $200,000 personal accidental death policy purchased from the mortgage company that covers only part of the risk—from accidents only. There is generally no coverage for death from an illness, which is the major cause of death at any age! Plus, the beneficiary is usually the mortgage company rather than the dependants.
Car insurance liability of $100,000 per person, which is grossly inadequate in today's legal environment.
Home liability of $300,000 per accident, which again is grossly inadequate and inconsistent (i.e., all personal liability limits should be the same because they're protecting the same assets).
This hodgepodge of insurance coverages purchased piecemeal, with no coordination, is clearly way out of balance, and premiums are being poorly allocated.
What Makes a Great Personal Insurance Program?
There are three components of a great insurance program:
The program is in balance. All the major loss areas are covered well, with high limits across the board, not favoring any one particular type of major loss. For most people, the major loss areas are premature death, long-term disability, major medical bills, large lawsuits, and major damage to or destruction of one's residence.
Every policy in the portfolio has been endorsed to provide coverage that basic policies lack. Plus, every policy has been customized and/or endorsed to cover those significant risks unique to a given individual which otherwise would be excluded by the policy.
A highly skilled agent with expertise in every type of personal policy is available to help clients identify and manage all the risks in their life. This agent has the skills to make sure the program is in balance and all policies are properly endorsed to cover those risks that would not otherwise be covered.
A Balanced Insurance Program
The first component of a great insurance program—a balanced program—looks something like this for a young family of four with a combined income of $90,000 a year and a net worth of $250,000.
$1 million total life insurance, most of it 20– or 30–year level term insurance to cover the growing up years of the children.
Long-term disability insurance on both. If any of that is taxable group insurance, supplemental policies have been purchased to make up the shortcomings and taxation.
Major medical insurance—group or individual—with high lifetime major medical caps of at least $5 million or more, plus an annual out-of-pocket maximum that is bearable.
Home insurance at full replacement cost with extended replacement cost building coverage that will cover the cost to rebuild even if the construction costs exceed the insurance amount. That policy needs to cover special perils/all risk causes of loss, with earthquake and flood coverage added if there's any exposure to them.
A personal umbrella policy of $2 million or more with all the underlying policy limits high enough to meet the umbrella policy threshold requirements.
A Customized Insurance Program
The second component of a great insurance program is a customized program that has been endorsed or altered to fit the particular needs of the insureds. Following are some examples.
Personal umbrella policies chosen to cover the activities of this particular family that otherwise aren't covered by underlying insurance, such as renting boats or recreational vehicles while on vacation, or renting cars when traveling abroad.
For insureds with home offices, homeowners policies where the business exclusion has been deleted with respect to injuries on the premises to delivery people, coworkers, or customers who occasionally come on the premises for business purposes.
For insureds who have transferred their home to a trust, homeowners and umbrella insurance policies endorsed to protect the trust assets. On an unendorsed homeowners policy, the trust would have no fire or liability insurance nor any automatic liability coverage under an umbrella policy.
For insureds with expensive personal property above the standard limits, properly scheduled personal property (jewelry, furs, cameras, and so on).
For insureds who employ domestic workers (e.g., nannies), workers compensation insurance and employers liability coverage with limits that satisfy the umbrella requirements. Ensure that the umbrella policy does in fact cover excess employers liability losses.
Life insurance policies with beneficiaries and contingent beneficiaries properly set up.
Long-term disability insurance that has been properly endorsed to provide future purchase options, to cover partial as well as total disabilities all the way to retirement age, and a cost-of-living adjustment rider that will adjust monthly benefits while on a disability claim to keep pace with inflation.
A Personal Risk Manager
What's missing from nearly everyone's program is the third component—a personal risk manager or overseer, someone skilled in every area of insurance who can make sure that the program is in balance, all the coverage limits are adequate, and all the major gaps are covered. And, of course, a risk manager makes sure that the premiums for the coverages purchased are prudent and reasonable.
To oversee an entire insurance program requires expertise in every type of personal policy—expertise few agents have. Agents today tend to specialize. They might specialize in personal automobile and homeowners policies, but might not have a lot of expertise in life, medical, or long-term disability insurance. Career life agents know life insurance, and often medical and disability insurance, but know very little about automobile or homeowners insurance. However, an agent cannot serve as an overseer of someone's entire program unless he or she commits to developing the expertise in every type of personal policy and commits to ongoing educational development to stay current.
For example, the state of Minnesota, where I practice, requires 15 hours per year of continuing education credits to maintain an agent license. I think I actually spend closer to 100 hours a year of classes and self-study, learning what I need to know to stay on the cutting edge of expertise in every type of policy.
Problems I Encountered When Setting up a Personal Risk Management Practice
Agents selling policies get paid more if they sell more. To serve as a personal risk manager and offer much greater coverage expertise and more services, I had to find a way to be paid for quality, not quantity. In most states, personal risk managers can charge a fee to provide value-added expertise and services, including minimizing the purchase of insurance, provided there is full disclosure that the fee is in addition to any commissions.
A personal risk manager has to oversee a client's entire insurance program—not just policies directly placed for them as an insurance agent. So, for example, I coach clients on their group insurance choices at work, help them evaluate the options and choose the best plan. As a personal risk manager, I also help clients identify risks in contracts they sign, such as car or boat rental contracts, moving and storage contracts, wedding reception contracts, and condo association agreements.
A personal risk manager needs to stay in regular touch with clients, informing them about new coverages, laws, and other risk-related developments, including advice for dealing with each. I accomplish that through a personally written newsletter that I've been sending out 3 times a year for 25 years now. When there is a claim, I am there to coach my client on the documentation necessary to speed up and to maximize the claim settlement. And if there's a dispute, I use my coverage expertise and claims knowledge to go to bat for them.
As a risk manager, I don't need to sell as many policies to get paid for my time and expertise because clients pay an annual value-added fee to provide that expertise to them on an as-needed basis. The fee works very much like an insurance premium. Some years you use your insurance a lot; other years, you use it very little. But you pay regular premiums to make it possible for the insurance company to be there for you with the services you need (when a claim happens, for example).
So it is with my value-added risk management service. Clients pay me an annual retainer (a "premium") that pays for the added expertise and value-added services plus all the additional time I have to spend to stay current on coverages, contracts, and products. The fee makes it possible for me to be there to assist a client with any insurance or risk-related problem they have. (See Personal Risk Management: An Overview in which I identify the 16 value-added commitments I make to clients as part of my personal risk management service. These commitments constitute the framework on which my practice is built.)
Challenges with this approach that I have experienced include:
A significantly smaller client base. Practicing personal risk management requires much more time per client. With a significantly smaller client base, my commissions are at least 50 percent lower than an insurance agent whose objective is selling policies traditionally on a commission-only basis.
A need for much greater skills and assistance from staff. Lower income from commissions plus increased staff expenses equals a much poorer insurance agent! (I found out the hard way that that formula did not work very well for very long.)
The difficulty in determining how much to charge each client for the added services and expertise. (This, for me, has been a very bumpy road with lots of trials and errors.)
The difficulty in explaining to new or existing clients the necessity of charging added fees and the difficulty in attracting new clients who have been trained to buy insurance the old-fashioned way—by shopping price only. I have overcome most of this difficulty because I start the new client prospects with a thorough insurance audit. I interview them at length, identify gaps in their program, and put a summary of those gaps with my recommendations in the report. Usually, there are a number of gaps and inconsistencies that are potentially serious if they occur. Once most people see what kind of major risks they are facing, they see the value in what I can offer and are more than willing to pay my value-added annual fee.
The difficulty sometimes in collecting renewal fees from clients who have been recently fairly inactive in requiring my services. Through trial and error, I have found that it works best if I make contact personally by phone or in person with each one of my risk management clients each year near the renewal date of the fee.
So what insurance agent in their right mind would ever go to all this trouble for so little financial reward? Someone like me who's idealistic and gets great joy in making a huge difference in other people's lives! Plus, frankly, being this type of insurance agent is so much more fun than just selling policies!
Becoming a personal risk manager for my insurance clients has not only benefited my clients a great deal, but also has increased my job satisfaction tremendously. Serving in a professional capacity for clients and offering them services and expertise they seriously need but are unlikely to find anywhere else is very gratifying.
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