INSURANCE – A DEFENSIVE STRATEGY

Thinking of insurance in terms of a defensive strategy illudes most people because our
relationship with insurance for the most part is super imposed on us by force or mandate. We
have to have insurance to purchase a home, if a lender is involved, and we have to have
insurance to buy a car, if a lender is involved, and these major purchases set the tone for our
relationship with insurance. A necessary evil that consumers really don’t understand and
wouldn’t deal with except for the fact that they’re obligated to do so by a third-party lender.
The average person has never read an insurance policy and only comes face to face with the
terms of a policy at the time of loss. For most, the insurance company vs policy holder
relationship shares many of the same attributes of a landlord vs Tenant relationship, one that is
seemingly adversarial and polarizing. So, when you speak in terms of insurance as a defensive
strategy, it can cause one to pause.

Before delving into the strategic defensive approach to insurance, I’d like to outline some of the
most common mistakes we make in our management of insurance. The biggest would probably
be the deductible. In some cases, people aren’t aware that they have a deductible and in others
the dollar amount is unknown and the financial resources to cover said deductible does not
exist at the time of loss. Your deductible represents the out-of-pocket portion of the loss that
you are required to pay and be responsible for. The deductible is set at the time of purchase,
however, as it relates to homeowner insurance, the policy is updated annually and the
deductible can change over time. There are also, different deductibles for different types of loss.
So, one policy could have multiple deductibles and the applicable deductible is dependent on
the type of loss involved.

Another major misconception about insurance is the belief that once you have insurance you
are fully protected against loss. That could not be any further from the truth as insurance is sold
“a la carte”, meaning separate riders, endorsements and limits can exist or not exist based on
your policy and/or purchase decisions. The most infamous statement in the auto industry is the
term “full coverage”, there’s no such thing in terms of insurance coverage but what that does
represent in most cases, is, full coverage that protects the self-interest of the lender and not
necessarily the consumer.
The above stated often creates a love hate relationship for insurance and leaves many asking
the question, “what am I paying insurance for”?

Let’s start with the definition of insurance, which is the transfer of risk. We purchase insurance
to transfer a risk to be absorbed by the insurance company at the time of loss. Every loss is
independent and stands on its own merits. Two neighbors, side by side, can suffer the same loss
and be compensated differently based on the terms and conditions of the policy each individual
has purchased, so it is left to the consumer and incumbent one every policy holder to become
familiar and acquainted with what they have purchased as insurance and to ensure what they
have, serves their own family’s best interest.

As it relates to insurance being used as a defensive strategy, it’s important to note that our first
layer of defense is simply doing the right thing as often as possible. The right thing in an
automobile could simply mean, obeying the rules of the road or no texting or drinking while
driving. When it comes to our home, we should exhibit the same degree of caution in the utility
of electricity, water & gas and purchase those preventive options that offer protection against
use.

Let me close with the strategic part. When we’ve established a fully funded emergency fund,
which is understood by most professionals as 3 to 6 months of living expense. We now have a
pool of resources we can leverage against insurance cost. Liquid cash, gives us the luxury of
being able to insure with a high deductible. High deductibles mean lower premium and lower
premium strengthens our cash flow position and allows us to invest more and save more. Think
in terms of high deductible for auto, homeowners, and health insurance but not until you have
paid off your consumer debts and saved your fully funded emergency fund (in that order).