Guest Blog courtesy of Ross Brown (Acorn to Oak Financial)
Insurance to many people is a confusing and often highly misunderstood topic. Most of us have been taught to think of it as a cost or a necessary evil. Many families have not been counselled on how to utilize it effectively as an integral part of Risk Management within their overall wealth building process.
Over the years we have seen many financial plans that were created from an accumulation and retirement planning philosophy, but in reality, few are created with true Risk Management in mind. Too often these well intended plans are created with static assumptions that look fantastic if everything goes according to plan but fail miserably when adversity rears its ugly head.
We need to think more like an engineer when we build our financial lives: that our plan should work equally in both good times and in bad. When an engineer builds a bridge, they do not just build it based on the bare minimum requirements, they build in many contingencies that could impact the integrity of the structure such as excess winds, additional load, earthquakes etc. Our financial lives should be no different and insurance can play an important role in this.
Let us start by looking at what types of risks could potentially exist for you and your family throughout your lives and how they could derail or significantly impede your future financial success.
In the first category there are events that we would classify as Economic Risks such as Job Losses, Inflation, Stock Markets, Interest Rates, Recessions, Pandemics, Tax Rates and Tax Laws. These are events that you usually have no control over as an individual and the best way to protect yourself from them is by having access to liquidity for both emergencies and opportunities as the situations arise.
In the second category there are events that we classify as Insurable Risks such as Lawsuits, ID Theft, Disability, Death, Property Damage or Loss, Health & Long-Term Care Costs. These are events that you are in control of mitigating the risk in advance by securing insurance so that you and your family are protected should any of these events occur.
Insurance is one of the most important financial instruments available today in society. It gives us the ability to transfer certain risks away from ourselves into a pool of many who agree to assist in the loss of any individual member within that pool if a certain peril should occur. Insurance is something we all want to own as it provides us with security and certainty.
So, what is Insurance? Well if you always keep this one definition in mind, you will have a much stronger and resilient insurance portfolio: Insurance is the reimbursement for the FULL VALUE of any item lost. We should all use insurance effectively to protect our wealth, income, and lives by looking at the “economic value” of them and then matching that value to the proper level of insurance.
Let us give you a few examples.
If your home burned down in a fire, would you want the insurance company to pay you the full value of the home or just enough to build a smaller home to “meet your needs”?
If your car were stolen, would you want the full value of the car to be replaced or would you want just enough money to buy a smaller less expensive car that “meets your needs”?
If you became disabled and could not work, would you want your full income replaced or just a lesser amount based on what “you need to get by”?
If you were to die prematurely, would you want your family to receive your full annual income, as if you were alive, or would you want them to receive just what they “need to get by” and not a penny more?
We hope your answer to each of these questions was that you would want the full replacement value, and not a lesser amount that represents a perceived “need”. The most important point that we can try to get across is that when we purchase insurance, we are buying a way of life that WILL occur if one of those perils should happen.
Often we see people with substantially less coverage than full replacement value and when asked why some of the answers we get are, “that was all I wanted to spend” or “I have no idea but it sounded good at the time” or “I don’t like insurance and I am trying to save money on the premiums”. But when asked how much they would own if it were free most people would own the maximum they could acquire.
The focus on an insurance buying decision should not be on premium cost but should always be on obtaining full-replacement value coverage first.
Many times, the decision has been made by seeking out the cheapest policy (which often provides the fewest benefits, and hence the least value), we should seek to insure for the full value of the asset, income or life we are trying to protect. When discussing any form of insurance, first imagine the peril occurring in your life, then select the coverage that will make your life happy or complete if the event should actually occur.
Once that amount has been ascertained, then the cost and how to pay for it comes into play. But never settle for less than what you would want to have if the peril did occur.
Born in Edinburgh, Scotland Ross moved to Canada in 1996 and has over 20 years of experience in the financial services and insurance industry. His expertise focuses on the efficient and effective accumulation and distribution of wealth using insurance products. He specializes in assisting families, professionals and business owners with solutions designed to protect, as well as enhance their income and wealth throughout all stages of their lives, while ultimately passing it on as efficiently as they’d prefer to their families, charities or religious affiliations. Working regularly with other professional advisors he brings integrated and strategic insurance solutions to meet a client’s unique circumstances, complementing the excellent work delivered in the Wealth Management, Investment, Legal and Accounting sectors of our industry. He is actively involved in volunteering his time to the Barrie Scotch Whisky Society and has also served as a Simcoe County board member for the Canadian Association of Insurance and Financial Advisors.