Life is full of choices. We make choices every day. Good choices, bad choices, simple choices, and complex. We make choices that impact our lives day in and day out. If you sit back for a moment and think of all the choices you make during the day, it will astound you. As the saying goes, the only things you must do in life are pay taxes and die. With the exceptions of taxes and death, everything else is a choice with varying levels of necessity rolled into them. Insurance, with all the structures and designs available to us, should protect our family when we make bad choices, take no action, or have unfortunate circumstances happen.
I have heard insurance referred to as necessary gambling. If you think about it, insurance is a type of gambling. It is protecting the insured party from a potential monetary loss. The loss may never occur. However, without the insurance, you are gambling on the chance nothing bad will ever happen. You gamble that you will never need to use an insurance policy. If you use insurance, of any form, you are putting money into a bet. You are hedging the bet that you will need it one day.
Learn from history.
This past year I have learned quite a bit about choices and how those choices impact human behavior. Take the COVID-19 pandemic. Please! Someone take it! Take it away. We are ready to move on.
Many business owners, for years, took advantage of various exclusions in their business disruption insurance. Why? They wanted lower prices by omitting portions of their coverage. Again, a gamble. Take out a piece of potentially necessary coverage here and there. All while hoping that you will not need that protection. All in the name of saving a few dollars on the front end. Carriers have catered to these requests and obliged the clients’ demands to remove specific coverage. One such popular option for removal is coverage for pandemics.
I mean, hey, there has not been a global pandemic of this magnitude since 1918. I will not ever need to insure against a once-in-a-lifetime event. So why pay for it? The likelihood is just too remote. The attitude is that it is not going to happen to me. But, as the last few years have shown, that is not always the case. It did happen. It happened to all of us. It really did. Now we know better.
Ironically, business interruption insurance riders are tax-deductible as ordinary business expenses. So there is little to lose in paying for these things but a lot to gain!
100-year weather events.
Here in Houston, we just experienced Snowmageddon. Yep, y’all, we are calling it that! We froze for the better part of four days in South Texas. Do you know the last time it snowed like that in Houston? On Valentine’s Day in 1895, Houston had 20 inches of snow. Yes, another 100-year event! Valentine’s week 2021 brought snow, sleet, and freezing rain to Houston. It also brought freezing temperatures that lasted for several days. It brought multiday road closures, power outages, broken pipes, and more school closures. We have heard reports that the 2021 Snowmageddon is the costliest weather disaster for the state of Texas in history. The last count was estimated to be an 18-billion-dollar loss in the state. That number is so large many of us cannot even comprehend the magnitude. The freezing storm surpassed the infamous Hurricane Harvey from 2017. I do not want to even talk about Harvey. In 2017, Houston experienced its third 500-year flood in three years with Harvey. I have friends that are still not back in their homes post-Harvey. It has been almost four years!
Are your clients underinsured?
Underinsurance is a common problem. After a total loss situation, the impacts are for a lifetime. The resulting chaos of Snowmageddon became amplified by homeowners who lacked proper coverage. They thought they were sufficiently insured. They opted for lower premiums in a trade-off for higher deductibles. The advisors and carriers are obliged in efforts to close the sale because the customer is always right. Right? Well, many Texans emerged from the storm trying to figure out how they were going to come up with a $7,000 deductible to begin the repairs to their homes. Others learned that their policies lacked simple provisions for things like hotel accommodations while completing these repairs. Honestly, in my opinion, your Additional Living Expense (ALE) limits should cover rent for at least two years after a total loss.
Is it too good to be true? Probably.
Here in Texas, neighbors learned about the nature of unregulated energy markets when they got energy bills as high as $17,000. Yes, their electric bill costing that much for five days of energy! These plans are great when the energy supply is consistent. They are great when energy demand is low. What happens when demand is excessive? What happens when supplies are diminished or non-existent? Well, now we know. If it sounds too good to be true, there is an underlying cost unforeseen coming your way. We will probably be seeing commercials soon. Did you hear the story about the $9,000 electric bill? These examples of too good to be true resonate when it comes to insurance, too.
An old friend of mine used to put it to me this way. He would say, you are going to make a mistake. When having two choices, either choice could turn out to be the wrong one. The question he put to me was simple. Do you want to make a big mistake? Or do you want to make a little mistake? You are going to have to choose one.
In this example, the little mistake entails paying slightly more for an insurance plan instead of going for a bare-bones policy. You see, if the price is the only determinant absent value, then the customer is in a race to the bottom, and eventually, they may get there.
Don’t be that advisor.
Today, I see too many advisors selling no-frill, low-cost term insurance to customers because their customers want the lowest price. Well, so did all the businesses that opted out of pandemic coverage. So did the Texas homeowners who opted for no flood insurance.
The other choice is no action at all. Potentially, not making a choice be the worst choice to make of all options you have. A staggering 43% of homeowners do not have life insurance! They have decided not to pay for protection. The result of this could be their family losing their home in the event of their untimely passing. The same 43% of homeowners would no longer have the ability to pay their household expenses within a month of losing the primary income earner. You have seen it time and time again. It is so difficult to see a For-Sale sign in the yard a month after someone passes. The family has not only lost their beloved spouse, parent, or partner, and their home. They’ve doubled their grief.
I have experienced the shock of staggering unaffordable premiums. A few years ago, I bought a no-frills term policy for $1 million of coverage. It was guaranteed for 15 years and was very affordable, around $1,500 annually. Then, a not-so-funny thing happened. As the policy entered the 16th year, my premium jumped to $22,000. Naturally, I let the coverage go, but what if I needed it? What if my health had changed and I could not get a new policy? This is a common issue most clients face at the end of a term plan contract. Fifteen years earlier in life, they opted for the least expensive option. They only thought they would not need life insurance later. Assumptions that they would be higher-earning and would have had grown their wealth sufficiently. In those 15 years, they assumed they would essentially be self-insured.
What about when things do not go as planned? Oops, the late-in-life child arrived in their forties. Three beautiful grandkids they never dreamed they would have so young. Now, they want to leave a legacy for their unexpected life gifts. Life can change drastically in 15 years. Now, your client is no longer insured because they cannot afford their current plan. Now, they cannot qualify and obtain more coverage. Sounds like you and the client made a choice and lost the gamble. So, now what?
One potential alternative is converting policies. Many present-day contracts come with the option to convert the coverage to permanent insurance before certain milestone ages. I have an example. I spoke to a man, now aged 56, looking to convert $100,000 of his million-dollar term plan to permanent coverage. The new pricing is based on his preferred health from 13 years ago, which is fantastic. Especially great if he has had a negative health change. However, the new coverage cost is calculated utilizing present-day rates and his current, older, age. His million-dollar term plan, which cost a 43-year-old about $1200 per year, is now going to cost him $2,600 for only one-tenth of the coverage. Yes, coverage prices can increase that much! An older age factor combined with inflation comes into play in this example. If he had locked in permanent rates in his 40s, we would not be worrying about these increased prices. Again, a gamble and a choice made. Far too frequently, the house wins.
There are term policies with conversion options that include living benefits like critical illness and chronic illness. These are amazing benefits in the event of one of these circumstances. However, far too often the choice is made to save a few dollars a month and not elect these particular benefit options.
Be the hero advisor.
Clients make choices with the support of their advisors. They look to advisors for insight and planning. This means planning for all the good in life but also protecting against the bad. If you, the advisor, do not work with the client to approach life with the insight of all circumstances, they may go with the least expensive alternatives. So, I challenge you with the image of 20 years in the future. Would you see the client happy they had the proper protection or regretful of the decisions they made? If we let the customer roll the dice (yes, I used another gambling analogy), they will most likely make the wrong choice. Potentially a very costly mistake.
EMG is here for you. We strive to help you develop the best plan to educate and protect your clients. It is essential that you understand the protection options for all the possible twists and turns life can take. You can then turn that around to the client and help them create the best plan for themselves. Roll the dice with EMG.
Durr H. Sexton, CLU
EMG Insurance Brokerage