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The Bet You Have To Lose To Win

I remember the moment like yesterday. It was March 1980. I had just spent an hour with a young couple preparing their tax returns. The question was simple: “We were wondering if you ever offer advice on insurance?”  While I routinely advised on finances, I deferred insurance advice to the professionals. My answer was: “I am glad to help you with your finances but insurance is a specialty all to itself. I can recommend some good agents.”

After a pause, the husband looked at me and said: “How do you advise on finances and not insurance?”  I was perplexed. Here I was presenting myself as a financial advisor without one critical skill set. I ignored Pope’s adage: “Fools rush in, where angels fear to tread”.
 
Two hours later we had a plan. They had shopped for insurance but felt they had Hobson’s choice: what is offered or nothing at all. All the proposals looked the same. They recognized they would be underinsured.

Since this was new ground for me I needed to start with the first question: what are your needs? With three young children, a mortgage, other bills and only one spouse employed outside of the home; defining the needs was easy. What was complicated was the disparity between their needs and their ability to fund the premiums.  

I have had hundreds of opportunities to revisit this analysis over the last 31 years. Each time the challenge is to craft a plan to bridge the gap between needs and affordability. Whether it is a Fortune 500 executive or the owner of a local business, each case raises similar issues. The quality of the planning turns on how thoroughly you examine the needs as well as your ability to provide a comprehensive solution. Since insurance is like the bet you have to lose to win, your thinking must sometimes be counterintuitive.

We start with the needs analysis. It requires clear vision and pragmatism. You start with income replacement. For the typical business owner it can quickly become a lot more complicated. Income replacement may only be a small piece of the puzzle. Lines of credit tied to home equity or personal guarantees demand attention. In addition, a disproportionate percentage of your net worth may be invested in the business. These differences require a more thorough analysis.

An executive who has moved across country has other issues to consider. The possibility of a round trip is important. Often the survivors will want to return to their home. Not anticipating this possibility leaves your family with an unfunded need. Similarly, you want to provide flexibility in marketing your residence. Insurance can take away some of the pain experienced in a slow real estate market by allowing your family to move sooner.

Alternatively you may have moved your family to a very appealing, but expensive, community. Your survivor may decide to remain so the children can graduate with their peers. In a careful analysis you provide for all possibilities.

Needs are relative. There is no absolute. In the case of the executive, professional or business owner some needs may not be readily apparent. I am reminded of a call one day from a client who had received a big promotion (and raise). The new position required a move to San Francisco. He quickly explained why he was calling: “Tim, this move was a mistake. I got a $50,000 raise but it will cost me $100,000 more a year to live here!”  We discussed the options. He finally settled on sticking it out for a few years in the hopes of another raise or move. Unfortunately the decision came with consequences. He would be unable to add to his retirement or college savings. In effect, he was investing in the job hoping for a future benefit. When I suggested he obtain a short term policy to cover the gap he recognized the benefit and became more comfortable with his decision.

This same issue faces business owners and executives all the time. They sacrifice for a future benefit. Often they have passed on upgrading homes, vacations or family trips to meet the needs of their growing business.  Alternatively, consider the professional who puts their career off six years to pursue advanced skills in their chosen field. A premature death means their family will not experience the benefit of their efforts.

Back to that meeting 31 years ago and how we bridged the gap between affordability and needs. Once we defined what was needed the challenge became how to acquire it within their budget. After carefully shopping the market it became apparent they could not afford permanent insurance for the full amount. Instead we introduced a timeline approach which addressed their area of maximum vulnerability. The end result was a combination of policies which would address needs while their children were still dependent and provide the opportunity to retain future insurability. We discussed the fundamental concept of insurance: its ability to meet a need which would be otherwise unfunded by available assets. As with a seesaw, as one side rises the other falls.

The children of the couple I met with 31 years ago have grown to have children of their own. As I sat in a meeting with one of my young associates a few weeks ago, I watched him tackle the same issues with his clients. I smiled knowing he was able to walk down a well trodden path.

-Timothy F. Terry