“This is a very complicated case, Maude. You know, a lotta ins, a lotta outs, a lotta what-have-yous. And, uh, a lotta strands to keep in my head, man. Lotta strands in old Duder’s head.”
— Dude Lebowski, “The Big Lebowski”
In the cult classic, “The Big Lebowski,” the Dude was referring to a tangled plot fraught with kidnappings, embezzlement and bowling league politics. Back in the real world, insurance coverage may also feel confusing and complex. Professional agents are available to provide cost-effective solutions for life’s manageable risks, but augmenting a stand-alone approach to insurance coverage with sage oversight from an objective financial planner can add considerable value to your decision-making.
Read Before You Sign
There is certainly no lack of insurance possibilities to consider. Some of them, upon informed inspection, seem to benefit the commission-based salesperson pushing the product more than the intended beneficiary. For example, inspecting the fine print for variable annuity policies, we often find them burdened with excessive fees, weak underlying investments and onerous redemption costs (if you change your mind and want to move on). In his blog post, “Variable Annuity Fees You Don’t Know You’re Paying,” Michael Zhuang comments, “My advice: read before you sign. If you’d rather read Sports Illustrated, at least hire a fee-only financial advisor to read it for you. Why fee-only? They are not taking money from the insurance companies; chances are they will give unbiased advice.”
Insurance and Its Positive Possibilities: With “Ordinance Coverage” as an Example
On the other hand, there are still many instances in which the right insurance coverage can be a literal life-saver for you and your family. Some opportunities are easy to overlook if you’re unaware they exist. This is another way an impartial advisor who is familiar with the range of beneficial insurance resources available can add value, serving as an objective matchmaker between you and appropriate coverage for your circumstances.
Rocco Esposito of Esposito Insurance Group shared an interesting example with us regarding “ordinance coverage.” (For other insights from Esposito, see Rocco’s guest post on liability coverage.) Never heard of ordinance coverage? You’re certainly not alone. But if your home insurance policy does not include coverage for “building ordinance or law,” you may face challenges when putting your home back together after a claim.
At the time of your claim, if you face a local ordinance or law that calls for a change that will incur extra costs to remain compliant, that’s when ordinance coverage can kick in … provided you have it.
For example, say your home is damaged by a broken pipe. When contractors begin their repairs, they discover that your wiring is no longer to code. Updated wiring is not part of the claim, but the job cannot be completed without it. Or, imagine your detached garage is destroyed by a falling tree. Since the garage was built, local town ordinances have changed, so that all new garages must be installed farther from the property lines. This calls for a new foundation built in a different location, increasing the cost of the claim.
Many standard policies only provide 10 percent of the home value for these sorts of ordinance-driven overruns, which leaves the balance to be paid out of pocket. Solutions range from increasing this over-run percentage (for a cost) to seeking a cost-effective policy that allows for a higher percentage of the home value for building ordinance coverage.
Weighing the Risks
Seizing every risk management opportunity available could represent the height of savvy or the depth of folly, depending on your particular needs. There are essentially two factors to be considered when weighing each risk management possibility:
- Likelihood – What are the odds a particular risk will apply to you? For example, a professional athlete probably faces greater disability risk than an office executive.
- Degree – Even if the threat is minimal, how damaging would it be if it occurred? This is why most homeowners protect themselves against total loss. While it’s unlikely your home will ever burn to the ground, you can’t afford to take that risk.
In short, each family faces its own particular risk exposures across the ins and outs of their lives. An objective financial planner can help you consider the range of available coverage possibilities and strike a reasonable balance for your circumstances.
In addition, beyond considering each risk-exposure possibility in isolation, the results can be synchronized with one another as well as into your broader wealth considerations. By managing your insurance plans in coordination with your overall financial planning, your advisor can help you interweave the various strands, eliminating risky gaps and costly overlaps that may otherwise be missed.
In our next post, we’ll consider a case study related to disability insurance. Many professionals assume they’re well-covered through their employer’s policies. Sometimes, it’s worth taking a closer look.
Sage Serendipity: Especially if you’re a fan of the movie, “The Big Lebowski,” you’ll enjoy this moment of “Zen Dude-ism.”