Articles
In the last issue we discussed in depth the many nuances of disability insurance. In this installment we will discuss two additional areas of risk management: Life and personal liability insurance.
• Life Insurance—Insurance designed for the purpose of providing for beneficiaries in the event of the insured’s death. Insurance proceeds provide income for dependents, payment of estate taxes (in the event of a taxable estate), wealth replacement, or charitable purposes.
• Liability Insurance—Personal liability insurance provides for the payment of claims from others covering the personal (non-business) liability of the insured. These liabilities may include accidents in boats, in vehicles, in a home and other liabilities where the insured did not purposefully attempt to inflict harm on another person.
For a quick recap of risk management please refer to Why Risk Management Is Important For Lawyers.
Defer All Risks Deemed “Catastrophic” In Your Individual Financial Situation To Someone Or Something Else
As professionals and individuals we each assume significant financial risks whether or not we recognize or are aware of them. They are significant. If we choose not to defer the risk, the effect can be “catastrophic” to us individually and to our families. The proper use of risk analysis and implementation of a risk management plan is crucial to our livelihoods and the well being of our families.
Remember this rule of risk management:
People should defer all risks deemed “catastrophic” in their individual financial situation to someone or something else. (This is why banks require fire insurance on all homes they lend against—an uninsured house that burns down is a total loss with the exception of the building lot.)
Fact One: Death is by definition “catastrophic.”
Everyone will die. Fortunately, most of us do not know when and under what circumstances.
Fact Two: Significant accidents can also be “catastrophic” either as a victim or as the cause.
Accidents happen to hundreds of thousands of people each day. By its very nature, an accident is unanticipated and uncontrolled. Based on data from the Department of Highway Safety, over 50,000 people are killed in automobile accidents each year. Many more hundreds of thousands of people are permanently injured in those same accidents. We discussed disability insurance in part one of this series. However, let’s think about the consequences if we are the one causing the accident and therefore liable for monetary damages. We may also be the victim of an accident caused by someone without adequate insurance.
Why Lawyers Do Not Implement Appropriate Life Insurance Coverage: Misinformation And Mistrust
After many years of discussions regarding life insurance, I have discovered two reasons why lawyers have not implemented what in my view is appropriate life insurance coverage: 1) misinformation and 2) mistrust.
Misinformation: Most lawyers are exceedingly busy. They must constantly react to client needs, in painfully short time frames, with a high degree of professional accuracy. Most attorneys do not have the time it takes to unravel the various “positions” on life insurance. To make matters worse, there is a significant amount of conflicting information and advice available in books and online regarding life insurance. It becomes increasingly difficult to sift fact from fiction. It takes the one thing lawyers don’t have—large blocks of time. This lack of adequate time and focus lead to quick assumptions, vague guesswork, and a misinformed decision-making process. As a result, most lawyers do not understand much about life insurance.
The second main cause of inaction or “bad implementation” is mistrust.
Mistrust can be summed up in a phrase someone once coined:
“Insurance is not bought …it is sold.” Insurance salespeople rank down there with used car salesmen in the social order of mistrust. However, often a small number of “bad actors” causes us to assume that there are no “honest” insurance salespeople. This is simply not the case. The cures for mistrust are two fold:
• We need to be well informed in guiding the insurance discussion. The decision making process is ours alone and cannot be delegated.
• We also need to find an experienced, reputable insurance professional… not a salesperson. By definition, experience takes time. I would recommend someone who has at least 8-15 years experience in the same market segment. Just as you would not give a second year associate a complex M&A task, your cousin’s son or daughter–new to the insurance business—has not yet paid the price in experience to be entrusted with your family’s life insurance policies. Remember: if you allow the insurance professional to make a mistake you are gambling with your family’s back-up plan (don’t forget you will already be dead).
Misinformation and mistrust, coupled with the fact that some types of insurance contracts are quite complex financially and require a high degree of insurance “sophistication” to evaluate, make the need for a real insurance professional crucial. We have discussed the cure for mistrust and the need to gather additional insurance knowledge. Let’s discuss how a lawyer should guide his/her own insurance discussion.
The Insurance Discussion: Do I Really Need Life Insurance?
Let’s walk through a series of questions with the answers supplied as a reference to help you sift through the misinformation.
Q. Do I really need life insurance?
Life insurance is designed for the purpose of providing for beneficiaries in the event of the insured’s death. Insurance proceeds provide an asset base to pay debts and produce income for dependents. If you do not have stable sources of continuous income to support your dependents in the event of your death, then you need life insurance.
Life insurance provides cash for the payment of estate taxes. Estate taxes only enter into the picture if you currently have more than $2,000,000 in net worth as a single person ($4,000,000 for a married couple) or expect to have such net worth in the next 3-5 years. Note that the estate tax exemption amount will increase to $3,500,000 per person in 2009…but drop back down to $1,000,000 in 2011. If your net worth is in the range described, then you may need life insurance for payment of estate taxes. We will discuss issues regarding estate planning in more depth in a future article. (Fact: 41% of attorneys do not have up to date estate planning documents).
Life insurance is often sold as a “wealth replacement” vehicle. This usually means that someone asks you to gift a large amount of money to a qualified charity and then “replace” your heir’s wealth by buying life insurance (usually sold by the promoter of the “donation”). Not generally recommended. You should evaluate the donation on its sole merits and based on the current affordability of the donation in each case.
