Avoid the Turmoil of Insurance Mistakes

September 16, 2008
William B. Howard, Jr, ChFC, CFP

Physician's Money Digest, April15 2003, Volume 10, Issue 7

Physicians need the correcttype and amount of insurancecoverage to providetheir demanding lifestyle some peaceof mind. With their minds at ease,physicians can concentrate on thehealth and well-being of their patientsand families. However, thereare pitfalls along the path to properlyinsuring every aspect of life. Toavoid these hazards, a physicianneeds to be aware of the followingcommon insurance mistakes:

• Buying insurance from arandom agent or company—Notall insurance companies are thesame. Select a company based on itsfinancial ratings. Several differentrating services (eg, A.M. Best,Moody's Investor Services, Standard& Poor's, and Duff and PhelpsCredit Rating Co) use slightly differentrating methods, which canhelp you in your search. Most companieswill be glad to share this informationif you request it.

Selecting an agent is a little moredifficult, so look into their background.How much experience oreducation do they have? A goodgauge of an agent's expertise is aChartered Life Underwriter designation.Ask friends or colleagues whothey recommend, or seek the adviceof a financial planning professional.

• Buying the wrong type ofinsurance—Don't let an agent orinsurance company pressure youinto purchasing insurance thatdoesn't satisfy your needs. Your particularsituation is unique, and onlyyou know all the key variables. If thepolicies are difficult to comprehend,ask questions. A good agent shouldbe willing to take the time and makesure you thoroughly understand allthe details of the available policy.

Before you purchase any insurance,do your homework. Knowwhat types of policies are available foryou. Often the wrong type of insuranceis purchased because of cost orconvenience. When buying life insurance,know if you need term or wholelife insurance. Do you have sufficienthealth and disability coverage? Isyour liability protection inadequate?

• Failing to document yourproperty—It isn't easy to proveyour loss when it occurs. If a firedestroyed your home or business,would you be able to replace theitems that were destroyed? Inventorythe items you need to protect.Collect and organize the receipts orpurchase contracts. Make sure theproperty is properly appraised.Supplement the paper records with avideo description and keep all theseitems in a safe-deposit box. Double-check your insurance to make sureyou have the proper coverage.

• Letting your premiumamount dictate your insurancecoverage amount—When purchasinglife insurance, a good estimateof the amount needed is 5 to 8times your annual salary. Of course,this estimate doesn't work in everycircumstance. The type of coverageneeded and your individual situationis unique; a lot depends on your age,number of kids, spouse's earnings,how much savings you have, yourhealth, future ability to work, etc.

Once you decide on the amountof coverage, see what your insurercan provide. If the premium is tooexpensive, you might want to tryusing another insurance company.Another solution could be a combinationof insurance products. A basepolicy and then supplemental terminsurance to cover your needs duringspecific years might provide the necessarylife insurance coverage. If thepremiums are still too high, youmight want to consider increasingthe deductible. This is an easy methodto quickly save money.

• Failing to update beneficiaryinformation—This is one of themost common mistakes made. Manypeople forget about such details afterthe purchase of their policies. Birth,death, divorce, or other life circumstancesmay dictate the need toupdate or change entirely the beneficiaries on your policies. Also, youwill need to name contingent beneficiaries as a precautionary measure.

One issue of concern is namingthe estate of the insured as a beneficiary. Insurance benefits are normallytax-free to a beneficiary, but theestate could face estate taxes becausepolicy benefits become part of thenamed estate. A solution to thisproblem is to create and name anirrevocable life insurance trust as thebeneficiary instead of the estate.

• Using life insurance as aninvestment—Life insurance wasdesigned to provide death benefits,not potential investment returns (eg,funding retirement or paying for achild's college education). Insurancecompanies are good at insuringagainst a loss, not necessarily investingfor the future. Stay away frominsurance products marketed basedon investment returns.

• Buying credit card lifeinsurance that pays off your outstandingbalance—If you havecredit card debt, your first concernshould be to quickly reduce thatdebt, not purchase insurance fromthe credit card to cover the balance ifyou can't pay it. Usually this insuranceis expensive, and when yourdebt is paid off, you're still payingpremiums to cover that amount.

• Depending entirely on youremployer's group insurance policies—Group policies are often theleast expensive policies you will everhave, but they may not provide youwith all the coverage you need.Examine your group coverage anddecide if you need supplementalinsurance. Also, consider the potentialinsurance ramifications if youleave your current employer.

• Not reevaluating your insurancecoverage—Examine yourinsurance needs at least once a year,or when there's a significant materialchange in your life. Based on anychanges, determine if you have sufficient coverage. Think of it as an annualphysical. A financial planningprofessional can provide a comprehensiveinsurance-needs analysis.

• Waiting too long or notplanning at all—A busy lifestyle cancause you to put off insurance planning.Don't fall into this deadly trap.Commit the time and effort to completethis as soon as possible.Protecting you and your family'sfuture should be your first priority.

William B. Howard, Jr is presidentof William Howard andCompany, a fee-only investmentfirm in Memphis, Tenn.He has 21 years of experienceworking with physicians andwas named one of the top 150 advisors fordoctors by Medical Economics. He welcomesquestions or comments from readers at 901-761-5068 or whoward@whcfa.com.