Planners Financial Plan: Car Insurance

THE TEXT

My insurance agent sent me a text a few weeks ago. (We are friends and used to work together.) Like most people who are busy, I failed to reply in a timely matter.  The nature of his communication was a notice of our annual review and an opportunity to shoot the breeze to discuss life, family, and business.

A few weeks later, I noticed the bill for our car insurance sitting on my kitchen table. While visiting with Yvonne one evening, I opened the bill only to have my jaw hit the floor.  At that moment, I did not remember 2015’s premium, but I was positive it had been lower than the hefty number listed on the paper. Perhaps out of frustration, the bill found its way to the bottom of my mail pile.  The urge to examine, review, or even think about the premium upset me.  Eventually, I had to pick up the bill and review it, so I put our coverage under the microscope as well.

Basic Terms and Provisions of Auto Policies

First, here is a simple a review of policy terminology. (Your policy language may be different. Please see your agent with specific questions about your policy.)

Bodily Injury Liability: This is the medical portion of the policy and pays for expenses for cases in which you are at fault.  Often the policy will have numbers that display a “100/300.”  The numbers describe the maximum payout for a single person’s injury or the maximum payout for all occupants of the other auto (1.)

Property Damage Liability: This portion of the policy will pay for damage to the other auto in an accident for which you are deemed at fault (1.)

Medical Coverage: This portion of your auto policy will cover medical costs after an accident with your personal injury.  Coverage requirements are different for each state and benefits from insurers vary.

Comprehensive: Comprehensive coverage addresses costs pertaining to a car if it is stolen or damaged by something other than an accident (3.)

Underinsured Motorist: This helps provide coverage if the owner of the other car in an accident is uninsured or underinsured (3.)

Coverage Pricing

Below is a comparison of my coverage from 2015 to 2016 and the change in price. (My policy has added items not listed in the terms above.  Categories are listed as noted on my policy.)

2016-car-insurance-analysis

As you can see from the table, the increase is credited mainly to bodily injury, uninsured motorist bodily injury, and underinsured motorist.  After creating the table and knowing which categories increased, I was still perplexed. No one in my family had been in an accident, no claims had been filed, and we owned the same cars, which were now a year older.

The Question

Finally, I called my agent to inquire about why the premiums had increased.  First we talked about families, friends, and business. Then the time came for me to ask about the increase.  Interesting enough, a bad feeling came over me for wanting to understand.  It seemed like I was questioning his integrity (I am lucky enough to have a good agent) or implying that he was personally pulling one over on us.  So I paused for a moment, realizing this must be similar to how many couples feel when they sit down with a “financial advisor.” Still, the question would not come out.

After regaining my exposure, I did ask.  My agent took the time to explain general trends in driving and how the technology in cars has been adding to the cost of fixing them after an accident.  (Here is an article he shared with me to help explain these trends (4.) While no one can expect to be happy about seeing a premium increase, at least I now understood why.

My next question focused on ways we could better manage the premium.

Coverage

In preparation for my call, I examined my current coverage limits and even used a calculator to see what it recommends for insurance coverage. The recommendation from the Geico calculator is listed below, while my current coverage can be found in the previous table. My current coverage and what the calculator recommended are similar.*

geico-reccs-for-insurance-coverage-traverse

While knowing that I had proper coverage felt good, my issue of increased premiums had not been solved.  My agent and I explored changes in coverage and deductibles, and looked at comparable cars.  The one likely alternative would have saved me $131 with a payback that would have taken me 3.8 years to achieve.

So after all the personal analysis and discussion with my agent, Yvonne and I decided to just write the check. The payback period was too long and we felt comfortable with the coverage we have.

Why not get another quote from a competitor?

As I mentioned before, an unpleasant feeling arose when I started asking why the premium had increased.  My friend, without hesitation, acknowledged my concern, discussed how he was not happy about it either, and moved into his own search for an explanation.  He stayed calm and listened to my monologue of personal analysis.  I suspect he knew the correct answer was to stay with my current policies as is, yet he helped guide me to the correct solution with great questions.

As a learner, this is important to me.  He exercised great patience and empathy: two qualities I have yet to encounter in other agents.  So if this means paying a premium, I will write the check as long as there is personal value.

Important takeaways from this experience:

  1. Take the time to understand your car insurance policies before you have an accident.
  2. Make sure you have an agent who is willing to take the time and educate you.
  3. Some things that directly affect you are out of your control.
  4. Complete an annual review of your policies. Through this review, we discovered that my motorcycle was not insured. I thought it had been for a few years, but we did not catch the lack of coverage because a review had not been completed. (This is a story for another day.)

Sources:

  1. “How Much Car Insurance Do You Need?” Personal Finance RSS. Wall Street Journal, 17 Dec. 2008. Web. 14 Oct. 2016. <http://guides.wsj.com/personal-finance/insurance/how-much-car-insurance-do-you-need/>
  2. “Medical Payments Insurance Coverage | DMV.org.” DMV.org. Dmv.org, 2016. Web. 14 Oct. 2016. <http://www.dmv.org/insurance/medical-payments-coverage.php>
  3. “How Much Car Insurance Do You Need?” Personal Finance RSS. Wall Street Journal, 17 Dec. 2008. Web. 14 Oct. 2016. <http://guides.wsj.com/personal-finance/insurance/how-much-car-insurance-do-you-need/>
  1. http://www.cnbc.com/2016/05/27/auto-insurance-rates-rising-at-fastest-rate-in-almost-13-years.html
  2. https://www.geico.com/landingpage/coverage.htm#set8

*use of the Geico calculator is neither an endorsement nor recommendation of the company or calculator

Comprehensive Planners vs Spot Checkers

Here and Now

Get good grades, go to college or trade school, and then land a high-paying job.  That is what we tell and teach our youth.  Have you gone through the same cycle?  How has it worked out? If you are like me, you have encountered many twists and turns along the way.

As I stop now and look back, I realize the disservice I have done my children through whathere-and-now I have told them. Here in this moment, I see that the finish line has been a life filled with the promise of a later, greater life at retirement.  This thinking had led to a personal longtime mantra of “working towards the later, greater version of yourself.” Am I not great now?  If not, what is stopping me from pulling that greatness forward to now, this moment?

How do we define the extent of this greatness?  Culturally, we do it by comparing incomes or net worth (in other words, to share an old favorite saying, “He who dies with the most toys wins,” a saying often heard during my childhood and adolescent years).  After completing thousands of financial plans, I see the reality of this saying. Here is the updated version: He who dies with the most toys usually has much debt, and sometimes leaves his family with an empty bag.

Fearing that they would leave family members with an empty bag while heading towards the finish line of retirement, generations before us completed anecdotal planning—what I like to refer to as Spot-Checking.  Am I saving enough for retirement? Yes, buy this mutual fund, the returns will help. Are you sure?  Ok, save more and protect your family.  Buy this permanent life insurance.  Have more stuff? Here, buy another policy.

After you buy the product, you fall into an advisor black hole, a place where you surface only after the book of business has been cycled through.  Consider the following for a moment. When did you last hear from your insurance agent?  At your policy renewal? If not then, when? How about the last time a significant event took place in your life?  Did you hear from your investment manager?  Has your estate lawyer checked in to inquire about life changes?

Chances are you spoke to one of these professionals when a major event was taking place in your life for which you needed their expertise.  Often, we do not seek this “expert” counsel until the event has already passed, limiting the effectiveness of the help.  It would be similar to watching your house burn halfway down, then deciding to call the fire department.

This planning has been going on for decades, with our parents, grandparents and continuing with most of us today.  The experts come in to address the singular issue or give peripheral solutions. The client does not know what he does not know.  On down the road, we go to the next event.

Change is in the Air

The recent ruling stemming from the Department of Labor and requiring advisors to act as time-for-changea fiduciary will change the way financial “advisors” work with client’s retirement assets.  The client (and not the product, sales agent or company) will be placed at the center of the relationship.

New companies are popping up, like the XY Planning Network, where advisors commit to putting the client first.  The Garrett Planning Network is another example.  The people working in these circles care about your financial picture and do not want to come in for a spot-checking exercise.  As proof of intent, review how your advisor gets paid.  Is it commission based? Could she win a trip for selling large volumes of product (often the case with annuities)?

Next Step

Review the last time you had a major financial event. Did it go the way you planned? What next-stepwould you change?  Could you have prepared ahead of time?  If so, what would the preparation entail?

Addressing these questions is only a small portion of the ways in which a comprehensive advisor helps. Instead of calling after the house has burned halfway to the ground, work with a comprehensive planner and install a sprinkler system in your financial house.  It will not stop a fire from happening, but it will keep the house from burning down.

Here is an example of this in my life.

Recently, I started working with a client who lost her mother. (Her dad passed away a few years ago.) Overwhelmed, she did not know where to turn.  We took care of her immediate needs by consolidating accounts, going through policies, and working with her CPA to file the estate tax returns.  The client was happy with the progress we had made in a short time.  However, she was still overwhelmed by the money, so I turned the conversation to her future.

It took time, but she was eventually able to paint a picture of a desired future, honoring the values of her parents by paying for her children’s college and paying attention to the way she spends money. We accomplished this progress by starting not with products but with what she values and why those values are important.  We even paused to see if her calendar and checkbook currently matched those values.

I went back and started crunching the numbers. As I went through her data, a loan on a 401k was found. We discussed why the loan had been taken out and how we develop behavior biases with our finances.  Since the conversation, she decided to take action by looking for ways to pay off the loan and increase her retirement savings with a recent pay raise.

As the early wrap-up of the plan implementation took place, I found unclaimed property in her name.  She put these funds towards the loan, saving her taxes and tax penalties if her employment ended. Plus, she did not have to take cash flow from her current spending.  She has fortified her plan by building momentum along the way. She is confident and living a life based on her values.

Spot On

Spot checkers who come in only to sell a product or help make an isolated investment change or portfolio tweak usually do not go the extra mile to check the unclaimed property, walk through the process of paying down a 401k loan, or having debt conversations about matching a calendar and assets to personal values. This is how a comprehensive planner helps. This is how financial wisdom is built.  The best part will be seen as her children learn from Mom’s money wisdom.

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