Someone wrote to me to tell me I was basically an idiot for previously writing that insurance is designed to protect assets and that products advertised as insurance that do not protect assets are not really insurance.
The writer's first point was that under various state insurance codes--I will use the one he cited for California--"Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event" (California Insurance Code, Section 22) was that liability/casualty insurance does not protect assets.
I will be brutal here: If you do not understand that casualty insurance/liability insurance protects assets, you probably should not be allowed to maintain your insurance license. Liability insurance is 100% designed to protect the policyholder's assets. Otherwise, if it is determined the policyholder must indemnify another party against loss, damage, or liability arising from a contingent or unknown event and must spend their personal assets in order to indemnify the other party, they have lost those assets in the process. Simply put, if you are sued for $100,000 and must make a $100,000 withdrawal from your savings account, you have lost $100,000 of assets. If you have a liability policy that will pay the $100,000, your liability policy has protected your assets.
It is neither here nor there whether an insurance policy protects property or liability. The purpose is the same--to protect a policyholder's assets.
The same "expert" went on to say that life insurance does not protect assets because it does not prevent a person from losing their life. That is a silly point. The writer then goes on to say that life insurance protects the beneficiaries but does not protect assets. Again, this is indicative of ignorance.
How does life insurance protect assets and what assets does it protect? Take a simple situation not involving tax planning. Why is a primary earner's death so devasting to their family that it necessitates the purchase of life insurance in the first place? Because the primary earner's income stream is stopped.
That income stream is an asset. An income stream in this sense is no different than the income stream of a business. The value of that income stream can easily be calculated using a variety of capitalization models. The amount of life insurance a family needs can be calculated using one of these models and hence, the life insurance protects the asset known as an income stream.
Understanding that an income stream is an asset, a clear and legally defined asset, is something about which everyone selling insurance should understand. However, in teaching dozens of business income classes, it is not something most people in this industry comprehend. Life insurance in many ways is quite similar to business income insurance because both are designed to protect what would have been a future income stream.
My clients who understand income streams well, sell business income coverage that is structured far more accurately for their clients than the common, generic approach of, "We just give everyone ALS." Insureds deserve agents who truly understand income streams and how to value those streams as assets. Agents failing to do so are failing their customers.
Life insurance sold for tax planning purposes, which is a huge proportion of the life insurance that is sold, is designed to protect assets. Otherwise, assets must be sold to pay taxes. Sometimes the asset lost is cash, and therefore it does not have to be sold, but it is still lost.
A problem arises when life insurance is sold and the beneficiaries do not really have any kind of insurable interest in the insured. This "life insurance" is no longer really insurance. It is more of a put or call, speculation, or cause for crime, but it is not insurance any longer.
Another point of contention he expressed that health insurance is not really health insurance and in most cases (self-insured individuals are an exception as I pointed out in the previous article), it is not really insurance. The reason, as I previously noted, is that true insurance is designed to protect the assets of the named insured and the named insured has an insurable interest. Fully funded employer provided health insurance policies are not protecting the assets of the named insured and the named insured does not have an insurable interest in the employee (to have an insurable interest would require ownership in the employee which is illegal). Therefore, health insurance fails the insurance test.
A self-insured person, say a self-employed person who is also self-insured for health insurance, has bought real insurance. The named insured has an insurable interest in themselves, and they pay for their own insurance 100%. The insurance protects their personal assets against spending time in a hospital and being unable to work. In effect, health insurance in this scenario is protecting the self-employed person’s income stream and their bank account, both obvious assets.
An employer paying for their employees' health insurance is not protecting their balance sheet because they are not liable for their employees' hospital bills when they break a leg skiing on vacation. They have no risk or exposure to their balance sheet and unless, and maybe not even then, the person meets the criteria of an irreplaceable employee critical to the daily functioning of the organization (think a $1 million commission producer in an agency with $1.2 million in total commissions), that employee's hobbling around does not materially endanger the cash flow of the company either. In other words, there’s nothing to insure.
Individuals could just as easily buy their own real health insurance. Employers offer it as a benefit, a subsidized benefit and that is all it is, albeit an extremely expensive benefit.
The last major point this writer raised was that I was wrong in stating that workers' compensation is not really insurance either. He proceeded to give me a history of why workers' compensation exists. Why something exists is of no importance relative to what it is. Workers' compensation is a benefit to the employee. The fact that it replaces what would otherwise be some form of insurance an employer would buy in the event an employee sued them for a workplace injury does not make workers' compensation "insurance". It is simply a benefit designed to avoid having a true insurance product because business leaders, politicians, maybe the plaintiff's bar, and maybe the unions all agreed workers' compensation was a better solution than constant litigation. It is great they developed a non-insurance solution that is still sold by insurance companies and uses the word 'insurance."
A professional understands exactly what they are selling. At the very least, a professional understands that casualty insurance protects assets just like property insurance protects assets--just different assets. A professional understands that an income stream is an asset. When private equity and Harvard MBA's talk about monetizing the value of their product, they are talking about the value of future cash flow.
I hope this article helps further clarify what insurance is and is not for those beginning their careers. I sincerely hope this intrigues a few people enough to truly explore the value of insuring future cash flows because that is where the future of insurance lies.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand Insurance Education, Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.
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