Making Cents: Insurance - assess risk, take steps to mitigate

John P. Napolitano

When you think of insurance, ethics isn't the first word that comes to mind. Many people like to complain about insurance, about agents, claims, prices and “betting against yourself.'' But the ethics of insurance can be boiled down to a few general concepts.

The first is about risk. What are the risks that can send you or your loved ones into a tailspin? Is it premature death, disability, fire, liability? The first ethical obligation starts with you, and that is to identify these risks. Just because you purchased mandated levels of insurance - such as home insurance requirements if you have a mortgage and car insurance if you want to drive in many states - doesn't mean that you are done with your obligation to identify the risks that you face.

The next ethical obligation is regarding how you plan to deal with that risk. You may or may not be able to avoid the risk, you may self insure or you may mitigate or protect against the consequences of that risk through insurance. Your obligation is to assess each of the possibilities. That would include financial projections under each option, including the cost for insurance coverage. Be realistic about the costs and other consequences of uninsured perils in your future. Long-term care insurance is an example of where I think people in general have not properly evaluated the costs and consequences of not having coverage.

Once you've decided to investigate your options, the next obligation you have is to evaluate all of the possibilities. Remember, not all agents are created equal. Some are captive, meaning that they only sell one company's or a few companies' products. You may need a broader search than that. The agent, in this case, has the ethical obligation to state that they have only looked at one company and that you may be best served to look at other options. Investigating alternatives is not required of licensed agents; I simply believe that it is common sense and good practice. It is possible to have a broker that does shop all the major companies for you.

The last part is taking action to acquire coverage or make an intelligent decision that the coverage is not needed. Some agents will disclose their compensation, and others will not. It may be wise to at least make sure that they are not selling a specific company or product to get a higher commission instead of picking the best option to meet your needs.

John P. Napolitano is the CEO of U.S. Wealth Management in Braintree, Mass. He may be reached at jnap@uswealthcompanies.com.