Cost is the Most Important Consideration When it Comes to Investments – It Always has been in the Insurance World

I read an intriguing blog post today on The Reformed Broker titled – “Two Thirds of Advisors Care Most About a Fund’s Cost.” The article is about financial advisors, not insurance advisors, I think if it was talking about insurance advisors the number would be even higher. The article seems to allude that cost is being driven by the client and not the advisor, the advisor is simply trying to provide for what the client is asking for which makes sense when the goal for most advisors is to increase AUM.

To me, this is a mildly surprising stat. Fees, and their potential impact on returns have been hammered home by the likes of Vanguard and Warren Buffett so they are at the front of everyone’s minds. That being said, performance should matter. Most of our purchases in life aren’t simply figuring out what we need and then buying the cheapest version of that product, but it appears that is what we are doing with our investments.

When it comes to insurance price is even more important for consumers. Does the consumer care about coverage details or will price drive the decision as long as coverage is somewhat similar? My experience shows that price will be the driver because brokers do not do a good enough job of demonstrating the differences in coverage in a policy that appear similar but are vastly different. If you buy an S&P 500 ETF cost is very important because the products are the same, they track the S&P so every additional basis point that ETF charges will lower your performance compared to that index; price matters in this case. If, on the other hand, you have ever looked at your insurance policy you realize the language is archaic, there are endorsements and exclusions added to the policy, policy sections refer to other parts of the policy, definitions that might differ from everyday use, and so forth and so on. This is why insurance is bought more on price, it is hard and tedious to go through a policy and figure out what the differences are. The buyer will usually ask if there are any “major” coverage differences and if the answer is no then the consumer will buy on price. The problem becomes we often don’t know what a “major” difference between policies is until after a loss that is either covered or excluded. What we thought was a minor coverage difference turns out to be the reason why a loss was covered or not covered.

Price should and will always be a factor when buying insurance, but coverage should play a more integral part. I understand that insurance is not something people are excited to buy as it has no upside, it is designed only to make you whole after a loss so there is no ROI on an insurance policy. All too often though, the insurance policy does not make insureds whole after a loss because what was once considered a minor policy difference has now caused a major issue in the coverage. The loss is either excluded or the coverage limit is not adequate so the insured is left making up the difference.

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