Rattiner's Secrets of Financial Planning

CHAPTER 5Dispensing Advice on Insurance

Once cash flow is determined to make objectives happen for the client so they can be on their way, the client needs to understand, evaluate, and gain a handle on the other financial planning disciplines. Some will be relevant while others will not. However, without question, the most important of these areas that affects all clients is being properly insured. It's the old joke. Why? Because my insurance agent told me it was!

In all seriousness, if insurance is not properly analyzed, exposures determined, and possible solutions disclosed, there is little to no chance of making a full recovery and accomplishing anything in the client's financial plan. Here's why. Many years ago, when I was a CPA working on taxes in New York City, I had a tax client visit me during tax season. He said, “Jeff, I have a significant issue I need help with. My house burned down this past year and I had no insurance. I owe a lot of people a lot of money, so I need you to help me get a refund.” (Mind you, this was when casualty losses in general could be written off on the Form 1040.) I went through the numbers with him. I asked him what he paid for the house. He answered $19,000 (yes, a long time ago). I said, did you make any improvements to the house? He said yes, I put in $29,000, which made his adjusted basis $48,000. I asked him what the value of the house was before the fire and he stated $190,000. I then asked him what he sold it for and he said $92,000. ...