Rule No 1 Insurance Is Never a Complete Asset Protection Strategy

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Or: Never let a commissioned salesperson tell you how to protect your assets.

At Rich Dad events around the country I am always confronted by the person who asserts that his insurance agent has assured him that asset protection is a hoax and that all that is needed is a good insurance policy. I have to laugh because there are so many instances of insurance companies failing to cover real estate investors and others on their coverage policies, that there is a whole area of law named after the situation. It is called "Bad Faith Litigation," as in the bad faith that occurs when insurance companies say they will cover you, collect your premiums, and then, heaven forbid, a claim arises and they find reasons not to cover you.

Never forget that insurance companies have an economic incentive not to cover you. As is clearly obvious, the less they pay out in claims, the more money they make. Also never forget that insurance agents receive a commission on all the policies they sell. So when an insurance agent says that all you need is insurance instead of asset protection, please remember where his incentive lies. It is also important to acknowledge that insurance agents are not licensed to give legal advice. You would have to question the motives of one who would do so.

Real Life Story: The Plight of "Paul"

A client of mine, we'll call Paul, initially believed in the strident assertions of his "insurance professional." Instead of combining insurance with entities for his Aspen, Colorado, fourplex, he obtained only an insurance policy on the mountain property. He held title to the fourplex in his individual name.

Despite the 100 percent insurance protection guarantees of his agent, the policy was very clear that the company would not cover any claims related to an avalanche.

Sure enough, Paul's fourplex was greatly damaged in a swift and freakish avalanche. The insurance company quite correctly refused to cover the claim. Its policy expressly excluded avalanche damage.

Paul was furious at his agent who, besides assuring that the pricey policy covered everything and that no other protection was needed, had never pointed out the very clear policy exclusions. By relying on his agent and not taking any other protective steps, all of Paul's assets were exposed to the avalanche claim.

Paul's problem was completely avoidable. If he had relied on a team of advisors, including an asset protection attorney, the situation where a highly commissioned salesperson got away with giving legal advice would never have occurred.

Given my healthy skepticism of the insurance industry, you would think that I would advocate the exclusive use of asset protection entities without the use of any insurance at all.

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