I am a sucker for insurance. Life, accident, flood, fire, earthquake -- I figure the more prepared I am for any catastrophe, the less chance it'll actually happen. Which is why a company called Pre-Paid Legal Services (NYSE:PPD) caught my eye. Purchase legal insurance from them and for around $26 a month, you can call a lawyer any time you want and never get hit with a huge, whopping bill. It's like having the ultimate "get out of jail free" card (well, close to free -- especially compared to what lawyers normally charge). What's not to love about this?

Well, there's always that pesky fine print.

Legalese from the lawyers
As a rule, I have a hard time investing in a company unless I believe in its products and business model, regardless of price. So when evaluating Pre-Paid Legal as an investment, I first have to ask: Does the average American really need legal insurance, and is the coverage offered worth having?

At first blush, Pre-Paid Legal looks pretty good. With heavy emphasis on prevention, subscribers are generally entitled to as much telephone consultation with an attorney as they'd like, along with a certain amount of contract or document review, assistance with civil and criminal matters, and a completed simple will with annual updates. Thanks to the will provision, the plan usually pays for itself the first year (although most folks have little need for a yearly update to their will unless there has been some significant change in their situation).

On top of the free will, legal representation is available to subscribers in the event of traffic tickets, accidents, some civil or criminal proceedings, even an IRS audit. Riders and add-on plans can be purchased to cover individual circumstances. All in all, a basic Pre-Paid Legal membership would probably more than cover the legal needs of about 70% of the population, according to attorneys I spoke with.

But what's not covered can give pause. Close reading of the fine print reveals you're on your own with some high-dollar, high-frequency matters: divorce or child custody problems, bankruptcy, arrests for DUI/DWI and drug-related offenses (prescribed or not), hit and run, etc. Trial defense benefits are limited to "covered" actions, whatever those are. The exact definition of "covered" criminal defense work is hard to figure out. One clause states the criminal matter must arise out of the subscriber's employment activities; another clause states cases must be "meritorious."

You can purchase a separate rider that entitles you to call your lawyer if you get arrested. Final determination of what's covered and what's not rests with the judgment of the law firm representing you -- and that judgment is final, with no chance for appeal.

Oh, and they don't cover appeals.

Faceless attorneys
All of this legal service is accomplished by firms that contract with the company to provide services at a flat fee, regardless of the workload that results. This type of arrangement is certainly beneficial to Pre-Paid Legal, since there are no revenue surprises on a month-to-month basis. But what about the law firms? Can all the quality-control measures in the world assure a law firm will give the same level of service to these flat-fee clients as they give to their clients with deeper pockets?

And consider this: The average tenure of law firms staying with Pre-Paid Legal is only 6.5 years. Why so short? Is it because attorneys are continually building their practice, migrating toward a larger, stable, and more lucrative client base?

Whatever the reason, for my money, I'd like to see a lot longer retention period. If I can't choose my lawyer, I'd at least like to know I'm getting somebody who's been around the block plenty of times, not a new guy who's just here till he can move on to something better.

What about the stock?
It's tricky to value a company like Pre-Paid Legal, whose competitors include MetLife (NYSE:MET), General Electric's GE Financial (NYSE:GE), and Legal Club of America (OTC BB: LEGL). Legal insurance is only a part of what MetLife and GE do, so a straight comparison is impossible. But with a P/E just under 11 and a price-to-sales ratio of just over 1, it appears Pre-Paid Legal's stock is not outrageously priced (and the company is buying back its own stock fairly aggressively). A subscriber-based evaluation of the stock's price would be helpful (memberships times average retention period in months times average monthly cost of membership), but the company has not been forthcoming when asked for these numbers.

In its favor, Pre-Paid Legal recently introduced a new product called Identity Theft Shield, an increasingly important concept. This benefit includes a free credit report and continual monitoring for fraud attempts. It doesn't pick up the tab for actual damages, but does reimburse some of the expense of clearing your name. (For more on the importance of monitoring your credit report -- and protecting your good name -- visit the Fool's Credit Center.)

Pre-Paid Legal boasts a long history, dating back about 30 years. Memberships are sold through a multi-level marketing program, and the company's sales force recently achieved 11 consecutive years of subscriber growth.

Although the overall picture for 2003 looked good, the fourth quarter was less than stellar, despite a beefed-up sales force. Membership revenue was up, but net income was down 13%. Earnings per share decreased 4%. Somehow, more salesmen translated into fewer memberships sold in the quarter, and memberships for the whole year were only up 3%.

The company is not exactly dismissing these troubling fourth-quarter numbers, but it's not doing a very good job of explaining them, either. Why did memberships drop off? The investor relations department didn't respond to my calls or emails, and the company's automated switchboard at last check was outdated.

So what's going on? Maybe answers will be forthcoming on April 26, when Pre-Paid Legal releases its first-quarter 2004 earnings after the close, or in the conference call scheduled for April 28.

Until then, however, I'm not excited about buying either the stock or the insurance, and for me, that's a real switch. It's not too often that I let a "get out of jail free" card get away.

Fool contributor Laurel Brady does not own shares of any of the companies mentioned in this article. The Motley Fool is investors writing for investors.