“Numbers never lie, after all; they simply tell different stories depending on the math of the...
Risk management, or asset protection, is the planning and implementation of strategies to financially offset the material loss from an unexpected event. There are strategies to protect investment portfolios from dropping beyond a level you want, which we cover at a high level on our Investment Management page. Here we will focus on mitigating risk with insurance.
Other than those insurance policies required by law, no one MUST have insurance. You can self-insure and people do this all the time. The mistake is when people self-insure without realizing it or without understanding the potential loss. This is not the time or place to stick your head in the sand and pray for the best. It is very important that you understand what is at risk and what protection you have.
There are two major potential issues when you have any kind of insurance. The first is over-insuring. Insurance companies are very grateful for those who over-insure. The second potential issue is under-insuring.
With our holistic wealth management planning, we help our clients by optimizing your insurance potential while minimizing the unnecessary costs. These can be small like when people determine that they will not file an insurance claim unless the cost is over a certain amount but have a deductible much less than what they plan on paying out of pocket. These can also be larger like buying a term insurance policy without a clause to be able to convert the policy to a permanent one in future years.
There are numerous categories of insurance and then many different types within those categories. We cannot cover it all here. However, we are going to start with the areas we believe are the most under-insured. Here are the major insurance categories:
There are many misconceptions regarding disability insurance. The biggest is that you must be paralyzed or blinded to receive a payout – a victim of some catastrophic event. Many illnesses, including mental health, can also be covered by a disability policy. We do not like quoting the odds of you becoming disabled, as this is sometimes used as a scare-tactic by insurance companies. However, it is appropriate to point out that disabilities typically are the result of less severe injuries and more common conditions such as pregnancy, back pain, and digestive disorders.
As various sources have indicated, the one statistic that you should be aware of is that you are approximately 4 times more likely to be disabled, not die, before retirement. In which case, your income stops while your expenses increase often significantly. While you might have the assets to financially survive such circumstances, how might this impact your savings and the holistic, long-term wealth management plan that you have been working towards for so many years?
Many firms offer disability insurance for their employees. A group policy like the one they offer are almost always the cheapest way to insure. If your firm doesn’t offer it or you are self-employed, please consider disability insurance. At the very least, you need to really know the risk before deciding to self-insure.
Life insurance can be very beneficial for two main reasons: death benefits and tax-free living benefits. Most people buy life insurance to replace the income of a spouse who dies. This is the traditional usage of life insurance. Life insurance can also be used to lower, or offset, estate taxes, and as a source of tax-free distributions in retirement.
At Virtus Wealth Management, we focus on both wealth accumulation before retirement as well as ensuring your after-retirement income plan minimizes taxes as much as possible. Life insurance may be a very effective was to maximize your wealth in retirement. That is because there are two primary types of life insurance:
Temporary, or term, insurance. This is insurance that has a set term, death benefit, and price. For example, you may want a 10-year term for $1 million death benefit. This is the cheapest of the two main types because the probability is that you will not die within that term. Term insurance is typically used to cover income lost due to death. The major strength of term is the cost. The biggest weakness is that it has an end date that may not fit your plan later on down the line. Times are different today, prior generations had pensions. There are still pensions today but far and few between. When there is a pension, term was typically a very good fit if your only objective was to replace lost income in case of death. You knew if you worked to a certain age, you received monthly income for the rest of your life.
Our society has moved to putting more of the burden, if not all, on the employee instead of the employer. If you don’t have a pension, you might believe you are going to work to a certain age, plan for that goal, but life can throw you a curve ball and making it no longer possible. Maybe the market crashes right before you want to retire. Maybe you have a surprise baby or even a family member needing to move in. Maybe you get laid off and due to a tough economy and you are without work for a long-time, making you eat into your savings. The point is that the risk of your retirement is 100% on you. In this case, in which you just bought term insurance, you might find you need to buy additional life insurance when you are much older and it costs significantly more.
We highly recommend you purchase a rider that allows you to convert your term policy to a permanent policy as long as the policy is in good standing. This little rider might save you thousands of dollars.
Permanent life insurance. Permanent covers you for your life. Even if you reach the age of 121, the insurance company then pays you the death benefit while you are still alive. Permanent insurance covers you for the period you want plus covers you for an extended period if those unexpected surprises alter our plans for the worse. Permanent is typically more expensive for the same coverage because it does not end. You get paid.
Within permanent insurance, there is cash value insurance and non-cash value insurance. In the old days there was this adage, “buy term and invest the difference (between term and permanent insurance).” That was in the day when most people had pensions and were not self-funding their retirement plan, which is dependent on the market cooperating at the right time.
The wealthy individuals realized there was one very attractive aspect of cash value insurance. If distributed the right way, the proceeds are tax free. Not only are you sure to get paid when you die, as long as you pay the premiums, there are also living benefits that may be attractive for some.
In fact, there is the rule the IRS put in place to ensure the wealthy could not abuse cash value insurance because it is favorable from a tax perspective. This is called a modified endowment contract (MEC). For the sake of space, I will not get into this other than to say it is a strong indication of the value of something if the IRS sets up rules to ensure you do not use it too much to avoid taxes.
Cash value insurance can be invested aggressively or more conservatively. It can be tied to market-like returns or more based on dividends, so as risky or conservative as you want.
Our job at Virtus Wealth Management is to explain your options, the good and bad with each, and then let you decide what is best for you. Our goal is to partner, educate, and then serve.
You also need to protect your assets from creditors and lawsuits. Your property and casualty insurance will cover this up to a certain level. It is very important to understand both at what level these policies protect you and how at risk you are of some of your assets being easily accessible to creditors and lawsuits.
One way to ensure you are protected from frivolous lawsuits is an umbrella policy. This insurance is called an umbrella policy because it covers beyond the existing limits and coverages of other policies. Your home insurance will cover some asset protection but it might not cover all your exposed assets. One of the great things about an umbrella policy is how inexpensive they are relative to the coverage you receive.
All of these policies should work together efficiently instead of each policy standing on its own. Your home insurance, car insurance, other property and casualty policies, and an umbrella policy should all be in sync. Also, the legal structure of your assets should also in sync with your overall asset protection plan. Real estate, outside of your personal home, is typically best held in an L.L.C. (Limited Liability Corporation) instead of titled like the rest of your assets (savings and investment accounts). I cover this more on our Business Owners page.
How Virtus Wealth Management Can Help
Insurance is more that just an obligation you must handle before driving your new dream car off the lot. Insurance is there to help you in the event of unexpected or unfortunate circumstances. There are many different areas of your life that might need insurance and many different options to choose from. It can be very confusing, which creates procrastination.
The biggest mistake to avoid is not buying the wrong insurance but rather putting it off and never buying it all. Like estate planning, we see people all the time who say they know they need it but have not got around to it. Your financial advisor is there to help you navigate the industry and find the best fit for your overall financial plan.
At Virtus Wealth Management, we partner with you to ensure you are educated and confident in the amount of risk and coverage you have. We strive to eliminate the confusion and overwhelming number of options to make this process as painless as possible for you. We can also help to ensure that your policies are structured properly and working in conjunction with your overall financial plan in order to maximize the efficiency of your wealth.
Get started today by scheduling a complimentary consultation with our advisors.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent.