If you have followed the steps in our previous posts in this blog series, then you likely have a much clearer picture and good handle on your financial assets and estate documents. Organizing your finances and frequently reviewing accounts, documents, and other important elements of your wealth could allow you and your family to better achieve your goals.
After you’ve established this financial picture and a good review process or relationship with an advisor, you can start the process of seeking out appropriate insurance plans that best fit your individual or family needs. Now that you’ve spent the time to ensure your financial situation is secure, it may make sense to identify where your income or assets should be guarded by significant life events – disability, casualty, or death.
The following sections of this blog are a deep dive into some of the technical aspects of common insurance coverages.
Regarding life insurance, the first step is determining if you have a need – and it’s generally quite simple: if you have someone (spouse, child, or other) that depends on your income to meet living expenses, you likely need life insurance.
The second step is calculating how much insurance you need. Generally, this would be equal to your annual income multiplied by the number of years you want the insurance to cover. Then, add in any fixed costs for one-time events (tuition, braces, etc.) and subtract any savings or investments you have that could cover some of these costs. There are also many online calculators that can assist you with this process.
Next, you will need to determine the type of insurance. Term policies last for a set number of years and then expire, but they are very cost effective. Permanent policies (such as whole life) remain in place as long as you pay the premiums but will be costlier. Actual pricing will depend on a variety of factors including health and age. If you purchase a policy when you are young and healthy, you’ll get a more affordable premium for a potentially larger amount of coverage. A life insurance agent can help you place coverage and can advise on amounts and type of insurance. Be sure to work with an independent agent that can shop multiple insurance carriers for the best deal as opposed to a captive agent who can only sell products from one insurance company (the one they work for).
High net worth families (HNW) will often find themselves using life insurance for reasons beyond income replacement for dependents. Permanent policies can be a place to store excess cash and their returns have a low correlation to the stock market. In addition, Life insurance can be a solution in the following situations:
- Making a charitable gift
- Ensuring estate liquidity and paying estate taxes
- Passing wealth to loved ones
- Funding a trust that is exempt from estate taxes
- Perpetuating a small business (buy-sell insurance)
This type of insurance will pay you if you become disabled and are unable to work. Like life insurance, you will likely have a need for this type of insurance if others are depending on your income.
Most employers will offer disability insurance as part of their standard benefits package. Usually this coverage is at a fraction of your total pay (approx. 70%) and therefore might not be sufficient to cover this risk. Some companies allow you to purchase additional disability coverage through group benefits but will require medical underwriting. But keep in mind that group policies are tied to your employment and, in most cases, are not transferable if you leave the company. An independent insurance agent can also help you put a policy in place. These policies tend to have higher premiums but also offer better features (non-cancelable, tax-free benefits).
LONG-TERM CARE INSURANCE:
Long-term care insurance covers the cost of care if you need assistance with daily living activities. This insurance applies in a variety of different settings such as in-home nursing services, assisted living facilities, and nursing homes. It has become more important as life expectancies increase and the aging population needs assistance with basic activities. Statistics show that it is more likely than not that someone will need long-term care services during their life time.
Given the high cost of care, this insurance is essential for many to make sure that lifetime savings aren’t depleted by a multi-year stay at a nursing home. Although government assistance (Medicare) kicks in to cover care if savings are depleted, this government “insurance” may limit the type and place of care. This puts families in the difficult position of deciding if they should use their own savings for high-quality care of an aging parent.
Most individuals look at purchasing long-term care policies in their 50s. Although it can be purchased earlier, there is less risk of needing it at a younger age and there are typically higher priority items for someone in their 20s, 30s, and 40s, such as purchasing life insurance, building emergency savings, or paying off student loan debt. It’s important to not wait too long to secure long-term care, as the costs increase as you get older and you are more likely to have a health condition that may preclude your from coverage or increase your costs.
HNW individuals and families may consider self-insuring their long-term care risk given that their savings are sufficient to cover these costs. While a 5-year, $90,000/year nursing home stay could ravage the finances of many people, a wealthier individual could likely pay that out of savings.
Also, a relatively new type of “hybrid” policy is available that combines long-term care and life insurance. These policies pay a long-term care benefit if needed, but if it is not used (or only partially used), the unused benefit is paid back in the form of life insurance proceeds. These policies typically have an upfront lump-sum premium. Additionally, more and more traditional life insurance policies offer provisions that allow you to use the cash balance to pay for long-term care expenses.
PROPERTY AND CASUALTY INSURANCE:
This insurance covers property that you own (home, cars, boats) bundled along with liability coverage to protect you if you’re found legally responsible for an accident that causes injuries to another person or damage to another person’s belongings.
While most people are likely to have these coverages in place, very few people review them on a regular basis. If you haven’t reviewed with your agent in a while be sure to do so before renewing again. You will want to make sure that you are not underinsured anywhere. Furthermore, as the circumstances in your life change you may need additional different coverages (for example: increase liability insurance after adding a pool). You can also review deductible levels and other policy attributes to optimize for your personal situation. Finally, the liability piece of property & casualty (P&C) insurance is relatively cheap, and you should always aim to have plenty of coverage.
For HNW individuals and families, their P&C insurance situation can be much more complex if they have multiple homes, operating businesses, vehicles or boats, and other valuables. Their level of wealth means that they have much more to lose and are more likely to be sued. Also, while everyone wants to keep their P&C insurance premiums lower, the wealthier tend to focus more on working with insurance companies that offer concierge services and a better claims experience, even if that means slightly higher premiums. They will also seek out insurers with expertise in insuring collectibles and valuables.
While we are not licensed insurance agents and cannot place coverage with a provider, our team is well-versed in understanding insurance programs and identifying issues. At Clearstead we advise our clients on insurance matters and work closely with their agent to review, adjust, and place coverages. Our presence can facilitate the insurance process – as we alleviate our clients from having to digest and understand all this on their own and we assist agents by providing our comprehensive knowledge of client’s financial situation along with our own insurance ideas.
Information provided is general in nature, is provided for informational purposes, and should not be construed as investment, tax or legal advice. These materials do not constitute an offer or recommendation to buy or sell securities. The information provided is from public sources and data available at the time the information was written. Any information provided is subject to change at any time. Clearstead disclaims any liability for any direct or incidental loss incurred by applying any of the information provided. You should consult with a professional before making any investment, tax or legal decisions.
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