When the unexpected occurs….are you prepared?

Blog post #395

Are you and your loved ones protected if the unexpected occurs?

Do you need life insurance? What kind? How much?

These are important questions and the answers can be complex. We can provide you with valuable and useful guidance, both in this blog and discussing this with you.

The most common purpose of life insurance is to provide replacement of income or earnings for family members who survive a spouse or parent who dies prematurely, or before the family had built up adequate resources.

If you have loved one(s) who depend on you monetarily and you do not have adequate savings or investment accounts if you were to die, then you likely have a need for some form of life insurance. Good financial planning would guide you to have savings and life insurance to cover living costs in excess of what your survivors can generate, to cover basic living expenses, such as housing, clothing, everyday expenses, as well as what your family may want to provide for college education, if you have children who will likely be attending college. Life insurance can also cover funeral expenses and other items, such as outstanding debts, including car loans and car lease obligations.

How much life insurance coverage do you need?

Everyone will have different needs for life insurance, based on their assets, age, stage of life and other specific issues. If you are in your 30s or 40s, have children and are just beginning to save for college and retirement, you may have a significant need for life insurance. If your children are grown and on their own, and you have significant assets, you may have much less need, or no need, for life insurance.

You should consider how much money your loved ones would need in both the short and long term. Ask yourself what are the immediate expenses they would need to cover if you passed away and how much money they would need for the future? Especially if you have children. You should consider your housing costs, property taxes and insurance, as the later items likely increase over time.

Calculating your need for life insurance is where our guidance, along with an insurance professional, can begin to provide you with answers, as determining the amount of coverage that is needed is difficult. Then, once the cost of insurance premiums are obtained, we would work with you to see what is an appropriate balance of insurance coverage and premium cost that could fit into your family’s budget.

Beyond determining how much life insurance you and your family may need, and then the cost of insurance, there are many types of life insurance. To keep things simple, let’s focus on the two major types of life insurance….term and permanent (whole life) life insurance policies.

Term life insurance policies provide insurance for a certain period of time and the premium paid into the policy provides a death benefit to your beneficiaries if you pass away during that stated term. Most common is a renewable term policy, for a certain period of time, say 20 years. With such a policy, you pay the same premium every year, and any health changes in your life do not impact the premiums, as long as you pay the annual premium on time each year. Term life insurance policies are generally more affordable than whole life policies because the insurance is only for the specified term. Term policies usually do not cover you late in life and there are no other features, such as investment aspects of these policies.

Term policies are generally best for younger people, as the cost is less and more insurance can be obtained. These policies are best to cover you and your family into your 50s and 60s, as your children may become independent and you build your family savings. However, the cost of term insurance, especially if the premium is not fixed, can become prohibitively expensive as you get older, certainly beyond 70-80 years old.

Permanent life insurance policies can be useful when you want to provide coverage for later in your life, well past your 60s. There are many types of permanent life insurance, such as Whole life, Universal and Variable Universal life insurance, each which can have many different and sometimes, complicated and/or expensive features.

Whole life insurance can provide coverage for up to a lifetime (a term that you need to verify within each policy, as the policy states an expiration age, such as age 95 or 100), if you stay current on your premium payments. Some whole life insurance policies build cash value or pay dividends during the life of the policy. You can borrow against the cash value, if needed. We would not advise this, unless you carefully weigh your alternatives, as if you do not pay the borrowed cash value back, your loved one(s) will get a reduced death benefit due to the unpaid loan, at the time of death.

In general, we feel that insurance policies should provide you with insurance only, and not offer investment aspects, as the investment features of those types of policies can be quite expensive. Universal life insurance can offer flexible premiums and have the potential to build account value and Variable Universal life insurance can also offer flexible premiums, investment options and the potential to build account value.

As you consider various types of insurance policies, they can get quite complicated. We recommend that you consult with a licensed life insurance advisor, who can help you navigate which life insurance policy and company you should use, review with you which life insurance policy you should consider and help you decide on the amount of coverage that works best for you and your family.

We are independent investment advisors, meaning we are not compensated by any investment firm. The insurance industry is quite different, as most life insurance professionals are paid by commissions for the products they sell. We recommend you consult with an independent insurance professional, who works with more than one company. That does not mean you should not talk with an insurance agent who only represents one company, but make sure that you talk with multiple agents or at least one independent insurance professional.

As part of the comprehensive financial planning that we provide to clients, we can provide you with a referral to an independent insurance planning firm that we have worked with, that has been vetted by our back-office firm. They can provide you with independent, expert analysis and advice, as well as work with us to coordinate the planning, decisions and process with you. We do not receive any compensation by working with them.

Together with this outside firm, we can help to guide you through the complex maze of life insurance policies and terminology.

In the past, life insurance was also a key part of estate planning, as many more families were subject to estate taxes. As the estate tax exemption is now over $11.4 million per person (almost $23 million for a couple), unless you have assets in excess of that amount, you would not have estate tax obligations and would not need life insurance for the liquidity that life insurance provided to pay for estate taxes, if the bulk of your assets were illiquid.

If you have older life insurance policies which you obtained many years ago, for estate tax or just general coverage purposes, please contact us if you would like this outside insurance firm to review your existing policies. This may be helpful if you have a policy with cash value or to confirm the age at which your policy may expire.

Life insurance can be another place to find financial comfort and security for your future. It can also be a very complicated area. While we are not experts, we are knowledgeable and can work with you and other experts to help you through this process.

Please contact Brad or Keith if you would like to further discuss life insurance related matters.

 

 

What is Your One Thing?

As fall begins and we approach the last three months of 2015, what deserves your attention before December 31, 2015?

Take a step back. What is one thing, which if you focus on, will make a difference in your life, or the life of your family?

As Stephen Covey said, what is something that is important, but not necessarily urgent, that needs to be done?

What comes to mind? What can you be pro-active about? What have you been procrastinating or avoiding?

If you are young, are you saving enough? Are you participating in your company’s 401(k) program? Are you properly allocating your investments within your 401(k)? We can help you with this.

If you have children who are young, have you prepared a will and designated guardians for them? Do you have adequate life insurance? Have you started to properly save for their college education? We can help you with these.

If you are older than 50, have you started to plan how much income you will need for your retirement? Have you checked your social security benefits online? Have you developed a financial plan for a 30 year retirement span? With longer life expectancies, a 30 year retirement will become the norm for many. We can help you with these.

Is there a medical test that you should have done, which you have been putting off? Are you getting regular physicals? We can’t help you with these, but hopefully this gentle reminder will encourage someone to make an important appointment or phone call. I will make the appointment that I have been putting off.

Is there an important conversation that you need to have with someone, or a group of people, which you have been putting off? Please take the initiative and have the conversation. Some of the most important things are accomplished by having what appear to be, in advance, uncomfortable conversations. They may be uncomfortable, but they are usually very worthwhile. We can help you with these.

If you don’t have an idea yet, are you using a password management program, like 1Password or Last Pass? If not, please read these blog posts: How to Securely and Efficiently Manage Your Passwords, Practical Tips for Online Security and 5 Password Security Tips. Password management may not be as important as many of the topics above, but it should be on your list to get updated. We can help you with this.

We view our roles as financial advisors very broadly. We provide our clients with investment management, tax and estate planning advice. We counsel families, individuals and people who are going through life transitions regarding numerous topics, both financial and non-financially related.

We hope this essay helps you to improve some facet of your life. If we can assist you to do this in any way, please contact us.

Long Term Care Insurance or A Thing of the Past?

Long term care insurance is a complicated, but important topic that most individuals should consider, with the assistance of a number of professional advisors.

We think the purchasing decision regarding LT care insurance falls into 3 categories:

  • those who need it, but cannot afford it,
  • those who need it, and can afford it,
  • those fortunate enough, after a proper analysis, feel they do not need this coverage.

A major development in the LT care insurance field was announced by MetLife, a major seller of LT care insurance, that they would stop offering this insurance to individuals, effective December 30, 2010. This was covered in an excellent NY Times article (see cite below). This continues a trend of dramatically increasing LT care insurance premiums, in the range of 18-44%, as well as other insurance companies not entering or stopping to sell long term care insurance.

While we feel that LT care insurance is appropriate for the group above, in the middle (people that need the insurance and may be able to afford it), the purchasing decision becomes much more difficult now. As the NY Times article clearly states, the insurance companies have underpriced this insurance in the past, due to numerous factors. Thus, if you purchase this type of insurance and pay the premiums for many years, you could then be faced with the prospect of huge insurance premium increases down the road, or having to drop the coverage because of the high cost of the increased premiums. Neither of these are good alternatives.

We would advise individuals to review whether LT care insurance is appropriate for them. It is extremely important to work together with your financial advisor, as well as an insurance professional that is well versed in LT care insurance, in analyzing this decision. Please note that LT care insurance is highly specialized, so we recommend only working with an insurance professional who is very experienced in this specific area.

As many individuals will face the possibility of huge long term care costs, potentially in the hundred of thousands of dollars, due to longer life expectancies, this is another reason for the importance of good financial planning, which addresses these type of issues.

“When a Safety Net is Yanked Away,” NY Times, November 13, 2010, by Ron Lieber
http://www.nytimes.com/2010/11/13/your-money/13money.html?ref=ron_lieber

Our Role as an Advisor: Getting Started

A number of months ago, we met with another professional at his office, to discuss our business and his. During the course of the meeting, he asked what differentiated our practice from other advisors. We discussed a number of items, but we knew the best way would be for him to really experience our services himself.

So, after a number of discussions, he and his wife met with us, at our office. We talked about their past investment experiences, their lack of a financial plan (“I just pick stocks and have mostly not done too well”), how they now really want to get serious about their investments and feel they need professional advice. We asked them questions. Like many clients, their desire was in line with our fundamental goal, to have a greater sense of financial comfort and security, as well as clarity.

During our discussion, they asked us questions, which we answered in plain English. I drew some pictures and sketches on a legal pad, to explain our investment philosophy. Their conclusion: our philosophy is logical and makes sense. They liked that we are globally diversified, and realized that their current portfolio had almost no exposure to international stocks at all. We feel that international investments should have a significant place for almost all investors.

We recommended that we evaluate their current investments, which we call a “portfolio review.” The emphasis of this analysis is not on performance, it is on how one’s investments are allocated. We base our investment decisions on academic research, which teaches us that investment returns are based mostly on investment asset allocation, not individual stock picking. We will present this information in a clear, easily understood manner.

As part of the discussion, we all came to the conclusion that this couple had “made it” financially. They had accumulated adequate assets. However, they were risking this comfort by allocating so much of their assets to stocks (say 60- 70%). This was an uncessary risk for them. In our role as advisor, we recommended that a much more conservative asset allocation made more sense, given their age and financial assets. The primary goal should now be to preserve the majority of their assets, to provide them the comfort and security they desire.

We then talked about the allocation to fixed income, the assets I refer to as “the foundation.” We talked about why it made more sense for their fixed income investments to be in individual bonds or CDs, to be generally held to maturity, and not in bond funds (as I’ve blogged about a number of times). For this, and most others we meet with, this advice is new (and quite welcome). They did not realize that they could be at great financial risk, if interest rates eventually rise, with their bond funds.

Finally, we talked about another potential investment they are considering, an annuity product another person had recommended to them. We are analyzing this product, with very surprising results. What the couple understood to be the great advantage of the annuity product (the terrific guaranteed return), did not turn out to be what they thought. The guaranteed return only represented a small part of the total investment, and only if certain conditions were met. The annuity had very high fees, withdraw restrictions and surrender charges. Investments that we recommend have none of these. We are fee-only advisors, and our fees are clearly explained.

This is a typical example of how we begin to work with a new client. We meet with them a number of times. We want our clients to understand how we work, how we invest, what our philosophy is. We want them to be very comfortable with us. We want them to understand that we clearly understand their needs. To realize that we will utilize our extensive financial experience as CPAs to assist them with their investments and financial planning, as well as their tax and estate planning, along with their other advisors.