As we continue to move through the 5 pillars of wealth management on our five-part series of financial planning amidst a recession, it’s important we stop to catch our breath around the pillar of insurance planning. To plan around insurance can be a very broad task, as we naturally insure a large number of areas in our life. It can also be an area that is easy to overlook, as individuals assume what they have in place is sufficient and the need to further analyze is unnecessary.
This post will identify the four areas you can assess in your life, to determine whether or not a more comprehensive insurance planning approach is appropriate.
1. Life insurance
To determine whether life insurance is right for you, ask yourself these questions.
- Does an insurable need exist in your life?
- Is the cost of the premium valuable to your financial plan?
- What is the insurance meant for?
What each individual must know about their life insurance situation is: a) whether or not the death benefit is tied to a specific objective b) an understanding of the beneficiaries and how the money is meant to be used.
When I meet with those who are currently insured, the first question I ask: what is the death benefit meant for? The second question: how did you decide how much insurance coverage to put into place? The third question: who are your beneficiaries? By going through those questions and answers, we are able to better position the planning to understand the WHY behind life insurance. If you’re an educator who is just starting out in their career, raising a family, and is paying off student debt from your advanced degree journey, a life insurance policy is incredibly valuable and necessary. If you’re an educator whose family has grown, managed to pay down all your loans, and you have a spouse who is also working, the overall need for a life insurance policy can be added to the discussion. Once it is determined you need coverage on your life, you can determine the specific type of coverage to ensure you and your family are in the best situation. If it’s determined you no longer need insurance and are ‘self-insurable’ the discussion about what to do with existing policies can take place.
The beautiful part about comprehensive financial planning is the plan dictates what makes the most financial sense and what does not. From there it’s a matter of comfort and making sure you have the ability to sleep at night, with whatever you decide.
2. Home / Auto / Umbrella
Assessing your home, auto, and umbrella coverage isn’t meant to be tricky or painful. The first thing I look for when advising on these three is to make sure they’re coordinated between the same carrier. The reason for coordination is to ensure (no pun intended) the minimum coverage requirements are hit for the umbrella policy. Every umbrella policy, to be valid, requires minimum coverage requirements on the pieces of property it is insuring. If your car is covered through Insurance Company A, and you have an umbrella policy through Insurance Company B, the possibility of the coverage requirements slipping through the cracks is higher, leaving you between a rock and a hard place if something happens. Coordinate your carriers.
The second item that must be assessed is your coverage. The coverage necessary is unique to everyone and the assets they own, so making a blanket recommendation isn’t the proper solution. The financial plan, specifically the net-worth statement, will give your financial planner the ability to recommend coverage limits on the assets that are insured and what makes the most sense for you as the policyholder to keep your assets safe.
The third item is premiums and deductibles. The simple rule of thumb to remember here is if your deductible is higher, your premium is lower. Let’s say you’re in a very good financial position with a healthy savings account and the deductible on your home and auto coverage is $500. I may recommend you move your deductible to $1,000 and allow your annual premium to shrink (your insurance company would tell us by how much). The equation I use with my clients is if your annual premium shrinks enough to cover the breakeven costs within five years, it makes sense to go ahead and increase your deductible by $500. For all the math heads out there, if you can save more than $500 in a five-year period from a smaller annual premium, than it can make sense to increase your deductible.
Lastly, and I can’t even explain how often I’ve seen individuals and families without the proper coverage here – MAKE SURE YOU HAVE AN UMBRELLA POLICY. At minimum you should have coverage in the amount of $1,000,000. Your premium for that level of coverage will be very fair (around $120 – $150/year) and is worth the cost. An umbrella policy acts exactly as it’s described – it covers you for any liabilities above and beyond your primary coverage. Let’s say someone slips on your driveway and breaks their leg. This leads to a decision to sue you for $1.5 million. If your home has liability coverage of $500,000 already built in, the umbrella policy will step in and cover the remaining $1 million of coverage you need in this case. The same applies to the coverage in your automobile – your umbrella policy acts as a secondary safety net for anything related to your automobile.
Make sure you have an umbrella policy and coordinate your coverage.
3. Health
Your health care coverage is rarely flexible, especially as an employee. What I look for and advise around with clients is the ability to get the most out of the healthcare options they are presented with. The most important item, in my opinion, is the ability to utilize an HSA (health savings account) if it is offered.
HSAs have an immense amount of long-term benefits that can be instrumental in planning, but they’re not always offered to individuals. If your plan does not have an HSA, not all is lost, but finding the nooks and crannies within the offering you are presented with as an employee is extremely valuable.
4. Long-term care
Long-term care coverage is a very sensitive topic, and one I’ve advised around for years. This post will not center on the dollars and cents around the coverage, but what you as a consumer need to understand before beginning to take the step of purchasing coverage.
Similar to life insurance, long-term care (LTC) insurance gets more expensive, the older you get. According to the Association for Long-Term Care Insurance, you are more likely to qualify for LTC coverage between the ages of 50-59[1]. This is the age-range that is really the ‘sweet spot’ to get insured, so it can be time sensitive if it is something you’re thinking about doing.
The reason LTC can be such a sensitive and emotional topic is usually because of the history of the individual and their family. Recency bias really comes into play when planning around LTC in my experience. If one of my clients knows someone who was recently in a long-term care facility, it’s highly likely they will want to purchase LTC insurance, whether they truly need it or not. We have all heard the stories of an individual spending a decade in a long-term care facility, and that decade of medical expenses eats up the net-worth of the family slowly, but surely. Yes, I’ve heard this story too, and it does happen. The numbers tell us the average stay is much less, and you can find those averages here.
The financial plan will outline both factors for you – the risk you are running if you don’t apply for coverage, then have to pay for time in a facility – and the risk you run if you do spend money on coverage, then don’t ever pay for time in a facility. There’s risk to every decision but planning around the risk and having a firm grasp on how to deal with the potential outcome is much different than making a blind decision.
Insurance has a very specific place in financial planning, and what was touched on here is merely the tip of the iceberg. Remember, we at BerganKDV do not carry any insurance licenses, and we cannot execute the sales of any insurance products – that becomes a conflict of interest we do not partake in. We advise on everything and getting into the weeds on your insurance planning is part of what we do best. As you can see, insurance plays a big part in your life – we are here to help you understand it.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
The views expressed are those of BerganKDV Wealth Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, an SEC Registered Investment Advisor.
[1] Retrieved on 3 November 2020 from: https://www.aaltci.org/long-term-care-insurance/learning-center/best-age-to-buy-long-term-care-insurance.php
