The Power and Value of Insurance
When developing, analyzing, and implementing wealth planning goals and objectives, many times the area of risk management can be overlooked. This is understandable as we are naturally inclined to think about the positive outcomes we hope and strive to achieve. Thinking of and developing plans to achieve our goals, and live out our most authentic life, is rewarding in and of itself and invokes positive emotions. Thinking about what could possibly come up to thwart those plans invokes the exact opposite set of emotions. So why then talk about it? Well, because life is uncertain, the best laid plans often go awry, and having protection in place can keep you on track for accomplishing your goals.
By changing our perspective, we begin to realize that risk management planning actually provides peace of mind through the security it brings to the financial futures of you and your loved ones. This enables us to shift the conversation into a much brighter light. So instead of focusing on the “death” aspect of life insurance, or the “property loss” component of a homeowner's policy; we emphasize that with these tools in place, as part of a comprehensive risk management strategy, your family is taken care of no matter what unforeseen event life throws your way.
Below, we highlight some of the key risk management factors that are essential to a comprehensive wealth plan.
A wise person once said, “nothing is certain except death and taxes.” Well if you’re like many of us, we go to the ‘nth degree to make sure that we are not paying a penny more in taxes than we are bound to, per the letter of the law of course. Why then, should we not apply the same scrutinous attention to the only other thing that is guaranteed in this life?
Life insurance provides three key advantages to a wealth plan. (1) proceeds are typically paid income tax free. This allows your beneficiaries a readily available source of tax-free capital to cover the unexpected costs of your passing (i.e. settlement of estate, income replacement, settlement of debt etc.). This is a very valuable and cost-effective way of making sure the loved ones who rely on an income source, get taken care of if the income source goes away. (2) if structured in an irrevocable trust, these proceeds can additionally avoid estate taxes. This provides further “value” to each dollar received from the policy, versus liquidating assets subject to estate taxes, when needed to provide capital to beneficiaries and heirs. (3) to equal the economic value of the life insurance death benefit proceeds (remember, they’re income tax-free), equivalent annual contributions into a taxable investment would require higher returns and possibly greater risk. This allows you to specifically earmark the proceeds of the policy for future planning needs, allowing you to focus the remainder of your balance sheet on more immediate goals and objectives.
Long-Term Care Insurance
Studies are showing the average individual is living longer. While this is generally positive, it can come with substantial downsides that should not be overlooked. Firstly, the risk of outliving your assets becomes larger the longer your life expectancy. Secondly, modern medicine is allowing individuals to live longer lives, but not necessarily providing complete cures to the ailments.
So, while we are living longer, higher percentages of the elderly are living with conditions that require constant care and assistance. This care and assistance doesn’t come without a cost.
In the San Francisco Bay Area, costs for long-term care assistance can exceed $110,000 annually.1 Incurring this expense can have a detrimental impact on your goals and objectives, as well as your families’. Long-Term Care Insurance can provide an income tax-free benefit to assist in covering these costs. By leveraging a portion of your financial estate today, capital can be made available in the future, should the need occur. Having long-term care insurance could assist in providing additional funds to protect you or a spouse in the event you require care in the future and help prevent against the sidelining of your other financial goals and objectives.
Many times, when we think about insurance and risk management, we think solely about death. Many of us don’t think about disability, and the impact it could have if we were unable to earn a living. Ensuring you have appropriate disability insurance protection will provide an income stream if you are temporarily forced to stop generating income as a result of an accident or a medical condition.
Most employers provide a disability insurance benefit. While they typically cover 50%-60% of pre-tax income, many allow for individuals to purchase additional coverage (up to certain limits) cost effectively. A comprehensive review of all available disability benefits is a prudent step to ensuring your accumulation goals and objectives are not materially impacted in the event your income is reduced as the result of an accident or an illness.
Homeowner’s / Property & Casualty Insurance
Homeowner’s, renter’s, and automobile insurance are all types of insurance that are considered “property and casualty insurance.” These policies protect in the event of damage or loss to your home, your belongs, and your vehicles. Many times, these policies are put in force and then forgotten about. We set our premium payments on autopay, see them debited monthly, but never stop to think about what the coverages are, and if they are sufficient for our needs. Property values change, additional furnishings and belongings are acquired or purchased, and wealth additional wealth is generated. All of these could be exposed should your property coverage limits not be sufficient to replace the full value of your personal belongings. Regularly reviewing these policies is a prudent action to ensure that you are appropriately protected in the event of a major loss. Additionally, these policies can protect your liability exposure in the event you are found liable for the damages or injuries to others.
Excess Liability (Umbrella) Insurance
While Excess Liability insurance is a component of Property and Casualty insurance, we find it appropriate to individually address, as it is often overlooked. Umbrella coverage will provide protection in the event damages, which you are found liable for, are in excess of the base coverages of your home and auto insurance policies. In today’s litigious society, we believe it prudent for all clients who own a home, or have a significant financial estate, carry this coverage. Many carriers provide coverages of $2-$5 million, for less than $1,000 annually. These policies can provide peace of mind that your estate exposure is minimized in the event you are found liable for damages or injuries to others.
Catalyst Private Wealth maintains an extensive network of professionals in all areas of risk management. We work closely with these partners to review your existing coverages, provide insight into its strengths, and any gaps, and work to find you the best coverage for your premium dollar. Our network of strategic partners are not affiliated with any individual provider, ensuring that the recommendations being made are in your best interest.
Whether you have been thinking about updating your risk management strategies, or haven’t reviewed them since they were implemented, we welcome the opportunity to discuss this component of your wealth plan as part of our comprehensive wealth management process. Please do not hesitate to reach out to your Wealth Advisor to schedule a review of this integral part of your planning.