LIFE INSURANCE: A NECESSARY CONVERSATION
Your Reason in Focus – May 2016
Life insurance is an interesting topic. Not interesting like watching a rocket land upright after re-entering Earth’s atmosphere interesting. But certainly on par with a National Geographic Special on the Lifecycle of the Snail.
The difficult part of life insurance is two-fold, talking about death is hard and pricing the dollar impact risk of our death on those we love is subjective.
This quandary manifests itself in real life when you dig into the facts of life insurance. Out of a sample group of 10 adults, 6 will have insurance. Out of the 6 insured individuals 2 will only have coverage because their employer provides it; meaning they will be uninsured in the event of retirement, employment termination, changes to the group benefit policy and so on. Only 3 of those 10 people are confident they have the proper coverages for their level of risk.
Put another way, only 3 in 10 otherwise insurable adults have intentionally pursued a rational, informed and well-reasoned approach to their life insurance needs.
The first part of 2016 we focused on estate planning and the methods by which any individual, regardless of complexity, can take control of their estate planning needs. If you missed it, we suggest going back and taking a look as we covered the spectrum of simple to complex estate planning, as well as providing some basic tools for those just starting out.
We also shared a short video which served as an inspiration to us and continues to inspire, especially now that we are switching gears and focusing over the next several months on preparing for the unknown via insurance.
The driving motivation behind life insurance is to provide assistance to those impacted by your death be it timely or otherwise.
Life insurance proceeds will enable your loved ones to focus on life after death (yours) without having to wonder how the mortgage will get paid or the kids will get to college. Secondarily, life insurance plays an important role in various strategic areas such as: tax reduction, wealth transfer and business transitions.
‘THE GLOOMY SHADE OF DEATH’, King Henry VI, Part 1
Let’s get this out of the way at the beginning – Buying life insurance doesn’t make sense for everyone. If you have no dependents and no shared liabilities it is very possible you do not have a need for life insurance; although long term care or disability insurance is probably worth looking at.
However, if you have dependents (especially if you are the primary provider) or others for whom your death would have negative financial consequences, you likely will need some insurance. This is where we get to the pricing quandary involved in determining insurable need. We can either provide you with a calculator for determining your insurable need, or you can find one online pretty easily. The calculator takes a variety of factors into account for determining your “need”:
Assets • Liabilities & Debts • Current Income • Standard of Living for Survivors • Length of time to provide for Survivors • Projected Future Inflation • Number of Dependents • Cost of Care for Dependents • Future College Expenses • Inflation in Cost of College • Future Income Sources • And So on
The list is both quantitative and qualitative in nature. Meaning there are numbers and there are emotions. This is a lot like the saying, “There are lies, damn lies, and statistics.” You can finagle the inputs to tell just about any story you want. In fact, small tweaks to any of the inputs can result in a large change to the proposed insurable need. Personal preference also factors in via the qualitative inputs. Some individuals have a very strong preference to not have others make money on their death regardless of the circumstances. Or they think their significant other is perfectly suited to finding another partner to navigate life with.
Determining your “insurable need” is challenging and it must be approached rationally. We want to help you be intentional in your approach and well-reasoned in the solution you choose.
UNDERSTANDING THE BASICS
Once we have determined your need for coverage the next challenge is determining the proper type. In short – you either need coverage to last for your life or you don’t.
Lifetime coverage is known as Permanent Insurance and short(er)-term policies are known as Term Insurance. Term, for context, is a form of rental coverage. You buy a policy that pays out a set amount if you were to die during the period in which the policy applies; use it or lose it. The purpose of this insurance is to hold you over until you can become self-insured by your assets. Think SHORT TERM NEED such as: Mortgage payoff, College Expenses, Business Loan Coverage, and Income Replacement.
“Term, for short, is a form of rental coverage …
Permanent insurance is just as it sounds – Permanent.”
Permanent insurance is just as it sounds – Permanent. There are several varieties of permanent policies with varying costs and complexities but the common characteristic that the policy is designed to remain in force for as long as you live. Some build cash value, others provide for long-term care, advanced proceed payouts, and other needs. Due to the nature of these contracts, the cost of permanent insurance can be much greater than term. We work closely with you to gauge your true need before making a determination as to whether one is better suited for you over the other.
At the end of the day we want the Permanent insurance to pay-out a death benefit and the Term to expire before we do.
JUST LIKE BREAD, INSURANCE CAN GET STALE
Life is rarely boring, even in the groundhog day of parenting and working, life continues to grow and change.
Have you had another baby? A second marriage? Purchased a home? Purchased a second home? Started a business? Received a raise? Retired? In the midst of all that excitement, have you made sure that your insurance coverage and beneficiary allocations are up to date?
If you do not regularly, as in once per year, review your insurance policies and the beneficiary allocations your survivors may find the benefits they thought were there really are not. This is particularly important if you are one of those 2 out of 10 people who are only covered through a group policy with your employer.
Having coverage though work is a great benefit. The issue becomes, what happens when you leave that employer or retire? Most employer sponsored insurance policies are not portable; meaning the term length of such contracts is based on employment. As you increase your seniority at work, your age increases too, which means your premium costs also increase. Benefits can change, or be taken away by your employer.
Be informed and do not let your various policies become stale. This may be like watching the life cycle of a snail, but remember, some people like that kind of thing and are willing to partner with you to get your insurance reviewed on a regular basis. People like us at Reason Financial.
OTHER INSURANCE ISSUES
Insurance planning actually encompasses a wide world of solutions and reasons for obtaining coverage other than providing a death benefit to care for survivors. If you are a business owner or are likely to run afoul of the current estate tax exemption it is absolutely in your best interest to look at what advanced insurance planning can do for you. For example –
The Robbie Family owned the Miami Dolphins from their inception in the AFL in 1966 until their sale in 1994 after a couple years of legal wrangling amongst the heirs. A big factor in the sale was the lack of advanced planning from a life insurance standpoint to adequately pay both the beneficiaries and the estate tax to the government which was $47 million based on net worth of $109 million . Proper planning and utilization of a very available tool, life insurance, is an important part of wealth transfer and can prevent this type of thing from happening.
As of today, estate taxes are levied at a top rate of 40% after the applicable lifetime exclusion of $5.45 million (single) and $10.9 million (married) is used up. For each dollar in excess of these thresholds you can expect the government to take approximately half!
The tax-free death benefit of life insurance, when structured appropriately as part of an estate plan, can help you preserve these dollars and cover your estate tax liability.
Most family businesses are started with a dream and built with hard work. If what you envision for your business after you die is to keep it in the family, you should first consider a discussion about which of your heirs has the interest in managing and ability to manage the business. In many situations, families can use insurance benefits to “cash out” some of the other heirs, preserving family peace while continuing the viability of the business. Is your business succession plan up-to-date?
HANDLING WHAT LIFE THROWS AT YOU
No matter where you are in the process of life insurance planning from not having done any to having stale policies to being up to date, we are here to assist you. We can work with you to perform the following:
1. Insurance Needs Assessment (Quantitative Assessment)
2. Develop Your Approach (Qualitative Assessment)
3. Obtain In-Force Illustration(s) on current policies
4. Cost Comparison
5. Complex Planning to handle Estate and Business issues
Our purpose is to enable a lifetime of rational, informed and well-reasoned financial decisions. We welcome your input and ask that you contact us with any questions or to schedule a meeting. We are here to help you establish your own approach to ensuring your life insurance is organized, effective and up-to-date.
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Securities offered through 1st Global Capital Corp., Member FINRA and SIPC. Bruce Rawdin-Baron, Steven W. Pollock, Sean Storck and Nicole Albrecht are Registered Representatives of 1st Global Capital Corp. Investment advisory services, including RBFI portfolios offered through Rawdin-Baron Financial, Inc. IMS platform accounts offered through 1st Global Advisors, Inc. Rawdin-Baron Financial, Inc. and 1st Global Capital Corp. are unaffiliated entities. Rawdin-Baron Financial, Inc. is a Registered Investment Adviser. Placing business through 1st Global Insurance Services. Registration does not imply a certain level of skill or training. We currently have individuals licensed to offer securities in the states of Arizona, California, Illinois, Indiana, Kansas, Massachusetts, Michigan, New York, Oregon and Washington. This is not an offer to sell securities in any other state or jurisdiction. CA Department of Insurance License: Bruce Rawdin-Baron #0736631, Steven W. Pollock #OE98073, Sean Storck #0F25995 and Nicole Albrecht #0F99962.
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