Let’s be frank; no one likes to pay for insurance. It’s one of those things we do because we’re “responsible adults”. But in many cases we’re paying to protect ourselves against something that isn’t likely to happen. Most people don’t totally destroy their cars. Most houses don’t burn down. But when those things do happen, they can have catastrophic financial effects on those who are ill-prepared. While this is true for things like houses and cars, it’s also true when it comes to planning your financial future. Let’s take a quick dive into three areas we think are critically important to address when thinking about your financial plan.
While it’s true we are all going to die someday, that doesn’t necessarily mean we will always need life insurance. Think about it. What is the financial risk associated with death? For me, that’s the money I’m supposed to save during my working career for retirement. Or the income I was supposed to make. Or the debt I was supposed to pay off. But like many, I’m hoping to retire at, say, 65. And my plan is to have all of those needs met by then. Therefore, contrary to what many life insurance salesmen would have you believe (you know who you are) in my opinion most people don’t need permanent life insurance (whole, variable, universal, etc.) and are best served by a term policy that coincides roughly with retirement. And that’s good for you. Because term insurance is almost always the cheaper way to go. For me, that’s a 30 year term policy.
So how much should you get? My formula is simple. First figure out what you want to accomplish in the case of your untimely demise. For me, I’d want to leave my wife with a paid-off house, a new van (she loves her Sienna), some money in a college fund for our kids and a reasonable stream of income. Then do the math. Add up the one-time expenses that would need to be paid off first. $200k for a house, $30k for the van (plus trade-ins), and $35k in two 529 college funds. So that’s $300k. Then determine what kind of income your family would need once those debts are gone. Say that’s $50k per year. Take that number and divide it by 5% ($50k/.05 = $1,000,000). And then add those numbers up. So if I had a $1.3MM 30yr term policy and I died before retirement, Beth could take that money, pay off our debt, buy a new car, invest $1MM in a decent portfolio and draw 5% for the rest of her life1.
But what if I don’t die? What if I’m just in a bad car accident and I become disabled and can’t work anymore? Now my family is without my income and I’m probably also a financial burden on them. Enter disability insurance. There are actually two kinds of disability insurance. Short-term and long-term. Because we’re big advocates of having cash emergency funds, we don’t usually recommend the short-term variety. Long-term disability is highly customizable so you should definitely go through an agent to make sure you’re buying a policy that functions as you would expect it to if you should ever need it. It typically would kick in after 90 days of disability (elimination period) and if you pay the premiums with after-tax dollars, the income stream is tax-free! And you want to make sure it isn’t structured in such a way where if you can flip burgers, it won’t pay. Moral of the story: if you’re the primary wage earner and your family would be ruined without your salary, call us and consider getting a disability policy in place.
Long-term Care Insurance
According to the US Department of Health and Human Services, about 70% of people turning age 65 can expect to use some form of long-term care2. And as we live longer, those numbers are growing. And it’s expensive, costing anywhere from $6,000 to over $10,000 per month3! So being in a nursing home for 2-3 years can cost you hundreds of thousands of dollars. In many cases, this is orders of magnitude more expensive than buying some kind of long-term care insurance (LTCI). But what kind?
Traditionally, LTCI is purchased on an individual basis and much like auto or home insurance. You pay premiums every month (for LTCI, often until you die) and if you never use it, you lose it. For the most part, people seem to be ok with this when it comes to home and auto insurance. But when it comes to LTCI, that’s often looked at as a waste of money. Ironic, since the financial risks of nursing care are undoubtedly higher than replacing a car or maybe even a house. But if you’re in that camp, consider either “pooled coverage” or asset-based LTCI.
Pooled coverage can be purchased by a couple with the coverage shared between them both. Since the likelihood of both spouses needing long-term care is not high (typically the healthy spouse takes care of the non-healthy spouse), it may be ok to purchase a slightly lower amount in aggregate (say 6 years in total coverage) than if that same couple had purchased individual policies (2 x 4 years = 8 years in total coverage). This can help keep the premiums down.
Asset-based long-term care is a kind of hybrid long-term care/life insurance product. These policies can have a cash value or death benefit that pays out if the policy owner never needs to pay for long-term care expenses. And while this sounds like a nice way to avoid potentially wasting money, the premiums are often quite high and cost-prohibitive. Making this primarily a product for those of high-net worth.
Like disability insurance, long-term care insurance can be highly customized with many optional features (riders) that can make the policy more powerful but also more expensive. For instance, considering the ever-increasing costs of medical care, it probably makes sense to have an inflation rider on your policy. If you’re interested in discussing the details of your situation and how to construct an LTCI policy for you, please give us a call (920) 617-6830.
So what do you do if your work offers these types of benefits? Consider the following. First of all, they’re often group policies which means the costs are based on your group, not you as an individual. They are sometimes more expensive than if you would try to get coverage on your own. And what if your company decides to get rid of those benefits? There goes your risk management plan! If you don’t plan to work there for your whole life, or those policies aren’t portable (can’t take them with you when you leave), then don’t count on them. Consider getting your own insurance. Of course, if you aren’t insurable, group coverage is probably your only choice.
As you can see, insurance planning is a big part of financial planning. Doing it incorrectly or ignoring it completely can really harm you and your family. It can be the difference between living in wealth or languishing in poverty in the most extreme circumstances. This is why we’ve included insurance planning in our practice. If you or someone you know needs help in this area, don’t wait any longer. Call us today.
-Mike Macco, Financial Advisor
1This is a hypothetical illustration and is not intended to reflect the actual performance of any particular product. Individual results will vary.
Opinions expressed are those of Michael Macco and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Investing involves risk, investors may incur a profit or a loss. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but we do no guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Long Term Care insurance policies have exclusions and/or limitations. The cost and availability of Long Term Care insurance depends on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of Long Term Care insurance. Guarantees are based on the claims paying ability of the insurance company. The cost and availability of life insurance depend on factors such as age, health and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition if a policy is surrendered prematurely, there may be surrender charges and income tax implications.