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Risk management is just a fancy way of saying insurance. Remember, at its core, by purchasing insurance you are transferring the risk of financial loss to an insurance company. Depending on which stage of life you are planning for, risk management may include considerations for life insurance, different types of disability insurance or long-term care coverage.
In the first five months of 2017, I’ve seen several cases where; in my opinion, our clients had been previously sold wholly inappropriate life insurance policies relative to their original goals. These policies were sold by former advisors prior to their having begun working with Allied Financial Services. With that in mind, I wanted to take a moment to provide some direction on how a person can develop a personal risk management strategy specic to life insurance. Additionally, I’ll try to provide basic insight into the types of insurance that should be considered depending on your specific needs.
Determining how much life insurance an individual or business needs should take into account several key questions:
1. If I were to die unexpectedly, who will be affected and how disruptive would my passing be to their quality of life?
2. What debts would need to be paid in order to reduce or eliminate the burden that is created by my death?
3. Would my survivors still; after my debts are paid, be able to continue to pay for their ongoing living expenses and avoid the need make dramatic changes to their lifestyle?
4. If NOT, how long should we plan to have expenses paid to create a period of stability and how long should that period extend?
5. If you have children, would you anticipate creating a college fund with insurance proceeds? Or would a surviving spouse be able to continue to save for college in your absence?
6. Do you have any legacy desires? Put another way: if I live to my normal life expectancy should my children/loved ones receive some inheritance regardless of whether I spend all my accumulated savings during retirement?
After answering these questions, we then turn to quantifying the impact of each of your answers. In so doing, you will have a target benefit as a starting place for discussion. The overwhelming majority of financial planning clients are surprised to
learn just how underinsured they are. However, they are usually equally surprised to learn that the costs of insuring themselves correctly is much less than they had ever thought. There are at least six meaningfully different types of life insurance: Whole Life, guaranteed universal life, non-guaranteed universal life, indexed universal life, variable life and term life. Each with their myriad riders, design options and pricing. If you have a temporary insurance need like covering the balance of your 10 year mortgage, a 10 year term insurance policy should do nicely. However, if you want to create a legacy for your children then some type of permanent insurance is likely more appropriate. And you may be able to envision any number of additional circumstances that may require more than one policy to fulfill your personal vision.
The important thing to remember is that people age and health statuses change. Age and health are obviously the most important criteria in obtaining insurance at affordable rates. However, it is only natural that your insurance needs will change
with time. Does the policy you purchased 15 years ago meet your needs today? Insurance policies—like any investment—will require monitoring to ensure their performance reects the policy owner’s intent when the policies were purchased. For instance, if you have an old policy issued when interest rates were higher, it may not be performing as originally intended in this low interest rate environment.
This information is the simplest introduction to some of the questions we help clients answer every day. As with all our services, we hesitate to use rules of thumb or “common knowledge” because your insurance portfolio should be tailored to
meet your family’s or business’ specific needs. If you’d like to learn more about insurance or to design a portfolio that adequately supports your family’s stability please contact us today. We have the expertise and resources to develop a custom
solution for you and your loved ones.
by David A. Younis, CFP®, Director of Financial Services
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