Risk Management Strategies
Risk Management is a term that has multiple applications. We consider risk management in a very broad context when dealing with comprehensive financial planning and wealth management. For instance, it deals with understanding the nature of risk, being able to determine the possibilities and probabilities associated with a particular risk, and finally, assessing the financial consequences should the risk occur. Furthermore, the “management” side requires an in-depth knowledge of how to effectively deal with the risk(s). These include: (1) transference, (2) avoidance, (3) reduction, and (4) retention.
We divide assets that fall within the study of risk management into three categories:
- Those which produce and/or assist in the production of income
(e.g., investments, professional equipment, etc.)
- Those which provide for the necessary functions of living
(e.g., shelter, clothing, transportation, etc.)
- Those which enhance the quality of life
(e.g., home ownership, vacation property, art, recreation equipment, etc.)
In analyzing your assets, we help you determine, in the event an asset is lost or destroyed, what financial impact that loss will have on you. Those assets whose loss would cost more than you are able or willing to pay must be insured. Then, we help you determine the most efficient way to insure against such losses. Finally, we help you implement the transferring of those risks to quality insurers via the most suitable policies.
The realities of this risk are unavoidable. With medical technology continuing to advance at astonishing levels, the probability of living longer despite declining health and frailty is ever increasing. Thus, a conscious decision must be made of whether to transfer this risk, through purchase of insurance, or to self-fund it. Given the present pricing and insurance products available for this risk, we believe that it is economically feasible and most often preferable to use insurance.
As with any insurance product, it is crucial to review the policy language, definitions, coverage, and exclusions very carefully. Not all policies are the same. Likewise, not all insurance companies are the same. An insurer’s financial stability should be a major factor in choosing a product since you could be relying on the insurer’s promises for 30 to 40 years or longer. We have a variety of different insurance products available to meet your specific needs and priorities. Just as important, all of the insurance companies recommended and used by our advisors maintain “excellent” and “superior” financial ratings.
What is the value of a person’s life? Perhaps those who are dependent on that person for their financial well-being can best answer that question. It is also impossible to eliminate the emotional and psychological impact that a death can have to a family and/or business. Undoubtedly, life insurance is an integral piece of the financial planning and risk management process. In it’s simplest form, life insurance provides for a sum of dollars to be available to one’s family in the event of premature death. This lump sum is then used to cover the cost of dying, payment of debts, and to provide income to family and others who are dependent on a specific individual for their livelihood.
However, life insurance has many more uses than just to protect the financial well-being of a family in the event of a premature death. Businesses also rely on individuals for their success, wealth can be dramatically shrunk by estate taxes, and charities have benefited tremendously by gifts of life insurance. These are but a few of the multiple uses of well-designed life insurance planning.
Life insurance is a complex aspect of financial planning, yet one of the most useful, versatile and powerful products available to accomplish multiple financial planning goals. It has long been our strategy to fully understand and comprehend our clients’ specific needs and goals so that the appropriate life insurance policy, beneficiary, ownership, tax and funding decisions can be made. Life insurance is not a product that can or should be examined in a vacuum. There are numerous areas that must be studied in order to choose the appropriate policy. These include tax issues, estate issues, premium requirements, guarantees, expected or anticipated returns, other assets available, flexibility, and many other interrelated areas that will all be impacted and have consequences based on the life insurance decision(s) made.
Today’s market of life insurance products is almost unlimited in allowing creative solutions to a variety of circumstances, needs and goals. However, we do not believe in using life insurance products to solve financial planning goals where there is not a need for the death benefit. Using life insurance solely as an “investment vehicle” creates a strain on the ability to accumulate wealth because of the cost of the insurance component that is constantly and adversely impacting the “savings” element. Conversely, where there is a need for death benefits, the life insurance vehicle can be structured to accumulate wealth, often in a very tax efficient and advantaged manner.
We have the ability to use a large number of financially strong, very diversified insurance companies to design and provide appropriate life insurance programs. There are many products used by our advisors to meet the broad life insurance needs of our clients. These include; Term life (with guaranteed premiums of up to 30 years), traditional Whole life, Universal life, Variable Universal life, Single Premium life, First to Die life policies, and Second to Die (or Survivorship) life policies. All of these type policies and more can be structured and used in numerous forms and scenarios including; personal, business Buy/Sell arrangements, estate planning, retirement planning, “split dollar” funding, Section 412(i) benefit plans, deferred compensation plans, asset protection strategies, and more.
We believe the importance of making life insurance policy decisions from a holistic perspective and as an important piece of the overall financial planning process cannot be understated. It is within this context that we utilize and implement life insurance as an important and valuable financial planning and wealth management tool. We further believe that a “needs analysis” process can accurately quantify both the financial and emotional needs for life insurance death benefits so that the amount of life insurance is sufficient, but not excessive.
Death benefits and other guarantees are subject to the claims paying ability of the insurer.
It has long been a belief of our advisors that this type of insurance coverage should be the first and foremost concern for professionals. For most individuals, the ability to earn income is their most important and valuable asset. Without the income to fund the creation of wealth, investment returns and asset accumulation become moot issues. Thus, it is paramount to begin the financial and wealth planning process by protecting your income stream from the unpredictable and most devastating financial occurrence that can strike; a lengthy disability from illness or injury. Furthermore, given the vital importance of the asset being protected – your income stream – the form and quality of insurance protection sought is an extremely serious and critical decision.
Businesses also have a vested interest in their key employees’ health and continued ability to provide services that help to create revenue and profitability. In the event of a key employee’s disability, positions must be filled to replace their skills and productivity, which is often a very difficult task. Also, the business may have legal and moral obligations to the disabled employee, creating further economic stress for the business. Disability benefits through employment, therefore, can be an important tool for financial risk management as well as a useful way for business owners to attract and maintain key employees.
Disability policies have evolved significantly over the past three decades with several major insurers changing their focus from individual to group policies. Despite these changes, however, there are still several quality insurance products available that can provide the needed protection for this major health and financial risk, whether through a business group policy or through individual coverage specifically for professionals.
We have relationships with the leading insurers in the disability industry to provide the finest coverage available on the market today. Not only do we implement policies from companies that are superior for handling this risk area, we understand how the policy language and provisions can affect you during a claim. Also, as with all other product areas, the economic decisions of how to best purchase this coverage as well as what levels of coverage are appropriate to each individual’s unique circumstances and needs are thoroughly discussed and incorporated into the process.
Long Term Care Insurance
As all of us age, it becomes more and more evident (both internally and externally) that time and the aging process is inevitable and, therefore, need to be addressed from both a financial and emotional perspective. This usually becomes a poignant issue around age 50 to 60 depending on the individual and his/her personal health and financial circumstances.
The government has made it clear that it will not be a primary resource for long term care costs. And, these costs can be significant. Estimates for the annual cost of long-term care (whether in an institution or at home) run from a low of approximately $75,000 to well over $100,000 depending on geographic location. This can obviously place a large burden, both emotionally and financially, on an individual and his or her family, regardless of how “wealthy” they may be.
One of the most unique methods of addressing the potential risks posed by long term care needs is through “asset-based” long term care products. By partially self-funding this risk exposure through a fixed annuity or life insurance contract, you can leverage your own assets via the use of insurance riders in order to protect the bulk of your wealth from a lengthy and expensive disability. The annual premium costs for these insurance riders are typically far less than traditional Long Term Care policies and they are often guaranteed not to increase. In addition, recent tax legislation makes these products extremely tax-favorable. Perhaps best of all, if you never require long term care services, the annuity assets remain your property to be used or distributed however you deem best or the life insurance death benefit get paid to your beneficiaries.
Protecting one’s assets from exposure to loss resulting from liability claims (medical or otherwise), bankruptcy, and/or unnecessary and avoidable taxation is an integral part of accumulating wealth and keeping it. True asset protection incorporates many aspects of a comprehensive financial plan and many of the products described on this web site. Depending on the size, complexity, and geographic location of your wealth, there are numerous strategies and vehicles available to assist you in protecting your wealth.
Perhaps here, more than any other area of planning, however, we hold firm to the old saying, “don’t let the tail wag the dog.” In other words, an effective asset protection strategy should coincide with logical, reasonable, and responsible financial planning. It is not uncommon to hear of outrageous dollars and energies spent to protect against highly improbable occurrences. In situations that seem to call for extremism in the protection of assets, it is probably prudent to review closely the risk exposures involved to determine if they can be minimized by transferring the risk via insurance or reducing the risk by behavior or other modification.
Some of the tools we utilize to accomplish the protection of assets (as well as to accomplish additional financial planning goals) include: wills, testamentary trusts, living trusts, international “offshore” trusts, irrevocable trusts, “Delaware” trusts, limited liability companies and partnerships, family limited partnerships, qualified retirement plans, IRAs, life insurance, annuities, and obviously property, casualty, and liability insurance policies. All of these, in varying degrees, can be very effective in accomplishing asset protection.
A key point to understand about asset protection is that no one instrument will do everything. Instead, a comprehensive plan based on individual circumstances and needs will produce the best results. A review of your assets and potential risk exposures with one of our professional advisors is a good starting point for this type planning. With the passage of the 2005 Federal Bankruptcy Reform Act, this area of planning is more crucial than ever.