Risk Management

Provided by Income Advisors USA, LLC

Defining Risk Management

Risk may be defined as “the chance of injury or loss” or “vulnerability to undesirable consequences”. We believe the major underlying issue in risk is “uncertainty”. Simply put, then, the management of risk is the management of uncertainty in whatever discipline in which one is laboring. Thus, in financial planning, a definition might be “the process of identifying, analyzing and either accepting or rejecting a financial tool or process based on its inherent level of uncertainty (risk)”. Because insurance protects you from the uncertainties inherent to life, it plays a crucial role in your comprehensive financial plan.

Risk Management Tools
  • Life Insurance
  • Critical Protections for You and Your Heirs

Life insurance is one of the most incredible financial instruments ever devised, providing a stunning array of benefits and protections. It’s the only legal way of which I am aware that a poor man can leave his family a rich man’s inheritance for pennies on the dollar. It provides a wonderful example of the power and use of leveraging, multiplying a pittance exponentially into a fortune without breaking a sweat. Quite simply, the only other financial instrument that even comes close is long-term care insurance in terms of value and benefit.

Do You Need Life Insurance?

It depends. Are others dependent on you for financial support? If your children, spouse or other loved ones had to continue without you, would they have sufficient income to do so? Do you have assets you would like to protect from potential seizure by creditors or litigants? Would you like account proceeds to avoid probate? Would you like to have an account that pays a conservative rate of interest that could be used to supplement your retirement income if needed? Would you like tax deferred growth in your account? Would you like an account from which you could take loans with loan interest rates of 0%? Do you have a mortgage you would like to have liquidated without further liability to your beneficiaries? Your answers to these questions might indicate whether you need life insurance or not.

How Much Life Insurance Do You Need?

Determining how much life insurance you may need can be a complex and difficult process. Its not as simple as buying an insurance policy. In fact, such an approach could lead to being over insured or underinsured, thus undermining the risk management effort. Rather, it should be determined as part of a systematic comprehensive financial planning process.

What Type of Policy Is Best for You and Your Family?

Several critical factors should inform your choice of policy type including the following:

  • Your life stage (are you single, married with children, about to retire or already retired?),

  • Your financial goals (e.g., debt retirement, income replacement, estate tax avoidance, probate avoidance?), and

  • The length of time you need the coverage (Is the need time limited or lifetime?).

Each factor carries its own complexities. However, to illustrate, let’s address factor 3 briefly. If the need is time limited, perhaps term insurance would be better. If it is a lifetime need, perhaps you should consider some type of permanent insurance like whole life or universal life. And if you want to combine the benefits of life insurance with that of investments, you might want to consider variable life insurance.

Long-Term Care Insurance
Protecting and Preserving Your Estate

According to numerous studies, the single greatest financial risk associated with growing older is the cost of custodial nursing care. Medicaid pays for approximately 50% of the nursing care received in this country, but you have to impoverish yourself in order to qualify. Medicare pays for approximately 10% of the care received, though it will pay only for a limited number of days of skilled care (it won’t pay for custodial care at all), and strict qualifying requirements restrict access. The remaining 40% is self-paid out of pocket by the individuals receiving care. With approximately 40% of all Americans expected to spend at least some time in a nursing home, and a 10% risk that such a stay will last 4 years or longer, and with the average daily cost in excess of $245 ($89,425 annually), it is easy to see why this is so critical to the financial planning process.
Besides the benefit of having charges for long term care services paid without having your estate ravaged by onerous costs, a portion of the premiums paid for a policy are exempted from taxation up to a designated amount based on age. And the benefits paid for long term care services are tax deductible as well. This means the tax benefits of owning long term care insurance can be substantial.

Do You Need Long-Term Care Insurance?

It depends. However, answering the following questions might help you decide.

  • Are your assets such that you can pay for long term care services if they are needed?

  • For how long could you pay before running out of money?

  • How would paying for long term care services out of pocket affect your net worth? Your quality of life? Your spouse’s quality of life?

  • Would you want to protect your estate from potential erosion from a long term care need?

There are numerous other questions that need to be answered when deciding whether you need long term care coverage. If you need help making that decision, call us for a free consultation.

How Much Long-Term Care Benefit Do You Need?

The answer to this question is connected to a second question: how much of your long term care services can you afford to pay out of pocket? If you can afford to pay for one half of the cost for services, you need a plan for paying the other half. Long term care insurance is likely the cheapest way to provide that. If you can’t afford to pay for any of the cost for services, you might want to consider transferring the entire risk to the insurance company.

The question is far more complex than the paragraph above indicates. If you would like help in determining how much long term care coverage you need, call us for a free long-term care analysis.

What Type of Policy Is Best for You and Your Family?

The traditional long-term care policy basically creates a pool of money from which a maximum specified daily amount of dollars can be paid to cover the cost of receiving long term care services for a specified maximum number of days. If you prefer monthly premium payments, which minimized outlay leaving more funds available to invest or use elsewhere, perhaps the traditional model would work for you.

A second, less well known type is the asset based or linked benefit long term care policy which comes in several variations and addresses most of the weakness of the traditional long-term care model. One example of this is the loss of premiums paid into a traditional long-term care policy if the purchaser dies or is forced to terminate the policy having never used its benefits. Because of the nature of linked benefit coverages, if the policy is surrendered, premiums paid would not be lost. Rather they would be recouped along with modest increases in account value. And if the policy is life-linked and is surrendered due to death, beneficiaries stand to receive a return of all premiums paid into the policy plus an amount exponentially larger than the premium.

Linked benefit policies have traditionally required deposit of a single premium, which did away with lifetime monthly premiums but put them out of the reach of a large part of the population. However, the recent addition of long term care riders to traditional universal life policies allowing monthly premium payment has made variations of this version available to almost everyone. For more information on the linked-benefit long term care model, email my office.

Principal Protection, Asset Protection, Medicaid Planning, Creating Income, and Providing Tax Deferred Growth

For well over 100 years, annuities have been providing an impressive array of benefits; more than almost any other financial instrument. The list includes principal protection, industry safety, tax deferred growth, tax free exchanges, liquidity options, guaranteed death benefits, avoidance of probate, creditor protection, participation in state guarantee pools, guaranteed income that can’t be outlived, tax benefits for some types of annuity income, and ratings by 3rd party rating agencies.

Based on the type of annuity, the list could also include guaranteed annual interest rates, market based performance, automatic rebalancing, and professional money management. Additional riders might also provide guaranteed income benefits, guaranteed withdrawal benefits, enhanced death benefits, and enhanced liquidity options based on long term care needs and terminal illness.

Do you Need an Annuity?

It depends. In general, however, an annuity might serve you well if you can answer “yes” to several of the following questions:

  1. Do you want your money on deposit with one of the safest industries in our nation?

  2. Do you want a guarantee that your principal will be safe?

  3. Do you want account values protected from seizure by creditors?

  4. Do you want the increased growth potential and reduced taxes provided by tax deferral?

  5. Do you want the full account value to go to your heirs without erosion at your death?

  6. Do you want on deposit assets to avoid probate?

  7. Would you be ok with limited liquidity in general (10% to 15% of the account value annually) if you could have 100% liquidity for nursing home care or terminal illness?

  8. Would you like to have guaranteed annual growth rates?

    What Type of Annuity is Best for You?

    Like other financial instruments, annuities were developed to address specific financial goals of individuals like you. Like most tools; they work best when used to address the goals for which they were developed. Thus, most annuities would probably be appropriate for persons looking for a place to put non-IRA money where taxes don’t have to be paid until the money is used. At the same time, those same annuities would be inappropriate for persons whose liquidity needs exceed the annual surrender free amounts allowed by an annuity.

    • Fixed and equity indexed annuities likely would be appropriate if principal protection is important, but might fail the test if growth guarantees are less than that needed.

    • Fixed annuities with specialized language would probably work best if you are doing Medicaid planning.

    • Variable annuities might be good if the potential for more aggressive growth is what’s needed but would be inappropriate if loss of assets would lead to severe financial difficulties.

    Fact is, the value of an annuity, as with any other financial tool, can only be known in the context of the job it is expected to perform. Hence, there is simply no way the question can be answered without knowing that context. Remember, diagnosis, then prescription.