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Astoria Strategic Wealth

Risk Mitigation - Insurance Planning and Protecting Your Nest Egg

Protecting Your Nest Egg

You’re working hard to reach your goals.  Let's assess your insurance need (if any) and suggest tools to mitigate loss. Please understand we do NOT sell insurance. 

There are a few “life happens” events that could quickly derail your current financial path.  Life insurance for a head of household passing prematurely is typically the first line of protection most people consider.  Statistically speaking, however, you have a higher probability of becoming disabled than passing prematurely, so disability insurance should not be overlooked.  Health care is an increasingly expensive and complex risk mitigation factor - to include Long-Term Care Insurance.  And of course, protection for your personal assets (home, car) and general liability must be considered. How much is enough?  How much is too much?  Let’s take a look at some basics.

Life Insurance

The general impact of premature death can leave a household with unresolved financial responsibilities including the following:

  • An unpaid mortgage
  • The funding of your child(ren)’s college education
  • Car loans
  • Credit card debt
  • Financial support of dependents (child care expenses)
  • Funeral expenses
  • Estate administration costs

How much insurance should you own?

Usually, the amount of life insurance you should own is not as difficult to ascertain as it may seem.  A number of methods may be used to determine the proper amount of life insurance for you.  The rules of thumb are basic calculations.  One common method suggests multiplying your salary by a certain number (usually six to eight times your salary) to provide an adequate estimate of level of insurance, while another calculates need based upon your normal living expenses.  There are also more specific calculations such as the family needs approach, income replacement approach, capital retention approach, and capital liquidation approach.  Whichever approach is utilized, life insurance is important to provide needed cash to meet financial needs arising from a premature death.  Later in life, it is possible to be self-insured from a life insurance perspective.  There are a variety of other reasons life insurance may be used though such as mitigating estate tax impacts as well as providing care for special needs dependents.

Types of life insurance policies

There are two major categories of life insurance: term life and permanent (cash value) life insurance.  Within the two broad categories, there are many types of policies that have been developed in response to consumer demand, market conditions, sales tactics and changes in the tax laws.

Term life insurance provide life insurance for a specific period of time or “term”.  If you die during the coverage period, the named beneficiary receives the policy death benefit.  If you don’t die during the term, your beneficiary receives nothing.  At the end of the covered period, you must either renew your coverage or apply for a new policy.  Some term policies offer guaranteed renewal extension terms, however, these premiums can become prohibitive.

Permanent (cash value) life insurance policies provide insurance protection for your entire life as long as the policy remains in force (meaning the premiums have been paid and the policy hasn’t lapsed or been canceled).  In addition to the insurance protection provided, this type of policy also builds internal cash values.

Disability Insurance

What is disability income insurance?

Disability income insurance, generically referred to as “DI” within the industry, is essential in a risk management program and as part of a comprehensive financial plan. Yet its importance often is overlooked - leaving a major risk exposure uncovered. This risk exposure can result in financial catastrophe unless the disabled income earner otherwise is able to replace his or her earnings during the period of disability. From a personal point of view, this is likely to be the worst type of loss. If a home or auto is destroyed, it can be replaced. If personal property is lost or stolen, it can be replaced. An individual with high medical bills can eventually recover from the financial loss, but an individual who loses the ability to earn a living can lose the ability to obtain and maintain a secure lifestyle.

Most disability policies pay you a benefit that replaces part of your earned income (usually 50 percent to 70 percent) when you can’t work. 

You might be surprised by the definition of disability however – insurance companies likely will have a much more rigorous definition of disability than you.  Are you able to work at all in any capacity at any job?  If yes, you may not be disabled from the insurance company’s perspective.  Nuances around “own occupation” disability insurance are complex.

Many people believe they are adequately insured against disability because they think they have coverage through their employer or through the government.  Perhaps this is why approximately 80% of Americans don’t own private disability income insurance coverage.  However, assuming that you’re covered against disability through your employer or through the government can be a considerable risk to your financial plan.  Although 50% of employers cover short-term disability, only 40% cover long-term disability.  Government programs such as Social Security and workers’ compensation may pay benefits, but you must meet a rigid definition of disability to qualify.

Evaluate your risk and define your scope

Your first step is to determine if you are planning for just yourself, your family, or a business.  Statistically, your risk of being disabled is great.  It is estimated that every year, one in eight people become disabled.  If you are age 45 right now, you have a 50% chance of suffering a disability that lasts more than 90 days sometime before you turn 65.  Of course, you may never become disabled, especially if you’re healthy and work in a low-risk occupation.  But then again, likely you know one or more people that have suffered with cancer, heart attacks, motor vehicle accidents, back problems or mental health issues that have left them unable to work for some period.  If you were hurt or got sick, how would you support yourself and your family?

Deciding what kind of disability policy you’d like to buy

Before you can fairly compare policies, you have to determine what features and coverage you want.  Would you prefer to buy a policy that will pay you benefits only if you are completely disabled and can’t perform any of the duties of your own occupation, or do you want to buy a policy that will pay you benefits if you can go back to work part-time or at any occupation?  Beyond a policy’s definition of disability, other features to consider are the policy’s elimination policy (when the benefits would “kick-in”), the probation period, pre-existing conditions, amount of coverage, duration of coverage, taxation of benefits, policy durability (also known as renewability), riders such as cost of living (cola), social (security) riders, long-term care policy riders, and, of course, premium.

Long-Term Care Insurance

Long-term care insurance (LTCI) is a contractual arrangement that pays a selected dollar amount per day for a selected period of time for skilled, intermediate, or custodial care in nursing homes and other settings (such as home health care).  Because Medicare and other forms of health insurance do not pay for custodial care, many nursing home residents have only three alternatives for paying their nursing home bills: their own assets (cash, investments), Medicaid and LTCI.

In general, long-term care refers to a broad range of medical and personal services designed to provide ongoing care for people with chronic disabilities who have lost the ability to function independently.  The need for this care arises when physical or mental impairments prevent one from performing certain basic activities such as feeding, bathing, dressing, transferring and toileting—activities known as ADLs (activities of daily living).

One of the first considerations is how long your parent (primarily same gender) lived and what kind of health situation they were in the last few years of their life.  Actuaries place a significant value on this as being a factor in the longevity for each of us.  Another consideration is the amount of assets available to pay costs of facility care and if you are willing to use your assets to fund these costs.  Current Medicare benefits include 100 days of inpatient skilled nursing care following a hospital confinement, so a person should not be billed until day 101 if covered by Medicare.

Options for covering long-term care

You may consider self-insuring, purchasing long-term care insurance, owning a life or annuity rider with coverage, Medicaid (requires spending down assets) or a combination of these tactics.  We recommend you consider family history, current health and age and speak with a long-term care specialist to weigh your options and determine the best strategy for protection.  Long-term care insurance is typically considered in your 50s.

Property, Casualty and Liability Insurance

What is it?

We all share a common interest in protecting our property and guarding against financial loss.  Moreover, most of us have a natural aversion to the kind of risk that comes with leaving ourselves and our property exposed.  This combination of factors creates a market for various types of property and casualty and liability insurance that minimize the risk of loss.  Property/casualty/liability is a general term for insurance that may serve either or both of these basic purposes: (1) it covers you for loss of, or damage to, your personal property caused by one or more insured perils, and (2) it covers you when your negligent acts or omissions damage or destroy another party’s property, or cause bodily injury to another party.  In effect, when you purchase policies that fall under the umbrella of property and casualty and liability insurance, conceptually you gain peace of mind as well as financial protection.

While the broad category of property/casualty/liability encompasses numerous lines of insurance available to you, it can be broken down in to the most common types of policies: homeowner’s insurance, personal liability insurance and automobile insurance.  We recommend you periodically confirm your policies remain in line with your evolving net worth to avoid exposure to risk.

Umbrella Liability Insurance

This additional type of property/casualty/liability insurance offers protection above and beyond basic coverage that homeowners/renters and auto insurance policies offer.  An umbrella policy can protect you against the catastrophic losses that can occur if you are sued.

Although an umbrella policy can be purchased as a separate policy, your insurer will require that you have basic liability coverage before you can purchase an umbrella liability policy.  It is often referred to as excess coverage.  If you are found to be legally responsible for injuring someone or damaging someone’s property, the umbrella policy will either pay for the part of the claim in excess of the limits of your basic liability policy or pay for certain losses that are not covered.

We typically recommend you carry 2-3 times your net worth in an umbrella policy.  The maximum coverage for most is $5M which would likely cover the legal fees of the named attorney in a law firm to handle your case.  This is a relatively affordable protection measure and is especially critical for those in professions who may be more likely to be sued.