Much of wealth management can be tied to things that our clients WANT to talk about: saving for retirement, children’s education, business succession planning, charitable donations or gifting, to name a few. However, one conversation that needs to be had is not always the most fun: Insurance.No matter what stage of life you are in on your own wealth management journey (Accumulation, Preservation, or Distribution), Risk Management is a foundational piece that must be taken care of as a part of any carefully crafted financial plan. Life, Disability and Long Term Care insurance can be vital tools when securing your “good life.”
Listed below is an overview of those three insurances. It is important to note that this list and overview is not exhaustive. Insurance can be incredibly nuanced and tailored with bells and whistles that can cater to many different financial and health situations.
Life insurance can be an effective resource for many things such as income protection, wealth-building, or estate planning. There or four main types of life insurance: Term, Whole, Universal and Variable.
- Term: Term insurance is just that — insurance for a set term, usually a variable in years of five, ranging from 5 to 30 years. Most often with a fixed, level premium. The policy stays in effect as long as the premium is paid and expires at the end of the term. Should you still have a need for life insurance, a new exam and application will need to be taken.
- Whole: Whole life, or permanent insurance, is insurance that will pay a death benefit regardless of how long you have the policy. There is also a cash value component to it. Premiums are level for the life of the policy. It is typically more expensive than term.
- Universal: Universal insurance is also a permanent life insurance policy; however, it offers the use of flexible premiums and can even offer flexibility to adjust coverage amounts, though adding coverage usually requires additional underwriting. The cash value component can sometimes be tied to a financial index (Indexed Universal Life or IUL). It is more complicated than straight whole life policies.
- Variable: Variable is also a type of permanent insurance. The cash value is invested into investment funds. It is considered a securities contract.
Disability insurance can allow you to replace income, in the event that you are physically unable to work. There is both Short and Long Term Disability.
- Short Term: Provided through an employer. Covers income replacement for a short time frame, typically 3 months to a year, depending on the terms of the contract.
- Long Term: Long term disability replaces income after an elimination period, usually 90, 180, or 365 days. It replaces income up to a certain level for a set number of years, or to a certain age such as 65. It is important to note that LTD paid for by an employer is still considered taxable income. However, benefits from a LTD policy purchased individually comes to you income tax free.
LONG TERM CARE INSURANCE
Long Term Care insurance is designed to cover the cost of long term care needs, such as Stay at Home care, Assisted Living Facilities, or nursing homes. They are usually paid on a reimbursement basis. Similar to a disability policy, there is usually an elimination period and then a set number of days, years, or dollar amount that the policy will provide coverage. Over the years, LTC has evolved and there are more types of policies that can provide protection. Here are two of the most common:
- Traditional: Covers your long-term care needs on a reimbursement basis, after an elimination period, for a set time or amount.
- Life/LTC Hybrid: These have become more popular through the years as they have been developed and refined. Usually purchased with a lump sum/single premium, these policies provide both life insurance coverage, as well as a pool of money to use for LTC, if needed.
So what type is best? What amount is right? Do I even need this? These are all questions that should be asked and discussed with a professional advisor. To read more insights about life insurance, I encourage you to read my colleague's blog, The Life Insurance Riddle.
Remember, the above list is only an overview, and a trusted advisor can help you navigate the ins and outs of insurance policies to help make decisions that are best for you and your situation. So, while it may not be the most fun to discuss, making sure your risk management portfolio is in good order can help make those exciting wealth management discussions that much more enjoyable.