In the wealth management arena, insurance is, far and away, the most criticized.  Jerry feels this is due to the fact that “in many cases, insurance has been a product sold to a client rather than a potential solution to a situation involving an advisor and a client with an issue.  While insurance comes in many forms and can get quite technical, I think it’s important that people understand the most basic fact about insurance:  it is nothing more than a transfer of risk from you to the insurance company.  The more risk you wish to transfer from you to the insurance company, the more it will cost.”

While it is not a popular topic discussed in wealth management, it must be addressed due to the responsibility to those we leave behind.  Jerry believes there are five reasons for life insurance, and all involve the objective to protect and preserve of wealth.  “First, life insurance is needed for replacement income.  Usually, people who say they don’t need life insurance simply believe they don’t need replacement income because they are now wealthy, or their children have left the nest,” says Jerry.  But in many cases, when you don’t need life insurance for a replacement income, the second reason you need life insurance becomes even more important – liquidity to pay estate taxes upon the death of the second spouse.  If there are no cash assets to pay estate taxes, then the heirs must liquidate other assets – stocks, bonds, real estate, or family businesses – to raise cash to pay the estate taxes.  This can be a very large burden placed upon the children of the deceased parents during a very difficult time in the children’s lives.

Additionally, Jerry cautions that it is important for these life insurance policies to be owned either by an irrevocable life insurance trust or by the descendants of the insured so that the life insurance proceeds themselves won’t be subject to estate taxes, thus eliminating approximately half of the proceeds that would otherwise go to the heirs to pay the taxes due.  Of course, individuals should always consult with their professional tax and legal advisors regarding their situation.

The third reason is to fund buy-sell agreements.  If an individual owns a closely held business, and he or she plans to have it sold after his or her death, their surviving family members must deal with considerable risk – who will buy the business?  How much will they pay for it?  Where will the money come from to buy it?  A buy-sell agreement that states who will buy the business, the price they will pay for it, and which is funded with life insurance on the current owner’s life, provides an understanding to the current business owner that his or her family business will be sold equitably.

A fourth reason for life insurance is called key person insurance.  This type of insurance protects against a business’s demise after the very important or key person of this business dies prematurely.  The insurance proceeds allow the company to plan the transition of the business without this important person.

A fifth reason for life insurance flows from the previously discussed key person.  Jerry explains, “If the key person who had the insurance on his or her life lives to retire, the cash value and the policy can be used to provide some retirement benefits or deferred compensation to that key person.” 

Another important issue regarding life insurance is analyzing the existing policies owned and assessing whether new policies would provide additional benefits for the same premium or the same benefits for lower premiums.  With people living longer, actuarial tables are changing, allowing life insurance costs to decrease.  Jerry strongly believes that any life insurance policy purchased several years ago or more should be comprehensively reviewed to ensure it still aligns with the client’s goals. 

Investors should consider carefully the fees and charges of features associated with new insurance policies against the costs of existing policies.  Also, investors may be assessed a surrender charge for terminating an existing policy while also starting a surrender period for the new policy.


Long-Term Care Insurance

Perhaps the most discussed, yet least understood, area of insurance is long-term care insurance.  As a society, we are living longer, and we must be aware of not only the quantity of life, but also the quality of life.

Long-term care insurance provides payment for extended professional care when we are no longer able to care for ourselves.  With long-term care policies, individuals must examine and understand the elimination period and the benefit-paying period definitions.  The elimination period is the amount of time before benefits begin.  The longer the elimination period, the less the premiums are today; and the shorter the elimination period, the greater the premiums are today.

The benefit-paying period is the length and amount of benefit that is paid.  The benefits for long-term care policies are typically purchased either in dollars of daily benefit or gross lifetime benefit.  For example, some policies may carry with them a $200 per day benefit payable to the insured should the individual be unable to perform at least two activities of daily living, which may include bathing, dressing, feeding oneself, moving from room to room and/or in and out of bed, toileting, and continence, or have a cognitive impairment.  Because long-term care coverage is usually for those who are older, it’s important to look into the appropriate benefit-paying period purchased.

Naturally, the longer the benefit paying period an individual purchases, the higher the premium payments.  Many policies carry a lifetime limit – an example may be a total of $400,000 over the insured’s lifetime.

“Earlier in my career, I felt that many of my affluent clients, having a large buildup of assets, should simply ‘self-insure,’ meaning in the event they would need professional long-term care, their surplus assets would be used,” says Jerry.  In the meantime, they would not have to pay long-term care premiums.  But, as I have seen cases unfold, I have seen financial legacies lost and terrific burdens placed on families.  In the end, long-term care insurance is not only for the insured, but for all those the insured loves.”

Additionally, the insurance industry has been very creative over the last several years, making the argument for self-insuring less compelling. Today, many carriers offer hybrid policies.  For example, if an individual took out a long-term care policy and paid premiums over the years but died without ever needing long-term care, then the policy would pay a death benefit covering most or all of the premiums paid.  In this instance, the only thing the estate would have lost is the time value of money that was used to pay the premium payments.