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Managing risk is a key factor in reaching your financial goals. Illness, disability or death can derail even the most successful individual's plans for financial security. If something unexpected throws you off course, are you and your family prepared?
Here is some information to help you think about how to use insurance as part of your overall financial plan. You may want to contact a financial professional to help you identify your options, understand the tax consequences of your choices, and obtain the products that will best help you achieve your goals.
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Getting started!
1. Assess your risk.
2. Know when insurance might be needed.
3. Understand what you're buying.
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| For more help with Insurance Planning, contact the Private Client Group
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1. Assess Your Risk
As your wealth grows, it is increasingly important that you think about how to manage risk and protect your assets. Risk management requires serious self-assessment. Here are some key questions to help you determine your risk and your potential need for insurance:
- Is my family's financial security based upon my ability to continue earning income?
Life and disability insurance can help your family remain in their home, afford a good education, pay necessary taxes and maintain a comfortable lifestyle despite a catastrophic illness or death.
- Is my wealth tied up in assets that are not liquid (i.e., a family business or farm)?
Insurance can protect heirs from having to liquidate assets (which are also the source of family income) to pay estate tax obligations.
- If someone in my family became incapacitated, would our assets be wiped out by long-term care expenses?
With Americans living longer and healthcare costs continuing to rise, the price of long-term care can devour an estate that has taken decades to build. Long-term care insurance pays uninsured medical expenses, allowing you to preserve your assets for the use you intended.
- Am I operating my business without a formal succession plan?
Closely-held businesses carry a high degree of financial risk when an owner retires, becomes disabled or dies. A buy-sell agreement funded by life insurance provides the cash to achieve the transition objectives of business owner(s) and provide for their families' future.
- Would my company's financial stability be impacted by a key employee's death or disability?
Key person life insurance creates a financial safety net while your business recovers from the loss of an employee, partner or owner who significantly contributed to the company's success.
- If I died tomorrow, would the government get more of my estate than my family?
Life insurance is often used to offset the cost of estate taxes. It also can be used to protect the value of IRAs and other tax-deferred investments that carry significant income tax liabilities when the account holder dies. Owning life insurance inside a wealth replacement trust is another way to offset estate and income taxes due at the time of death. This assures that your family or favorite charity receives the assets you intended for their use.
If you answered "yes" to any of these questions and you don't have the appropriate insurance, you may be exposing your assets to unnecessary risk. A financial professional can help you identify how to use insurance strategically to protect your assets.
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| For more help with Insurance Planning, contact the Private Client Group |
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2. Know When Insurance Might Be Needed
The more you have, the more you have to lose. Insurance is an important tool to help you meet sophisticated personal and business financial objectives.
Insurance for Personal Objectives
- Provide ongoing income for your family in the event of your disability or death
- Fund estate tax liability
- Replace wealth for heirs when assets are gifted to charity
- Transfer your wealth with the least tax impact
- Protect assets from the expense of long-term care needs
Insurance for Business Objectives
If your business accounts for a substantial portion of your income or wealth, you can protect your family by securing your business with proper insurance.
- Provide estate liquidity for the owner's family in order to fund business-transfer and estate taxes
- Provide funds to other owners to buy back business interests of deceased owners
- Equalize inheritance for children not active in the business
- Reimburse business for loss of a key employee due to death or disability
- Fund supplemental retirement plans using cash-value policies on owners or key executives
- Provide for repayment of a business loan or mortgage
Get an Insurance Checkup
If it has been awhile since you purchased your insurance, it pays to have a professional look over your existing policies with an eye to your current circumstances and future goals. Just as your objectives may have changed since you purchased your policies, so have insurance products changed. There may be a better way for you to accomplish your objectives today.
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| For more help with Insurance Planning, contact the Private Client Group
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3. Understand What You Are Buying
Insurance is one of the most effective wealth management tools available. Life, disability and long-term care insurance can protect and often enhance your assets when used in combination with other financial planning strategies. But be sure you understand what a particular insurance policy will accomplish. Here are some things to look for.
Life Insurance
Definitions
- Permanent Life Insurance: Permanent insurance policies may have many different features depending upon the type of policy. Premiums are typically higher than for term insurance because they include a "savings" element in addition to mortality costs. The main benefit of the additional premium cost is the build-up of cash value inside the policy. Your investment in the policy can grow free of income tax (unless withdrawn). While many permanent insurance policies are intended for an individual's lifetime, sometimes premiums are structured with the intention of eventually surrendering the policy and withdrawing its value for some other purpose (such as retirement).
- Term Life Insurance: Term insurance provides coverage for a fixed period of time. Once you reach the end of the term, you may not be able to renew the policy of you are not in good health. Premiums increase as you get older (because your mortality risk is greater). Term insurance does not benefit from cash value build-ups like a permanent insurance policy.
Checklist
- Assess your need for permanent versus term coverage, and how long the need will continue.
- Determine how much insurance you need in light of your family's income and liquidity requirements.
- Weigh the benefits of tax-deferred build-up of cash values in a whole life or permanent policy against the higher returns which may be achievable with other types of investments.
- Consider riders and options available to you, such as:
- Waiver of premium
- Accidental death benefit
- Supplemental term
- Family protection - children
- Extended maturity option
- Accelerated death benefit
- Access to cash values through policy loans or otherwise
- Premium payment options in case of disability
- Consider placing insurance in a life insurance trust for estate tax purposes.
Long-term Care Insurance
Definition
Long term care insurance provides for nursing home care, home health care and certain other medical and health care expenses so that families do not have to deplete their assets to provide good care for an extended period of time. It covers gaps left by inadequate coverages under Medicare, Medicare supplements and Medicaid programs. A number of relatively new policies now offer combined long-term care and life insurance coverage. These policies provide a death benefit for your heirs, but allow you to tap into that benefit while you are alive if you go into a nursing home or need home health care.
Checklist
- Assess whether you have the financial resources to pay for extended nursing home or in-home care.
- Review the policy to see if it is guaranteed renewable for life.
- Adjust the waiting period (also known as the elimination period) to your finances. If you have personal resources to cover the waiting period, you can reduce your premium outlay by having a longer elimination period.
- Check to see if the policy has an inflation rider.
- Review coverages for skilled, intermediate and custodial care.
- Verify that your policy covers Alzheimer's disease.
- Avoid policies which have a requirement that only covers care following a hospital stay.
- Review any pre-existing condition exclusions.
Disability Insurance
Definition
A policy that covers the risk of physical injury or illness that impairs your ability to earn income. The definition of "disability" will vary by policy. If your family income is dependent upon your earned income, it is important to have disability insurance.
Checklist
- Assess whether disability insurance is essential to your family's income and lifestyle.
- Understand the features of the policy before you buy:
- Waiting period restrictions
- Benefit period restrictions
- Definition of your ability to work: in "your own occupation" or any type of work?
- Ability to renew in cases of partial disability
- Cost of living adjustments in benefit period
- Whether Social Security is integrated into benefits
- The cost of "riders" (such as a cost of living adjustment) against the consequences of a disability policy without the rider
- Overall assessment - Is the proposed premium cost reasonable in light of the financial consequences of not having a disability policy?
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If you're not using insurance as part of your financial strategy, you're missing a great opportunity to maintain control of your lifestyle and assets, no matter what happens.
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| For more help with Insurance Planning, contact the Private Client Group
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Insurance Glossary
- Accelerated Death Benefit — Usually available at no additional cost, this enhancement pays a benefit during the life of the insured in the event of a terminal illness.
- Adjustable life insurance — Life insurance that allows the policyholder to change the face amount, premium and coverage period.
- Cash value life insurance — A life insurance policy that provides a death benefit but also accumulates cash value over time so that benefits could be paid out before death if the policyholder wished.
- Disability insurance — Insurance that pays benefits if the policyholder becomes incapable of working.
- Estate tax — Tax imposed on the transfer of property from a deceased to his/her heirs, legatees or devisees.
- Single-Premium Whole Life ( SPWL) — Single-premium whole life is permanent cash value life insurance that is bought with a single, large, front-end premium. Because only one premium is required to keep the coverage in force for the life of the insured, SPWL is the extreme form of limited-pay whole life.
- Survivorship Life Insurance — Often called second-to-die, last-to-die or joint life insurance, this is a contract that promises a death benefit payment only when the last of two or more named insured persons dies.
- Term conversion — Term policies can also be purchased with the right to convert to a cash value policy. The conversion usually does not require an additional physical exam or proof of insurability. This is invaluable if the insured's health has changed.
- Universal life insurance — Life insurance which combines the low-cost protection of term insurance with a savings component that is more like permanent insurance.
- Variable Life Insurance — Variable life insurance is essentially a cash value policy that allows its owner to use cash values to select among several mutual fund-type investments for the accumulation of cash value. Typically, the policy owner can choose among real estate, growth stock, and income-producing bond or money market investments.
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| NOT A DEPOSIT |
NOT FDIC INSURED |
MAY LOSE VALUE |
NOT BANK GUARANTEED |
| NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY |
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This information provided represents the opinion of U.S. Bank and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Investors should consult their investment professional for advice and information concerning their particular financial situation.
This discussion is intended to be informational only and is not exhaustive or conclusive. U.S. Bank and its representatives do not provide tax or legal advice. Each individual's tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.
Insurance products, including annuities, are available through U.S. Bancorp Insurance Services, LLC, U.S. Bancorp Investments, Inc., in Montana U.S. Bancorp Insurance Services of Montana, Inc., and Wyoming U.S. Bancorp Insurance & Investments, Inc. All are licensed insurance agencies and subsidiaries of U.S. Bancorp, and affiliates of U.S. Bank. Policies are underwritten by unaffiliated insurance companies and may not be available in all states.
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