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Risk Planning


Risk management is the foundation of a solid wealth management plan.  Without thoughtful and comprehensive risk planning, your financial future could be badly damaged by an adverse outcome that happens to good people once in a while.

Effective risk management involves planning for the unexpected and satisfies the question:  "What happens to my family should something happen to me tomorrow?"

Risk avoidance is the best risk management program, but when external risks are inescapable and material, insurance is the best way to safeguard your wealth through risk transference to a third-party.

While commercial insurance is often the most economical way to mitigate financial risk, the purchase of insurance should be the result of a financial planning exercise to determine the appropriate amount of risk protection.  Old selling rules of thumb like "buy life insurance equal to ten times your salary" is not the best way to purchase something as important as income replacement and survivor protection.

We employ a comprehensive risk planning process that addresses the key risks to your financial future and help you determine the appropriate amount of risk protection to purchase – and not a dollar more.


Term Life Insurance

Of the two major categories of life insurance – term and cash value - term life is the more cost-effective risk management tool.  Term life insurance essentially allows you to rent the death risk protection for a certain number of years.  The timeline is usually your working years and the coverage affords important protection for your family or business from the financial hardship caused by the death of a breadwinner or key-person.

Term life insurance is the the best option to protect against the risk to achieving specific goals – funding college for your children, funding a survivor benefit for a spouse, retiring mortgage debt or even funding a buy-sell agreement between business partners – that has a foreseeable timeline. 

For situations where the risk timeline is less clear, adding a conversion feature to the term life policy that allows the policy holder to convert it to a cash value policy without evidence of insurability is a flexible planning strategy.

Since the life insurance carrier will be relieved of paying a death benefit at policy termination, term life insurance is the most inexpensive way to purchase a substantial amount of death benefit.   In fact, term life insurance is an excellent value when you consider the significant of income-tax free death benefit you can purchase for the premium dollar.


Cash Value Life Insurance

Permanent – or cash value - life insurance is a versatile tool solving a host of financial planning problems.  Cash value life insurance has evolved over the years from traditional whole life to an array of sophisticated flexible premium policies that are part risk management and part investment.

A distinguishing characteristic of cash value life insurance is the opportunity to build equity in the policy over time that is available to use during your lifetime on a tax-advantaged basis.  For example, a significant portion of the accumulated cash value in a permanent life insurance policy can be withdrawn on a tax advantaged basis.  The growth of cash value generally occurs on a tax-advantaged basis so long as the policy remains in force.

All forms of cash value life insurance must be managed to make sure the policy cash value and periodic premium contributions are sufficient to support the policy over your life expectancy.

Another attribute of cash value life insurance is that the "permanent" death benefit to be paid to your spouse, heirs or charities at your death.  Cash value life insurance can be quite valuable if estate liquidity is a financial goal.  Paying death taxes and other estate expenses, buying out a business partner's estate, discharging debt or balancing inheritances among children are just a few examples of how cash value life insurance can be a good estate planning tool.


Disability Insurance

What is your most valuable tangible asset?  It is not your investment portfolio, your farm, business or your home - it is your ability to earn a living.  Consider a forty-year old male who earns $75,000 per year with an expected retirement age of 65; the future economic value of his accumulated income approaches $2.0 million alone, ignoring future raises and the future value of retirement savings over that time span.

Many high-achieving people are cavalier about protecting their income generation ability, even while piling on life insurance death benefit.  The reality is that you more likely to become disabled than to die prematurely, and the odds of becoming disabled are higher than you might think.  In fact, a forty-year male has a 50% chance of becoming disabled for more than three months before age 65.  Worse yet, if disabled for at least three months, this same fellow has a 50% of being disabled for life.

Insufficient income protection is a key reason why many families encounter severe financial hardship when a breadwinner is injured or sick and can no longer support their standard of living. 

Finally, Social Security disability benefits exist but can be quite difficult to qualify for.  Employer-sponsored group long-term disability insurance plans are helpful, but generally do not produce enough after-tax income to protect your standard of living. 


Long Term Care Insurance

The impact of medical advances increasing our life expectancy has staggering financial planning consequences.  The notion of a person spending thirty plus years in retirement creates presents a real financial planning challenge, especially in terms of funding the cost of professional elder custodial care.  It is estimated that 40% of all people that reach the age of 65 will enter a nursing home during their lifetime and many will live there for years. 

Elder care planning starts with the desire to maintain a dignified existence once you have lost the ability to live independently.  It also considers your tolerance for reducing your spouse's quality of living and the risk of disinheriting your children by consuming your wealth on elder custodial expenses. 

Long term care is the term to describe a variety health, personal care and social services for persons chronically disabled or infirm.  Long-term care may include services like nursing home, assisted living, home health care and adult day care. 

There are no financial shortcuts regarding elder care planning.  A reverse mortgage can be an effective source of cash for elder care purposes, but it is an expensive and suffers other drawbacks.  Medicare offers almost no nursing home benefits and Medicaid requires you to spend down of most of your assets to qualify for restricted facility benefits, definitely not an ideal elder care plan.

Long-term care insurance is expensive, prohibitively so at certain ages, and the underwriting is rigorous.  Generally, the best profile for purchasing long-term care insurance are reasonably healthy folks in their fifties with a meaningful financial net worth looking seeking long-term wealth protection.


Health Insurance

It has been said that the first wealth is your health.  Indeed, it is difficult to plan your future if health concerns are an issue.  However, plan you must, especially if health issues may impact your quality of your life, either now or in the future. 

Rising health insurance costs is a major financial problem for employers and employees alike and has also become major retirement planning challenge.  Access to affordable health insurance can influence your ability to change jobs or to start a business and it can even drive the timing of your retirement before Medicare eligibility (age 65).  

The reality is that health insurance planning has become an important part of a comprehensive financial plan, especially when early retirement is a priority goal.


Personal Liability

Your child sends a libelous e-mail and is sued. You serve on the board of directors of a non-profit organization and a disgruntled employee sue over a wrongful termination claim.  Are you personally liable? 

Personal liability is an underappreciated financial risk.  Next to jointly-held marital property, the best personal liability risk management strategy is transference by purchasing personal umbrella liability insurance. 

An umbrella liability policy is not just for the wealthy — they are for anyone with assets at risk if they are held responsible for a serious tort action.  It is a separate liability insurance policy that supplements the liability coverage of both your homeowners and automobile insurance policies.

Personal liability insurance offers coverage not found in your auto and homeowners policies, including false arrest, false imprisonment, malicious prosecution, defamation, invasion of privacy, or eviction.

However, a personal umbrella policy does not cover claims arising from business endeavors.  A separate business liability insurance policy with adequate policy coverage limits is required.
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Securities offered through Cambridge Investment Research, Inc., a Broker Dealer, Member     FINRA/SIPC.   Investment Advisory Services offered through Cambridge Investment Research Advisors, Inc.  Cambridge and Harvest Rock Advisors, LLC are not affiliated.  Cambridge does not provide tax or legal advice.



This communication is strictly intended for individuals residing in the state(s) of DE, FL, IL, KY, ME, MD, NJ, NY, PA and VA. No offers may be made or accepted from any resident outside the specific states referenced.
 


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