Risk Management
Webster's Definition:
Risk - exposure to possible loss or injury
Management - judicious use of means to accomplish an end
When we hear the words "risk management" most of
us think, Insurance. That is one way to lower our exposure to possible
loss or injury. Another way might be to diversify our investments into
different investment vehicles thereby lowering our overall chance of
loss or doing some estate planning to increase the chance that more of
our assets go to our heirs.
I am going to spend most of my time here, however,
focusing on insurance. I will touch on other ideas as they come up.
Insurance is used for two main purposes; replacing
lost income or assets and for estate building and planning. There
are may other uses for insurance but when you look at the ultimate use
you will find that it falls into one of these categories. Let's
look at some typical insurance uses.
Property & Casualty Insurance
Protecting the value of our property is a primary use
of insurance. Property and casualty insurance is used to cover our
homes, cars and businesses from loss caused by theft, fire, flood and
personal damage. Our property and casualty insurance also contains
protection against personal injury caused on or by our property.
Life Insurance
Life insurance is used to provide or replace dollars
for our families and businesses that are lost by the premature death of
a loved one or employee. Life insurance can also be used to
accumulate dollars to be used for retirement, a business buy out or to
pay taxes on a large estate.
There are 2 basic forms of life insurance; term
insurance and cash value insurance. When it comes right down to it, all
insurance is made up of term insurance. If you are just looking to
provide a death benefit for your family or business, term insurance is
the least expensive way to do that. You might think of this type of
insurance as a temporary insurance need. When your children are grown
and your major debts are paid of or you have accumulated enough assets
to cover all of your liabilities, you don't need the coverage any more.
Term insurance is just insurance so all you are paying for is the death
benefit coverage. The best way to buy term insurance is to purchase a 20
or 30 year policy so you know that the premiums will not go up over
time.
Cash value insurance is term insurance with a side
savings fund attached. You would buy this if you knew you would need
lifetime coverage (if you have a child with special needs for instance)
or if you wanted to take advantage of the tax-deferred growth and
tax-free withdrawal privileges inherent in these types of policies.
The most
unique feature of permanent life insurance is that under Section
72(e) and 7702 of the Internal Revenue Code the accumulation of
cash inside the insurance contract is tax advantaged. Not only
can the cash value accumulate tax free, but the cash can also be
accessed tax free. This makes these types of policies ideal for
creating a private retirement plan and putting large sums of
money into them over a short period of time.
If you are
looking for a policy that will allow you to accumulate large
sums of money over a short period of time and access that money
tax-free for retirement, college or personal needs you should
look at the new Equity Indexed Universal life Policies now
entering the market.
Health Insurance
Health insurance is used to reduce the risk of severe
and long term illness that could potentially deplete our assets.
We all know the value of having health insurance and the cost of this
coverage. Since most of us are covered through our employers we
are sometimes less engaged in the potential for cost savings than those
of us who purchase our insurance outright. If you are self employed you
should look at an HSA or health Savings Account. This type of policy has
a high deductible and you pay for most service out of pocket but it can
be half the cost of a major medical plan. The idea is for you to take
that savings and put it into a health savings account that you can use
to pay the deductibles and co-pays tax-free.
Disability Insurance
You are 3 to 4 times more likely to be disabled during
your lifetime than you are to die. In addition, a disability can
actually be more costly than death since your medical costs increase,
your income decreases and all of your other living costs remain steady.
Long Term Care Insurance
If you are over 50 years old you should be considering
long term care insurance. If you or your spouse were to need to go
into a nursing home or require long term home health care you could see
your assets depleted in a very short time. The average cost of a
nursing home can be $30,000 to $40,000 per year and if you are not
protected you could see much of your income and most of your assets gone
before too long. Look for a plan with inflation protection since
it may be many years before you actually need to use this insurance.
I suggest you speak with someone who specializes in this product as the
features differ greatly and you want to have a policy matched to your
needs. I can refer you to someone who does this full time.
