My family has a long history with insurance.
My dad sold insurance for Prudential for over 30 years back when a family’s agent would come to their house to collect premiums and they would sit and talk about the things of life. His clients were his friends or soon-to-be friends, neighbors and family. He taught my brother and I to treat people like people and not simply a means to an end. His code was all about respecting the individual and showing them that they matter enough for him to treat them with dignity and to act with integrity. These were all things that are part of my person to this day and I will be forever thankful to him for it.
My brother works for a large healthcare provider and has been with that company in its different manifestations, for over 20 years. This is extremely unique in an industry that typically experiences high turnover. I admire his loyalty and diligence. He also treats people with dignity and respect. Again, these are lessons from dad.
I, personally, have been using insurance with clients for over 10 years. I started out specializing in Medicare health plans, but soon broadened my offering and advice to include all manner of insurance. At Touchstone Capital, we consider a client’s insurance portfolio one of the major pillars of a person’s financial plan.
However, you are probably wondering what this has to do with the do’s and don’t’s of using insurance in financial planning. It leads me to the first point I want to make. Trust me, if all you get out of this article is the first point, it will have been worth it.
Find a trusted insurance professional.
From misunderstood products to questionable advice, this financial tool can be tricky to get right when trying to weave it into a comprehensive financial plan. This is why my first suggestion is to find someone that you trust. Someone that truly has your best interests at heart. To me, this is one of the most compelling aspects of the way our firm does business and is the single reason I joined Touchstone Capital. We endeavor to put ourselves on the same side of the table as our clients at every opportunity, seeing the world through their eyes.
And so, for us, insurance is simply a tool in a very large toolbox. Albeit a very important tool, but one that must be seen in light of the client’s entire financial picture. If it makes sense, then we use it. If it doesn’t, we don’t. As simple as that. Find someone with that mentality and you will have avoided many of the mistakes people make when incorporating insurance into their financial plan.
In addition, you will also want to make sure that the financial professional with whom you are working is constantly evaluating and re-evaluating the different strategies and products on the market. We are regularly meeting with product vendors to hear what is the newest and best offering that their company brings to the table. If a previously used insurance product becomes obsolete, we ditch it in preference for the newer, better structured policy offering.
Make sure the proposed insurance is appropriate.
Clarify the objectives of the insurance. Whatever it might be, be definitive of what it is you want to accomplish. Perhaps it is to lock down a certain part of your exposure, whether it is healthcare, life insurance, tax exposure in retirement, etc. It could be a case where one spouse is in bad health and can generally assume that they will be passing before their mate and there is anxiety over how that surviving spouse will get by. Wow, that’s a loaded one right there and has led to many, many deep and meaningful conversations with clients.
Just as an aside, these are the types of conversations I love having with my clients. The kind where there is an actual connection that leaves both parties with genuine good will and trust for the other. Keep this in mind when you are finding and working with your advisor. Allow the relationship to blossom into something more than just a retail transaction. Both parties have a responsibility therein. Yours as the client is to open up to the best of your ability. Let your advisor truly know what it is that’s important to you and why. If the person that you are dealing with doesn’t seem to want this level of relationship, my recommendation is to find another advisor. Find someone that cares.
Next, identify the risk with precision. With clarity of your objective in hand, dig a bit deeper to uncover what is the real risk you are facing. What is it exactly that you are trying to protect against? Is it premature death? Could it be loss of income? Perhaps it’s the compelling need that you feel to leave a legacy or maybe just the desire for a tax-free stream of income in retirement. One of the mistakes that people often make when buying insurance as part of their plan is that they fail to truly capture the risk. They know that there is a need, but are unsure as to its magnitude being that it’s sometimes difficult to pinpoint or quantify. It needs to be measured accurately.
A trusted advisor can assist you in walking through all three of these steps (clarify, identify, measure/quantify). You want to make sure you accurately pair the need with the product purchased.
Managing the risk
Once the objective has been clarified and the risk has been identified and measured, we then need to manage that risk. How do we control it? How do we finance it if we decide to do so?
Risk Control – There are several ways a person can control the risk they find in their financial life. The most simple is to avoid the risk. Now, that might sound a little facetious but you would be surprised at how many times over the years this has been the solution. In fact, I can honestly say that when its proven to be the case, it has surprised both of us sitting across the table from one another. It’s not often the solution, but it still needs considered. A silly example might be that if you clarified the risk to be premature death and then further identified the risk as being premature death while sky diving…don’t skydive. I am tempted to put a smiley face emoticon at the end of that sentence, but I will resist.
A person can also reduce the risk. If a person feels they need to protect against the threat of a long-term care need being that there is a family history, they may decide to sock away as much money as they can during their last 10 years of employment. If they’ve measured the risk to be approximately $500K and they save an additional $300K during that time, they’ve reduced their risk.
Lastly, a person may decide to diversify that risk. The most common example of this would be to purchase different types of insurance from a number of different companies.
Now, I want to be clear, I am not being prescriptive with my above examples. I am merely trying to outline to you the ways people can control their risk. This article is meant to arm you with information so that you can start to ask the right questions and truly consider your insurance strategy in the grand scheme of your financial plan.
Risk Financing – This is where a person needs to consider what is their risk tolerance. Insurance planning is a very individual and personal endeavor. There are some people that have a great capacity to retain risk for themselves. They perceive the risk accurately and yet decide that they, and their plan, can handle it. This is perfectly fine if the decision is made with clarity and accuracy. What we try to avoid at all costs is to have a client make this decision without counting the costs.
So that’s the first way to finance risk, by retaining it. The alternative is to transfer that risk to someone else’s balance sheet. To allow someone else to shoulder the burden of a possible future need. This is the very essence of insurance planning, pushing the risk to an insurance provider.
Monitor the Risk
The last step in this process is to monitor the risks and the chosen solutions on an ongoing basis. Review your insurance strategy regularly to make sure it remains appropriate and is the best fit for your need. Ask the insurance company for in-force illustrations for whole life policies. These reports will detail for you how the policy is performing and will forecast its viability in the years to come. Periodically ask for an outline of coverage so that you stay up-to-date on any changes that may have occurred through the years. This is mostly for health plans as they can change from year to year with a notice to the policy holder. The bottom line is that this is your plan and you, and your trusted advisor, need to stay on top of it.
I truly hope that this article has helped someone along the way and I wish you well in all of your insurance adventures!
