Who could have predicted all the different kinds of risks we’d face today. As we add in the aftermath of COVID-19, what other futures concerns should we be planning to mitigate?
Today’s Financierge takes on these ever-changing realities of risk that affect our money, our family, our businesses, and everything in between.
Do you have a plan to manage the many risks you will face in this life? Well, fortunately for you and yours, this very issue is a large part of the advice your financial advisor is trained to provide you.
In my business, this area of practice is called Risk Management.
What Part of Your Financial Life is under Threat?
Risk management strategies are born out of eliminating or reducing identified threats unique to you.
Because this list of risks is nearly endless, how does one combat or manage these risks? One tool that I have seen to be very effective is the use of INSURANCE. We all know what insurance is meant to provide, right? It is intended to safeguard us, at least financially, should certain things happen. And because ‘anything’ can happen, there is insurance for everything. Most of us understand the need for life, health, disability, and auto insurance. These are rather a standard course of doing life kinds of policies that most of us own that we will discuss to some extent today. But in my practice, I’ve also come across some interesting threats my clients have asked me to manage. Let’s look at a few:
Investment loss is a real risk when investing. But there are ways to insure or ‘hedge’ against stock market losses. This kind of insurance isn’t a policy you buy from an agent; it is part of your portfolio strategy you design with people like me. We do this through a method called diversification. By investing in a variety of assets, the loss one might suffer in the decrease in one stock will be offset by the increase in another. For example, one type of investment that has a kind of insurance built-in is an annuity. Oddly enough, an annuity is a contract with an insurance company where they GUARANTEE to pay you back on the money you’ve paid them at some later point, hopefully with some form of a greater return of what you’ve paid them. If you’re concerned about your investments being lost, you should discuss this very fear with your advisor.
Property loss deals with your home, auto, art, and jewelry. These items are all subject to theft, fire, earthquakes, flooding, and other risks. Your property insurance must address these risks. For example, did you know that if you rent out your home and don’t have landlord insurance, you could be uninsured? Did you know that some policies don’t cover full replacement value? Did you know that you may not be covered for some fires, earthquakes, floods, and other disasters? The point I’m making is that you should not assume that if you have a particular property loss insurance policy, that it covers everything under the sun. Moreover, you might be paying for insurance you may likely not ever need.
Personal liability cost is covered by casualty insurance should you be found to be legally responsible for an accident that causes injuries to another person or their property. Casualty insurance is a broad category of insurance that deals with a lot but may not cover your total net worth. This is why I recommend an “umbrella” liability policy to protect the depth of your assets. Nearly all insurance policies have a limit to what they will payout, and thus the rest, should you be held ‘liable’ for someone’s injury, is part of the full umbrella coverage I often recommend.
Estate Liquidity is another risk area where you can use insurance. For example, for 2020, you will pay a 40 percent federal estate tax on the amount your estate is over $11.58 million per person. If your estate comprises mostly illiquid assets like property or a business, paying taxes might be an issue since they are due nine months after death. One risk management solution is to create liquidity for estate taxes by using an irrevocable life insurance trust funded by life insurance. Think of it as funding a life insurance policy to develop future liquidity that grows and distributes tax-free.
Cyber Security and Identify Theft is a real and growing threat to us all. You can do many things to protect your computers, networks, and data, such as keeping software current, installing anti-virus software, and using strong passwords with dual authentication. Still, it might be prudent for you to buy cybersecurity and identity theft insurance. Some credit reporting agencies provide limited identity theft insurance, along with credit and identity monitoring services. At the Bahnsen Group, we work closely with some companies who provide high level cyber and personal security on a global stage, perfect for those who travel extensively for business or pleasure.
Business Continuity is an area that many of my clients seek my guidance. While businesses have a suite of insurance coverage for professional liability, property, product, worker’s compensation, and business interruption insurance, one area of substantial risk has to do with key people in the company. What happens when an owner dies or gets disabled? One solution could be the use of insurance in a buy-sell agreement to buy out partners upon death and keep the business moving forward. Like leaving a legacy of your wealth to your family, business continuity planning is designed to leave a desired business legacy of assets and control to the right parties.
The Bottom Line
Most people understand the simple concept of insurance, some don’t like it, but everyone is thankful they have it when they need it. Risk management is a valuable component of your family wealth management strategy. It is critical to identify, assess, and close the gap on risk. It is also an ongoing, lifelong process that works in concert with your goals and strategies as your risks change over time. With so many dangers in the world, let’s work together to assess your risks, review your insurance portfolio, and build a plan to protect your family, wealth, and business.
Please reach out to me at firstname.lastname@example.org if you have any questions, or I can serve you in any way.
Thank you for listening, and may you and your family be blessed with health, prosperity, and wisdom.
Warm and best regards,
Don B. Saulic, CPA, CFP®
Managing Director, Partner