Implementing the correct Insurance Plan into your Financial future is primarily a function of where you are at in the lifecycle, what financial goals you have, what legacy you want to leave your family and the lifestyle you want to live.
Individuals typically progress through three life cycle stages from the beginning of their careers to their deaths
- Asset accumulation
- The life cycle begins after a person completes his or her schooling and enters the workforce and typically lasts until ages 45-55 (high debt, low income)
- People in this stage typically have a need for Term Life Insurance and Disability Insurance as part of their risk management plan
- People in this stage often use Universal Life Insurance Policies as an Investment Tool for risk free retirement planning in addition to any IRAs or 401(k)’s, as well as a way to fund their children’s college education through tax free loans
- Conservation/risk management
- Typically lasts from 45-50 until retirement, earnings from employment have reached their peak, children enter and exit college, the outstanding balance on the client’s mortgage shrinks substantially, and savings increase to support retirement
- The need for Term Life insurance and Disability decreases
- Retirement planning becomes exponentially important so the need for Annuities and Long-Term Care Insurance are very high as well as Permanent Life Insurance (Universal/Whole) and Business Focused Insurance for Business Owners (Key Man and Buy-Sell Agreements)
- Distribution/gifting
- Begins near retirement and ends at death. Person generally begins to spend down his or her accumulated assets and may begin to transfer excess assets to family members and loved ones as gifts
- If you don’t have Long-Term Care Insurance at this point the need is very high and the use of Annuities to provide guaranteed income for the rest of life is important to supplement any Social Security payments you are receiving
- Life Insurance policies are often purchased to cover funeral/estate expenses at the end of life, preserve wealth accumulated by passing your assets to your family completely tax free through a life insurance death benefit and ensure any of your dependents (spouses, grandchildren) are financially able to continue their lifestyle after you are gone
- Determine the objectives of your risk management (insurance) program
- Can range from obtaining the most cost-effective protection against only catastrophic loss to protection of continuing current income after a loss
- Identify the risks you and your family are exposed to (primarily a function of where you are in the lifecycle)
- Personal risks that may cause the loss of income or an increase in the cost of living (untimely death, disability, health issues)
- Property risks (auto, home etc..)
- Liability risks (injury to another or to property)
- Evaluate the identified risks for the probability and the severity of the loss
- Only risks that have severe financial consequences but occur infrequently are appropriate to insure
- Determine and selecting the best risk management alternative
- Reduce
- Insure
- Avoid
- Retain
- Implement the risk management plan selected
- Periodically evaluate and review your risk management (insurance) program
Insurance Agents – legal representatives of an insurer and act on behalf of an insurer. Only permitted to sell the policies written by the companies they are agents of
- Most commonly used by the average person; have knowledge of the industry and usually will consult a broker for additional advice. Act as the relationship manager with the client
Insurance Brokers- legal representatives of the insured and act in the best interest of the insured. A broker may sell insurance polices from any one of a number of different insurance companies. Brokers do not represent the insurer
- Typically, most knowledgeable in the industry; work with a variety of agents, financial planners and financial advisors to provide advice on which insurance company and plan is best for their client but does not work directly with the client
Certified Financial Planners (CFPs) – financial advisor or planner who has earned the title of CFP© through extra accreditation. CFPs typically work with clients to both determine their financial goals and build a plan to reach them. CFPs often have specific focuses, such as tax planning, estate planning, insurance planning, investment planning and more
- Most expensive help you can get. Usually used by wealthy individuals to not only provide insurance advice but also investment planning as well. If they do not specialize in insurance planning will often rely on advice of a broker for help
Premium – the amount of money you will need to pay to keep your insurance policy active (in-force). These payments can usually be paid monthly, quarterly, semi-annually or annually
Rider- a way for an insured to customize a policy
Underwriting – the process of classifying applicants into risk pools, selecting insureds and determining a premium. An underwriter is responsible for evaluating risks and determining whether the risk is insurable or non-insurable. An underwriter groups risks into similar classes and assigns a premium or class rate to all members of the class, such that the premium is expected to cover all claims, operating expenses and produce a profit
Insured – the individual whose life is covered by the life insurance policy
Owner – the person who can exercise the economic rights of the policy and typically pays the premiums
Typically, when owner of a policy is different from the insured the insured is attempting to reduce estate taxes. (Example. ILIT – used to purchase life insurance so that the proceeds are not included in the gross estate of the insured)
Beneficiary – the person entitled to receive the death benefit
Grace Period – most life insurance policies provide a one-month span after a premium is due of the owner to pay an overdue amount before the policy lapses. Once a policy lapses the insured will be required to undergo additional underwriting to provide evidence of insurability to the insurance company
Insurance company ratings are important and consumers should attempt to purchase from companies with a strong likelihood of survival. If a life insurance company that issues a policy fails, all states have a guarantee funds run by the state insurance commission that acts as the payor. Each year, insurance companies that issue insurance pay a premium to the state guarantee fund.
Additionally, the National Association of Insurance Commissioners (NAIC) provides a list of insurance companies based upon a risk-based capital financial ratio analysis. It measures the financial health of an insurance company to promote solvency and avoid insurers from being unable to pay claims. The riskier the investments of the insurance company the more capital the insurer is required to maintain or they will face regulatory action including liquidating the company.
Although, it is possible for a life insurance company to fail the likelihood of it happening (especially to a large insurance company) is very slim.
It is for this reason that the best method to choosing an Insurance Company is to first evaluate what type of product you would like to buy based on your risks and needs. Then, evaluating which company has the best version of that product for sale.
This is extremely difficult for somebody without deep insurance industry knowledge to know. The products, prices and companies are constantly changing and there are a wide variety of options. This leads to most financial professionals that do not specifically specialize in the Insurance Industry recommending the company that they are most familiar with. This also leads to individual consumers selecting the companies they see the most in advertisements.
The company you choose could potentially be the difference in hundreds of thousands of dollars and is extremely important to your financial plan.