Term Life Insurance
Term Life Insurance policies provide coverage for a specified-period and a predetermined premium. Term life insurance generally provides the largest death benefit protection amount (face value) for your premium dollar; however, this type of policy does not build up cash value.
Term policies come with a variety of payment and coverage options. A YRT (yearly renewable term), also known as ART (annual renewal term) policy covers the policy owner for a specific amount with premiums starting out low and increasing on an annual basis. Level premium term comes in many varieties usually issued in five year increments; five, ten, fifteen, twenty-year level premium term. The premium stays level for the specified amount of years.
There are also increasing term and decreasing term policies referring to the death benefit increasing year over year or decreasing year over year.
Universal Life Insurance
Universal Life Insurance is a flexible life insurance contract. Universal life provides the policy owner the flexibility to adjust policy premium payments, adjust the face amount and the duration of coverage. Universal life insurance contracts came of age in the early 80’s when interest rates were high and traditional policies were somewhat limited and inflexible.
Universal life contracts have the ability to build up cash value. Cash Values are the total premiums that are paid for the policy less the deductions for expense charges and the cost of insurance. The remaining premiums paid for the universal life insurance go into a policy account that earns interest.
The universal life policy is similar to whole life insurance with the added flexibility to adjust some of the key factors within the contract. The value of this type of policy is in its flexibility. This type of policy shifts some of the risk for maintaining the death benefit from the insurance company to the insured.
As with traditional policies, this type of policy allows for tax-favored cash value buildups and income tax free proceeds at death. Please keep all of these issues in mind when making your decision as to which type of policy to purchase.
Whole Life Insurance
Whole life insurance covers you for as long as you live if you continue to pay your premiums. A whole life contract also has the ability to build up a cash value account. All values related to the policy (death benefits, cash surrender values, premiums) are determined at policy issue, for the life of the contract, and cannot be altered after issue. Therefore, the insurance company assumes all risk of future performance versus the actuaries’ estimates. If future claims are underestimated, the insurance company makes up the difference through its reserves.
There are two major types of whole life insurance policies, participating and non-participating policies. The main difference between these two types of policies is the way interest and or dividends are credited within the policy and whether the policy was issued by a mutual or stock insurance company.
With a whole life contract, you generally pay the same amount or a level premium for as long as you live. When you first take out the policy, premiums can be several times higher than you would initially pay for the same amount of coverage using a term contract. However, they are smaller than the premiums you would eventually pay if you were to keep renewing a term policy year after year.
Disability Insurance (DI)
Disability insurance is a simple form of insurance that ensures you are financially covered if you are unable to work due to a disability caused by an accident or sickness. It provides an income while you’re out of work to help you avoid debt. However, disability insurance is one type of insurance that very regularly is overlooked. Many full time employees have some basic disability coverage through their employer. This basic coverage is usually limited in the percentage of income it replaces and is very often restrictive in coverage and duration.
A disability is one of those things that people think will never happen to happen to them. However, statistics show that 30% or more of employed people experience some form of disability which causes them to need time away from work, whether that is short term, long term or recurring.
To put it simply, not taking out a disability insurance contract is a risk. People who own disability insurance have peace of mind and if they experience a disability they can be free of financial stress and concentrate on their treatment and getting healthy.
Long Term Care Insurance (LTC)
According to a survey by Sun Life Financial (SLF) it was estimated that in the US at least 60% of people over age 65 will require some long-term care services during their lives. The survey also found that 84% don’t feel financially prepared for a long term care situation; although just 36% of those surveyed believed that they would need this type of insurance coverage. There’s a major disconnect between people’s need for LTC and the preparation for that need.
Long Term Care insurance can provide for personal and custodial care for an extended period of time. In order to activate this coverage an individual would need assistance with at least two activities of daily living (ADL’s). There are six ADL’s which include: bathing, dressing, eating, transferring, toileting, and continence.
A common misperception misconception of long-term care is that it’s the same thing as nursing home care. While care may be received at a nursing home, it can also be used at an assisted living facility, adult day care, with respite services or for home-based care. Medicare and private health insurance programs don’t pay for the majority of long-term care services that most people eventually need.
LTC is a tool that can help preserve and protect financial assets, provide flexibility to choose the type of care, offer the ability to choose where care is received, help to ensure high-quality care, and provide financial and emotional support for the family.
An annuity is a contract between the client annuitant/owner, and an insurance company, the contract issuer. Simply put an annuity is a systematic liquidation of an asset. This translates to a client receiving a guaranteed income from an insurance company for a specified number of years or for a lifetime. Annuities were developed by life insurance companies to provide income to individuals during their retirement years.
An annuity allows the earnings to be tax deferred until the client begins to receive payments from the insurance company. Over a long period of time, your investment in an annuity can grow substantially larger than if you had invested money in a comparable taxable investment. Like a qualified retirement plan, a tax penalty may be imposed if you begin withdrawals from an annuity before age 59½. Unlike a qualified retirement plan, contributions to an annuity are not tax deductible, and taxes are paid only on the earnings when distributed.
Annuities have an accumulation (or investment) phase and the distribution (or payout) phase. The accumulation (or investment) phase is the time period when the annuity is growing by earning interest on a tax deferred basis. Annuities can be purchased via a single premium method or with periodic investments over time.
The distribution (or payout) phase is when the owner starts to receive distributions from the annuity. As a client you can choose to receive the money in a lump sum, unscheduled withdrawals or through a systematic payment option. An annuity owner can also elect to receive the annuity payments over two lifetimes, this is referred to as a joint and survivor annuity. Under a joint and survivor annuity, the insurance company promises to pay an amount of money over two lifetimes, usually husband and wife, on a periodic basis (monthly, quarterly, annually).
An immediate annuity is similar to the type outlined above. However, the client purchasing an immediate annuity chooses to start their income stream within the first year of purchasing an annuity.
There are several types of annuities, such as fixed, indexed, differed, immediate, single premium, multiple premium, qualified, non-qualified just to name a few. However, the two most important things to remember about an annuity is that they allow for a lifetime income and they grow on a tax differed basis.
Estate planning is a team sport so don’t go it alone. Solicit help from all the professionals you trust. It could be your registered investment advisor, accountant, attorney, financial planner, insurance agent, banker or other professionals that you work with. The two key elements here are, professional and trust. Most estate plans are developed by you and a team of trusted professionals.
Remember all plans should have an objective and in many instances those objectives change as people age and their family, business, social, health and financial circumstances evolve. Make a plan and keep it updated as life develops and progresses.
Business Succession Planning
Family businesses are sometimes, more often than not, very complicated and hard to understand especially for those not affiliated with the business. Therefore, business succession planning is even more important for the closely held family business.
It is sometimes very difficult to transition a closely held family business to the next generation while simultaneously fulfilling the needs of the current newly retired business owner. Very often those interests conflict.
Family differences between younger and older generations can be quite complex. Divorce, death, different social values, ownership percentages, health issues and old resentments can be major contributors to disputes between family owned businesses.
Engage a team of trusted professional advisors. Update the current plan to reflect where the business is today and where the owners want the business to go. Come to an agreement on the businesses vision, goals, and objectives.
Evaluate the leadership, ownership, and involvement of all key stakeholders both family and non-family members. Establish reasonable retirement expectations and timelines for the current generation of owners. Pinpoint the leaders, managers and crucial staff and set business goals of next generation.
Ensure the plan is comprehensive, realistic and documented in writing. Make sure the plan is properly communicated to all family and non-family stakeholders. Update the plan to reflect any changes that will influence the transition of the business.
Not every closely held family business will survive to the next generation. However, proper planning, open communication and common goals will help to overcome many obstacles that stand in the way of successful business continuation and succession.
Business Continuity Planning
Very often there is some misunderstanding between business succession and business continuity planning. Many think they are the same thing with different names because they are often discussed and planned for simultaneously. However, although there are some similarities they are different.
A business succession plan is a process for identifying and developing individuals, most often internal to the business, with the potential to fill key business leadership and ownership positions upon the retirement or transfer of company ownership. The succession plan usually takes place over a longer period of time.
A business continuity plan is a plan to help ensure that business processes can continue during a time of emergency or disaster. Such emergencies might include a natural disaster, terrorist attack or the premature death of an owner or key individual within the business. The event or combination of events prevents the business from operating under its normal conditions and standard practices. The continuity plan usually takes place over a shorter period of time.
If your organization doesn’t have a business continuity plan in place, start by assessing your business processes, determining which areas are vulnerable, and the potential losses if those processes go down for a day, a few days or a week.
As you create your plan, consider talking with key personnel in organizations who have gone through a disaster successfully. People generally like to share their experiences and the steps and techniques they employed that were useful. Their insights could prove incredibly valuable in helping you to craft a solid business continuity plan.
Risk is about uncertainty. If you identify that uncertainty, then you can work to reduce and manage the risks that are inherent to the industry, and in particular, your business. Applying a systematic risk management process to your entire enterprise will enable you to have a more effective business which in turn will create a more positive experience for you, your employees and your clients.
- Identify the Risk; Identify risks that might affect your business.
- Analyze the Risk; Analyze the consequence of each risk and its potential impact on your business.
- Evaluate or Rank the Risk; Rank the risk by determining the likelihood of it occurring. Then make decisions about whether the risk is acceptable, or whether it is serious enough to warrant treatment.
- Treat the Risk; Set a plan to treat or modify these risks to achieve acceptable risk levels.
- Monitor and Review the Risk; Continuously screen and review your businesses risks. This ensures your business to be out in front of any unplanned events.
The risk management process also helps to resolve problems when they occur, because those problems have been envisioned, and plans to treat them have already been developed. The end result is that you minimize the impacts of risks and you maximize your chance to capture the opportunities that naturally present themselves.