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Life Insurance 101 – Uses of Whole Life Insurance – Part 4

Posted on October 23, 2014 by Comments are off

Jack Driscoll: Welcome back again everyone to another edition of All Things Financial. We’ve done a four part series here, today being the 4th part with Ian George we have as specialized guest with us. He’s an expert at life insurance and is the Brokerage Director in Mass Mutual Life.

Thank you very much for coming Ian.

Ian George:   My pleasure to be here.

Jack Driscoll: Well we talked about the last couple weeks. Ian first went over Life Insurance 101 basically – the different forms of life insurance.

 Number 2 session that we ran was based on Needs Analysis – How to on an elementary basis evaluate your needs for life insurance; how much you need; maybe even what type of life insurance you need.      And we did discuss there a little bit about beneficiary designations and be careful with those.

 The 3rd segment we touched on some basics of Whole Life Insurance. How Whole Life Insurance has survived the times; why it has stayed so strong and why we’ve seen some other forms of life insurance come and go where Whole Life has stayed the course.

Today what we’d like to talk about are your own situations; your personal situation in life today as you’re listening to the show or watching our videos. And what I mean by that is – some of you already have some form of life insurance. You bought it for a personal reason or a business reason.

You have Group Term Life; you have your own individual Term Life Insurance you may have bought on the internet. You have Universal Life Insurance let’s say and maybe that was purchased 5 years ago, 1 year ago or 20 years ago.

And we’re going to share with you today a little bit of how to tell if your life insurance company is healthy; if your life insurance policy is healthy. Some of you have Whole Life Insurance that you’ve bought 50 years ago that your parents bought for you 30 years ago.

Maybe you’re looking into more life insurance now and aren’t exactly sure what form of life insurance is available. What we want to go over with you today is how to tell the difference and how to evaluate your own policies and your needs.  And how to do tests on your plans right now to make sure they’re healthy.

 And also  – is what you bought 20 years ago still most appropriate for you or have your lies changed beyond the life insurance policies that you now still have in place ?

So Ian I’ll turn it over to you to talk about a lot of those areas if you will.

Ian George:   Those are a lot of areas Jack.

Jack Driscoll: Yes they are.

Ian George:    So one of the things you did mention that I think is really valuable is that you know there are a lot of people out there that have smaller policies that were purchased for them by their children.

Jack Driscoll: Right, by their parents

Ian George:    Excuse me by their parents for them as children. And I want to take that into 2 different areas just quickly. First and foremost a lot of people are inclined to say, “Well you know I need much bigger plans those policies were only $25,000” or $10,000 or something along those lines. “I need such bigger plans I’m just gonna cancel that policy”.

I would you know encourage you to stop and not do that. The reason is it’s just because some thing’s small doesn’t mean it doesn’t work.

Jack Driscoll: (chuckles).

Ian George:    So it could be working very, very well it’s just not a big part of it. But no reason to get rid of that little gem that’s still doing its job day in and day out to replace it with something that’s going to be less efficient. So I encourage people to take a look at those too.

 And one of the things that when we were talking you know in the last show about different features – one of the things that you know that comes up in this area are the features about what happens when you buy a life insurance a Whole Life Insurance policy for your child.

There are some great features to this.  Many Whole Life Insurance contracts with many different carriers offer the opportunity for when a child buys a policy to give them a lifetime of insurability. And what that means is when the child is given; you know when you buy that policy on a child you’re getting something started.

 It’s gonna build some cash value; it’s gonna grow with them and over time it’s gonna increase in value. The other thing too though is when that child becomes of age and depending upon the carriers it’s gonna depend on with when this starts.

 But generally speaking between the ages of 21 and 25 that child gets the opportunity to buy more life insurance without any underwriting. That can be very valuable to a child that may have a history of something in their family.

 We all know folks who are you know lean and thin and you know very athletic yet their cholesterol always seems to be really high.

Jack Driscoll: Right (chuckles)

Ian George:    Well that could sometimes cause them to pay more for their life insurance really than they would want to. Had they had a child’s contract that allowed them to but the additional coverage this can be skipped.

There’re also some people that come in areas where they can’t get insurance for something that just makes insurance companies too nervous to get them and this means that they can’t get any life insurance for the rest of their lives.

 With a number of carriers if you get something on your child you can get your child probably up to a million dollars of lifetime insurability. So that’s something that you know people might want to consider as well when they’re doing that.

 Not only that but it gives you a nice little college funding nugget for them to; it probably won’t pay for all of college unless you buy a very large Whole Life Insurance contract.

Jack Driscoll: Mm-hmm.

Ian George:    But it’s something there that can get started and it has value for them going forward.

Jack Driscoll: And grandparents I’ll share that with you because if you’re looking at providing gifts for grandchildren and you’re putting gifts into either a college fund or you’re just gifting them money, you may want to think about – does it highly leverage your gift by buying a life insurance policy for your grandchildren, where – the parents are struggling to make ends meet which are your children.

 But you have the opportunity where maybe you’re retired, have some ancillary funds available to help a gift to a grandchild in that area. Now you know – how old or young can you purchase insurance on a person?

Ian George:   On average it’s 15 days.

Jack Driscoll: 15 days.

Ian George:    In 15 days they’re eligible to, you know to have insurance.

Jack Driscoll:  Okay, okay.

Ian George:     I will also tell you something that you brought up grandparents and you know being a dad who has kids as you are and also having grandparents on my kids – you know a lot of times as parents we all get – you get sick of tripping over the same plastic toy that gets purchased.

Jack Driscoll: (chuckles)

Ian George:    Or God forbid that that at the end of Christmas your biggest detail is to go buy more batteries. Well the grandparents are also probably sick of giving the kids plastic stuff that breaks and people complain about the batteries too.

And that’s where these contracts can become valuable as well. And there’s one other thing that’s become pretty positive for what some grandparents are doing which is – you can designate in a life insurance policy that the policy pays out each and every year.  And you can have it be that child’s birthday.

 So what a lot of grandparents like the idea of is that they can form a contract that will pay the child or get that child a birthday check every year long after their grandparents are gone.

 So that’s something that a lot of grandparents like the idea of – I’m able to give something to this child that long after I’m dead and buried that child’s gonna be getting a birthday check from me. As a reminder of who I am and you know what I built for them that they have to work with today.

 So that’s just one other area that some people might think of.

Jack Driscoll: That’s very good

Ian George:   Yeah.  A lot of people do like that area.

So we were going to talk about some of the other areas and you know  kind of you know dialed into what you can do with those juvenile policies in taking a look at what you may or may not  already own.

And one of the things that we had talked about in a previous segment was Universal Life Insurance and I do always throw up a very big warning about Universal Life Insurance. And the reason is – is because they can be pretty volatile.

There are a number of people who have unfortunately found out far too late that their Universal Life Insurance policy isn’t in fact permanent at all.

What happens is-  is that because the policy has grown so old that or the individual has grown old enough that the internal charges for their life insurance have grown so high that it’s pulled away a lot of the cash value if not all of it.

This can often result in the insured the policy owner getting a premium statement for something that’s very, very costly. So they’ve been paying ‘X’ amount of dollars. It could be 3 or 4 times that and that would be for that year.

The following year could be 3 or 4 times that because as we get older the cost for the life insurance gets very, very expensive. Well the best way to avoid that is to find out long before that day comes. So what I encourage people to do is to contact their advisor and to bring in their policy.

Now on a policy statement from Universal Life Insurance policies if you read carefully enough you will probably find that they will talk to you about a lapsed date. And what it is – is it’s a date that that policy is gonna lapse based on current values and their current interest rates of that year.

What I think should always bring caution to people why you wanted to make sure an advisor has reviewed this is – the fact that you own a policy that under current circumstances if you continue to pay your premiums even has a lapsed date.

That means that all Universal Life Insurance policies for the most part basically say that even if you continue to pay the premiums you agreed upon that one day you probably will not have life insurance nor will you have any cash value.

So this is the; these are the types of contract where you really, really have to get to your advisor and have them take a look at them. Your advisor at that point can then order an In Force Illustration. And basically what that is – is taking into account today’s numbers. The numbers you have in their already and going forward in what that policy looks like it will do.

You can also then talk to that advisor about evaluating the basics. Is this enough life insurance? Am I protected enough? Because the good news is if you catch a Universal Life Insurance policy early enough let’s say you have an individual that does own a Universal Life Insurance policy but cannot get new insurance because of health conditions.

So in other words just cause this one’s broken right now doesn’t mean I can go get another one because in insurance company for whatever reason isn’t going to allow me to buy more life insurance. If you catch it early enough there may be ways to refocus what you’re doing with that policy to get it fixed so it will last.

That may include lowering your death benefit a little bit or maybe increasing the premium payments today for when that policy is supposed to lapse so that it doesn’t lapse.

So it is important because just because you say well I can’t get new insurance so I definitely don’t want to let go of this, that’s probably true but what you want to make sure is – is that you have a professional helping you work with that insurance company to get that policy where you want it. So that it will survive if that’s something that you want to do to make sure it happens.

Jack Driscoll: And I’ve run into cases where it was too late. And when it was brought to me, “Hey can you check this policy?” they had received no adverse notices form their insurance company indicating the policy would lapse at a certain date but they wanted their policy looked at.

 They might have been later in years on the policy or they some of them might not have been. Some of them who were in their 50’s had a policy for only 20 years and some of them were in their 70’s.

 And what I found in a number of the case were after doing an In Force Policy Illustration by the company that issued the contract they came back with, “Here are the results of your policy looking forward and it is going to run out”.

 I have made phone calls to some of those companies and had the response, “It’s gonna run out”. And I’ve said, “How much additional could we do we need to put into it to save it?” they’d say, “You can’t put any amount in that’s enough to save it because we have maximum amounts we can accept and you waited too long. It is too late”.

 So my caution to everyone of urgency is – get these evaluations in your personal situations and your business situations done now. While you’re listening to the show, while you’re watching it on video pull together the policy you have.

 Give us a call. Let us do the reviews with whatever companies you have. Separate from the good companies that you have and the policies you should keep that are healthy and the ones that might be in jeopardy. So we can begin the analysis of what can be done with the companies you have now to save them. Just like Ian said – maybe reduce the death benefit, increase the premiums. Maybe there’s still time.

 The other thing I’ll point out is your needs have changed. Your lives have changed since some of those policies you’ve bought. You may have Term Life Insurance that’s come and due to run out you may still have the need. Or you may have new needs.

 You know when you first bought policies when you were in your 40’s and your 50’s you thought by the time you retired you’d no longer need life insurance so you bought Term Insurance.

 Now that you’re getting near retirement you realize your retirement needs are based on both your social security checks and pensions. And if one of you should pass away the other spouse will have an income reduction.

 We don’t want you buying new insurance at age 65 when we could have helped you identify that need at age 45 and bought a more permanent form of insurance as your needs transition.

Ian George:    That’s great advice. And the idea there is to make sure that you’ve taken an inventory of what you’ve got going on there. What I do a lot of individuals. When I’m helping people out is what I will find is what we can often do is, you know as a part of the planning process, is start from scratch.

Let’s take a look at everything you want to have happen that you want to have in place. Once we figure that out we can then plug in what you already have to see what is taken care of.

Jack Driscoll: That’s excellent advice.

Ian George:    So that way we’re starting with, “I’m here today. I’m at this age this is     what I see that I want and or need and I’m going to get that taken care of”. Then I can reach back here and my advisor can work with me to say, “Well you’ve got this and that’ll fit there; and you’ve got this and that’ll fit there”.

 You might have something that doesn’t fit; it doesn’t have a place in your plan. We see this a lot with some things.

Jack Driscoll: Yeah.

Ian George:    Things that don’t work and things that aren’t functioning. You may have something that is working great for you that you weren’t aware of how it was working for you. So with some reviews and plugging that into your plan the next thing you know, you’re like “Wow its really taking; it’s really doing its job for me”.

So that’s one of the planning ways that that can do. And again that has to do with reviewing everything that’s going on. We have people too who will take a look at old Whole Life Insurance policies. Again they don’t have to be smaller ones. They can be ones they’ve bought years ago.

And again they’ve suddenly heard from somebody talking about, “Well you should have known that. And you should do this with it and you should do that with it”. Before you do anything to it, to any life insurance policy you really want to have a professional review it. And here’s why.

When you bought that policy you were younger than you are today. The one thing about any life insurance policy is that they are extremely heavily based on the age of when you purchased it. The thing you can’t do with anything today is become younger.

Jack Driscoll: (chuckles)

Ian George:   So you can’t get those years back.

Jack Driscoll: That’s not what the ads on TV are telling us.

Ian George:   (laughs) very true. Although yes you may look younger but the insurance company knows that ticker is not getting any younger. Now as much as we want to make sure you have the right thing but that is again we talked about even Universal Life Insurance, Term Life Insurance, Whole Life Insurance.

A lot of people have different opinions about how these products can work   and fit. What I ask everybody to do is be thorough. It’s your money and it’s your protection so don’t let anybody tell you that it’s something is the way that it should be or it shouldn’t be without you thoroughly understanding it.

A lot of the stuff can be confusing at first but with professionals what you will find is that the good professionals do a wonderful job of making things easy to understand. Our job in our industry is to take things that can be very complicated and get them down to a personal level for the individual so that they understand their circumstances.

What I say to a lot of individuals I work with is, “You may not be able to go and help all your friends with how this should work but you will absolutely know what you own, why you own it and what it does for you”. And that’s the really big goal with any of this stuff.

Jack Driscoll: You know the other thing that I want to point out is – when I had mentioned the evolving needs and changes over your life it’s become; I think I’ve become more and more aware of why Whole Life Insurance has lasted all these years through some of the other products coming and going.

Whole Life Insurance, and we might get into this in another show but Whole Life Insurance seems to be able to have flexibility as your circumstances change beyond where you expect it because of the unique features of the living benefits inside Whole Life Insurance beyond the obvious death benefit.

 So we’re running into situation where Whole Life policies have an ability in some cases to evolve ahead of you, ahead of where you’re going. That they’re ready for you by the time you get there to do a totally different benefit than you even anticipated you might have needed.

 So we don’t have enough time to get into it in today’s show but Whole Life Insurance through the living benefits; through the cash value accumulations; through different needs that can be really addressed that we didn’t even anticipate. Whole Life Insurance seems to be a very transient type of policy because of its living benefits; and it also ability to outlast some of the others.

 So I know we’re pretty much out of time today but again I’d like to share with all of you. Please call us. Let us help you evaluate your needs. Do the In Force Policy Illustrations; do the health insurance tests on your life insurance policies that you have now.

 And the life insurance companies

  • Is the company healthy?
  • Is the policy healthy?
  • Do they still meet your needs?
  • Are you able to still have time?
  • Is there still tie to help you transition?

And Ian your point of reprogramming your needs; starting from scratch. Program your needs now as if you had nothing. Build a house of coverage that you would need and then look at the policies you now have. Are they what you would buy again if you didn’t have anything now? And help you through that process.

So again we’re pretty much out of time for today. I wanted to thank you Ian

Ian George:   My pleasure.

Jack Driscoll:   Again the Brokerage Director with Mass Mutual Life of Pittsburgh. I thank you very much for coming and help shed some light on this area.

Ian George:   My pleasure.

Jack Driscoll: Thanks again everyone for tuning into another edition of All Things Financial. We’ll be back again next week.


Life Insurance 101 – Whole Life Insurance – Part 3

Posted on October 23, 2014 by Comments are off


Life Insurance 101 – Whole Life Insurance

Jack Driscoll: Welcome back again everyone. I have with us a special guest that we’ve had for probably last 2 shows and probably the next 2 shows – a specialist in life insurance – Ian George I appreciate your coming back on the show. This is a show that I’m doing as a series. Ian George is a Brokerage Director with Mass Mutual Life.

 Now the first in this series that we’re recording; we’re doing a 4-part at least series for you, to try to get through some of the areas in life insurance and how it fits into your life.

 The very first was a basic 101 discussion about the different forms of life insurance. The second show we did was a basic show on Needs Analysis – how to at least understand why people need life insurance when they do and if they do. And then to figure out just a basic amount of insurance that person might need.

What I wanted Ian to talk about in today’s show – there’s a form of life insurance that is widely misunderstood. I’m not going to say it’s so complicated but it’s widely misunderstood. And it came about on an area of Term life insurance versus permanent life insurance; and buy Whole Life versus Term and invest the difference; and all those transitions that happened over the last 30 and 35 years.

 And now coming full circle how have they all worked. Well the discussion I would like to have today is on the unique advantages and opportunities and differences with Whole Life Insurance which is still here after all these years of other products coming and going.

 So Ian I wanted you to try to share with us this issue of Whole Life Insurance, how it fits in, what are some of the unique opportunities and advantages with it and why people are still using it.

Ian George:    Okay that would be great. One thing I you know you; it’s funny that you brought up the misconceptions and misunderstandings about Whole Life Insurance. And you know the one thing is – is that I notice a lot of people and will say things along the lines of, “Oh you shouldn’t own Whole Life Insurance – that’s bad”.

They you know, there’re surrender charges; there’s this and there’s different aspects of these contracts that are bad. The one thing that is very interesting and if you Google Whole Life Insurance – and boy can they take it on the chin.

Well obviously in my profession it’s up to me to understand how all these things work. And it’s also up to me find out where people get confused and what’s going on.

And I will tell you that we have some people in our business who are out there saying things like you know, Whole Life Insurance – because of surrender charges and things along those lines that don’t know the difference between Whole Life Insurance and Universal Life Insurance that we discussed.

Jack Driscoll: Right.

Ian George:    So what I would say is if you happen into somebody who was telling you that you know, and this goes with any product that you’re ever looking at. I encourage clients when somebody brings up something no matter what it is, if they say, “You don’t want to do that, you want to do what I have to offer”, ask them why what they don’t want you to do you shouldn’t do. And make sure they understand what they’re talking about.

That’s very, very important. Because I’ve had a lot of people that have heard that they shouldn’t do something but then they don’t know why. The advisor who told them not to do something didn’t give them any foundation as to why they shouldn’t do it so there’s no way that they should really know if it worked or not.

But with that being said a couple of things to remember about Whole Life Insurance and we did talk about this when we went over the chassis, And you know it is funny because Whole Life Insurance is a very simple product. Not quite as simple as Term Life Insurance

Jack Driscoll: (chuckles)

Ian George:    But it’s pretty simple. So with Whole Life Insurance we have our mortality charge or our cost of insurance, what it cost to carry the insurance that’s fixed and level and our death benefit and our premium. All those 3 areas are guaranteed.

And then on top of that we either have interest rates or dividends that are gonna be pushed in on top of that to grow the cash value end or the death benefit. So what’s interesting is – is that a lot of people have seen where Whole Life insurance can be used as a savings vehicle.

It’s a place where I can put some money that could you know that provides me death benefit as well that can grow and I can have money in there that I can have access to. The thing to understand about Whole Life Insurance is that there are not surrender charges.

Whatever is in there is available – one number. So as it accumulates and you want to have access to it, it is there and it’s available. Depending upon how you take it is something you need to work with your advisor on but you can have it. It just depends on the best way to take it that suits your personal needs.

Now one of the things that goes on with Whole Life Insurance are all the different features that come up with it. And so what we decided to do is kind of do an overview of what those features are. And you know why they can be you know great advantages to certain individuals if it’s something they’d like to take advantage of.

So I’m gonna start with one of my favorite features because it ties into a little bit about what we talked about which was disability insurance.

Jack Driscoll: Right.

Ian George:    So one of the things about it is – is people will compare everything they’re doing to save for retirement or to save for a legacy plan. We have a lot of individuals who as they’re putting money away, in the back of their mind that money is not earmarked for themselves to spend in retirement, but it’s something that they want their children or their grandchildren to have. And obviously life insurance is a great way to do that.

But one of the things that we take a look at is that if something were to happen to use if we were to become disabled what would happen. So I; we do know that if I were to become disabled that I would have problems with my paycheck.

So I probably have my group Term; my group long-term disability would you know pay me. I would also have hopefully I’ve sat down with my advisor and taken care of my individual disability. So I’ve stabilized my family income.

One of the things that has changed is that I may not be continually funding my retirement plans. And there are by the way just to keep an eye out, some disability policies that will help you continue to do that as well; but that’s a different topic for a different time.

Jack Driscoll: Right.

Ian George:    The one unique factor is the waiver of premium on a Whole Life Insurance contract. And what that means is that you have an asset that you’re funding for retirement or for legacy planning that should you become disabled become self-completing.

That means that the insurance company is gonna take all of that premium payment that you’re making  and pay it into your policy – continuing to grow your cash value and continuing to grow your death benefit even while you’re disabled.

And remember even though they’re pushing the money in, it’s another safety place that an individual can go and actually take money from their cash value to help them if they need a little extra help in the event of their disability.

So waiver of premium on a Whole Life Insurance policy can be a very valuable benefit should somebody be facing disability.

Jack Driscoll: Yeah and especially what we’ve run into are a lot of cases even with the group products, people who count on group life insurance for instance are now costing them based on history  – that a number of people who die prematurely might have developed either an illness or due to an accident.

They might have become disabled first run into medical difficulties, lost their job, lived for a couple years struggling with their bills or their medical bills etcetera, not able to maybe even keep their house and then die prematurely.

                        Well what happened to their group life insurance through that? If they were disabled they probably lost their group life benefit once they terminated employment. And if you have an individual policy and you were disabled, again they’re not paying even on the best disability policies typically more than around 60% of your income.

So you’re already making cut backs. Can you then even afford to continue to make the life insurance payment that then if something happens to you – you were diagnosed with cancer, you lived 3 or 4 or 5 years, and then died prematurely?

Your life insurance may no longer be there for you when you needed it most. Where with the rider that you’re talking about, the premium waiver assures that your policy continues even when you can no longer afford to pay it if the cause is due to disability.

It’s a critical component that you’re pointing out on a Whole Life policy that’s available.

Ian George:    Yes and it can be very, very valuable to families. The other areas we’re taking a look at is what goes on with all that. So you have now your Whole Life Insurance contract and you have a waiver of premium that’s gonna actually complete an asset for you that’s going to have cash readily available for you that you can have access to.

                         That can be a very valuable benefit in the event that all that occurs. Other features that have started to occur with Whole Life Insurance or things that people have started to notice of how they can use with Whole Life Insurance is – let’s talk about one special rider that’s come out that’s pretty new in the Whole Life Insurance world.

 There a number of different carriers that are carrying this rider – again you want to work with your advisor to make sure you’ve picked the right carrier for you and that the policy is working the right way for you in terms of how these riders go.

But there are riders that will allow you to have access to the death benefit of your Whole Life policy in the event that you have a long-term care need.

So basically what that means is on the outset if you were to buy $100,000 policy you would have $90,000 of that. In most cases they’re using a 90% factor with the different carriers of cash available for the use for long-term care.

For most of these contracts you do have to qualify for the long-term care meaning you have to not be able to do 2 of 6 activities of daily living. Or it can be a cognitive stand-alone benefit meaning the doctor has said it’s not safe for you to be alone.

And in that case the policy is available to be used for whatever the parameters of those policies are for you to use that for long-term care. So you can imagine Jack, we just went over this with the waiver of premium. We now have an asset that we’ve been using that’s growing this cash value.

That we can access our cash value when we see fit and most appropriate way for us. If we become disabled that cash value and that policy is gonna continue to grow because the insurance company is gonna cover our premium.

If down the road that disability turns into a long-term care need we now have a policy that is going to have a death benefit where a lot of that, 90% in a lot of cases can be used to cover that long-term care.

Jack Driscoll:  We’ve actually seen in the financial planning world – we’ve looked at how do we solve the problem for long-term care needs. We’ve looked at the long-term care insurance; there’re pros and cons on that. And we’ve looked at one of the alternatives is – is life insurance proceeds to replace assets lost due to a long stay in a nursing home. But it’s after the fact.

The life insurance proceeds did not come at the right time so the spouse at home let’s say in an example, might have depleted their assets to pay for the stay for the other spouse, the institutionalized spouse in the nursing home. But the life insurance could upon the death of the institutionalized spouse in some cases replenish or replace those assets that were lost.

Well now with the rider, it helps trigger the potential benefit being due and being able to be claimed at the time of need rather than actually depleting the other assets for the nursing home stay and then upon death recouping those assets.

With this rider the benefits can possibly be there at the time of need to help defer or postpone or maybe eliminate entirely depleting the assets.

Ian George:   Exactly. So you have that protection tool. There’s another feature that goes on which is standard feature. It’s not a rider just included in all the Whole Life contracts that you’re gonna take a look at and that’s obviously the cash value and what that can do.

                        But added on top of that is many, many carriers now offer the opportunity for limited pay contracts. Now limited pay contracts offer the client the opportunity to pick an amount that they’re gonna use to pay. And it’s gonna be guaranteed that it’ll be done paying in a certain year.

                        The shortest of these usually is 10 years although some can be shorter. But you can have a ten pay contract that as you’re pushing your premiums into that. At the end of 10 years it’s paid up and guaranteed to be done.

                        This can extend in a whole different area of taking it out longer, for it could be a 20 pay or it can be you know a birth year, excuse me not a birth year but an attain age such as paid up at age 65.

                        Where these contracts become purposeful for a lot of individuals is when they really are looking at the cash value as a savings vehicle for them for what it can do.

For somebody to be able to take money and put it into a ten pay Whole Life Insurance contract and have that bucket of money just sitting there with a death benefit on top of it and have those both continuing to grow and know that they can have access to them can be a very nice feature for them to have.

Knowing if they have a place where they can access that cash value. And if they access the cash value and take a look at their surroundings and what’s going on then with their tax code and how they’re touching the cash value, they very rarely will have to pay tax on accessing that cash value.

Again that’s something you need to work with, with your advisor to make sure you’re accessing it in the way that is best for you as an individual.

So we have a couple of features there that are pretty strong in terms of what goes on. But again that’s where I spend a lot of my time so I obviously believe in how these things work. So the waiver of premium is very strong.

But you have the long-term care access which is also strong, and then you have the limited pay contracts which also bring in other features to the Whole Life Insurance as well.

Jack Driscoll:    And we’ve taken that further to an extent where sometimes in financial planning we’ll look at the amount of assets in retirement and I might have a spouse who says, “I’m worried about how to handle and manage these assets because if anything happens to me” one spouse might say the other spouse may not be as adequate at managing assets.

So sometimes we’ll carve out a percentage of those assets and do what’s called a single premium. We’ll carve it out, put it into a life insurance policy to leverage that percentage of assets that we’ve carved out to leverage the benefit. Can you explain a little bit about how that might work?

Ian George:   Well with single premium policies basically what you have is you’re basically handing over to the insurance company, one lump sum of cash depending upon the type of the contract. Because you have Single Premium Whole Life contracts and you have Single Premium Universal Life contracts.

Now with the single premium contract obviously we don’t care too much about the wave of premium.

Jack Driscoll: Right (chuckles)

Ian George:    That’s a one shot deal. So we’ve taken our money; we’ve put it directly into the Whole Life contract. In many cases obviously you may start with close to or a little less than what you actually put into it in your cash value. So you’ve transferred cash in.

In any case you’re going to have a death benefit which is going to be greater than your cash value obviously. So if I put money in here, I’m gonna have my cash value and I’m going to have my death benefit.

Over time both of those are gonna grow. My cash value’s gonna grow and my death benefit’s gonna grow. Where these types of ideas become very valuable to people is when they’re taking a look at what they’re doing and want to think about what they want to leave for their family and how they can do that.

Now the one caution that people have to understand about a single premium is – the policy in terms of accessing the cash value will have one bit of a tax wrinkle and that is that you will have to pay taxes on any growth it attains.

It’s called a Modified Endowment contract and I don’t think we need to go into too grave a detail about that. But just know that any growth when you do a Single Premium on those policies will create a taxable event should you want to use the cash value.

The death benefit however will remain tax-free. Again, provided it falls under the estate tax rules of you know where you are on the federal basis as well as the state; in terms of you know under 5 million or 10 million with unified credit you know for your wife.

Jack Driscoll: Okay now that’s an important concept because the person who has the need or desire to carve out a percentage of assets, put it into a contract as a single premium, may want to talk with tax advisors and the financial advisor and say, “Okay, this is my area that I want to carve out and my percentage – 30% of my assets” or whatever.

And by your advice may be told that’s your end result that you want to end up in the policy but to not end up in a Modified Endowment contract otherwise known as a MEC.

You might be advised take one-seventh of that amount every year for seven years – called the seven pay test or whatever to get in up to an amount every year before you cross that penalty threshold. And it may take you 6 or 7 years to fund that amount. Is that right?

Ian George:   Correct so you can take a look at; well you can sit down with your advisor and find out how you can fund that that it may be to your advantage. To some people they don’t care – the cash value is no longer an issue.

If I have this amount of money then I can automatically upon my death turn it into this amount of money and if the only thing that this is for is for my heirs that may not be something to be concerned about and that’s where the single premiums can really have their effect.

By the way just to make life more complicated in terms of where some of these features go nowadays as well we go back to the long-term care conversation.

There are a number of those programs that provide even greater long-term care benefits with a single premium product – where you’re depositing your premium into the contract; you’re getting very large long-term care coverage for it. And actually life insurance that’s a bit less than your long term care but still more than your cash value but not a lot of cash value growth.

Again these are areas; these are other features and other ways that these life insurance contracts have grown. Those exist both for Whole Life Insurance as well as Universal Life Insurance. Again just beware that you understand how those contracts work and who’s offering them.

In other words – is the company I’m buying this from a stock held company, is the company that I’m buying this from a mutual company. As you can guess I’m a little biased towards mutual companies when it comes to cash-valued based life insurance.

Again primarily it comes down to who’s paying me, who’s in front of me to get paid on dividends. In a mutual company – I’m part owner of that company. In a stock held company – as a policy holder I fall behind the stockholder. So I would like to be first inline so I like you know if I’m getting cash on a contract I’d like it to be with a mutual company.

Jack Driscoll: And the other issue is when Ian says, “Become aware of the different forms of insurance and different benefits available”. I again turn back to – do not try to so this yourself. Get to a qualified professional who deals with this and has dealt with this for years and years.

You might run into a situation and not even realize it. Where you’re making payments for a policy and it serves your needs and you have the premiums scheduled but they run forever.

You’re paying the premiums forever by your policy design where with a simple advance preparation you might realize, “hey when we’re retired we don’t want to keep paying these premiums”. What little twist do we need to make when we’re first purchasing this policy to make sure that it is a limited pay time period that you have to pay that?

By the time you’re 65 or over 20 years or 10 years the policy is fully funded and you don’t have the premium burdens in retirement that you can’t afford to make.

So get to a qualified professional. They’ll diagnose not only your needs but diagnose your abilities to pay; diagnose which types of policies and features on those policies are best suited to you. And end up with a tailor-made portfolio of life insurance just like in every other area of your life.

                         Ian I want to thank you for coming back again.

Ian George:   My pleasure.

Jack Driscoll: We’ll have you back for the next show. Hopefully there we’ll try to wrap up our initial evaluation of life insurance for all of you coming. Thanks again for tuning in and we’ll be back again next week.

Life Insurance 101 – Needs Analysis – Part 2

Posted on October 22, 2014 by Comments are off

Life Insurance 101 – Needs Analysis – Part 2

Jack Driscoll:  Welcome back again everyone to another edition of All Things Financial. You know last week and over the next couple shows I have a guest with me – Ian George, the Brokerage Director with Mass Mutual Life. Ian I appreciate you coming back on this show.

Ian George:     It’s a pleasure to be back

Jack Driscoll: Last week what we talked about was really Life Insurance 101. Ian went through some different categories of types of life insurance -Term, Universal Life, Whole Life and a little bit of the differences between them.

 But I’ve noticed in the financial planning world a lot of people who come to see me are wondering number 1 – how much life insurance do they need; do they need any life insurance any at all; and how do you know the difference.

So last week we touched a little bit upon the different forms of life insurance but that pre-supposes that person either has or wants to have life insurance at all.

So today I thought it would be nice if we had the discussion on:

  • needs analysis; programming a person’s needs;
  • how to evaluate in your own situation; whether it’s a family situation, business situation or otherwise
  • if you need life insurance at all and
  • how to calculate why you do and
  • how much you do if you determine that you do.

So Ian I’ll turn it over to you to help us with that discussion.

Ian George:   Okay great. Well thank you. Thanks again for having me back.

                        I come across a number of people who get very confused in terms of how much life insurance they need. Now what’s interesting is when it gets down to it, really what it comes down to in most circumstances is – how much life insurance does somebody want.

                        Because the need; that’s a tough thing it’s not like home on earth where you take a mortgage and you know the bank says – you need to have homeowner’s insurance if you want a mortgage from us.

                        So life insurance doesn’t quite work that way. But there are a lot of us who would like to take a look and make sure that if something were to happen to us then our families were taken care of. The question is – is how do we calculate that in what we do.

                        I’m not gonna get overly complicated here. There is software and a lot of planners do have software, Jack I know you have access to that as well, that can let people do something that’s far more intricate in terms of calculating what people need and how that can work.

But to give people an idea of where to start – “How do I start thinking about the amount of life insurance that I might be comfortable with” – is what I’m gonna talk about today.

What I find with a lot of people is that what they’re looking at is if something were to happen to them they wanna make sure that their families, you know if it’s the bread winner as the husband you wanna make sure that their wife and their children will have the resources to keep going on.

And then what I describe it as is – they’ll be able to keep the promises that they may have made either out loud or that they made to themselves about what they want for their family. You know so we see this a lot now too with where we have the mom or the wife being the main breadwinner too.

And that’s the same question that goes back there as well. And as you know today more and more and more we have families that are joined. And so having this discussion in both directions with each of the; with both mom and dad or both are important.

So the way basically comes down to it is – is that I take a look at an individual and I say to them, “Look you know what is the ideal thing that you want to do?” And that’s the starting point because I think we all do better when we know what we’re looking to do where we’re placed.

Jack Driscoll: Goal-based place.

Ian George:    Exactly. So a lot of individuals will take a look at it and they will say, “Well look ideally what would happen is if I died my income would continue”. So I’m gonna oversimplify this completely just to let people get a; have a chance you know making sure this can make sense.

So what I do is a take to them and I say to them, “Let’s take an individual and keep it rather simple. And say that that individual is making $40,000 a year. And that individual would like to have that income replaced if something were to happen to them.

Now again Jack as you know we can get more complicated with this by adjusting for inflation and down the road but then again that’s not the purpose of this conversation. The purpose of this conversation is just to get a basic fundamental idea because you can make this as complicated as you would like.

 So let’s start with I have an individual who says they make $40,000 a year and they would like to make sure that that $40,000 a year continues in the event of their death.

Well what we find out and from a lot of planners and a lot of individuals is that – if I had a pot of money and I were going to retire and I wanted $40,000 a year that a lot of advisors now use the draw down rate – meaning the amount of money that I can take out of my savings and not run out for the rest of my life being 4%.

So obviously I pick 40,000 for a very obvious reason because $40,000 at 4% means that I need to have a pot of money that is a million dollars. If I have a millions dollars and I’m drawing 4% from that I should be able to have $40,000 for a long time.

Jack Driscoll: And you know what’s interesting folks is – some people would say, “We can’t earn 4% we can only earn 1% or 2% or 3%”. It does not matter when you’re doing planning.

What you’re trying to evaluate is your area of comfort where when you say, “We’re planning for a life insurance need”, the question you need to do is ask yourselves –  “What amount if I had a pot of money do I feel comfortable that we could always earn safely?”; and just use that amount; right?

Ian George:   That works too exactly. And again that’s why again I use very obvious numbers that you know my 40,000 which came right to the 4%.

Jack Driscoll:  Because the industry standard was always 4% until the great recession of 2008 and 2009, and we recognized what’s called the lost decade and the interest rates are way down. And is the 4% stable or unstable?

So that discussion can’t be solved it’s an area of comfort for you and your own family. And that’s what Ian’s bringing to the table. Whatever level you have if you’re using a traditional 4% or 3% or whatever it is, follow this math that Ian’s about to explain.

Ian George:    Correct! And this is; and that’s really important Jack. The whole thing about getting the understanding about getting the amount of life insurance you want is so that when you think about that you’re comfortable with what’s occurred.

Jack Driscoll: Right.

Ian George:    The value is there for you. So that’s the really; that’s really the big issue and that’s the only way you’re gonna make the right decision for you is if you’re comfortable with how that math works; which is why I like clients to understand how this process can work.

                         So to come back full circle to where we were; we left off and we realize we need a pot of money of a million dollars. In that, if we use the 4% and we had a pot of money of millions dollars we’d be drawing down $40,000 a year. Now the question is – is where are we gonna get a pot of money of a million dollars.

                         So a lot of people already have things that are in their pot. So what you put into that pot can be things like what’s in your 401k. So again as an individual you have to look at what is yours. Or what that you’re leaving behind can be put into that pot to be used for this purpose?

                         So obviously your 401k that you have at work counts for that or whatever your savings vehicle it is that is given to you at work. Another item that is often provided to you at work is your group term life insurance.

 It might be something small like $10,000. It might be a multiple of salary, it might be anything along those lines, but it’s probably there in some form or fashion.

 You might have outside investments that you have on your own; a stock portfolio that you have with an advisor or mutual funds something along those lines, who knows. That goes into that pot too because again that’s money that can be used for this purpose.

 So once you’ve put everything into it what you have; let me stop myself here quickly. What we don’t want to put into that pot is our home. And the reason we don’t want to put that into the pot is because we don’t want our heirs to have to sell the home to live. Because it’s kind of counterproductive. So that can be a bit of a problem.

Jack Driscoll: Especially a spouse who still needs to live in the home.

Ian George:    That’s right. So we don’t include things like the home. And by the way I even tell clients who have vacations homes where that’s important to their family too. We don’t include that either. Just because you’ve died you don’t want them to sell the vacation home to live. You want to leave them with enough.

So but everything else is goes into that pot. That’s gonna get you to a certain level; and the difference between if this your million dollars and that gets you here, that gap is where life insurance fits.

So in my example of that individual did a tally of all those assets – in their group term life insurances and they claimed that they had $200,000. They might want to buy $800,000 of death benefit to get them to a million. Some items I’ve also seen people do to add to that is they might want to throw in one times their annual salary, right on top.

The reason people will do this – so in my example that would be having them buy $1,040,000 in life insurance – is because they want their spouse to know in their planning that should something happen to them that she has $40,000 or that annual income to work with without have to be making any decisions.

Jack Driscoll: I see.

Ian George:    So she doesn’t have to go out and find out who’s gonna manage my money; how this is gonna work; what’s the best way to do this. She has a year to grieve; get her feet back underneath her. Or husband in the same boat to be able to do that. So some people would do that.

Jack Driscoll: So the spouse in this example would say $200,000 of assets, they’d normally buy $800,000 life insurance; you’d turn that into $840,000 to cover that first.

Ian George:    Exactly.

Jack Driscoll: Year buffer.

Ian George:    Now what a lot of people will point out into the methodology I just kicked out is to say, “Hey you didn’t cover my mortgage”. No I didn’t because what we did is we kept everything rolling as it were. Doesn’t mean you can’t do that.

So that’s why it’s nice to have an idea of how these components work. So whatever you want to count as in your pocket and count as what comes out is perfectly fine for where that would go.

I will caution on one form. A lot of us tend to figure out a way to buy the least amount of life insurance we can. So if I am making $40,000 and I figure I’m gone then my wife only needs $20,000 – you’re not leaving any room for error there.

So that means you might have college expenses that those kids are gonna be faced with; if you have daughters there could be a wedding. There’s a lot of stuff that comes in there that’s why I want make sure that people make sure that they have at least their full income insured;  even if they’ve added enough to pay off the mortgage.

Now I will also tell you this type of planning or conversation about needs analysis or you know what I want in life insurance often exposes one are that is sometimes left completely out of the discussion which is – disability income insurance.

So while clients are sitting there constantly saying, “What happens if I die? I want to make sure my family has enough money to survive” have forgotten about the odds of what would happen if they become disability; or they don’t become disability if they became disabled.

Jack Driscoll: And that’s interesting you say that because almost every case that I see if there’s any; it’s never a part of the discussion unless it’s brought up like you just did. So it’s not a natural discussion that most people have.

And I almost never see disability income protection which is a form of insurance if it has not been provided in a group policy at work. I rarely see someone solve that on an individual basis.

Ian George:    Yes and a lot of people get a lot of comfort from the fact that their employer tells them that they have disability insurance. Be very, very careful about what goes on in terms of that calculation.

Because what a lot of people don’t understand is that some employers do provide disability insurance and sometimes it’s only short term disability, which means the employee will be taken care of for 1 year of income. After that year things can get a little rough.

The other thing that can happen too though even if the employer is providing long-term disability which is a policy that would pay you if you were fully disabled ’til you’re 65 or 67, normal retirement age. They usually cover 60% of your income less taxes. The way I simplify this for a lot of people is to say, “Take a look at your paycheck and could you live on 60% of the net take home pay number?”

If the answer is yes you’re good to go and you don’t need to talk about disability insurance anymore. If the answer is no – it’s a conversation that you might want to have with your advisor.

The main reason that comes up is that this falls into that horrible category that we see over and over again which are people with – who lack proper health insurance or disability income insurance and how those disabilities lead to such financial travesties.

On a personal note what I will tell you is hard to watch for a lot of individuals is that – that individual that didn’t have proper disability planning has to sit there and watch their family suffer around them.

So that is something that you’re gonna want to take a look at – is to make sure that if something were to become; if something were to cause me to become disabled, do I have something in place that’s gonna help replace my income.

So that my family; again we go back to all this; all this focus is around on the promises that we’ve made whether they be out loud or to ourselves of what we wanna do for our family. And we don’t want to have that slip through the cracks we want to make sure that somebody’s giving us the real truth about how disability insurance works as well.

Because after all the odds of becoming disabled are so much greater than the odds of dying prematurely. That is something we want to make sure we’ve covered. And they’re both done in the same way.

So you can find out what your employer’s providing you in disability insurance just by asking them; they probably have a handbook that will go over it. Take a look at that. And if that’s not enough you want to make sure you talk to your advisor about making up that difference.

And again the only thing we’re doing here is on that $40,000 what’s replaced by the employer, we’re gonna add it down on this end. The life insurance we’re adding to the bucket up there.

The other thing I will tell you to is if you’re interested in your life insurance in taking care of that risk, all the underwriting that you have to do for your life insurance will also get you an offer for your disability insurance. So you might as well have them tell you what the numbers are going to be anyway while you’re going through all that.

And that’s generally what I like to make sure when we and now; that’s talking about basic risk coverage – protecting our family from death or disability. And that gets into what makes you feel comfortable.

Jack I know that you know most people and most advisors when they talk to their clients about money and they talk about risk – the idea is so that when their client’s think about their money that they can you know do it with peace.

Jack Driscoll:  You know I learned earlier in my carrier actually when I looked at programming needs and when I was trained as a financial planner – I was actually trained that people have goals, people have needs and people have fears.

The fears are usually surrounded by risks. What we’re trying to do is transfer some of those risks to outside parties to take those risks for us. But what I looked at; when I looked at needs and goals I found that most families just are looking to say, “We just need our income to continue”.

                         So what most families were diagnosed as having a need of was – “I need my income replaced if anything happens to me; if anything happens to my income”. And I found there were 4 sources of stealing income away from a family:

  • One was unemployment which we really can’t solve for through the insurance products;
  • one was disability which could rob your family of continuing income- cause you could lose your job over disability and lose your income;
  • one is premature death;
  • and one is retirement which also ends your income

So 3 out of the 4 causes of your income being interrupted or terminated permanently can be solved for with needs planning.

Ian George:   Very true; very true indeed. And that’s also why it makes a lot of sense to make sure that you’ve taken an inventory about what you got and where that’s gonna go.

Jack Driscoll: Yeah I agree. Now the other thing that I want to run into on needs planning is- beyond income have you found a situation where you have either special needs children or charitable needs; or like you say – paying off bills; or other areas that people would want to incur and make a decision on maybe – we want to transfer the risk or provide funds or create investment assets that don’t exist right now through life insurance.

Ian George:    Yes, and as you know and you brought up one very special area which is the special needs. Those families that have a special needs child their main concern as they look through what they’re doing in their planning is that – “When we’re gone who is gonna help take care of our special needs child?”

This is a very tricky area and not something to be done without making sure that you’ve consulted somebody who understands special needs. The reason I say that is that we all know that there are some actually some very strong programs provided to help people with special needs in our society.

                        Those special needs however are, and those services provided for that are income based. So if you suddenly die and you have a special needs child that is suddenly worth millions of dollars those services dry up. And they’re not replaced.

                        Now sure you may have a special needs child that has plenty of money to now pay for those services but I’ll do pretty good that you have a special needs child who won’t know how to pay for those services.

The risk and the fear that so many people have is that that special needs child will meet somebody who will find a way to take their money and not provide them the special needs that they need. So there are special needs trust planning and things along those lines and that’s where life insurance becomes very, very effective.

It’s a very efficient way to have the benefit show up exactly when it’s needed.

Jack Driscoll: And that’s why I say and I’ve said it in prior shows and I’ll say it again today – this is not an area nor is any area of financial planning an area to try to do this all yourself.

If you’re trying to evaluate your needs and you’re doing it yourself without the skills of a qualified professional – as you can hear you’re probably going to make mistakes that could have been avoided in your planning process which leads to mistakes in your solution alternatives.

Give us a call. I’m a certified financial planner. We can help guide you through this process to help you make better decisions with the help of skilled professionals and specialist like Ian and make sure to get you on the right path.

So again Ian I want to thank you for coming on the show. We’ll do a couple more segments for you over the next couple weeks again in the area of life insurance using Ian’s specialized skills to help guide you and give you some maps of questions in areas to uncover for yourselves.

So again thanks for tuning in and we’ll be back again next week.

Life Insurance 101 – Part 1 – Basic Forms of Life Insurance

Posted on October 15, 2014 by Comments are off


Jack Driscoll: Welcome back everyone to another edition of All Things Financial. I have with us over the next couple shows a guest, Ian George. And he’s a brokerage director with Mass Mutual. Welcome Ian. Thank you for coming to join us.

Ian George:   My pleasure thanks for having me.

Jack Driscoll: The reason I have Ian with us is – I get so many questions; especially from business owners but individuals and retires alike on different forms of life insurance. And Ian is an expert in life insurance.

                        So I wanted to bring Ian on the show to go through a number of different choices; alternatives that we have; evaluations that I want many of you listeners and viewers of this show to know:

  • whether your policies are healthy;
  • how to do checks;
  • what to look for;
  • what different forms of life insurance are available for those of you who are looking to purchase life insurance.

And also Ian’s going to help share many ideas on how to determine if we even need life insurance; what the benefits are; and things like that. So Ian again I’ll turn it over to you to pick up where you think people ought to begin with a basic explanation for starters.

Ian George:   Okay. Well basically over the years what I’ve discovered is that people from all walks of life have essentially the same kind of questions which is – they’re not quite sure what type of life insurance exist out in the market place. And more importantly obviously after they figure out what those are what type is right for them.

                        So I do find its best to give people some foundation in terms of what the basic types of life insurance are. As an industry the life insurance companies have done a great job of giving different life insurance products all sorts of different names to make things extra confusing.

                        So I’m here to tell you that the good news is that there are basically only 3 types of life insurance. And what I will do is go over and explain how those work one by one. And you know give people an idea so they can see how those work.

So the basic 3 types of life insurance are:

  • Term Life Insurance,
  • Universal Life Insurance,
  • Whole Life Insurance.

Now obviously the easiest to understand for a lot of people is Term Life Insurance. And that’s considered to be pure insurance. You basically pay your premiums, covered for death benefit, there’s no cash value, nothing else that goes on with it.

The reason it’s often called pure insurance is because basically what you’re doing is taking the amount of insurance that you want. And it’s calculated on the components of what all life insurance contracts contain. And that is first and foremost is the death benefit.

Whatever somebody wants to have to be you know their life insurance amount, their death benefit, that’s gonna be a part of all forms of life insurance.

The next thing you’re gonna have is what a lot of people don’t know about. It’s called the mortality charge. And all a mortality charge is, is basically what the insurance company needs to charge in other words when they figure out what the risk is if somebody would die.

So as an example you have somebody who’s in their 20’s. Their mortality charge for the amount of life insurance they would buy would be lower than that of somebody say in their 60’s. Because the odds of somebody dying in their 20’s is much lower than the odds of somebody’s dying in their 60’s. So that means that their charges would be lower for that.

Mortality charges in Term Life Insurance correlate pretty close to what’s gonna be charged to them in premium. So there’s the insurance company’s gonna pad in some added features on top of their mortality charge obviously because insurance companies need to make money; and when they’re selling and protecting the public with their insurance policies.

So it’s gonna be mortality plus some incomes from the insurance companies and then you’re gonna have the premium that you’re gonna pay.

Traditionally those premiums have now gone on to be level. So as mortality charges grow and they grow year over year, most companies now offer programs that levelize your premiums. So that you’re paying the same premium for say 5 years, 10 years, 20 years or 30 years. And that’s Term Life Insurance.

So if you look at it you have a very level death benefit. So whatever I want to pay in death benefit. And then I’m gonna have my mortality charges which are gonna go up over time. So the older I get the more I’m gonna pay for my life insurance.

With level premium all they’ve done is factored that in and flattened it out again for what we talked about; that – 10 years, 15 years, 20 years, 30 years. So that’s Term Life Insurance plain and simple.

The next product that comes into play is Universal Life Insurance. And Universal Life Insurance might be one of the most confusing programs and products that the insurance industry has ever come up with. It has gone through a number of different changes but let’s go back to the basics.

Universal Life Insurance starts with the same place that all life insurance starts with; that our Term started with. So we have the death benefit, And the death benefit is the number that somebody’s gonna pick.

Now we know insurance companies have to charge for that death benefit so just like your Term Life Insurance there’s gonna be a mortality charge. The cost that the then insurance company deems it’s gonna take to cover the death benefits you’re gonna do.

Now comes, well the added feature; or now the confusion comes in because now we’re talking about cash value. And cash value that sits inside a Universal Life Insurance contract is designed to grow over time. So what happens is you pick your premium.

So to a certain degree on Universal Life Insurance your producer, agent or advisor is gonna help you determine the amount of premium that you’re gonna put in. Now you’re probably not going to put in the minimal premium amount because that would be Term Life Insurance. Because they’re gonna give you the bottom and base amount for your mortality charge and you can pay that.

Now if you pay that it’s gonna demand that you pay more and more each year because that mortality charge is going to be going up and up each year. But generally they’re gonna pick some money so; pick a premium amount rather that you’re gonna put in there. And whatever is remaining from your premium after the mortality charge is taken out is going into your cash value.

The problem with Universal Life Insurance is what we’ve already referenced – what’s going on inside that contract year over year over year. There’s a charge in there that is constantly going up.

Now over time as you can imagine somebody in their 20‘s may not notice that charge as they’re pushing money into one of these life insurance policies. But over time their mortality charges as they go into their 20’s, into their 30’s, into their 40’s becomes more and more expensive.

The other aspect of it too is – this can sometimes be hard to see within your policy or your charges because you are actually only being charged on the difference between how much cash is built up and how much your death benefit is.

As an example if I started a policy that was $100,000 in death benefit, year 1 I’m paying my mortality charges. My fee is on all $100,000 because I don’t have any cash value.

Down the road if I have accumulated cash value and let’s say there’s $50,000 in cash value and my death benefit remains at $100,000 – I am now only buying $50,000 of life insurance because the other $50,000 is my cash value. So that upon my death I just get my death benefit.

So where that gets confusing is – people can look at their charges and see that they’re not buying as much life insurance but actually their cost is going up.

The trouble comes in with these policies when I go to either use my cash value. Or if I reach a point in time where my mortality charge has increased greater than my premiums which means the policy only has one place to go to make up the difference so I don’t pay more premiums; and that’s in my cash value.

So you can tell there’re a lot of working parts in Universal Life Insurance that can make it hard to work with and a little difficult to understand for a lot of folks. Not to mention the fact that you know we’ve come out in the industry with so many different types of Universal Life Insurance that it doesn’t make it any easier.

So when Universal Life again, first started it was based on interest rates. And this was back when interest rates were very high. So the insurance companies were offering a product where people could take advantage of the very high interest rate. It was a horrible time to buy a house but it was a great time to put money in the CD’s.

I don’t know if anybody could even remember the days when you could put money in the CD and get 10%; but they existed. And that was also going on inside these policies. Obviously those days came and went. And when the interest rates dropped so did what these policies were doing.

When that occurred these policies with the interest-sensitive portion became less popular.

Then came along the most recent incarnation of what they’re doing with these Universal Life policies which is called Indexed Universal Life Insurance Policy.

Now if you thought they were confusing before, the indexing of these policies is only matted to make them that much more confusing. Because then now not only does the client have to understand the variables that change inside the Universal Life policy on its own. Now they have to understand how their interest is going to be calculated.

So at least with the traditional interspace Universal Life Insurance policy it was like having a savings account. They told you what your interest rate was and that’s what your interest rate was and off it went. The indexing is supposed to be, can be tied to a market index such as the S&P500 and things like that.

But you really have to be very careful with these policies because you don’t really know exactly how your interest is gonna be credited from year to year because it changes. And that’s where Universal Life policies have basically come to today.

All 3 are still available out in the market place:

  • a traditional Universal Life with interest;
  • a variable which money is finding its way into the market;
  • and an indexed product where the markets are just being used to calculate the interest.

There is one form of Universal Life Insurance which is easy to understand that does work for some people. And that’s called Guarantee Universal Life Insurance.

Jack you and I have talked about Guaranteed Universal Life Insurance in the past.

Jack Driscoll: Right

Ian George:   But we basically talked about it. It’s Term till you die.

Jack Driscoll: Right.

Ian George:   And that’s basically what it is. Guaranteed Universal Life Insurance is essentially a premium that is guaranteed for the rest of your life for the death benefit guaranteed for the rest of your life. And that can be all the way up to age 121.

As we have gone over in some cases you can pay your premiums for a short period of time for Guaranteed Universal Life Insurance and keep your death benefit in force for the rest of your life.

Just know that there will be not, there will not be any cash value associated with these policies. It’s all going towards death benefit. Some polices will show some cash value at a certain time. But you have to understand with Guarantee Universal Life Insurance that if you touch that cash value the guarantee is removed.

So while you can see the cash value you can’t touch it.

Jack Driscoll: And that’s important.

Ian George:    It’s very important. Also it’s important for clients to understand if they’re working in that area that if they happen to forget a premium payment and that then will have the policy to look towards its cash value. They then lose their guarantees as well.

So they’re very fragile contracts but they will keep all of their promises and they are easy to understand as long as you’re very diligent what you pay.

 Now that brings us to Whole Life Insurance. And Whole Life Insurance is actually a fairly easy product to understand. We had talked about our basic components of life insurance. And so let’s go back and revisit those.

Our first basic component of Whole Life of life insurance is death benefit. Now with Whole Life Insurance obviously that carries a death benefit as well. So you’re gonna pick your death benefit. The next thing that happens is – we need to know about the mortality charge that goes on inside that policy.

Here is where Whole Life Insurance is different than Term Life Insurance or Universal Life Insurance – the morality charges on Whole Life Insurance are fixed in guaranteed level for the rest of time. This is nice because it makes it easier for people to figure out what’s going on inside their contracts.

So where as Universal Life Insurance is constantly going up. And then there’s the calculation of how that charge is taken out and what you’re paying into your premiums to get your cash value. And then you have to figure out how that’s calculated.

Whole Life Insurance kind of does away with that and basically says, “No. Here’s your mortality charge and here’s what it’s gonna be” and off it goes. Your premium also with Whole Life Insurance is- there’s gonna be a base premium to make sure all the guarantees can come true.

The underlying guarantees on any Whole Life Insurance contract are basically this – that the premiums that you pay in will go to your cash value and cover your death benefit. In a given year your cash value is guaranteed to be worth as much as your death benefit.

For most policies today that’s at age 100. So it doesn’t mean that you; you know that all that has to happen by age 100; well actually the policy guarantees that all that will happen by age 100 but it doesn’t mean you have to live to age 100 to keep it.

The other aspect is that you throw into what’s happening with that cash value. So you have that underlying guarantee but you can get more. So those are either with if you own a policy through a mutual company which are companies like my company – is Mass Mutual.

You have North Western Mutual; you have New York Life; you have the Guardian. These are your bigger mutual companies. We have Ohio National; we have National Life of Vermont; you have Penn Mutual. So you have small mutual companies that are out there as well.

The mutual companies, and this is where it’s important to understand this if you’re looking at a Whole Life Insurance contract – mutual companies are owned by their policy holders. So a policy holder of a Whole Life Insurance contract with a mutual company is being paid dividends. That’s how it’s done.

So if somebody has a policy with any mutual company, there are no stockholders other than the policy holders. You can’t find them on the New York Stock Exchange. They don’t; they’re not out there.

Other carriers do offer Whole Life Insurance they just won’t be paying you dividends on their Whole Life Insurance contracts as their dividends are paid to their stockholders. Policy holders are gonna get interest rates. So that’s how those contracts basically work.

With the dividends or interest rates on a Whole Life Insurance contract those are paid above and beyond the guarantees. They’re gonna do a couple of things. And most contracts are going to grow your cash value above your guarantee. And in other circumstances they’re going to pay your or grow your death benefit above your initial.

So it’s not uncommon to watch; on any Whole Life Insurance contract to watch all of your cash value grow and your death benefit grow. And that’s why Whole Life Insurance has been seen as a more stable program for a lot of people.

Jack Driscoll: And it’s important to point out – the dividends with the mutual companies are not guaranteed.

Ian George:   No they’re not. Dividends are not guaranteed and they do however; the cash value does have an underlying actual guaranteed amount.

Jack Driscoll: Right.

Ian George:   But no the dividends themselves are not guaranteed and they will fluctuate. So that is important to understand with anything. So your policy will go on over time.

The other thing that Whole Life Insurance contracts have are limited pay contracts. And those are offered by a number of different carriers offering you the chance to have a policy paid up in 10 years, 20 years. Some policies can be paid up at a certain year of you know the insured say at age 65 they want to make sure it’s all done, that can be done as well.

And that’s basically Insurance 101 with our Term Life Insurance, our Universal Life Insurance and our Whole Life Insurance. Now I know a lot of people do get confused Jack when they talk about all these programs. And somebody says, “Yeah but what about Single Premium?” well the funny thing is – is that Single Premium Life Insurance can be paid into any one of those 3 contracts.

So Single Premium contract in and of itself isn’t its own type of life insurance it’s actually a choice within any one of the 3 types of life insurance.

So how those companies choose to offer different options within those contracts can also be confusing. But what you want to know when you first start hearing about life insurance is – what is the basic type of life insurance.

And you can ask your producer or agent or anybody you’re talking to – is it Term; is it Universal Life Insurance or is it Whole Life Insurance? And then you’ll at least know what you’re starting with as a foundation and the blueprint for how that product works.

Jack Driscoll: And is it true that in any forms of life insurance; whether it’s Term or Universal Life or Whole Life – the death benefit if payable to a designated beneficiary and individual is income tax free no matter which form of insurance that you have?

Ian George:   That is true except for one particular area. It would be income tax free but depending upon individuals it could be, it may cause an estate tax which is why you need to work carefully with your advisor to understand how your policy’s being owned.

                         So nowadays if you’re an individual and you’re buying a life insurance policy and your life insurance death benefit proceeds take your overall estate over $5 million you could be subject to some inheritance tax as well as estate tax. That’s when you might want to take a look at having your policy inside of a trust in terms of how that goes.

But yes you can easily with some very simple diligence make sure that the death benefits of your life insurance policy remain untouched by taxation.

Jack Driscoll: And then the other area with life insurance can sometimes be probate where you get the name designated beneficiaries on the life insurance?

Ian George:   Yes probate is avoided as you know and some of you may know, is that probate is avoided on any beneficiary designation. So that is not only life insurance but its annuities; it’s your IRA’s; it’s your 401K at work; or your any plan at work where you’re forced to you know give a beneficiary.

                        And what probate does it that’s avoided as soon as the court is not involved. So anything that’s already been pre-deemed, and that’s where life insurance is obviously your front runner because – well people may forget to put you know beneficiaries on some other items; they’ll never forget to put beneficiaries on their life insurance policies.

Jack Driscoll: Because the one point I’d want to make to everyone is when you talk about life insurance the beneficiary designations override any designations you might have in your will. Because Ian just said it bypasses probate. If you have beneficiary changes that you’ve made in your will, who you want your heirs to be.

                         Let’s say you’re at a divorce or falling out or new children or whatever, and you update your will and don’t update your beneficiary designations, the issue will be the will is not seen through life insurance.

The beneficiaries that you have listed even if they’re old and defunct now will be the only designations the life insurance company sees when they’re paying out the benefits. So make sure to update both your wills and your beneficiaries when we talk about life insurance.

 Alright, well that’s it for today’s show. I appreciate everyone tuning in. I’m going to have Ian back on a couple of the next shows. We’re doing this as a series and will air them each week.

So Ian thank you very much for coming in and until the next show I appreciate it.

Ian George:   My pleasure thanks for having me.

Jack Driscoll: Thanks.


Valuable Papers and Business Interruption Insurance Coverage

Posted on September 26, 2014 by Comments are off

Insurance Coverage Episode

Valuable Papers and Business Interruption Coverage

Part 1

Welcome back again everyone to another edition of All Things Financial. We’ve discussed in many shows on the radio and now brought to you by video, so many areas in what I call financial planning but it’s really far more than that, that’s why I call the show All Things Financial. It deals with; we’ve talked about long term care issues; how to protect for long-term care; long-term care insurance or self-funding using life insurance.

We’ve talked about legacy planning; charitable planning; estate planning; special needs planning. For children let’s say future generations we’ve talked about college financial aid; we’ve talked about student loans; we’ve talked about FAFSA; we’ve talked about 529 plans, IRA’s, Roth IRA’s, Stretch IRA’s, Beneficiary IRA’s, 401k’s, 403b’s. We’ve talked about business insurance; workers compensation; auto insurance; car insurance; all these different areas in your lives; even budgeting.

Today I wanted to touch on a couple areas that most, especially business owners never think about. And the first one is – whenever there is a weather related or fire or any tragedy, any claim let’s say on an insurance policy, we find in many cases ruined documents. So I know it’s the paperless society. So we don’t have any documents anymore – everything’s online. Well, is it backed up? – “Yes, yes, yes, everything’s backed up”, you’ll say.

And then there’s a claim and it’s a water damage; it’s a flood; or it’s a mine subsidence; or there’s dirt; who knows; mud; who knows. And all your records that you didn’t think you had at your house or at your business are ruined. Now granted, the most up to date electronic records may be preserved because they were already loaded off site or in the cloud; but for the rest of the documents many times there’s data storage that’s ruined. It can be electronic media; it can be paper documents, same thing for those of you at home.

Well I wanted to share with you especially for the business owners – there’s a coverage called Valuable Papers Coverage. And you know we used to think that that was only a coverage for businesses who had blueprints or special valuable papers that were valued in and of themselves as hard to reproduce. But now we’re realizing over a long number of years, Valuable Papers Coverage needs put on to reproduce or preserve any paper documents, files and memos; because right after claim especially water. But it could be smoke or anything where they, the documents might have been recoverable using a specialist type of a company.

They might be ruined even just a couple hours later. Water is a classic case where it can compromise the whole box of files. Where immediately after the water claim if a restoration company properly comes in and specializes in paper restoration they might be able to save those documents.

Now picture this – papers or documents are in a box in the basement, water comes in, the box is wet. Immediately if you look and separate each paper and fan them out or lay them out, you may preserve the ink on those papers, you may still be able to read them but if you don’t they may all be stuck together and there may be 20 pages all stuck together and you’ll never tear them apart. That’s just a simple example of what I mean.

So what you’re gonna want to consider having coverage for, is the money to hire specialists at restoring paper documents if they can get in there fast enough and if you have the money to do it.

So we’re covering Valuable Papers. I’ve read a lot of articles on this and I refer to a couple of them here. But I read the Insurance Journals and on there were couple interesting tips in a number of articles; so the first one is – during or following a water loss. And this is from The Insurance Journal; it’s an older one but it’s The Insurance Journal – National Region and I quoted from this a couple shows ago – the same journal. I went through an old one from 2011 and I’m still talking with clients and prospective clients who don’t know this information. So I thought I’d bring this article back out again and share it with everyone because it’s just as timely.

It’s in the April 4th edition of 2011 and it says this – “During and following a water loss a standard letter or legal size box can absorb and retain several gallons of water”. You know we don’t think of this.  Who thinks of this? We just go along our lives hoping nothing gone happen but the insurance industry does think of this. And so do the valuable papers specialty firms.

Now, “saturated documents”, it goes on to say, “reduce the effectiveness of dehumidification efforts and provide a source of microbial growth”. So that’s mold. So you look at this and you say, “If we have boxes full of papers or files that are all wet and they’re trying to dehumidify the building to get all the moisture and humidity out, we’re making it hard on them by having all those paper documents; and it’s a great place to foster mold; which you know breathing that causes its own complications, very serious complications in some cases. So we’re festering and fostering the environment for mold and ruining documents and making it hard to dry out the whole location.

Now to prevent these problems and any other unnecessary expenses, the article says, “Damaged documents should be removed as quickly as possible”. I didn’t say discarded; I said removed from the premises as quickly as possible and blast frozen. Get that. I never heard of that before I had read this article. Blast frozen to arrest or stop or slow down the bleeding of ink and microbial growth.

Have any of you ever even heard of this? You know I’m bringing things to listeners and watchers of this show because most of us have never heard of half of this stuff, that’s why I’m bringing it out. Can you imagine that? Blast freezing! Who would’ve even think of that? – But the specialty companies do. So we would think of separating it out and drying it out like I said. They’re freezing it immediately and dealing with it later. It’s kind of genius right? But you need to pay for that.

Do you have the coverage to pay for that? – is one of the big issues. So it’s called Valuable Papers Coverage. You don’t have any valuable papers you might think and here, that’s the endorsement you need on to be able to preserve all your documents. So vacuum freeze drying and desiccant drying are the most widely used methods of document drying systems.

They’re 2 different methods folks. Again I don’t know anything about this until I read these articles but that’s why I share them with you. Vacuum Freeze Drying is one method, commonly used method, they’re others; and Desicant Drying – there the most; and they both have advantages and disadvantages.

Vacuum Freeze Drying results in a less wrinkled finish when you’re done – drying products. And it’s usually used when for books or clay coated paper is what they say. Vacuum Freeze dry chambers though are pretty small. Usually they’re pretty small. So you can’t handle a lot of volume at one time in one location. Companies using that system exclusively can have a significant backlog following a major loss. So they’re sitting out, unable to be treated fast enough.

Desiccant Drying – the other major alternative – is an expandable system; so several thousand boxes or documents can be processed at once. So it allows for faster turnaround; reduces your business interruption; reduces your time back in business; but desiccant drying can cause documents to expand. So it has its drawbacks too. And if you don’t use a highly skilled vendor for that it can get pretty bad.

Now, when even after drying these documents that you have may require some additional care. Gamma irradiation – again I never heard of half of this before I explored this further. Gamma irradiation may be required to combat bio-hazardous contamination to pre-mold; or soot may need to be cleaned form the surface; reproduction or imaging may even be required. So they’re gonna have to reproduce the document- can’t keep the old, original one; or they’re using gamma rays I guess to irradiate the documents again. You think this might cost some money folks?

You’re trying to replicate or restore the papers that you had. You didn’t think they were valuable but now that you think about it they might be original applications; documents; contracts. You never thought they were of any value and here’s what’s interesting – you have all your contents covered on your business policy and you have the full amount of coverage and guess what they’ll do. If you don’t have Valuable Papers Coverage or you do but you only have a basic limit, a lot of package policies give you basic limit – $10,000; $25,000 maybe $5,000.

You say, “Oh I have that coverage, I have that coverage” and in reality nowhere near enough. So these are some of the problems. So here are the big questions that we all look at and need to look at. Most business owners never even think about this –Does your property policy provide the necessary protection as you can already imagine, probably not? Rarely is coverage extended to include reproducing or imaging services as you can imagine. And a Valuable Papers endorsement is required; but how do you provide and determine the right amount of coverage? How do you know how much it’s gonna cost? You say you won’t know until you know what happens.

Well every need is, every business let’s say has a different need and every need is different.  But let’s use some common sense – Are you a medical firm? Are you a law firm? Are you an auto parts distributor? Are you a mechanic shop? Do you think there might be some difference in risk control with a law firm or a medical firm as opposed to an auto parts supplier or a mechanical shop? Yes of Course.

So there’s your first step – how vulnerable are you and is your business in this example? And you personally at home how vulnerable are you to paper being exposed to the risk of loss.

Now, the first thing an agent can do; so you need to contact your agents and say, especially if you’re a company and say, “Listen I have a law firm; I have a medical firm. I need your specialists, your qualified document recovery firm to come out and give me an estimate on how much exposure I have. What they would do if my papers got compromised; what treatment would they prescribe and how much would it cost and how much coverage do I need”.

Now if your agent says, “Huh!?” you might have the wrong agent. If your agent says “I’m familiar with what you’re talking about. I have company specialists that can help guide us in this and get a document recovery firm to come out and give you an analysis on the business and an estimate on the coverage”; now you’re dealing with a true professional and that’s why I share the show.

So that’s the first thing you do. And the second thing you do is find out – if I ever had this problem would you provide the restoration service in house or off site? Very few do it in house. You want one that does if you can to inconvenience you as least as possible; but you need to know the differences when you shopping these firms.

Now step 2 you need to see – do you have any damaged documents now that you might not know about? So you want to get down and see if there’s any mold where you’re storing things. Make sure, they might be able to give you some preventative measures; and if it’s a damp storage areas, how to protect from any exposure over a long period of time that might not be covered under any insurance policy. Because remember most insurance policies cover sudden and accidental types of losses but not losses that happen over long and extended period of time or it had to do with wear and tear, something like that.

When you look at your insurance, if you have a professional look at your insurance you may see the documents ruined over a long period of time because of mold may not covered under an insurance policy whereas if it was an instantaneous water loss they would have been covered.

So do your research folks. Standard limits that you have on policy typically just aren’t going to cut it, even if you do have some on your basic policy.

Alright, let’s take a quick break. We’ll be right back with more.

Part 2

Okay welcome back. We just got done talking about Valuable Papers Coverage, and for you business owners which was one little known type of a coverage on your policies; but another one is, you may be familiar with the term which probably you have no idea whether you have the coverage or adequate coverage – is Business Income or Business Interruption Insurance.

Here’s the key, if you own a business or you’re in business or representing a business or working for a business, that business needs money; which is its fuel to keep its doors open. Not its building, not its contents, not its people, not anything else.  Nothing works without money. Stop the money – people are still there, building is still there, contents are still there, machinery’s still there – business stops. Money is the fuel that keeps the business going.

The reason I bring that up – if there’s a loss, an insurable loss or a non-insurable loss, but let’s take an insurable loss here like a fire, or an earthquake, or a hurricane, or a flood or anything else; you might have great coverage with business on property, building, contents, workers’ compensations, vehicles, everything. And if your business is down while the property is being rebuilt; your building is being rebuilt whether you’re a tenant and don’t have a place to go back into yet or whether you’re a building owner or manufacturing firm or your manufacturing plant is down.

No matter what, your survival is an element of time and loss of revenues because loss of revenues coming in means you don’t have any money to pay your people; any money to pay your mortgages; any money to pay your business loans; any money to pay your expenses; any money to pay your car payments. Doesn’t matter how much those things are insured for – the people, if you can’t make their pays, will be gone 6 to 9 or 12 months later when you’re ready to reopen.

The vehicles will be – what do they call that?  – That’s right. They’re all taken back. The cars got repossessed. The properties got foreclosed on even though you had other property coverage; vehicle coverage; workers’ comp.; medical insurance; everything you needed to protect all of those things. You forgot the fuel which is the money stopped coming in until you reopen.

You know there’s a large percentage of businesses that are fully covered in the event of a claim that never reopen their doors again once everything’s rebuilt and restored. And the company is paying full replacement of the building and the contents and replacing vehicles and the business is never open. And you can tell why by the theme of this segment on this show.

They didn’t have income coming in through that whole period in time. Now there’re many reasons for that – Number 1 – no Business Interruption Coverage; Number 2 – Business Interruption Coverage but not pertaining to the type of loss that occurred. I have seen cases where we have Business Interruption Coverage or Business Income Coverage but the type of loss was a flood and the Business Income Coverage would have only pertained to fire, vandalism or whatnot but not all kinds of loss. Wow!

So check your coverages and then check your policy limits. I’ve talked about that in prior shows.

Now you have to take this very seriously because there’s another expense. What if your income is all coming in and by the time you reopen 6 or 12 months later all your customers went to the competitor because while your income was coming in and you had it insured your customers weren’t getting product.

You can’t expect your customers or maybe you can, to go down the street find alternative arrangements to have their needs met and especially if you’re a supplier for other businesses, and then come back to you when you’re open again. They’ve developed new habits now folks that’s why they stay with you now. The reason some of your customers don’t leave now, they’re used to dealing with you. There may be a better competitor right down the road and they still won’t leave because people don’t like to change.

Well in this case you need coverage piggy-backed called Extra Expense Coverage and that coverage needs to be of an adequate amount and limit to allow you to resume operations elsewhere. At a satellite location to service all of your customers so that their needs are met even if you’re making arrangements with other providers and manufacturers in the meantime to provide product through you so they don’t  have to leave you to keep your customers happy and fulfilled, in addition with having all your income coming in. So it’s Business Interruption Income and Extra Expense Coverage.

Now one final thing cause we’re out of time. You need to check with your insurance people or have us compare for you and do an analysis on your insurance program to see – “what if one of my suppliers goes down? what if my main suppliers has the fire? And now I’m out of product for 6 to 9 months and they’re proprietary products so I can’t license with another dealer or distributor. And I can’t provide product and my facility is fine. So you need to see if you have Dependent Properties Coverage.

Folks listen, we’re out of time, there’s a lot more to go over. It’s more than to do yourself. If you need a comparison, you’d like us to do a thorough analysis of your own business let alone the insurance program that you have, we will be happy to do that. We’ll get into an analysis on your business needs. Then do an analysis on your business policies; try to help you identify any gaps or areas of concern; and what potential and possible solutions are available.

Please feel free to contact us. As you could see our contact information’s available and we’ll be back next week we’re out of time again.

Thank you so much for tuning in and we’ll see you again next week.

Various Insurance Vulnerabilities

Posted on September 23, 2014 by Comments are off

Insurance Vulnerabilities

Part 1

Welcome back again everyone to another edition of All Things Financial. The last couple weeks we’ve been talking about Policy Comparisons – How to Compare. And if you missed the first 2 parts you’ll want to check those out. Because I went through some general concepts that are little known and widely misunderstood on how people compare insurance policies when they’re shopping.

But to continue this we were ending up last week with some differences and nuances with, as opposed to car insurance coverage, what recreational vehicle policies might provide; or boat policies; or classic car policies. So for those of you who have motorcycle insurance or any of these ancillary type vehicles, I wanted to point out some of the different coverages which we started on last week.

And I want to pick up this week where I left off. And I’ll also discuss some other areas in insurance issues. And maybe exposures that you don’t even know you have as we get through this show today. And maybe help you identify some areas you’ll want to hurry and call your agent about and ask him, “Am I covered?”

So back to the recreational vehicles – I wanted to share with you a couple other areas especially with boats and like I say the motor homes and mobile homes. But a lot of times when you’re going on a trip, especially when you have a motor home you will take a pet. And I bet most of you don’t have your pet insured. You never even thought of it.

So yes you can buy pet insurance but secondly in a motor home, you can actually add pet coverage while you’re transporting a pet, in some policies, in some cases, with some companies. So whether or not you have pet insurance, so to speak, which normally provides for medical care for the pet, this type of insurance is if they get injured in an accident or something happens to them in an accident let’s say.

So your motor home policy might be able to endorse pets on and I’ll bet that you never knew that.

When we look at some of the boat coverage – you know if you’re sailing in international waters do you think you might need some special coverage? You know, seems like common sense. Most of you would know that but I bring it up anyway because it is something you want to ask – If you go in international waters. Well be careful because – is Mexico international waters? or when you go off the coast of Florida. So be a little bit careful there.

We’re talking about some coverages that we didn’t have to concern ourselves or at least we didn’t know to like piracy and terrorism. So even on domestic waters we now have coverages that you may need to contact your agent and find out, “Am I covered for piracy and am I covered for terrorism?”; some of these things.

Now for you fishermen with the bass boats and I know they’re probably a lot of you listening. Some of you might be fishing tournaments for money and you might miss out on a tournament that you’ve invested money for, that your boat didn’t make it. It broke or you had a boating accident. What I want you to do is – know that you can talk to your insurance carriers about, “I fish for tournaments. And can I have coverage for loss of income or revenues or expenses as a result of the boat failing or me being in an accident?”

So I’m sure a lot of you didn’t know you could even buy that coverage but you can in many cases. Now again, remember there are a lot of discounts available that are not available in regular car insurance for boat policies. And that’s again Boaters’ Safety Training.

And you also have to know you might have to pay additional premiums. If you’re taking passengers you might have to pay additional premiums that cover those passengers if they’re hurt. Especially uninsured boaters liability and all those type of things. And you might have to cover equipment especially. They might not cover it on the regular boat policy. So know that fishing equipment, life preservers, things like that might qualify you for discounts but might also need covered. So you have to know all those things.

You know when you go into a Boaters’ Safety Course you might have as Boaters’ Certification – every 2 years or 3 years you might have to update that to keep the discounts but it’s good to have that. And you might also get a discount for having ship-to-shore radio on there; because it’s a safety feature. You might not think of but it might be a safety feature that’ll give you some discounts.

Alright let’s take a quick break and we’ll be right back after this.

Part 2

Welcome back again everyone. Now we’re going to get into some areas that I’ll bet you never even think of. But I’m here now to help you. One of them is texting while driving. There are issues with texting while driving and we’re a little bit concerned as insurance agents over – will policies begin putting provisions for if you’re texting while driving maybe coverages will be limited or something like that. So be aware of this because we already know the police can check your phones and see that there was texting and things like that; very, very dangerous. Remember when you’re driving a vehicle you’re really driving a loaded weapon so be very, very careful out there.

But an area I wanted to point out was an article I ran across. And I’ll cite the study, but you know what it pertains to?  – Football games. And I don’t mean participating in football games. I mean fans of football games and fatalities and car accidents after their team wins. So here goes.

There was an article. It’s an old article but I wanted to resurrect it for those of you now that it’s football season. And here is what it is, it dates back to 2011. It was in the “Insurance Journal” in the “National Region”, April 4th of 2011. And what it did was, it cited a study which I’ll tell to you about in a minute who did this, but here’s what it is.

The description says, “Closely contested major sporting events are followed by a significant increase in traffic fatalities for the fans of the winning team”. Whoever heard of this? So what seems to be happening is research from the North Carolina State University came up with this report that when your team wins there’s sometimes an increase in traffic fatalities – because the teams are winning and I guess it gets everybody all hyped up.

It said, “A previous study showed that traffic fatalities increased in the hours following the Super Bowl. Dr. Stacy Wood-Langdon” L-A-N-G-D-O-N, “distinguished Professor of Marketing at North Carolina State and a lead author of a paper describing the research went into a question saying – “Are close games or highly contested games; are the fans at more risk after the game?” Basically they’re all ramped up.

Now we don’t know whether it’s ’cause of drinking or whether it’s ’cause of testosterone, as it goes on to say in the article, that hypes people up and makes people more aggressive but here’s part of their conclusion. And the reason I’m sharing it with you on the show is because yes it pertains to insurance but it also pertains to your safety. Remember this show is All Things Financial so I’m trying to keep you safe folks.

“Games rated as nail-biters are far more likely to result in traffic fatalities” this study goes on to conclude, “but only for fans on the winning team”. So I don’t know maybe it doesn’t pay to win but be careful when you’re at these football games. “Wood and researchers”, it goes on to say, “from the University of South Carolina (USC) evaluated traffic fatalities after 271 games played between 2001 and 2008 including championship games”.

And it just goes on to say that they found that traffic fatalities increased significantly after close games and games that were like nail-biters. So the paper, it’s called if you want to look it up – “The Bad Thing about Good Games – The Relationship between Close Sporting Events and Game day Automobile Fatalities”. And the reason I bring it up on the show is forewarned is forearmed. So it’s from the General of Consumer Research. It was co-authored by Dr. Melane Morgan-McInnis – a Professor of Economics at USC; and David Norton PhD student at USC. Also the North Carolina States Department of Business Management is part of the university’s Poole College of Management had a part in this study.

So I bring it up for one main reason – it’s football season, be careful. As I say forewarned is forearmed. So be careful out there.

Now another thing I wanted to point out. A totally different area for those of who are involved in so many different sporting events or any community events – I know most of you don’t even think about insurance but my question as a financial planner not just an insurance agent is – are you covered? So if I had a hundred of you listening – tell me everything that you do on your off time. I’d be asking, or I’d ask you to ask me the question, “Am I covered?”; “Am I covered?”; “Am I covered?”; “Am I covered?” for all these different things.

It might be scuba-diving and you know bungee-jumping; it might be Little League Baseball; it might be coaching Little League Baseball. So all of these bring up activities and it might be being on a community board; or a community association; could be holding picnics; it could be holding trade shows; it could be doing all these things; holding fairs, farmers’ markets. All of these different ancillary activities raise the question to a seasoned and skilled financial professional – “Am I covered?”

So, I want to get into one area which is for those of you who are on boards or in leadership positions because you’re volunteering – and I know a lot of you probably are. I will start this discussion by saying many of you or maybe most of you are not covered. So you’re volunteering for organizations; you’re taking on responsibilities for those organizations; you’re making decisions on behalf of those organizations and may be personally liable for those decisions made having no protection through the organization.

So we’re going to take a quick break again. Come right back I’ll explain what I need; what I mean and what you need to make sure you’re covered when you’re volunteering out of the goodness of your heart to these organizations – to make sure that you’re also protecting yourself and the other members on the board; and the other members of the association properly, okay. Let’s take a quick break and we’ll be right back.

Part 3

Okay let’s get right into this issue. You’re volunteering for organizations; they get, they have no money sometimes. So you’re doing volunteer work- you’re coaching, whatever it is for no money. You’re putting yourself and your family and maybe even your business at risk. For what? – To do good work. But, be careful here folks because if you’re not covered it backfires. If you wish you never had done it then you need to know in advance – could coverage have been available; and then could the organization have afforded the coverage.

Many people are not volunteering because of the risks. But there’s a policy that can help mitigate some of the risk and it’s called – a Directors’ and Officers’ Liability Policy. Now for those of you listening you first need on your own; your automobile insurance, your home insurance; your miscellaneous insurance like I’ve talked about – recreational vehicles, motorcycles, boats, whatever and Umbrella Liability Insurance.

I’ve not talked about that on recent shows so write that one down. I won’t go into it in detail today. It will not typically provide coverage though for Directors’ and Officers’ Liability. So you still need; if you’re volunteering or on a paid board. You need to make sure that Directors’ and Officers’ Liability is first purchased from a reputable company. And many organizations don’t have the money to be able to afford the coverage.

And secondly, I’m going to help you see and write down what you need to be looking for, for starters out of the Directors’ and Officer’s Liability policy. So the very first thing that I want you to do is look and see when you join a community association or a board, I want you to realize you’re a fiduciary when you’re acting on a board. Talk to your attorneys first. And ask them, “Am I putting myself in any legal liability that I need to know about and I’m unaware of?”

And that can go so far as the attorneys might tell you, “Do you sign any leases? Do you sign any papers as a board member? Do you vote on anything?”

“Well yes we do.”

“Well that might be deemed as a contract.”

Who knows I’m not an attorney. But you need to ask the attorneys, your own attorneys and maybe the board’s attorneys – and they should have one by the way, “What liability are we exposing ourselves to individually and as an organization?”

So typically we see that as a fiduciary liability which means – you have to do what a prudent person  in the court of law they say- would have done to put the interest of the organization first and the members of the organization over yourselves and above and beyond. So get to an attorney is my first recommendation. And ask them, “What risks am I undertaking that I’m unaware of?”

Number 2 – on the insurance side with this Directors’ and Officers’ Liability even with your best efforts you still can’t control all the risks. So there are potential lawsuits that you might want to be buying this insurance to protect, and you might want to be shopping the insurance from many different companies.

So one is – breach of fiduciary duty. Are we covered if there’s breach of fiduciary duty? A lot of; how about employment issues? We had a secretary, we had a janitor, at the association we fired and they sued us. So for discrimination, “We didn’t hire”. You know sometimes you might be in a situation where it’s not an employee that you had. It was a perspective employee that you chose not to hire and they sue you for discrimination or whatever.

So don’t you think you might better have coverage so that you’re not on the hook paying all the legal bills defending yourself that you did not do anything wrong. Low and behold 2 or 3 years later it goes through the courts and yeah it was proven you did not do anything wrong. But it didn’t get to the courts for 2 or 3 or 4 years. Who’s paying all those legal bills for those 2 or 3 or 4 years until it gets to the judge to say, “Yeah it’s a ridiculous lawsuit”? – Well you are.

So when you look for the Directors’ and Officers’ Liability coverage, you’re looking for – does it have these coverage for  breach of fiduciary liability but you’re also looking to see does it pick up defense costs of each individual; and in fact is each individual an insured under the contract or is only the organization insured?

So if the organization’s sued and the judgment goes against them, the organization is not remunerated but the payment is made based on any liability to the organization. But what if it doesn’t pay based on the liability of any one individual in that organization acting on behalf of the organization? Ouch!! So you better make sure you’re covered; do your homework there.

Now you want to make sure that the insured like I say is – picking up all the members and all the officers. So I’m talking here about members and officers. Why do I want that? Well what if one member in the organization does something, and they’re not an  officer and they put the organization at risk for being liable for something because they were a member of the organization? Boy oh boy, what a mess huh!!

So you want to find out who’s an insured – are the members insured’s? Any action of the member as a result of an organizational activity? Are the officers insured?

Then you get to the next point and you say, “What about somebody stealing money?” What about members stealing money are we covered? What about officers stealing money or embezzling or not only money – theft of equipment? So are these things insured?

How about liability? When you’re a member of an organization and you conduct a picnic as or fundraisers. If anyone gets hurt at those activities are you insured? And another one is what if you plan a big event? Put all that expense into the big event, have all the commitments from all the vendors, let’s say, and all the members or not members but participants who might pay an entrance fee to the event and then it gets rained out. Or power goes out in the facility where you were holding the event. Do you have No Show Insurance? Do you have Show Cancellation Insurance? There’s a lot to think about here.

Now you see why I tell you – business owners and individuals alike. You need to surround yourselves with competent financial, legal and tax professionals. Don’t try to do this yourselves. Like the old TV shows, “Don’t try this at home kids!” because it’s too complicated. And I’m sharing that with you here. Don’t try to do this on your own. It’s tough. There’re a lot of things that you’ll never think of and in fact many professionals don’t even think of, so you have to get highly skilled ones.

How about this? What if a lawsuit is between an insured to another insured? Wow! A lot of policies don’t cover that, but you wouldn’t know to ask. So when you shop one company and you shop another company and they both say they’re giving you the same coverages, and you look at the policy quotes and they’re both saying $1 million or $5 million, and this and that and the other. You don’t know how to look in that policy coverage booklet.

Insured versus insured is excluded on one; claims on that and they’re covered on another one. Obviously one policy is going to be more expensive if it’s including more risks of loss than the other one is. Have your attorneys review your contracts when you’re shopping for coverage folks. Do not try to do this on your own.

Now – employment discrimination. Again I just touched on that but what about breach of contract? You know the attorneys will tell you there are verbal contracts, they’re written contracts, but if you tell somebody you’ll do something and don’t; what if your organization says they’ll do something and don’t? What if they sign agreements and then have a breach of contract for whatever reason? Are breach of contracts covered?

These are all issues that when you’re a member of an organization you’re now taking on that you weren’t before you volunteered or for pay. So either way I’m asking you to be very careful. I’m asking you to research. I’m asking you to ask the right questions. And I’m asking you to get and surround yourself with the right professionals to help guide you.

Okay folks, that’s it for another edition of All Things Financial. We’re out of time. I could go on and on as you know. But we’re out of time so we have to stop. I’ll be back again next week.

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jack driscoll

Hear Jack Driscoll's weekly radio show broadcast offering news and tips on all things financial.

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