Should insurance be part of your financial plan?

In my 40 years of tax and financial planning, I don’t think I’ve ever seen a client sit in my office and say, “We really need to talk about my insurance.

While the focus is usually on wallets, social security, and withdrawal strategies, insurance issues also deserve special attention.

With this column, I finish my look at the key decisions facing what I call the “good savings couple”.

As I described in Part 1 of this series, I define a good savings couple as a couple who have worked a lifetime, are between 62 and 66 years old and are planning to retire. They have a 401 (k) in the lowest seven digits, own a partially paid house, have consumer debt that consists only of car loans or rentals, and no longer have financially dependent children.

In the first column, I mainly looked at investment decisions. In Part 2, we looked at a wider array of dos and don’ts, including Roth IRAs, tax planning, and when to start taking Social Security.

Here we are looking at insurance.

Insurance safety nets and an updated estate plan are essential. However, two types of insurance are generally overlooked: supplementary liability insurance (umbrella) and long-term care insurance. Finally, fixed annuities can be a safety net in the event of unexpected longevity and / or increased expenses.

Umbrella insurance

When I ask clients if they have umbrella insurance, there are only two possible answers: “yes” or “what is it?” I explain umbrella insurance to my clients like this: If someone stumbles and falls at your house and sues you, they can usually take out all of your net worth. Most insurances, including home and auto owners, cover up to a maximum of around $ 500,000. Umbrella insurance can cover from $ 500,001 up to the limit you specify – it is recommended to be your equity. So umbrella insurance is essential in protecting your assets – and what’s surprising about this coverage is that it doesn’t cost much. A few hundred dollars a year can add a significant layer of financial security.

Long term care insurance

Another important safety net is long term care insurance. Many people mistakenly assume that long term care can be covered by medical insurance or Medicare. This is not the case. Medical insurance and Medicare cover medical costs, not long-term care costs. For example, a person with dementia may need care for years. This would be covered by long term care insurance, not medicare. At some point, if that person had a broken bone and needed surgery, Medicare would cover those expenses.

Over 50% of adults over 65 will need long-term care. And the biggest problem with long-term care needs is that care could be needed for many years at a cost of $ 10,000 per month or more. Considering that medical science has extended life without necessarily extending ‘quality’ life, long-term care can often be needed much longer than the average long-term care statistic of 2.5 years for women. and 1.5 years for men. In fact, 13% of people will need long-term care for more than five years.

Statistically, a pool of $ 250,000 (or the equity in an accessible home) could cover the costs of long-term care. But what if both spouses need long-term care? What if care is needed for more than five years? Here, we see the real need for insurance: to protect your assets in the event of the unforeseen.

Even for those who believe they can self-insure, I recommend long term care insurance. Why? Because if you are the person in need of care, you may be reluctant to spend the necessary money for fear of leaving your spouse without sufficient resources for the future. If you are the assisting spouse, you may be reluctant to seek paid help for fear of draining future resources. Yet for some reason I have never had a client who was hesitant to spend the insurance money.

Long term care insurance can get expensive. In fact, this is one of the main reasons people choose not to purchase this coverage. While some elements of this insurance are critical, there are ways to reduce costs while still maintaining the important protection. So what should you be sure to include in long term care insurance and what can you skimp on? Below is a simple table. It is not meant to be comprehensive and be sure to check with your own qualified advisers before making a decision.

According to Christine Benz, there are two main options for long-term care insurance: stand-alone long-term care insurance policies and “hybrid” life / long-term care or annuity / long-term care products.

While purchasing long-term care insurance when you’re younger may mean lower annual premiums, you’ll pay those premiums over a longer period of time than if you waited until you were older. Mathematically, the age to purchase long-term care insurance is between your mid to late 50s, although the risk of not being eligible is a big factor. According to Benz, about 20% of claimants aged 50 to 59 are denied coverage, largely due to ineligible health issues, while a third of those aged 65 to 69 are denied coverage.

If you don’t want to pay premiums for long-term care coverage that you may never use, or if health issues disqualify you, consider hybrid life / long-term care or hybrid / annuity / long-term care policies. long duration. These policies are growing in popularity because medical screening is often less stringent than with stand-alone policies and there is some “payback” even though long-term care is not required.

Do I hate spending money on insurance? Yes. But, in many circumstances, it is a necessary evil.


I am known to hate annuities. I’m saying 90% of people who have annuities don’t understand what they bought and / or should never have bought one in the first place. But there is one big exception: immediate fixed or single premium annuities. I see these annuities (in addition to their home equity) as a great safety net for retirees who are worried about running out of money.

Unlike other investments, assuming a financially secure insurer, an immediate annuity can provide guaranteed income for life, in amounts greater than typical “safe” withdrawal rates. For example, a 75-year-old single woman could receive $ 1,240 per month for life with an investment of $ 200,000. This equates to a drawdown rate of around 7.5%, far more than an investment advisor like me can promise for many years. Consider this type of annuity as another component of “Social Security”. It’s a monthly income that will be there even if you live longer than your estimated lifespan.

As with any insurance policy or investment, it’s important to work with one or two trained professionals – a licensed insurance broker and a financial fiduciary advisor.

Don’t pay for unnecessary insurance

Once retired or near retirement, life insurance is usually no longer necessary (unless it is for funeral costs or inheritance taxes). Life insurance is usually purchased to replace the current earnings of the covered person. By definition, a retiree is no longer working and hopefully has accumulated enough assets to cover living expenses in the future. Unless beneficiaries seek a windfall in the event of death, life insurance premiums are no longer required.

Please note that some policies may have accumulated a cash value. If so, there are four options:

  1. Maintain coverage as an investment decision, either by continuing to pay premiums or by using the cash value to pay premiums for a period of time.
  2. Cash in the police. To the extent that you receive excess cash from your base in the policy, you will pay regular tax on the gain.
  3. Borrowing Against Politics. As long as there is sufficient cash value (or ongoing premium payments) to pay interest and avoid lapsing, there is no tax payable on amounts borrowed. Upon the death of the insured, the insurance benefit will repay the loan and any remaining amount will be paid to beneficiaries tax free.
  4. Sell ​​the policy to a third party. This strategy can work even if there is little or no cash value. To the extent that the product received is greater than the tax base, tax will be due on the gain.

Like life insurance, disability insurance is not necessary during or near retirement. These bonuses can be quite expensive, so don’t waste your money!


Retiring is one of the most important decisions of your life. While you’ve worked and saved for it most of your life, pulling the trigger is an important move. Please take note of the suggestions here, and most importantly, hire a qualified financial advisor. For unbiased, commission-free advice, I recommend a member of the National Association of Personal Financial Advisors. You can find someone near you on the NAPFA website.

Sheryl Rowling, CPA, is Head of Rebalancing Solutions for Morningstar and Founder of Rowling & Associates, an investment advisory firm. She is a part-time columnist and advisor-focused product consultant for Morningstar, and continues to be active in the advisory industry. Morningstar acquired its Total Rebalance Expert software platform in 2015. The opinions expressed in its work are its own and do not necessarily reflect those of Morningstar or Rowling & Associates LLC.

Louis R. Hancock

Leave a Reply

Your email address will not be published.