Walking on salmonella-laced eggshells, wondering whether we’ve finally seen the worst of the BP oil spill, it’s clear that the world remains as risky as ever. By the time I post this blog, there will probably be yet another new headline with another unlikely risk that few of us saw coming.
As a financial planner, I think about unlikely risks all the time. While we can only do so much to avoid a bad egg before it’s been recalled, there are reasonable steps you can take to mitigate some of the bigger “unlikely” risks. Here are some examples.
1.) Premature Death. For most people, the chance they will die tomorrow is remote. But the consequences are too severe to ignore. Just in case, almost everyone needs a will. In addition, people who have substantial estates need expert planning to minimize possible estate taxes.
Contrary to what a life insurance salesman might tell you, not everyone needs life insurance. Nevertheless, in our comprehensive financial planning process we always examine whether the risk of death should be transferred to an insurance company by buying a life insurance policy. Life insurance most often makes sense for the younger client whose estate is not yet large enough to provide for the family if the breadwinner dies. But as the breadwinner nears retirement age, the need for life insurance as a risk management tool wanes. For this reason we usually recommend “term” life insurance policies, which expire after a certain term, and we avoid the much more expensive “whole life” policies.
2.) Living Too Long. The flip side of premature death is outliving your money. Average life expectancy is around age 78. But if you’re a non-smoker, add six to nine years to the average. Moreover, constant medical advances are gradually extending life expectancy. Referring to the MoneyGuide Pro Annuity 2000 Mortality Table, the bottom line is that, for the average non-smoking couple, there is a 50% chance at least one spouse will live to age 91, and a 10% chance that at least one spouse will live to 101.
3.) Health and Disability. Health insurance is a must, and disability insurance (though often expensive) should at least be considered. Depending on the situation, long-term care insurance may be appropriate too.
4.) Cars and Trucks and Things That Go. When it comes to liability claims, every wealthy person is a potential target. Everyone who has a high net worth needs an umbrella liability insurance policy to protect their assets against potential lawsuits resulting from events like car accidents. Yes, it’s a remote possibility that you’ll get into a car accident, that it will be your fault, that someone will be seriously injured and that they will successfully sue you for millions of dollars. But it can happen, and it is a relatively cheap risk to insure against. Typically we recommend at least a million dollars in umbrella coverage, and often more.
We take our risk management analysis beyond insurance to “asset protection” strategies, legal strategies that can protect assets from lawsuits after the insurance runs out. If you’re not sure you have adequate personal risk protection, call us. We don’t sell products or prepare legal documents ourselves, but we help you provide an objective risk review, strategy recommendations and appropriate referrals.
5.) Market Risk. Finally, some risks are far from remote, but when they occur many people are shocked anyway. Take the U.S. stock market. Since 1926, we’ve seen negative annual returns about a quarter of the time, usually in the double digits. If the stock markets weren’t subject to periodic ”head for the hills” panic runs, more people would invest, and remain invested. Supply and demand then would drive prices up and returns down.
But, while periodic bad markets are expected, they aren’t predictable; nobody knows when they’ll begin or end. Our goal is to help investors (1) remain committed, ready to capture any upswings that may occur and (2) dampen some of the stock risk by blending stocks with bonds in well-diversified portfolios that meet the client’s investment objective, bearing all of their financial goals in mind.
If you’re not sure whether your personal risks have been adequately addressed, give us a call.