Just as it’s important to manage portfolio risk through diversification, it’s equally as important to manage real-life risks through insurance.
Insurance can mitigate the cost of long-term care, cushion the financial blow of a sudden death or alleviate the financial pain of liquidating an estate. Yet too often individuals plan to use their own resources to cover the cost of catastrophic financial events, exposing themselves to unnecessary peril and risking the loss of their estate’s assets in a heartbeat.
Darren Markley, Market Leader for U.S. Bank Private Wealth Management in Denver, and John Campbell, Vice President of Wealth Planning for U.S. Bank Private Wealth Management in Chicago, shared their perspective on why insurance may be essential in managing financial risk.
Why is insurance an integral part of a wealth management strategy?
CAMPBELL: Forty percent of Americans do not own a life insurance policy1 and only one in four Americans 65 and older with a net worth of
$1 million or more owns long-term care insurance.2 High net worth individuals who do not own any life insurance or long-term care insurance typically plan to self-insure, using their own resources to cover the costs of long-term care and estate taxes. For these investors, it’s not a matter of whether they have the assets, it’s whether this is the best use of those resources. Self-insured investors with inadequate liquidity may need to borrow money against their assets or liquidate them when it isn’t a good time to sell.
In the event of death, executors or beneficiaries may need to sell or borrow at an inopportune time, receiving less than planned. Insurance could shift the burden to the insurance carrier.
MARKLEY: Buying insurance today at a fixed rate means you can pay 20 cents on the dollar for an asset that may prevent your estate from being depleted.
What makes traditional insurance better than self-insurance?
CAMPBELL: Life insurance is a contract that provides immediate leverage, relative to the premium spent, fully and immediately upon death. When self-insuring, however, needed funds may or may not be adequate or available depending on when death occurs and whether there has been time to accumulate needed funds. Also, under our current tax code, death benefits from life insurance are generally received income tax-free.