By Sally Hanley-Whitworth, CFP® | Executive Vice President, Wealth Services | 05.17.2018
Financial markets oscillate between periods of tranquility and turbulence, rising and receding asset prices. Our personal wealth tracks these movements, climbing much of the time and then stricken by periodic setbacks.
The timing of these setbacks can be unfavorable if they coincide with major life events. This phenomenon is called “sequence risk”—that is, the risk that a period of significant investment losses occurs right when you need to begin relying on your invested savings for income or expenses. The combined drawdown from investment losses and withdrawals can shrink an investment portfolio by enough to significantly impede its ability to generate sufficient returns in the future.
We have a tendency to segment our personal finances by accounts, financial institutions, or even goals. This has obvious practical uses, but it can also complicate the fact that our financial lives are connected regardless of where our assets reside.
With this unified perspective in mind, it can be helpful to think of the benefits that insurance offers in terms of risk reduction, both in the traditional sense of providing financial protection for your family and as a conservative measure that can help offset poorly timed market declines.
Here are several ideas worth considering as you incorporate insurance into your long-term financial plan:
Match Life Insurance Needs to Goals
For young families, life insurance needs typically revolve around income replacement. Later, insurance payouts can be used for children’s college expenses. After this point, life insurance proceeds can help cover an unforeseen market-driven retirement shortfall, safeguarding the financial well-being of a surviving spouse.
Life insurance trusts can also be used to enact estate planning strategies. For example, you could consider placing a life insurance policy into a trust, with the benefits passing to your beneficiaries outside the scope of estate taxation.
This is a smart maneuver for providing funds to pay estate taxes, especially if those taxes will be incurred on illiquid assets—like real estate or a family business—that your heirs may want to retain. Similarly, a life insurance trust could save your heirs from selling part of an investment portfolio at low prices in a poor market environment.
Will You Need Long-Term Care Insurance?
Possibly. Research indicates about 58% of men and 79% of women aged 65 and older will likely need long-term care at some point. The average time spent in long-term care is estimated at about 2.2 years for men and 3.7 years for women.
The connection between long-term care insurance and your savings is straightforward: This type of policy will reduce or eliminate your out-of-pocket expenses incurred for long-term care. The national average cost for a private room in a nursing home was $7,698 per month in 2016. That equates to more than $200,000 for men and over $340,000 for women based on their average times spent in long-term care.
It’s entirely possible to cover these expenses with savings, but if you’re seeking to maximize your legacy, then buying long-term care insurance when rates are preferential can increase the likelihood that your heirs will receive a greater inheritance. Furthermore, holding a long-term care policy alleviates the risk of drawing substantial additional savings at a time when a market decline may have already reduced the value of your investments.
Know Your Goals
The role of insurance in your financial plan depends largely on your goals and intentions. It offers an attractive—but often under-appreciated—risk-reduction benefit from a total-asset perspective. Insurance policies are complex, and wealth advisors can provide an objective assessment of your options so you can select policies that will best help accomplish your goals.
If you still have questions or concerns regarding this topic, reach out to our retirement plan team experts—we would be happy to help.