Buy/Sell Agreements Make the Best Insurance Policies

Buy Sell Agreements Can Be the Best Insurance Policies

Risk management is a pretty common objective for small business owners.  Once a business becomes viable, protecting what you worked so hard to build is usually a priority.  As COVID-19 has shown us, so many things could go wrong in the life cycle of a small business that it makes sense to limit risk wherever possible.

The first place many business owners will look is to the insurance industry.  Errors & omissions, malpractice, general liability, and standard business owner’s policies can be great ways to limit risk in specific areas of your business.  Insurance usually won’t help you much with planned or unplanned successions, though.

What happens when it’s time to retire?  Who might be willing to buy your stake in the business?  How do your partners feel about that?  How will your business be valued at the time?  And what happens if you’re forced into retirement involuntarily?

This is where buy sell agreements come into play.  They may seem mundane, but buy sell agreements are an important component of risk management in any small business.

In our financial planning practice there are a few common mistakes we see with buy sell agreements.  This post will cover those mistakes, as well as the standard provisions we tend to see in effective agreements.

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Reflections on the Pandemic So Far

Reflections on the Pandemic So Far

We are currently somewhere around day 60 of our family’s quarantine, and the country is inching closer to reopening.  Over those 60(ish) days I worked remotely from home, and held a TON of meetings with clients, colleagues, and others over Zoom.  As you can imagine, everyone has handled the last two months a little differently.  Some investors are more comfortable with volatility than others.

I had a chance this week to think back on the sentiment in general.  How people are doing and feeling.  How they’ve handled the last few months.  What their financial situation is like right now.  And while everyone has handled quarantine and the Coronavirus pandemic differently, there are some trends I’ve noticed across many of my conversations.  I thought these trends might make an interesting blog post, so here are a few things that have been on my mind recently.

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The Pros & Cons (and Economics) of Leasing vs. Buying a Car

The Pros & Cons (and Economics) of Leasing vs. Buying a Car

For most of us in the US today who do not live in the middle of populous cities, driving a car from place to place is a way of life.  Some of us share a car with a parent, spouse, or friend.  Some of us choose to rent cars by the week, day, or even hour as we need them.  Those of us who don’t are faced with a major financial decision every 3-15 years: should you lease your next car or buy it?

The car buying experience is not one that many people enjoy.  Neither is leasing, for that matter.  You generally start by doing some research online.  You identify what you need from the car in terms of size, capacity, fuel economy, etc., and then look at different makes and models.  Maybe you read some reviews on Consumer Reports or Kelley Blue Book to get a feel for quality, dependability, and price.  Then, once you have an idea what kind of car you’re really looking for, you start to look at the economics.

How much do want to spend?  New or used?  Should you finance it or pay cash?  And then the grand question: what about leasing a car?

Leasing a car would require less money down, which probably means you could be driving a nicer car.  Yes, you’d have a mileage limit, but who knows what your life will be like in 3 years after a lease would end?  Would you still want to be driving the same car anyway?

There are several moving parts surrounding the whole “lease vs. buy” decision.  This post will discuss the economics of the decision, as well as the pros and cons of leasing vs. buying a car.

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How to Determine How Much Life Insurance You Need

How to Determine How Much Life Insurance You Need

Many people I work with realize that they need some kind of life insurance once they start having kids.  The purpose of life insurance, of course, is to ensure that everyone in your household can maintain their standard of living if you die prematurely.  And as soon as other people start relying on income you haven’t earned yet to live, it’s probably time to consider some coverage.

The problem seems straight forward, but the options are confusing.  First, there’s more than one type of life insurance.  Whole, variable, universal, and term are the predominant options available.  While insurance agents love to sell the first three (because they’re the most profitable to the insurance company, and therefore pay the greatest commissions) term is the least expensive and usually the best fit.

I’ve written in the past about why most people seeking life insurance should steer clear of permanent insurance policies.  But what about the second part of the equation: how much do you really need?

There are two predominant ways to figure this out: human life value and a life insurance needs analysis.  Today’s post will explore both methods.

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What Everyone Ought to Know About Long Term Care Insurance

What Everyone Ought to Know About Long Term Care Insurance

You’ve seen the stats.  Long term care is expensive, and we’re all likely to need it at some point in our lives.  The cost of spending time in a nursing home or assisted living facility adds up quickly, which is why many retirees choose to insure against it through a long term care insurance policy.

Problem is, since there’s a high likelihood of requiring long term care, insurance is an expensive proposition in its own right.  Plus, there’s no guarantee that the premium costs of a policy today don’t rise in the future.  Genworth, one of the biggest underwriters in the long term care insurance, received approval in the Q1 of 2019 to raise premiums an average of 58%.  (Insurance companies must receive approval on a state to state basis).  That’s also after the company raised costs an average of 45% in 2018, and 28% in both 2017 and 2016.  Ouch.

Are you better off crossing your fingers and hoping you don’t need expensive care for a long period of time?  Or is it better to cover this risk through an insurance policy that will cost you an arm and a leg anyway?

This post will cover the essentials of long term care insurance, including exactly how to decide whether picking up a policy is a good decision for you and your family.

 

Long Term Care: The Stats

So here’s the big question.  What are the chances you’ll ever need long term care?  According to longtermcare.gov, about 70% of people turning 65 will need long term care services at some point in their lives.  With the average annual cost of a nursing home totaling around $100,000 these days (depending on where you live), this can be a scary proposition.

The stats can be misleading, though.  Many people who need long term care services only need them for short periods of time.  And since most long term care policies have elimination periods (the waiting period before the policy starts paying out) of around 90 days, many people won’t even need care long enough for their coverage to kick in.

What Everyone Ought to Know About Long Term Care Insurance

What Everyone Ought to Know About Long Term Care Insurance

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What You Need to Know About the SECURE Act Retirement Bill

What You Should Know About the SECURE Act Retirement Bill

Every now and then, lawmakers in Washington make noise about changing various sections of the tax advantaged retirement accounts I’m so fond of recommending to my clients.  Now that we’re living substantially longer, and a greater portion of our lives is actually spent in retirement, there’s a good argument that we should increase age limits, mandatory distributions, and other rules governing IRAs, 401(k)s and other types of accounts.

I usually don’t pay much attention to this speculation until there’s a bill on the floor that has a strong chance of becoming law.  The majority of the legislation drafted in this area doesn’t get far, and often doesn’t even get out of committee.

Nevertheless, the house and senate have both recently introduced bills that would change how retirement accounts work.  I’m no political expert, and don’t have the foggiest idea what the chances are of one of these bills passing.  But from what I’m reading there’s more momentum for retirement reform now than there’s been in the last several years.  Plus, more than one client asked my thoughts on the subject recently so I felt a summary post would be appropriate.  This post will cover what happened & why it might be important to you.

 

Pending Legislation

In February the senate introduced a bill called the “Retirement Enhancement and Savings Act” (or RESA), aimed at fixing America’s retirement savings problems – both in the public and private sectors.  This isn’t the first bill on retirement reform that’s been introduced recently.  Multiple versions containing similar provisions have been introduced since 2016, which speaks to the growing interest in helping Americans save for retirement.

Meanwhile, the house passed the SECURE Retirement bill (Setting Every Community Up for Retirement Enhancement Act) about a week and a half ago in a 417-3 vote.  This bill contains many of the same provisions as RESA, and the bipartisan support on both sides of congress could mean one of the bills may actually make it into law sometime soon.

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Pros & Cons of Long Term Care Insurance 3 Top Arguments For & Against

Pro’s & Con’s of Long Term Care Insurance: 3 Top Arguments For & Against

I have a good number of clients who are in their mid-50s, and hearing from friends and colleagues that they should consider obtaining long term care insurance.  They’ll often quote stats about the staggering percentage of us who will need long term care services at some point in our lives, or the mention the high cost of services.

These are valid points.  But there are equally valid reasons NOT to obtain a policy.  I’ve written on long term care insurance in the past, and how to determine whether you’re a good candidate for it.  Since this is a topic that comes up in my practice with some frequency, I thought I’d devote another post to the top arguments for and against long term care insurance.  If you’re reviewing your own situation and wondering whether to obtain coverage, you should consider these six points.

Let’s start with the top arguments FOR obtaining long term care insurance:

 

1) There’s a Good Chance You’ll Need Care at Some Point

Long term care services are described (in insurance policies) as requiring help in two of six “activities of daily living”.  The six activities are:

  • Eating
  • Bathing
  • Dressing
  • Getting on and off the toilet
  • Getting in and out of bed or a chair
  • Maintaining continence

Needing help with two of these six activities is a triggering event for long term care policies.  Policyholders in this situation can make claims on their policies.

The stats say that 68% of us will require long term care (needing help in two of the six areas) at some point in our lives.  This is a staggering number.  And with longevity rising around the world, I wouldn’t be surprised to see that number climb over the next 20-30 years.

While not everyone will need help for a long period of time (many will only need some assistance for a couple weeks, maybe after recovering from surgery) chances are pretty good you’ll need a hand at some point.  Rather than relying on family or friends, long term care policies can pay for professional help in your home or a stay in a facility.

 

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8 Considerations When Protecting Your Business With Life Insurance

8 Considerations When Protecting Your Business With Life Insurance

I read a stat recently that stated 71% of small businesses depend heavily on a few individual owners and/or employees.  This number makes quite a bit of sense, once you consider the limited resources most small businesses have to work with.  It also presents a great deal of risk.  Losing a key employee, manager, or professional could easily be the death knell for businesses without much bench strength.

To protect themselves, their families, and their businesses from this possibility, many business owners use life insurance.  As you probably know, life insurance comes in many shapes, sizes, and forms.  Depending on your business and objectives, there is probably a way to minimize the risk of your or your colleagues’ premature death using life insurance.

There is a lot to write about on this topic – in part because there is such a wide variety of life insurance products available.  This post will review 8 considerations when protecting your business with life insurance.  If you’re dipping your toe into the subject for the first time, this is a good place to start.

 

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Using Business Interruption Insurance to Protect Your Income

Using Business Interruption Insurance to Protect Your Income

Picture it now…

You own a thriving art supply store in your home town of New Orleans.  You’ve put years of your life and thousands of dollars into building the store into what it is now.  You make a nice living, and the business mostly runs itself at this point.

Then Hurricane Katrina comes to town.  The building you lease is ruined.  Your storefront and merchandise are ruined.  You have no cash flow to pay creditors, and are forced to close the store.

This is a pretty extreme example, but is exactly what happened to thousands of businesses in the wake of the disaster in 2005.  It’s also a risk that can be completely covered with business interruption insurance.

Virtually any disaster that is out of your control and risks your business’s profitability can be covered in a business interruption policy.  In other words, you can protect business profits and your personal income from a fire, flooding, earthquake, or other disaster.

This post will cover the ins and outs of business interruption insurance.  We’ll address what it does and doesn’t cover, when you should consider buying it, how much coverage you need, and how to purchase a policy.
 

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The Overwhelming Case Against Whole Life Insurance

The Overwhelming Case Against Whole Life Insurance

Insurance agents love to pitch whole life insurance.

This is sometimes a controversial topic, but the truth is that insurance agents make massive commissions on permanent life insurance when compared to term policies.  Because of this, it’s not uncommon to see agents find creative ways to work permanent life insurance into a financial plan.

The truth is that most people simply don’t need permanent insurance, and are far better served with a term policy.  Whole life insurance is costly, and offers very poor return potential.  This post will cover what whole life insurance is, and why most people are better off with lower cost alternatives.

 

How Life Insurance Works

In order to understand whole life insurance, we really need to understand term life insurance first.  With term life insurance policies, you’re paying an insurance company a monthly premium in exchange for old fashioned, plain vanilla insurance on your life.  If you die while the policy is in force, the insurance company will pay your beneficiaries a death benefit.

Since it’s a term policy, it’s only good for a certain amount of time.  Most term policies are written for 10, 20, or 30 years, and have level premiums throughout the life of the policy.

By and large, term policies are the best way to insure your life.  They’re inexpensive and straightforward.  Plus, the whole reason most people insure their lives is to protect against the chance that they die before becoming financially independent.  Once they become financially independent there’s rarely a need for life insurance.  You have enough assets to pay for your lifestyle, which can be distributed to your heirs after you go.

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