Many people think about a diversified portfolio of investments as a means to protecting assets. In addition, they may create trusts to preserve wealth when it is passed on.
However, many overlook the value of insurance as an asset-protection tool.
Insurance can protect you from judgments and liens, help you avoid taxes on money received, and keep your assets intact for your estate plan. These are just a few of the benefits of using insurance wisely.
Insurance protection for assets is not merely a strategy for the ultra-wealthy. Insurance can protect assets for everybody, and while it may seem that it is an expense, it is actually a way to save and preserve money. Money taken out of your pocket is real money that is yours, and insurance can zip up that pocket so no one can get their hands on your cash.
That doesn't mean you should start buying insurance policies haphazardly. If you make a reasonable plan that takes all of your vulnerabilities into consideration, you will have a road map for protecting yourself. A strong insurance portfolio interlinks the types of insurance, so that the whole thing is working for you.
We will look at five categories of insurance and see how each of them can contribute to your financial safety. Some will work better for you than others, so adjust your thinking to address your particular circumstances. Also, keep an eye on what each type of insurance covers, so you won't spend money on redundant coverage.
Life insurance is a basic building block of any asset-protection plan. While this is one of the most commonly known types of insurance, a well-informed person interested in asset protection will consider the different categories of life insurance. Each type has its own uses, and some varieties may be more effective for helping you reach your individual goals.
Here are the various life insurance options available to you. .
Term Life Insurance
Term life insurance pays a benefit if the insured dies during a certain term. The premiums you pay are based on the amount of coverage you want and the length of time for which you want coverage.
Typical terms run 5, 10, 15, 20 25, or 30 years. The criteria for choosing the length of the term include consideration of how long children will need financial support, the life expectancy of a spouse, and of course, the cost of the premiums.
Term life is easy to understand and protects your family in the event of your death. The insurance pays a one-time amount to your beneficiaries. It will provide financial support to pay debts, expenses, and even college costs.
It works well if you don't have special needs dependents who will require financial support for the rest of their lives.
The cost for the dollar amount of coverage you receive is often low compared to other types of insurance.
Term life does not accrue value, and won't cover your entire life. You cannot borrow against it, and if you stop paying premiums, the policy ends. The policy also ends once the term is complete. It will not provide ongoing income for your family.
Permanent Life Insurance
Permanent life insurance covers you for your entire life. This means that your dependents can count on money from your policy, because the term will not expire. A surviving spouse would have money to pay expenses, and the money could be passed on to grandchildren. Again, this is a guaranteed payout as long as all the conditions of the policy are met.
In addition to providing protection for your loved ones, permanent life insurance grows in cash value. The gains accrue tax-free. In addition, you can borrow against the cash value of the policy, usually at a rate that is far more favorable than for other consumer loans. You can borrow against the policy without a credit check because you are essentially pledging cash as collateral.
Types of Permanent Life Insurance
These policies have a guaranteed premium for life, along with a guaranteed payout amount. The rate of return on your cash is also guaranteed. In addition to accruing cash value, the policy earns dividends from the insurer, adding more value to the policy.
Variable life insurance allows you to choose investments to put your premiums into. This can include stocks, bonds, or other investment vehicles that have the potential to boost the value of the policy. If your investments are successful, your cash value goes up. Of course, the opposite is also true. Bad investments can decrease the value of the death benefit and the cash value.
This type of policy allows for adjustable premiums, as long as they are between the minimum and maximum amounts. You can reduce or raise the death benefit, and you receive a guaranteed return on your cash.
These policies have been able to lapse if the issuing company does not perform well and can't keep up with paying death benefits. However, Universal Life with secondary guarantees prevents this. You are guaranteed that your policy will remain in effect no matter what.
Variable Universal Life
This approach keeps all the features of universal life but allows you to invest your premiums in various stocks, bonds, and other opportunities for growth.
Advantages of Permanent Life Insurance
Permanent life insurance is an investment, not just an insurance policy. While it protects your family in the event of your death, it increases in value. That cash is accessible in two ways. You can borrow against it, or you can stop paying premiums and let the cash in the policy pay them. If you decide to terminate the policy, the cash is still yours.
Also, most states exempt the cash value in a life insurance policy from creditors. This includes protection during bankruptcy. Check with your state to find the status of insurance policies. Missouri, for example, does not exempt all of the cash value.
Disadvantages of Permanent Life Insurance
The cash value of your policy can be affected by events beyond your control, such as the insurance company's expenses and earnings on investments, or extensive payouts due to a spike in mortality rates.
The cash value of a policy does not grow very much in the early years, so the insured will have to wait for the value to become apparent later. This means it is advisable to hold a permanent life insurance policy for the long term.
Life Insurance Used to Leverage Business Buyouts (Key-Man Policy)
For companies that have several partners or co-owners, life insurance can be used to buy out one of the partners' share in the event of an untimely death. This is particularly true if one of the owners is considered a "key person."
Here is how it works. The company ensures the life of the key person. Upon that person's death, the company receives a payout, which it can use to pay the deceased's family for their share of the business.
This ensures that the company will survive while paying survivors for their interest in the company.
Mortgage life insurance
Do not confuse mortgage insurance with homeowners insurance, which is not a life insurance policy. Mortgage insurance is a life insurance policy that will pay off your mortgage in the event of your death. That means the home your family lives in will be paid for, and this will greatly reduce financial stress.
This is typically a term life policy, so you must choose the length of the term for which you want coverage. Choose a term that is likely to be longer than your lifespan so that coverage won't run out before you want it to.
One strategy for using mortgage life insurance is to buy a home late in life. Perhaps you sell a home and buy a new one in a retirement area. By putting as little as possible into the down payment, you have the bulk of the mortgage left to pay off.
Obtaining mortgage life insurance at that point will pay off the large remaining mortgage upon your death and leave the home free and clear for your survivors.
Home Owners Insurance
Homeowners insurance is usually required before a lending company will approve a mortgage. The reason for this is that it protects the property itself, particularly against fire damage. Additional coverage can be purchased to cover floods and earthquakes, but they are not part of a standard policy.
A homeowners insurance policy will also protect you against liability for injuries on your property, as well as damage to others caused by yourself, family members, or pets.
The policy will also protect your belongings against theft or damage.
Insurance for condominiums and co-op apartments covers your belongings and liability, and part of the interior structure. The interior parts that are covered are dependent on the bylaws of the owners association.
Renters insurance covers your belongings in a rented space, but not the structure itself. It offers liability protection and can protect your belongings even if they are stolen from your car.
All types of home insurance will pay in the event you have to stay in a hotel because of damage to your residence.
Types of claims made against homeowners policies
A good policy will protect against damage caused by vandals. This includes things like graffiti, damage to landscaping, destruction of windows, and damage to the structure.
Acts of nature that produce damage, such as wind, rain, and hail fall under the protection of a home policy. Protection from hurricanes and floods may require you to purchase additional coverage outside the standard policy.
Burglary is a staple of homeowners insurance coverage, as is theft. Damage from fire and lightning is also covered.
Many people are familiar with automobile insurance, but too often, they only get the minimum coverage required by their state. This will cover your liability for damage you cause in an accident. It does not cover your bodily injury or your car. In other words, you get no asset protection for your vehicle with minimum coverage.
A fuller policy can cover theft of your car, damage to your car, your medical expenses in case of an accident, and your liability for damage to others. You will also be covered when driving someone else's car (such as a rental), and it will cover anyone you allow to drive your car. If an uninsured driver hits your vehicle, you are covered for that as well.
You can also get coverage for fire, flooding, vandalism, hail and falling rocks or trees. If you get glass coverage, all of your windows are covered, including sunroofs.
Note that insurance covers the current value of your car, not what you paid when you bought it. Some people buy gap insurance to cover the difference between what you still owe on the car and what the insurance company will pay for it.
Always check the policy to see what it covers. Many of the "extras" above require a rider, and of course, will require a higher premium.
Here are the coverages that typically require riders:
- Roadside emergencies
- Fender benders
- Speeding tickets
- Car break ins
- No-fault accidents
- Rideshare coverage
- Gap insurance
- Hail and falling rocks or trees
- Glass coverage
These coverages are for personal use only. Any commercial use of your vehicle, such as driving for Uber or Lyft, will not be covered.
From an asset-protection point of view, you have to weigh the cost of premiums against the advantage of having the vehicle protected. You may view some losses as something you could absorb financially, while others are large enough that you may want full coverage. The most important thing is to look at your vehicle as an asset rather than an expense and take measures to protect it.
Umbrella Insurance Policy
Even with good homeowner's insurance and a strong automobile policy, there are limits to the amount of coverage you receive. You could lose all of your assets if you find yourself on the losing end of a catastrophic lawsuit due to bodily injury, personal injury, or property damage caused by you or occurring in your home.
A multi-million dollar lawsuit could wipe out your net worth and leave you paying exorbitant legal expenses. None of the insurance options we have looked at so far in this article will protect your assets in such a lawsuit. To get protection for such an event, you will need to look at an umbrella insurance policy.
Many people spend money on things like trusts to protect their assets, but don't carry more than the basic insurance coverage for their homes and automobiles. Perhaps this is because many view insurance as an expense for coverage they hope they will never need. However, insurance is one of the surest ways to protect yourself from losses, and should not be overlooked. The other reasons many don't have umbrella policies are that they either don't understand them or haven't heard of them.
You purchase an umbrella policy in increments of one million dollars. This policy is designed exclusively to protect against lawsuits that seek damages in the millions of dollars. Many of these policies will not only pay for a judgment against you, they will also pay for your attorney and other expenses involved in defending yourself. The umbrella policy begins paying at the point that your other coverages, such as homeowners and auto, have reached their payout limits.
Typical costs for these policies range from $150 to $300 for every million dollars in coverage. However, if you have other insurance with a provider, you may receive a discount for an umbrella policy with that same provider.
When it is time to consider an umbrella policy, it is time to sit down with your agent and have a frank discussion. You need to talk about your net worth, upcoming changes in your life, and the limits on your current coverages. A skilled agent will be able to advise you regarding what amount of coverage you need from an umbrella policy, based on your particular circumstances.
Many consider a good "rule of thumb" to be umbrella coverage that equals your net worth. However, as with all such rules, they tend to be an average. There are several risk factors you should consider in deciding whether to add extra coverage above the average recommendation.
You have more risk if you:
- Entertain others at your home
- Have a pool
- Conduct business at home
- Own rental properties.
- Allow guests to stay in your vacation home
- Have teenagers that drive
- Own a large dog
- Possess boats, motorcycles, jet skis, or ATV's.
Even if you have coverage for all of the above situations, that coverage has limits that most likely will not protect you in the event of a major lawsuit. An umbrella policy will extend your coverage to a level that will leave you financially sound.
Long-Term Care Insurance
This kind of insurance is not health insurance. You purchase a long-term care policy in addition to any health insurance coverage you already have.
Long-term care insurance provides for personal and custodial care in your home, professional care facility, or community organization. Services that can be paid for with a long-term policy include help with bathing, dressing, and eating.
Typically, you select the type of services you want coverage for. You must also select the length of coverage you want. Many policies will pay for two to five years, while you can find others that will pay as long as you live. All policies also carry a limit on the dollar amount they will pay.
The cost of your long-term care policy depends on:
- Your age when you purchase the insurance
- The length of the coverage
- Optional benefits like those that increase with inflation
- The maximum payout available
Note that long-term care policies have two maximums to consider. The first is the maximum amount the policy will pay per day. The second is the maximum number of days it will pay.
You most likely will not qualify for long-term care insurance if you are currently in poor health or are receiving long-term services already.
Though memory care facilities may be housed in the same premises and long-term care services, they are a distinct type of care. Memory care is for patients with Alzheimer's disease, dementia, and various other memory problems.
Long-term care policies may pay for memory care, but don't assume that your policy does. Make sure you have a policy that will cover such care if a doctor provides documentation that there is cognitive impairment.
Many Alzheimer's patients prefer to be cared for at home, so the policy's limits and requirements on home care are important to understand. Some policies will require you to wait 60 to 90 days before you can collect benefits. Find out when the waiting period begins before purchasing such a policy. The waiting period could begin with the doctor certification, or it could begin as much as 30 weeks after a caregiver has been providing care during the waiting period.
The type of caregiver is important. Many policies require a licensed caregiver from an agency, while others are more lenient and will accept any caregiver who is not a family member.
You can extend the length of the coverage if you don't use up the daily allotment each day. For example, if you only spend $100 per day and the policy allows for $200 per day, you can receive benefits for twice as long.
Another insurance strategy for paying for long-term care is to request a death benefit loan on a life insurance policy. The issuing company may loan part of the value of the death benefit (thereby reducing the death benefit by the same amount), and that loan can be used to pay for care.
Other people decide to sell the life insurance policy. A buyer purchases the policy for a set amount (usually at a discount) and makes the premium payments from there on. The buyer then collects the death benefit upon the death of the insured.
Another approach is to offer the life insurance policy as payment for care. An arbitrator or other intermediary will determine the policy's value, and the policy owner can offer that value for a specific length of care.
The Bottom Line
Do not overlook insurance as a way to protect assets. In many cases, it is the least expensive way to protect money, homes, vehicles, and other belongings, as well as covering any liabilities for damage to others.
When sitting down to calculate net worth and put protections in place, include insurance options as a tool to protect wealth and make sure you and your family will have the means to live. Trusts, wills, and other legal instruments have their place, as does diversifying your investment portfolio. However, insurance should be a major consideration when you seek ways to protect assets.
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