Insurance looms in my life. In the past few months, I have taken the time to chat with a number of professionals in the insurance and estate planning industries to learn more about how insurance can provide financial protection while we are alive and later for our heirs and heiresses. And, of course, I look at insurance from a real estate viewpoint.
I started out by looking at the number of policies that my wife and I have that are basically mandated by basic health and property needs. I was a little surprised to find out that we were paying premiums on 11 policies. Fortunately or unfortunately, there were none that I felt could be cancelled. They range from the automobile and home liability policies to earthquake insurance, personal property, long-term care, disability insurance, life insurance and health care policies and the inevitable blanket liability coverage for liability just in case we get sued.
The number of policies balloons when you own a business.
Carl Castellitto, a local insurance pro, provided a list of 10 basic policies for business owners: property insurance, auto/truck insurance, ffe (furniture, fixtures and equipment), data theft, identify theft, employment practices insurance (protecting against lawsuits by employees), general theft and standard general liability policies and professional liability errors and omissions policy. And, if you own your own buildings, there is mortgage interest protection insurance.
If you happen to be in the real estate development business, the list can be even longer, but I’ll leave that subject alone, along with the potentially devastating consequences of not having proper insurance coverage.
Robert J. Clark (with a half century in the insurance business) says that there are three factors that come into play in the life insurance business: (1) What are the statistical odds of the event occurring? (2) What is the cost of transferring the risk? And (3), what is the cost of retaining the risk?
(1) The statistical odds of a person’s death occurring is 100 percent. I’m pretty sure about that.
(2) Transferring the risk is buying insurance (spreading the risk over a large number of persons).
(3) Can your heirs continue their lifestyle if there are no insurance proceeds to cover estate taxes or to provide food or shelter? If there is no insurance, what will they have to sell to maintain a life?
The final type of insurance I want to mention is long-term care. Only 2 percent of Americans have it and up to 20 percent of us will need it. And Medicare doesn’t cover it. Sorry.
Without belaboring the issue, it is safe to say that long-term care costs $3,000 to $8,000 a month, depending on the health condition. Our lengthening lives and tendencies toward obesity pretty well assures that the percentage of folks who will need long term care will increase steadily over the next few decades.
Having exhausted those two types of insurance needs (personal and business), we come to the topic that is at the heart of this article: insurance for estate planning purposes.
Of late, the London Group has been called upon to provide services that fall within the category of estate planning. Or, more specifically, estate planning issues that involve estates with real estate. That category includes succession planning, marriage dissolution, inheritance issues and asset protection.
The real estate part of estate planning is rather interesting because it is rare for the team members like the CPA, attorney, insurance agent or trust officer to know enough about real estate to offer a cogent strategy for the holdings.
Real estate in an estate can be a complicated issue. Decisions on whether to sell, trade-up, exchange, fix up, all relate to the intended wishes of the client or perhaps the heirs. Some of those decisions have major tax implications (rarely positive). And some decisions have been known to cause major infighting among heirs. Our role is to assist in the determination of what to do with the real estate assets and also determine their value (both real and perceived).
We now know that insurance can play a major role in handling of real estate assets and be part of the strategy for the estate. The trick, of course, is to buy it before death occurs and when the departed is still in good health. In divorce situations, insurance can be used as a tool in asset allocations.
Insurance is such a boring topic for party talk. Bob Clark says “If you want to clear a room, let everybody know you are in the insurance business.” The only people who gladly talk about the benefits of insurance are those whose lives have been enhanced by an insurance company writing a check.
May you have a long, healthy life in 2013 and well beyond.