Paul Ferraresi

The potential earning power of a wage earner is one of the greatest assets of a family. The main objective of life insurance is to protect the insured’s family and creditors against financial loss due to the death of the insured.

With two income families, the analysis is just as significant for each spouse, even though one may have higher current earnings.

Determining the best policy starts with an analysis of specific needs. Such needs vary, of course, from family to family, but the following categories normally apply:

• Final lump sum expenses, funeral and debt repayment
• Income for the family until children are self-supporting
• Life income for the surviving spouse
• Special needs, such as education and business situations
• Retirement income needs

Once the needs are identified and measured, the next step is to determine other sources of capital, income or benefits available. The difference between the family’s needs and the money available from other sources represent the amount of life insurance which is needed.

After the amount of the life insurance need has been determined, we can evaluate what type of policy best suits your current financial situation. Your cash flow, other investments and savings patterns will be factors in making this decision.

Permanent life insurance builds cash values that will grow even if the insured is disabled. Term life insurance offers the maximum amount of protection for the lowest initial outlay.

If term insurance is indicated for all or part of the protection, it is very important to consider the conversion options should you wish to change the policy at a later date. Closely examine the scheduled premium increases or benefit reductions as they vary considerably between life insurance companies.

A family’s current and future tax structure should also be considered when evaluating different forms of life insurance. For example, variable universal life has some very attractive tax benefits, but they would be unusable to a retiree who had not been able to substantially fund the policy or who was in a very low income tax bracket.

All of us are generally aware of recent awards of large liability settlements. Usually, these are written up in the newspapers as they relate to aircraft accidents, hotel fires or similar catastrophes.

To a lesser extent, we read of individuals being sued for large amounts of money because of some unusual occurrence such as a water skiing or automobile accident.

Typically, we buy specific insurance to cover us against the more common types of liability. For example, we purchase automobile liability insurance to cover us for the operation of our cars. We buy comprehensive personal liability insurance to cover us for activities arising out of our residence or personal activities. Frequently, the limits on these policies are $100,000 or $300,000.

We tend to feel comfortable behind this shield of protection. However, the diversity of activities that individuals now engage in at times, goes beyond the limits of coverage of those policies. Therefore, the insurance industry has developed an umbrella policy that provides a broader scope of coverage with higher limits of liability than is normally encountered. The purpose of the liability umbrella policy is not to replace the other policies, but to provide excess liability coverage over and above what is referred to as the underlying limits.

The liability umbrella policy has two deductibles. The first deductible constitutes the limits of the underlying auto and personal liability policies. The second is a deductible, usually $250, for any liability exposures beyond the scope of underlying policies.

In acquiring a personal umbrella liability policy, it is very important to choose an adequate limit of liability ($1,000,000 to $5,000,000), and to fully disclose all underlying policies and all liability exposures. Then the policy’s exclusions should be reviewed to make sure they do not delete coverage for an exposure to which you are subject.

Liability insurance is vital to protecting your assets and future earning power.

Like many aspects of life, most people close the barn door after the horse has left. The same thing takes place with Long-Term Care planning. All statistics show that one out of two people (50 percent) will need some Long-Term care, yet most people want to buy the insurance moments before entering the assisted living facility. At that point, it is too late and too expensive. Funny, you have less than ¼ of 1 percent chance your house will burn down, but you buy fire insurance coverage. Long-Term care can average $72,000 to $100,000 per year and you have a 50 percent chance of needing it; yet, very few people protect against this risk.

One way to minimize the costs is by setting up a side business as a “C” corporation. The C corporation can establish a long-term care benefit plan for the owners and chosen employees. Due to the government’s interest in having people covered privately for long-term care needs, the normal rules that prevent discrimination in benefit plans have been waived. This means that the business owner can provide a long-term care benefit for himself and his family (who are either employees or directors of the company), and deduct the entire premium for the long-term care policy without regard to the IRS discrimination rules.

Obtaining a tax deduction on the long-term care premium lowers the cost of having this coverage, thus making the choice of acquiring long-term care insurance that much more attractive.

Most people think that Long Term Care Insurance (LTCi) is needed for senior citizens, or, very elderly grandparents. Not true.

A recent study by Unum, which provides 75% of group long term policies, found that almost half (46%) of group policy owner claimants in 2007 were under 65.

So, if you are under 65, then one out of every two people in your office will have a long term insurance claim. That is a 1 chance in 2. Yet, people are afraid of dying in a plane crash – the odds of the plane crash death are I in 25 million.

In our above examples keep in mind that one is death (plane crash) and the other can be a living death (long term care needs).

• The study also found the average claim for LTC was for 31 months. Since you will not be working if you are under long term care, do you have money to replace your salary, AND, pay for the care which average $2,000 to $15,000 per month? Remember your disability coverage does not cover this.
• The average age of claimants under 65 was age 53. While 6 % of UNUM group claimants were under 45.
• Two thirds of LTC claims were for care at home.
• The leading claim was for brain and nervous system injuries.

So, I hope you finally see with a 50% chance of needing this coverage and with high costs of coverage it is time to get serious about this coverage.

Contact me if you need ideas or have questions in this area at (713) 871-5919 or email: Darlyn@fgmci.com.

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With all the turmoil in the financial markets many people have voiced their concern about insurance companies. People wonder if insurance companies have similar problems. The truth is that Insurance companies are regulated and backed in a stronger manner than banks. Here is a great article from TheStreet.com written in September. It will educate you and bring some peace to your mind.

After the sudden fall of American International Group (AIG Quote – Cramer on AIG – Stock Picks), policyholders everywhere are asking the same question: How safe is my insurance company?

We all depend on insurance, from health coverage, life insurance, protection for our house and car, to our annuity in retirement. Every facet of our lives involves insurance, and we pay a large amount to make sure we will receive help when we need it.

How can you be sure your insurer is able to meet its claims? If you live in Texas and were affected by Hurricane Ike, aside from the desperate worry over the damage to your property, the news last week about AIG will not have helped.

There are two positive things about insurers. First, they are strictly regulated to ensure companies maintain the ability to meet claims, and this regulation is overseen by state insurance commissioners. Second, in the event an insurer is unable to meet its claims, states have a guaranty arrangement where all insurers would be required to contribute funds. When there is a multi-state life and health-company failure, the National Organization of Life and Health Insurance Guaranty Associations, or NOLHGA, coordinates claims. Similar guaranty associations exist for all insurance types.

So what is different about an insurance company that provides additional comfort? After all, banks are regulated by the FDIC and they fail, and AIG has failed too?

It is important to realize that AIG’s insurance companies are continuing to operate as normal. The insurance companies did not fail; the problems are with the holding company. The insurance companies are considered by the National Association of Insurance Commissioners, or NAIC, to have sufficient liquidity to meet all claims. In fact, the NAIC has set up a special committee of commissioners overseeing AIG to ensure normal operations. Additionally, the NAIC will oversee any sale of an insurance company.

“It will likely be the insurance subsidiaries or their valuable blocks of business and high-quality assets that will be sold in an attempt to return the AIG parent company to a more stable financial position,” NAIC President and Kansas Insurance Commissioner Sandy Praeger said.

The NAIC outlines the regulatory position as operating under conservative accounting rules and mandatory annual CPA audits. Insurers must follow investment regulations and limitations, and there are minimum capital surplus requirements. From a risk perspective, state insurance regulations give insurers the ability to continue to operate normally with greater losses than other parts of the financial sector in down-market cycles. State regulators also perform ongoing financial analysis of insurers and on-site examinations.

According to the NAIC, the entire solvency framework and safety net for policyholders is uniform in every state as evaluated by its Financial Regulation and Accreditation Program. Rating downgrades and drops in share prices do not change an insurer’s ability to pay claims. Ratings issued by TheStreet.com are intended to provide exactly that comfort with the financial-strength rating of the insurance company representing the ability to meet a policyholder’s claim considering various indicators covering capital, reserves, profitability, investments, liquidity and stability.

If an insurance commissioner believes an insurance company is at risk, steps can be taken to protect policyholders. A company can be placed under supervision, a step intended to monitor the company and give it specific targets to meet before the company can continue to operate without oversight. An alternative, in the event of imminent failure, would be to seek a court order to place the company under the control of the commissioner, in which case a manager would normally be appointed to run the company.

There are strict financial guidelines in place to provide policyholders the comfort that insurance companies are acting prudently, state regulators are monitoring the companies to make sure that insurers follow the regulations, and there are actions that a regulator can take to protect the policyholder.

During a disaster like a hurricane, the guaranty funds can kick in if a company fails. NOLHGA President Peter Gallanis said the group has acted in over 60 multi-state insolvencies over the past 25 years, assessing over $4.4 billion on its members to meet policyholder claims. “Current assessments are averaging $25 million per year, a relatively low level considering that we have the capacity for $8 billion,” he said. Policyholders have a preferred status over general creditors, he said.

TheStreet.com Ratings issues financial strength ratings for 4,000 life, health, annuity, and property/casualty insurers. They are available on the Insurers & HMOs Screener. In addition, the Financial Strength Ratings on each of the nation’s 8,600 banks and savings and loans are available at no charge on the Banks & Thrifts Screener.

Gavin Magor
09/23/08 – 10:49 AM EDT