Insurance and Risk Management at Hampton Wealth Management

Risk management is the first step of the financial planning process which assures that economic risk exposures are covered in some way. These would include premature death, disability, medical expenses, property loss, legal liability, and outliving one's income. The purposes of risk management planning are:

  1. to make sure that an otherwise sound financial plan is not unraveled by an unforeseen catastrophe;

  2. to make certain that your existing policies are not unnecessary or inappropriately priced

By identifying risks and categorizing them by their frequency and severity, we can use risk characteristics as determinants of the tool.

Low frequency — High severity:
This is the combination best suited for transferring risk onto an insurance company by purchasing an insurance policy.

As part of your safety net, we will examine your insurance coverages to make sure you have the right kind and amounts to meet all of your needs in the event of the unexpected, which is namely low frequency-high severity. As an overview, areas of discussion will include:

While we are not in the business of selling insurance, we believe that it would be helpful for you to have an objective discussion with us as your sounding board before and after talking with your insurance agent. If you would like referrals, we can provide a few names of reputable companies, free of charge.

Life Insurance Analysis

Like Estate Planning, nobody really likes to talk about dying, but insurance is a necessary consideration of any financial plan. Ultimately, it is another source of income that we normally don't think about to supplement our earned income, employee benefits, and social security. Any financial plan would not be complete without having all phases of life and death covered.

From a family perspective, life insurance can be used to cover the obvious like final expenses and dependent income, but it can also go beyond these to cover higher education or to take care of aging parents.

If you are an owner/partner or a key employee of a closely held business, life insurance can provide a partial solution towards business continuity and ownership.

Cash values may be used towards specific goals ranked by importance or by timeline, or towards a specific goal only, or not toward any goal at all. Any of these four options can be reflected in your overall financial plan.

The calculations used in our plan are based on a "die today" model, i.e. in the event of the premature death of a spouse. While not a great way to endear ourselves to you, we do hope you will be around long enough to really not need this. However, to prepare for the unexpected, we would take into consideration and can adjust many variables, such as:

  1. your existing coverage,
  2. any additional death benefits,
  3. your final expenses,
  4. your survivor's lifestyle expenses, and
  5. other goals that need to be funded still, whereas others won't be anymore.
  6. We can also earmark certain assets for sale, should that become necessary.
  7. stock options (if any)
  8. other streams of income (if any), and
  9. taxes (just like Shakespeare said).

After the needs analysis, you will know whether or not the insurance coverage you have is appropriate. Additionally, we can also run some additional what-if scenarios to illustrate possible outcomes. From there, you can go back to your insurance agent to discuss in further detail what type of coverage is most important. If you would like additional names to help with some comparison shopping, we would be happy to provide you some referrals.

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Disability Needs Analysis

Disability income insurance is essential in a risk management program, yet its importance is often overlooked — leaving a major risk exposure uncovered potentially putting everything else at risk. If you haven't seriously looked into disability insurance outside your employer's benefits, it may be instructive to understand some basics about how this sub-industry is set-up. More so than any other form of insurance, disability insurance is heavily influenced by underwriting considerations.

  1. The first category covers requirements the insurer sets up that the insured must meet in order to be even offered coverage.

  2. The second category includes limitations regarding the types and amounts of coverage the insurer will issue to each class of insureds.

Generally speaking, you cannot purchase additional coverage that would go beyond 2/3 of your income, so extensive worksheets become irrelevant. The purpose of outside disability coverage is to complement what Social Security doesn't cover. Ideally, we would like you to have a disability income policy with a liberal definition of disability and a short elimination period, usually 30 to 90 days.

The major features to consider when evaluating a disability income policy are:

  1. the definition of disability,
  2. the elimination period,
  3. the available monthly benefit,
  4. the maximum benefit period, and
  5. renewal provisions

While we are not in the business of selling insurance, we would be happy to help you pick out a plan if you don't have one already. The major seven factors we would use are:

  1. the financial profile of the company
  2. the occupational class of the client
  3. a comparison of their specific features
  4. the legal/product department
  5. their underwriting philosophy
  6. claims perspective, and
  7. administrative efficiency

If this area is relevant to you, we can delve into greater detail.

However, for the purpose of creating your financial plan, our Disability Income Needs Analysis will take into consideration and allow for the adjustment of the following variables:

  1. Length of disability
  2. Income needed for the nondisabled spouse
  3. Employment income of the nondisabled spouse (if any)
  4. Other streams of income (if any)
  5. Social Security Disability Benefits
  6. Group Disability Benefits
  7. Personal Disability Benefits (if any)

All of these will be used to determine if we have a deficit (or surplus) in which we may (or may not) need to consider purchasing additional coverage. Because we are fee-only advisors, we do not make any commissions on the decision to buy additional policies, so you know that our recommendation is unbiased.

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Long Term Care Insurance Needs Analysis

At Hampton Wealth Management, we recognize that buying a Long Term Care policy is a personal choice. Our goal is to explain what is involved here.

Long term care can prevent estate shrinkage — almost like life insurance policies do — except they come into play during your twilight years while you're still alive. Unfortunately they are not cheap, so one has to be careful that the premiums alone don't shrink the estate for you. Suitability boils down to three factors:

  1. Generally speaking, if you have between $100,000 to $1,000,000 in liquid assets, you probably should consider buying the protection.

  2. As another rule of thumb, consumer advocate suggest individuals should not pay more than 5%-10% of their income on premiums for long term care insurance.

  3. It is important to note that premiums will rise over time, so sustainability of paying rising premiums over time is just as important.

However, if you already have a long term care policy, we can include it in your financial plan. The following variables will be considered:

  1. Type of Long Term Care Policy
  2. Annual Cost
  3. Inflation Rate for Long Term Care Expenses
  4. Age at Which Care is Needed
  5. Life Expectancy
  6. Number of Years Covered by the Policy
  7. Expense Reductions During the Care Period Each Year
  8. Benefit Period
  9. Elimination Period
  10. Daily Benefit
  11. Inflation Rate for the Inflation Option
  12. Will You Pay the Premiums from Your Portfolio?

In your financial plan, we will show you in a comparative bar chart the impact of paying these premiums on your portfolio, as well as the effect long term care costs would have on your portfolio — with and without long term care coverage over time. We will then calculate the shortfall (if any) to determine whether you need to buy long term care coverage (or not).

Importantly, we can also discuss the impact on spending levels of the spouse to determine whether any reductions become necessary in the event of your needing to utilize the policy.

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