This fall, I conducted reviews of client risk management plans and found some interesting things I’d like to share with you in hopes that you might review your own situation to ensure you are prepared for the “what ifs” in your life. To save you some time, here are a few issues I came across on multiple occasions:
- Out-of-date beneficiary designations. (Most popular.)
- Too little liability coverage on auto & homeowners policies and/or no umbrella policy.
- Paying too much for auto & homeowners policies.
- Too little life insurance OR too much life insurance.
Let’s review each.
1. Out-of-Date Beneficiary Designations
This was by far the most popular issue I ran into during my client reviews. Most commonly, I saw parents who were listed as beneficiaries on old life insurance policies. In some cases, their parents had already passed away and yet the designation remained.
While stating the obvious, having out-of-date beneficiary designations can cause serious issues with your entire estate plan and complicate the life of your family. Take this time to obtain your beneficiary designations (this is often the hardest part of this exercise) by calling every single institution where you have assets or a product and request the beneficiary designations they have on file.
This can include all life insurance policies (don’t forget your employer coverage), old 401ks, IRAs, and annuities. Once you review those, be sure to update anything that is out-of-date.
2. Too Little Liability Coverage and/or No Umbrella Policy
When reviewing client auto and homeowner’s policies, I found a number of occasions where clients carried too little liability coverage. In some cases, their underlying liability coverage was 100/300/100[1] or 250/500/250[1], which could be deemed sufficient depending on the situation. See down below for what those figures mean. But if your net worth is in the millions, you may be underinsured and this is where an umbrella policy can come into play.
An umbrella policy offers additional liability protection that “sits on top of” your auto and homeowners policies. For example, if you have a $1,000,000 liability policy, this is the amount of additional protection beyond what your auto or homeowners policies would provide. And because it’s only offering protection beyond your underlying policies, they are relatively inexpensive. Depending on where you live, these policies can range anywhere from $130-$300 per year, so they are quite affordable.
Insurance companies require some minimum of underlying liability coverage to place an umbrella policy so you may be required to increase your liability coverages on your auto and homeowners policies to obtain an umbrella policy.
3. Paying Too Much for Auto & Homeowners Policies
While reviewing underlying liability policies, I found that many people were overpaying. Auto and homeowners policies tend to be “sticky” business meaning people don’t change their providers too often. Over time, these rates can become less competitive.
If it has been a while since you have obtained a competitive quote, I would recommend doing so. Be sure your underlying liability limits are sufficient first so that you can have a true apples-to-apples comparison. In my experience, people can save up to $1,500 per year. Of course, the savings can be much less, but it’s still nice to save.
4. Too Much or Too Little Life Insurance
Depending on your financial situation (if you have pensions to protect, etc.) you may have either too much or too little life insurance. Unsurprisingly, in the cases I reviewed, most are actually carrying too much life insurance so there may be some other opportunities to save some money when right-sizing your coverage amount. There were a couple of occasions (primarily for younger clients) where they needed to obtain some additional coverage. The point of this exercise is just to make sure you are properly insured.
Below are a few things you may want to be covered if something should happen to you. Cumulatively, these can also offer an easy way to run the numbers to determine whether you are properly covered. Add up the following items and compare them against what you currently have in coverage plus assets already saved. All are optional based on your situation, but these are the most common things people want to be sure are taken care of.
A. Pay off all debts. (mortgage, vehicles, etc.)
B. A monthly income for the family left behind.[2]
C. Final expenses. (funeral, etc.)
D. Additional lump sum needs. (relocation funds to move closer to family, education, etc.)
Add these values together to establish your total need. Then, compare that figure against your current life insurance coverage plus other available assets. Based on that calculation, is your family adequately provided for based on their needs? If your current coverage plus assets exceed your needs, a reduction of coverage may be a possibility. On the contrary, if your needs exceed your coverage and assets, you may seek out some additional coverage.
Bonus: Review Your Long-Term Care Plan
You may have saved enough to self-insure or maybe you already have a long-term care policy in place. The strategy you choose and how to plan for such a scenario is up to you, but it’s important to have a plan in place. If you are wondering about the four primary ways to pay for long-term care, I wrote about this a couple of years back. See here: How to Pay for Long Term Care.
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Life changes inevitably happen, so the above items should be reviewed every couple of years to be sure everything stays up to date. I hope this serves as an effective reminder to review your situation so you can be well prepared for the “what ifs” in life.
Stay the course,
Ashby
[1]These figures represent different liability limits. For example, 100/300/100 means, $100,000 total liability protection per person, $300,000 total liability protection per accident, and $100,000 liability protection for property damage.
[2]Estimate your family’s monthly income need. Then subtract out the incomes they would receive from Social Security, pensions, etc. Take the remaining monthly income needed and multiply it times 300 to obtain an amount that, based on a 4% withdrawal rate, might be sufficient. For example: Monthly Need: $5,000 per month. Monthly Income: $3,000. Remaining Need: $2,000. $2,000 x 300 = $600,000.
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This post is not advice. Please see additional disclaimers.
