When discussing insurance, my clients invariably ask three questions. "What insurance should I buy?" "How much should I buy?" "What kinds of policies?" My answer is always the same: "Buy what you need, and no more."
Insurance is as much a part of an investment program as stocks and real estate. If it can be said that stocks and real estate are the building stones of an investment program, then it must be said that insurance is the mortar that binds everything together.
However, I never recommend life insurance as an investment. Rather, I recommend it as an investment guarantor. Actually, to broaden the application, I recommend insurance as an estate guarantor. Very few people actually create investments, and barely any provide even minimal insurance to protect their families. The point is this: insurance, when properly bought and applied, best serves as a guarantor of an investment rather than as an investment in its own right.
What, then, does insurance guarantee? Insurance guarantees the completion of your investment program whether or not you are able to complete your investment career. Insurance is a bridge to your estate which guarantees the presence of money when it is most needed by your family, when income has been denied because of disability or death.
This guaranteed liquidity can play different roles at different stages of your life. For the beginning investor, insurance provides an immediate estate, automatically completing your financial goals that may be several years away from fruition.
For the more mature investor, insurance can unencumber an already sizable estate, thus providing increased income from assets made free and clear. Suppose you own several pieces of income producing real estate, all mortgaged. Think how much greater the net income would be if the mortgages were paid off.
As the structure of our families changes, we can find another role filled by insurance. Children from a former marriage can be provided an immediate estate through life insurance, while your surviving spouse enjoys full use of your accumulated assets.
Finally, the guaranteed liquidity insurance provides can allow for the timely payment of estate taxes. If your estate is large enough to require the payment of transfer taxes, it may not be liquid enough to fulfill the obligation. Insurance can provide that liquidity.
While we're addressing estate taxes, let me say a word here about the ownership of your life insurance policy. Depending on the size of your estate and the amount of insurance you are buying, you may need to consider a life insurance trust. This planning tool can assure that your insurance proceeds escape taxation and serve the purpose you intended. Too often this device is overlooked, and, instead of insuring your family and loved ones, you end up insuring the IRS.
After you have determined the reason or reasons why you need insurance, you are ready to start the buying process. You don't necessarily need to know how much insurance you need or what kind of policy. For that, you will consult an insurance specialist.
But keep in mind that you are a specialist too. Only you know what you want insurance to do, and, incidentally, how to do it. Your insurance broker should take what you know and find the right policy or combination of policies for you.
Like all of the members of your investment team, your insurance specialist should be thoroughly experienced and highly qualified. Ask about special designations and continuing education. Within the insurance industry there are a variety of programs available. The Life Underwriters Training Council offers a Fellowship (LUTCF) upon the completion of 3 ten-week courses. The Certified Life Underwriter (CLU) and Chartered Financial Consultant (ChFC) programs each require up to 10 college level courses and continuing education to maintain the designation.
Too often, people believe that there is some sort of magic in insurance—a magic type of policy or a magic amount of coverage. There is no such thing. What is right for you is not necessarily right for someone else. Insurance is an individual matter, and it must be tailored to your individual needs and circumstances. Don't buy insurance "off the rack". Buy it tailor-made to your own specifications. And remember: "Buy what you need, and no more."
But combining and coordinating the efforts of your brokers can be time consuming and complicated. In that regard, you can use the advice of specialists who in no way benefit from buy and sell transactions, but who derive their incomes as unbiased advisors. These are your advisory specialists. Not only do they help you make decisions on a broad policy level, they advise you of the tax and legal consequences of individual transactions, and of the cumulative effect of many transactions.
How do you create a team? Generally, the members of the team should possess perspectives, goals and temperaments similar to your own. They should be thoroughly skilled in their specialties, and they should have had some seasoning through experience. But most of all, they should be compatible with you, the investor.
That's not to say that your team should be comprised of "yes men". In fact, nothing will sharpen your investment thinking and improve your decision making skills better than hard-headed opposition to particular plans. If someone on your team raises strong objections to something you are planning to do, listen to the objection, follow the line of reasoning, and then incorporate that thinking into your own. It may be right and everyone else's opinions may be wrong. Or it may not be right for you. Whether or not you follow the advice, let it be known that you need and respect contradictory opinions.
Finally, few teams are perfect and they are seldom permanent. Weeding and adding are constant processes, but there develops, over the years, a sense of continuity among those who work together. Roots go down and they are hard to pull up. These roots are extremely important; they feed the tree. The roots may become so deep that, after a while, the various team members scarcely have to talk about what is going on. Somehow they know. When that happens you will know that the team is a winner. And remember, you are the most important member of that winning team.
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Moorman and Company, an accounting and personal financial management firm based in Palo Alto, serves the San Francisco Bay Area, Peninsula, and Silicon Valley from Hillsborough to Saratoga-Los Gatos, including Atherton, Menlo Park, Los Altos, Los Altos Hills, and Cupertino.