By Moshe Alpert
Before I discuss the more practical elements of a financial plan, I cannot overemphasize the importance of meeting with a financial advisor. One conversation can make all the difference. In our community especially, our financial needs are acute and can be greatly mitigated by consulting with a financial advisor. While we all run busy lives, the time you expend in a meeting with a financial planner can be of inimitable value.
As you can see in the diagram, a financial plan has several moving parts that are interdependent on each other. Where does one start? What is the most important first step to take when creating the plan?
Throughout my experience, I have frequently observed how most people define “financial planning” as budgeting, saving, and investing—the “wealth accumulation” phase of planning. While this part of the process can be exciting and rewarding, there is a gaping vulnerability in this definition.
When asked what their most important asset is, many people say their house, their jewelry, and their retirement savings, amongst other things. In fact, the most important and valuable asset one has is his income! Think about it, if our income goes, nothing will become of us financially. It therefore behooves us to protect our income from financial risk!
Let us use a hypothetical prospect who is thirty years old, is earning $100,000 a year, and is supporting a wife and two children who are both under the age of three. Using simple math, this person would require $3,000,000 if he were to provide support for the next thirty years for his family (we’ll keep it simple and not index for inflation, although that is an important factor in any long-term plan). If this prospect becomes disabled or dies, even the most disciplined saver will not have amassed enough wealth to provide for the needs of his dependents. While changes and adjustments will be made in the event of a death or disability, the need for immediate income and liquidity is pressing and the last thing one wants to do in the face of tragedy is to be forced into making uncomfortable changes due to financial constraints.
Therefore, I believe it is necessary to make sure that one has life and disability income insurance in place before any wealth accumulation planning begins. These policies are designed to help protect one’s assets and finances from risk; we call this part of the process “risk management” and is the first step in financial planning.
When it comes to life insurance, there are two basic types of policies: term life insurance and permanent life insurance. As their names imply, term life is limited to a certain period of the insured’s life: 10 years, 15 years, 20 years, etc. Permanent life insurance is permanent (most contracts extend until age 121, but one must be careful to check as some contracts end earlier) and will pay out regardless of when the insured passes away. At first glance, the obvious choice would be permanent insurance, but permanent insurance is structured quite differently than term life and is significantly more expensive. Therefore, it is more common to begin life insurance planning utilizing term life insurance.
When looking for the right term policy, I have narrowed it down to three main factors:
- Quality of the company
- Longevity of the contract
- Convertibility of the contract
I will proceed to explain each factor individually.
Quality of the company is one of the most overlooked factors in buying a term life policy. Practically speaking, a company that is financially strong and healthy will pay claims well. A low-quality company will try to “sliver” out of paying a claim and can cause significant delays in payment when money is unfortunately needed most. This should get one to think twice before “jumping” at the plan that has the “cheapest” premium rates; quality must be emphasized.
The next crucial factor to look for is the longevity of the contract. I have seen this mistake all too often. Many young people, some in their early 20’s, are purchasing ten-year term plans due to their low premiums. I explain to these people that they are making a fundamental mistake. After those ten years they will need to renew their policy and they will be paying significantly more than what they would be paying had they purchased a more suitable 20-year or 30-year plan. I wish I could tell them of all the instances in which people came over to me and related how their policies are expiring at age 40 or 50! In addition, there are no guarantees that one will be insurable at that age. Keep in mind, that while clinically one can be in good health, insurance companies can and will rate or decline someone based on seemingly small health risks. Even though a shorter-term plan will be cheaper today, it is a risky maneuver that can prove to be significantly more expensive in the long term. It is crucial that one should purchase a plan that will not need to be renewed. The extra upfront cost is worth it.
Lastly, one should make sure that the term policy is convertible to permanent insurance. While one will not necessarily need the same amount of life insurance throughout his/her whole life, it is important that one makes sure that he will have some life insurance in place throughout his life—be it for funeral expenses, burial expenses, or to leave a legacy for children. These needs can be met by using permanent insurance that will never expire (if premiums are paid). Although permanent life insurance is more expensive, one can ensure eligibility for permanent life insurance by purchasing term life insurance that is convertible to permanent insurance. Convertibility allows one to change his term life plan into permanent insurance without any financial or medical underwriting. This can be of indispensable value in the long term.
I have mentioned some of the more prevalent details that relate to finding the right kind of life insurance policy. Of course, there are many more minutiae that need to be worked on and only one who is proficient in this valuable commodity will be able to adequately plan for you. There is no website, article, or advertisement that can replace a good financial advisor!
While financial planning requires accumulation of wealth, it is most important that one makes sure that he or she has proper insurance coverage in place to protect his or her finances. Choosing the right term life insurance policy that is of high quality, has a sufficient term length and has a good convertibility option will be the most important step one can take to start their financial plan. We spend so many hours working to provide income for our families and we owe it to ourselves to set aside a small amount of time to properly plan to help protect and grow these assets. Talk to a financial professional who can help you plan your insurance needs properly so that you will not need to worry about it in the future.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities, and life insurance with long-term care benefits) and its subsidiaries. Moshe Nison L Alpert is an Insurance Agent of NM and Northwestern Long Term Care Insurance Company, Milwaukee, WI, (long-term care insurance) a subsidiary of NM and a Registered Representative of Northwestern Mutual Investment Services,
Some contractual features and optional benefits may not be available in all states. For costs and complete details of coverage, contact your Financial Representative or The Northwestern Mutual Life Insurance Company.
This article provides a partial description of policy terms, provisions and features. It does not modify the actual policy provisions in any way. Please read the appropriate policy contract for exact details of terms and conditions.
CA License: #0M21420