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Does Cheap Car Insurance Make Sense?

As an insurance professional I run into people regularly whose primary concern is to get the cheapest coverage. They like to ask,

How low can I go?

I have a friend, who carried pretty standard auto insurance liability limits with 100,000 per person injured in an accident and matching coverage for underinsured motorists. One morning while taking his dog for a walk he got clipped by a driver who had the same amount of coverage on his own policy.

My friend required years of physical therapy and multiple surgeries to repair the damage to his body. This ran him upwards of half a million in surgeries alone. Now for those of you who are good at math you are realizing that the driver’s liability coverage plus my friend’s underinsured motorist coverage add up to 200,000 towards paying my friend’s medical bills. Of course, however you do your math my friend now was on the hook for hundreds of thousands over the course of multiple years.

This casts a new perspective on the question above. The question should not be, “how low can I go?” but “how much is enough?” For that I refer to my previous article with that title. There is a balance that needs to be struck between risk protection and not blowing the budget, and for that it is invaluable to have an insurance advisor.

We don’t really grasp the importance of insurance until we use it like my friend and the driver that hit him. If you are unsure about your coverage or have questions it is critical for you to find and retain a quality insurance advisor. If you need an insurance expert I am happy to meet that need. Either fill out the form or call my office at 719-247-0008.

Executive Bonus 162 and Small Business

According to the IRS, business entities can deduct all reasonable expenses including compensation in a given tax year. (IRS tax code section 162 (a)1).

This opens a world of possibilities to employers large and small. Many take advantage of this provision by offering an executive bonus in the form of cash value life insurance for key executives within a company. There are many good articles available online about how this flexible bonus plan can help businesses generally such as this one from Bolicoli.com

As a new entrepreneur I am passionate about small business. Although big businesses often choose to reward key executives without the government oversight and regulations that accompany other more traditional benefits packages, small business owners are more concerned with paying today’s bills and success of their business in the future.

Small business owners are a high risk population, if they die or become disabled the likelihood that the business closes its doors for good increases dramatically. This impacts employees, family, and customers of the business. Additionally if the business falls on hard times like we’ve had recently with the COVID pandemic capital is not available to help a business survive.

Furthermore, if everything goes well and the owner is ready to sell the business and retire, it can be very helpful to have a supplemental tax free income stream in retirement. Or, as is often the case, the business becomes part of the inheritance it is helpful to have liquid (tax free) cash available to apportion inheritance amongst multiple heirs that may or may not wish to continue the business.

Structuring cash value life insurance as an executive bonus plan billed through the business can resolve all 4 issues. If a business owner dies early the death benefit can go to a beneficiary of their choice, generally a spouse. It can also act as a key person benefit to help wind the business down and avoid sudden layoffs and loss from inability to sell the business. If a disaster hits like COVID, the owner can access cash values to help either the business or family survive or both.

On the other hand, if everything goes great, the cash value in an executive bonus life policy can be accessed tax free to help retirement. Then, when the owner passes there is adequate liquid inheritance to divvy up amongst the heirs, without having to liquidate or in any way damage the business.

Some rules of thumb as with all other life insurance is that sooner is better. A 40 year old for example, will be able to get a more affordable policy than a 50 year old all else being equal. However, the principle also applies,” better late than never.”

To find out more about this very powerful tool you’ll want to consult with your personal insurance professional and your accountant or CPA. If you don’t have an insurance advisor, feel free to contact me via the below form or call 719-247-0008.

Life Insurance is for Living

DO YOU WANT FINANCIAL FREEDOM FOR YOUR FAMILY?

DO YOU WANT YOUR DREAMS SECURED REGARDLESS OF YOUR HEALTH?

DO YOU WANT YOUR FAMILY’S ABUNDANCE TO OUT LIVE YOU?

You can achieve the above with life insurance. In fact you can achieve it whether you live long or die early through cash value life insurance.

Cash value insurances come in a variety of shapes and sizes, but there are two basic categories – Whole Life and Universal Life. Whole Life has limited uses and is generally outdated and outclassed by Universal Life.

Universal Life or UL is a relatively recent product with some really nifty features. Almost all UL’s have:

  1. The ability to be accessed tax free.
  2. The benefit of saving while protecting income from loss.
  3. Many IUL”s are now sold with living benefits to allow you to access the money prior to death in cases of severe injury or illness.

The UL was designed to be flexible and efficient. As such, the basic UL has developed into a number of different products that target specific goals that consumers have. Most of these differences are based on what happens with the extra cash value in the account. The main variations are the Variable Universal Life, the Indexed Universal Life, and the Fixed Universal Life.

Variable Universal Life

There is a continuum of risk involved in the money growth portion of the UL. The most risky but potentially most profitable is the Variable Universal Life which functions in the market like a traditional investment, this is administered by a licensed investment professional and if done wrong can cost the investor dearly. I have had family who were ill advised to get into a VUL and were lucky to break even on their investment.

Indexed Universal Life

The Indexed Universal Life or IUL is great for young to middle age couples or families who are trying to grow their money. Unlike the VUL, the IUL is indexed off the market and typically has a floor at 0% so if the market tanks the owner does not lose any money. The best IUL’s have a growth ceiling at 8%-12%. Many financial gurus teach that 10-12% is the optimal growth in a good investment. This means that while the IUL is a safer vehicle than m0st traditional investments it is also on par with them for growth potential. Add the ability to access funds tax free and protect your family or business at the same time and the IUL is an ideal money growth vehicle.

Fixed Universal Life

Fixed Universal Life products are the most secure from risk. Some are even sold as guaranteed return of premium. In that sense they operate more like a term that lasts your whole life or if you make use of the cash back they become FREE.

In looking at whether cash value insurance is a good fit for your savings portfolio you should talk with your financial/insurance advisor about what you want it to do for you. If you don’t have a professional insurance advisor, fill out the attached form and I will be happy to meet with you via zoom or in person to evaluate your needs.

The Many Uses of Life Insurance

Life insurance is perhaps one of the most misunderstood and under utilized forms of insurance.

Most people are aware that life insurance can serve as an effective financial replacement for loss of income when a loved one dies. but it is so much more than that. Structured appropriately, life insurance can protect an estate, provide tax free income for retirement, protect a business, and be used by a business to attract and keep quality employees.

The variety of life insurance uses can best be understood by looking at two different buckets, personal uses and business uses.

Personal

Most people understand the basic concept of income replacement, but often avoid it since it involves talking about death. A more positive way to look at it is you are giving your loved ones the opportunity to live. Looked at this way, the topic isn’t so depressing. To provide this opportunity to your loved ones you need to consider how well you want them covered and how long you want the income replacement to last. A professional insurance/financial advisor can help with this

Two other uses of life insurance for individuals are protecting an estate and securing supplemental tax free income in retirement. These two applications are more complex and so it is best to consult with your financial advisor and tax advisor as well as in the case of an estate, your attorney.

Life insurance protects an estate in two ways. Because proceeds are tax free, you can use them either as direct inheritance in lieu of other taxable means of inheritance, or in the case of cash value policy you can use the cash value to meet the tax demands of the estate. Again, each individual situation is different and it is best to get advice from your financial advisor.

Using a cash value life policy to fund a tax free retirement is one of the most creative and fun uses of life insurance. Because life insurance is favored by the IRS, it is possible to use it like an unlimited ROTH and grow and access accumulation of wealth tax free. For more detail on this feature of life insurance I highly recommend Tax Free Retirement by Patrick Kelly.

Business

Because they operate as entities, businesses can use life insurance in similar ways to individuals. The most common uses are protecting the business from a significant death and rewarding employees.

Businesses need protection from the loss of key employees as well as be safeguarded from loss of a managing partner. Protecting a business from the loss of a key employee is much like protecting a family from the loss of the breadwinner. Instead of having individual relatives as beneficiaries, the corporation or a representative thereof is the recipient of the proceeds and then they are used to replace that loss.

In the case of joint ownership, the owners can fund a buy-sell agreement using life insurance. This is a more complex process depending on the size and value of the business and the number and stake of the partners. It is best not only to have an insurance professional but a legal professional to help ensure things are set out in a proper manner. The thrust behind this insurance is that the remaining partner can buy out the heirs of the deceased partner, and therefore continue the business using the life insurance.

Businesses can also utilize cash value life policies to attract and maintain valuable employees through the executive bonus plan 162. This is based off of section 162 in the IRS tax code and is unqualified money, meaning there are a lot fewer restrictions legally and more freedom for the business.

The Umbrella

One of the most useful but often overlooked policies is the umbrella.

The umbrella policy is often compared to a security blanket. It sits over your existing coverage to provide extra protection in case all hell breaks loose. What a lot of people don’t realize is how flexible an umbrella can be.

Umbrella policies come in all shapes and sizes just like their physical namesakes. Most start at $1,000,000 and can get as big as $10,000,000. They also have a range of purposes like covering personal assets up to covering multi location businesses. Some umbrella policies sit over both for broad protection.

What a lot of people don’t realize about umbrella coverage is that it can be for more than just liability coverage. Although its primary purpose is to extend liability protection it can also be used as an extension of your personal protection.

For example in automotive coverage it is generally a good practice to have uninsured motorist protection to cover you if you are hit by someone without insurance. The umbrella can expand this coverage, usually for additional premium. Some business umbrellas have endorsements that extend them over things other than strict liability as well.

To understand the value of the umbrella, I’ll tell you a story that I heard from a colleague of mine. There was a farmer who was getting close to retirement and his farm, worth 1.5 million, was his retirement plan. One evening a gate was left open on his property. Early the next morning one of his cattle bolted across the highway and slammed into an SUV with a family of 5, all of whom sustained significant injuries and sued for their bills and to replace their totaled car. The car spun out and significantly damaged fencing on the neighbors property as well. The farmer did not carry an umbrella and only had 1 million on his farm. Total court costs and damages came to over 3 million. For lack of an umbrella he lost his farm, lost his cash savings, and was unable to retire as planned.

A basic 2 million umbrella probably would have cost him under 1000 per year and would have helped save the farm and his retirement. There are many more examples like this. Moral of the story is, if you have assets protect them.

How Much Insurance is enough?

The most simple answer is…It depends.

Do you rent or own? How many vehicles do you have? What is your net worth?…

There are many iterations of questions like this. So many in fact that the list is nearly endless and it is nearly impossible for an individual without training to be aware of all the moving pieces. This is why it is extremely helpful to get and retain a quality agent. That way you have someone to look out for you and make sure your protection is up to date so you can live.

As an insurance professional, I’ve, found it helpful to boil down the individual questions to a summary one…

What could a catastrophe cost you?

If you are a poor college grad living with a roommate and broke, there frankly is not much to lose if you lost everything. On the other hand, if you have a good job, a family, a house or two, and a few toys, you’ll want much more thorough protection at higher limits because when Murphy’s law strikes you’ll want to be prepared since it is liable to cost you more.

The last thing to consider is,

what is the most likely disaster to strike?

A lot of this is dependent on where you live. Here in CO we worry about hail and wind as well as ice and snow. You’ll also want to consider things like are you in a flood-plain or are you in the middle of trees. Not only do these factors influence the type and amount of coverage you need they also play a part in the rates you pay.

One thing we often overlook is death. Every disaster has a percent likelihood attached to it. Death happens to be 100% chance. It is simply a matter of when and how. With this in mind, life insurance at every stage of life is the most important coverage to have. As with all other coverages you are best off consulting an insurance professional to get the right type and amount of life coverage.

Rethinking Insurance coverage

Everyone knows that they need insurance, but to many of us insurance is just another bill that we are trying to lower. Big companies vie for our attention as we scramble to lower our rates. Whole marketing campaigns are devoted to convincing you that if you switch you’ll save. There are even campaigns that allow you to ‘choose your own insurance’ thereby presumably getting the best deal.

Other companies market to our desire to be protected and use emotional language to convince us that only they have ability to be there for you in crisis.

These marketing appeals can obscure the reality of what insurance does and does not do and completely obscure the fact that having the ‘right’ company is not the whole story. If you don’t have proper limits you are left open to potential catastrophe. Dave Ramsey provides a good basic definition of insurance.

Insurance is transfer of risk.

Dave Ramsey

So the appropriate question to ask when shopping insurance is not merely is it cheaper. Nor is it solely based on buying a brand you’ve heard of. You certainly want a reputable company and don’t want to unnecessarily break the bank. BUT bottom line you want to evaluate how much risk you are willing to take and in what respect. For example, I have come across many individuals who have low deductibles on their vehicle for which they pay handsomely and yet they have insufficient liability on that same vehicle.

My question for them is what poses a greater risk, you getting sued for all you are worth, because you were at fault in an accident or having hail take out your car in CO and having to pay 500 instead of 250 for your deductible.

There are many different types of risks and different ways to alleviate the catastrophe potential through insurance. To best evaluate whether you have enough coverage you ought to talk with your local insurance professional as they can help you evaluate appropriate coverages for your situation.