This month’s Investor’s Edge column begins where last month’s ends…with the second part of a six-part series. The series is about the six steps of the financial planning process. The make-up of a comprehensive financial plan includes six elements. “Insurance planning and risk management” is the second element of the process (see part 1, “Financial statement preparation and analysis” here). My hope is that from this six-part series, you will gain a greater understanding of and appreciation for the financial planning process. The process, by definition, is never-ending as life-long monitoring is required to ensure a successful plan. It can serve you beyond your lifetime, continuing throughout the lives of your beneficiaries.
Only a select group of planners have met the rigorous education, examination, experience and ethics requirements set forth by the Certified Financial Planner Board of Standards, necessary to be a Certified Financial Planner™ professional (CFP®). For me, I recall this part, Insurance planning and risk management, as the most robust and far-reaching element of my studies of the financial planning process. Your life, assets and financial arrangements can be equally complex. Planning for preserving and passing on your estate is far from simple.
As you know in life, the only thing certain is that life is uncertain. There are many risks and uncertainties that can occur to disrupt your well-being and financial security at any time. Only proper prior planning can minimize, NOT AVOID, unexpected life events. Not fun to think about, but death, disability, or other potential hardships are necessary considerations in your financial plan and essential to the success of the process. Assessing and attempting to minimize and manage the risks associated with life’s unwanted surprises, or even the inevitable events, is a critical success factor to ensure that you and your loved ones can live desired lifestyles. Below are just a few common considerations to help with the notion of insurance planning and risk management as they relate to financial planning.
Life Insurance: This is an important component of financial planning. With prudent counsel, you can ensure you have enough insurance coverage to care for your loved ones should an unexpected tragedy occur, or just to efficiently pass on your estate at the time of your eventual demise. As much as everyone’s circumstances, and needs and desires are different, life insurance is not needed by everyone. Still, it’s an important factor to consider within your overall financial plan. The coverage delivers the opposite of my investment tenet, Don’t risk a lot to gain a little. I view life insurance as returning a lot for spending a little.
Long Term Care: Long Term Care (LTC) insurance coverage plans are now widely accepted as a helpful financial planning product. LTC, though, has various features and benefits that come with a cost and confusion. With people living longer, and in many cases with medical complications that require a high level of medical attention, LTC insurance is gaining in appeal to offset soaring healthcare costs. These costs must come out of pocket if you’re not prepared (insured). In many families, being “self-insured” is an intentional choice. Others find this insurance planning technique is key to managing the risk of estate assets being eroded by costly long-term medical care needs.
College Funding: Americans are facing a mountain of debt with over $1.4 trillion in student loans. Why? Because college is expensive! And, it’s getting more so every year. I know; with one kid in college in Hawaii and another getting an education abroad, it’s “heigh-ho, heigh-ho, it’s off to work I go.” Educational costs are rising at an alarming rate. The CollegeBoard in its recent, Trends in College Pricing, published many helpful stats and insights. It showed that between 2007-08 and 2017-18, in-state tuition and fees at public four-year institutions increased at an average rate of 3.2% per year beyond inflation. If you have kids or are planning on going back to college yourself, then you need to plan to finance it. Borrowing a little is okay, but student loans should not be the solution to planning for college costs.
Market Risk: Simply put, this is the risk of losses in investments arising from movements in market prices. The foundation of my investment philosophy is soundly built on two convictions: Investing is a process, and two, a disciplined approach is required to manage risk and succeed in the investment process. Hence, Investing is a process that must be based on a disciplined approach to manage risk. The “risk” referred to here is market risk. “Black Monday,” the “Dot-com Bubble,” the 2008 “Worldwide Financial Crisis,”—these are just the biggest market crashes since 1987. As you know, there were many before that. And, you can bet there are more to come. In my 35 years I have learned all too well what market risk means, and how to handle it. Understanding how what’s happening in the world can impact your portfolio over the short, medium, and long terms, is critical to the success of your investing efforts and your overall financial plan. Risk management is present and visible daily with respect to market risk. Investing is difficult and often an emotional experience. Ultimately, emotions lead to poor decision making. The third of my top ten investment tenets is “Control Emotions.” Achieving long-term investing success, requires a high “EQ” (“Emotional Intelligence”). Greed and fear (and other emotions) have no place in the investment decision making process. Instead, sensible strategies intended to minimize market risk is essential to the financial planning process.
Death: Does anyone like this subject? Probably not. I don’t think even my estate planning friends who talk to people every day about planning for their eventual death “like” the topic. Your financial plan, though, cannot ignore your death. A proper plan takes advantage of techniques and strategies that can not only benefit you now, while alive, but provide you post mortem control over your estate and allow you to provide for your beneficiaries for generations to come. Estate tax just sounds better than what it really is. It’s really death tax. The estate tax you pay, those taxes paid based on and from what you have when you die, can be minimized… unless you don’t plan for your death in your financial plan. Estate planning professionals can help you get your affairs organized so that your financial plan is structured to pass to your beneficiaries seamlessly as you wish at your death as if you were still alive.
I hope part 2 of the financial planning process was helpful. Look for part three: “Investment Planning,” in ALIVE Magazine’s July issue.
Leave a Reply