Risk Management and Insurance
Identify, then transfer
Risk management is a sequence: identify exposures, measure frequency and severity, then retain, avoid, reduce, or transfer. Insurance is for low-frequency, high-severity events; retention (deductibles, self-insurance) suits high-frequency, low-severity ones. Exposures most clients miss: liability from teenage drivers, rental property, volunteer boards, and umbrella coverage beneath a large net worth.
Life and disability
Life insurance needs analysis: human life value or a capital-needs (DIME: debt, income, mortgage, education) approach. Know term, whole life (guarantees, cash value, level premium), universal life (flexible premium, interest crediting, lapse risk), and variable life (separate account, securities registration). Disability insurance hinges on own-occupation versus any-occupation definitions, elimination period, benefit period, and residual benefits - for a working-age client, the probability of a long disability often exceeds the probability of death.
Ownership and taxation
Death benefit is generally income-tax-free under §101(a); policy ownership determines estate inclusion (§2042 incidents of ownership). §1035 exchanges defer gain; a modified endowment contract loses favorable loan treatment. Long-term care: know the difference between reimbursement and indemnity, elimination periods, and partnership programs.
Traps
- Ignoring ownership in estate planning for an otherwise well-structured policy.
- Assuming term insurance is always superior; convertible term and permanent coverage serve different needs.
- Confusing own-occupation with any-occupation.
- Overlooking umbrella liability for a high-net-worth household.
Rule of thumb
Insure the catastrophic and retain the manageable: buy high limits with meaningful deductibles rather than low limits with none.