Why Defense First Wins Your Financial Planning Game

This article is original content written by Manchester, CT Financial Advisor Thomas Scanlon, CFP®, CPA

“Offense sells tickets. Defense wins championships.” Paul “Bear” Bryant – Former Head Football Coach University of Alabama and six-time National Champions.

Defense wins championships.

photo of women punching

It appears the “Bear” knew what he was talking about with six National Championships. It’s the same with your financial planning. The stock market (the offense) and its returns get all of the headlines and attention. The truth is you need to play defense with your financial planning before you go on the offense.

Estate Planning

Estate Planning is not a subject many folks want to discuss, much less do anything about it.

An effective estate plan will have:

  • A Will
  • A Power of Attorney
  • A Health Care Proxy
  • A Trust (optional)

Your Will directs who gets your property and when they get it. Keep in mind, some assets will allow you to name a beneficiary on an account. This could be a 401(k) plan, an IRA, Roth IRA, brokerage account or perhaps a life insurance policy. The beneficiary that is listed becomes the owner of this asset when you pass away. It doesn’t matter what your Will says about any assets or accounts that have a beneficiary designation. The beneficiary designation that’s listed on file with the custodian of the asset or with the life insurance company dictates who gets this asset and trumps what is in your Will.

One section of the Will is naming the guardian of their minor children. This is one area married couples with minor children might struggle with naming a guardian for their children. There’s no way your brother-in-law is going to be the guardian of your children if you and your spouse aren’t here anymore. Regrettably, then estate planning comes to a screeching halt. Get over this. Pick a guardian and get your plan in place. It can always be changed at any time.

A Power of Attorney allows someone else to manage your affairs if you are unable to do so. This is an important document if you become disabled or incapacitated. Customarily for a married couple, each spouse would be the Power of Attorney for the other spouse. For a single person, perhaps another family member or their attorney might be their Power of Attorney.

A Health Care Proxy allows someone to make end of life decisions on your behalf.

A Trust is a tool that you may want to consider, particularly if you have minor children. There are two basic types of trust, revocable and irrevocable. With a revocable trust, also known as a ‘rev trust’ the donor can revoke this trust at any time prior to death. Once someone passes away, a revocable trust becomes irrevocable then. The revocable trust gives grantors (the person funding the trust) much more flexibility during their lifetime.

One of the more popular revocable trusts is for life insurance. These are known as Irrevocable Life Insurance Trust (“ILIT”). Set up and administered correctly, these trusts allow the death benefit from a life insurance policy to be estate tax free. Keep in mind that revocable trusts are not flexible and are very rigid. Once the trust is formed and funded, generally the trust can’t be changed and assets can’t be removed.

You will need an estate planning attorney to assist you with the preparation of these documents. Please, don’t prepare these documents through an online service. Hire a qualified attorney and invest the money. It’s well worth it.

These documents will need to be reviewed every three years. Why? It’s simple. Everything changes. Marriage, having children, divorce, having a spouse pass away are just some of the life events that you may encounter. That’s why these documents need to updated periodically.

It’s hard to believe but it’s estimated that about one half of Americans over age 55 don’t have a will. (1) The sad reality is that everyone already has a Will. It just may not be the Will you want. This is because most states have intestacy laws. These laws apply when you don’t have a Will. The state will dictate how your estate will be distributed. Yikes!!! Does anyone what this? I don’t think so.

Risk Management

Risk management is a fancy way of saying insurance. I’m sorry about that. The only thing people want to talk about less than estate planning is insurance, especially about buying more insurance. I get it. Try to stick with me on this.

First, let’s look at insurance that is typically mandated, car, homeowners and health insurance.
After dealing with these mandated insurances, most folks have had enough with insurance.

However, let’s look at some insurance you should consider:

• Life Insurance

The death benefit paid on a life insurance policy could provide your dependents with some of the funds to live a similar lifestyle they had before your passing away. Dependents could be a spouse, minor children or other relatives. If you have dependents you likely need some life insurance.

The two types of insurance are term and whole life. Term insurance is just like it sounds. It’s temporary. You pay a premium for a term. This could be for one year or you may want to lock in the premium costs over many years like 10 or 20 years. With term insurance you pay an annual premium and if you pass away while the policy is in force, the death benefit will be paid to your beneficiaries. Think of term life insurance like renting a policy.

As was mentioned above, term insurance just provides a death benefit if the insured passed away. With whole life insurance in addition to the death benefit, there is an investment component. This investment component makes the premiums more expensive and makes whole life insurance a permanent policy.

Employers can offer their employees up to $50,000 of group term life insurance as a tax-free fringe benefit. Depending on your employer, they may offer employees supplemental group term coverage that the employee could pay for through a payroll deduction. Check with your employer to see if they offer group term life insurance and what your options and costs would be.

• Disability Insurance

Disability insurance is designed to replace some of your income from working if you become disabled and are unable to work. Most policies will cover about 60% of your pre-tax income. There are two types of disability insurance, short-term and long-term.

Short-term disability will typically cover you between 13-26 weeks. Long-term disability will begin once any short-term disability benefits and employer benefits have been exhausted. Long-term disability typically lasts more than 6 months.

If you are an employee, see if your employer offers any disability insurance as an employee fringe benefit.

• Personal Umbrella Policy

While your car insurance is mandated by the state and homeowner’s insurance is required by the bank holding your mortgage, a Personal Umbrella Policy, also known as Excess Liability Insurance, is not required. Just because it’s not required, doesn’t mean you don’t need it. A Personal Umbrella Policy is a backstop to your auto and homeowners’ policies. This policy kicks in when there is a claim that is outside the limits of your auto or homeowners’ policies. The typical minimum coverage for these polices is $1 million and they go up from there. The premiums for these policies are very reasonable. If you don’t have a Personal Umbrella Policy get one. Call your insurance agent. Now.

Estate Planning and Insurance are not exactly the hot topics that everyone wants to discuss Happy Hour. That’s fine. But remember what the “Bear” said:

Defense Wins Championships!

(1) www.forbes.com February 15, 2019