We need to strategically protect ourselves and our assets from all the things that could possibly derail the plan. Protect at the level you would want if the event you are insuring against actually were to happen.
Maximum Protection is the second vital principle. The protection area of people’s finances is often overlooked, misunderstood, taken for granted, and minimized.
Part of the problem is found in understanding the legal language of the contracts/policies/documents. People get frustrated when their insurances, entities, and estate planning documents don’t do what they thought they were supposed to do at the time they need it. The frustration stems from misguided expectations and lack of understanding of the legal documents. No part of a person’s plan is more important than getting this area of your finances in order, maximized, and understood. This is an area of your finances that cannot be left to opinion. Insurance products are contractual, and if understood a person can base insurance decisions on facts. Opinions about different insurance products do not change the facts regarding them, what they do, or what they don’t do.
Another problem in the area of Protection is the misconception that protection comes at the expense of building wealth or vice versa. Unfortunately, people simply accept that misguidance as fact and fail to discover the truth of the matter. Our experience has been that nearly every person we meet with is able to improve his/her protection in some way without any additional out-of-pocket expense. And, with very little expense, clients are usually able to make vast improvement in their financial protection. The key to this improved efficiency and protection is in knowing how and having the right tools to evaluate the options.
We can see improvement in liability protection by more than ten times, with very little additional expense. Validation of the personal property coverage in the homeowner’s insurance through documenting personal belongings is another change we can make without additional cost. Tax and opportunity cost savings generated from our planning makes the purchase of life and disability insurance practically zero cost. Many times we are able to find ways to save a greater percentage of income simply by evaluating strategies on the model with no additional cost to budgets.
How Much Do I Need?
Often I get asked the question “How much do I need?” when it comes to levels of protection. The answer to that question is “the level you would want if the event you are insuring against actually were to happen.” In liability, you should have what you would want if you knew you were going to get sued. In property insurance, you should have the level and quality of coverage you would want if your home and personal belongings were totally destroyed. In disability insurance, you should have the maximum allowed by the insurance companies, with the very best definitions available to you. Combined disability benefits, like life insurance, are limited. So, it is impossible to “over-insured” in these areas. In health insurance, you should have the level of coverage you would want if you or someone in your family had major ongoing medical issues, where the costs, if paid out of pocket, would destroy your financial future. In your estate plan, you should have all of the legal documents in place that would protect your survivors from financial ruin due to medical costs, or other disabling or end of life scenarios. You should have legal documents that would make sure your children have the guardians you feel would be best for them. You should have legal documents that would make sure your loved ones are the beneficiaries of everything you would want them to have in the event of your passing.
In your life insurance, you should have the level of coverage that would replace your income throughout your working years (based on a conservative interest rate). When retired, you should have one times your net worth in life insurance, which would allow you to enjoy what you’ve created while you’re alive, guarantying replacement of those assets to your heirs (namely your spouse, if you are married) when you die. The potential difference in income that could be generated from assets in a plan with life insurance versus one without is phenomenal.
The reason we are so clear regarding the protection part of your finances is that you have to be satisfied with what you have at the time of the event (i.e. death, disability, lawsuit). You must be satisfied with your choices in your protection because once the event occurs, you cannot change your coverage. It is what it is. There is no backward planning, there is no rewind button. For the most part, current popular financial planning negates and minimizes the importance of protection, and liquidity for that matter. Their sole objective is to get as much of your money in the stock market as possible. Then, their objective is to put your money in as much risk as your “tolerance” allows. Those financial planners can see that their plans have failed, and that stock market investors do not receive anywhere near the 12% they were telling them they would. When their clients come to them to find out what they can do now that they’ve lost so much money, the planners’ response is: “work longer”, “save more”, “reallocate”.
Plans based upon preconceived needs and goals are simply based upon complex guesswork and mathematical formulas. They are not strategic and are far from efficient. They have no room for error. Wouldn’t you rather have a plan that protects you from anything that can go wrong, thereby giving you the freedom not to worry? Of course, you would. People would love to have a plan that works anyway, even if the stock market drops. They want a plan that works even if tax rates skyrocket. They want a plan that works in the event of a disability, lawsuit, and a decrease or increase in interest rates. People want their plans to work no matter what. Why? Money is an essential aspect to their way of life. The way to make sure your finances will work under any circumstance is to have products and strategies in place designed to do so, and the discipline to follow the five principles outlined.
By perfecting the protection component of your finances we are not trying to predict what will happen, we are recommending doing everything you have the power to do to protect against what may be. We want the best possible chance of success under any circumstance.