Risk ManagementSubmitted by Affiance Financial on April 12th, 2012
By Steve Lear
First, I’d like to thank Seth Meisler for joining our firm, becoming a partner, and bringing his “Fact Finder” skills with him. This has freed me to take the risk of writing about big-picture items because I now have a complementary partner to write about the details. As Kolbe Wisdom™ demonstrates, business partnerships are more successful when team members have very different styles of action with which they approach tasks.
I mention taking a risk, because in every decision we make there is an element of risk. What types of risk do we expose ourselves to?
- our physical and mental health
- our standard of living
- our egos and reputations
- losing money
- losing time
Our challenge, then, is to manage our risks. In this article I will focus on a risk management strategy that affects our standard of living (SOL).
In determining your SOL, the expenditures that need to be considered include major material items and necessities (house, car, food), discretionary items (clothes, entertainment, travel), a safety net (insurance) and values-based items (family and community support). My assumption is that the reader wishes to provide some sort of legacy to the next generation and believes there exists a personal responsibility to leave your campsite in as good a shape, if not better, as when you arrived.
Clearly, therefore, your standard of living is not just about material items and life experiences—it also encompasses your mindset or attitudes.
What are the risks involved in creating a standard of living?
- We will run out of income before we run out of life.
- We will run out of life before we run out of income (i.e., therefore having unnecessarily denied ourselves things or experiences we wanted).
- We will not live our lives according to the standards we originally envisioned and thus have regret at the end of our lives.
I believe you can free up capacity to create a satisfactory standard of living by having a properly structured life insurance portfolio (PSLI). I have no scientific evidence to back up this claim. But it is a concept I have implemented with a number of clients and I have witnessed a resulting sense of contentment, a lack of regret and a higher standard of living.
A properly structured life insurance portfolio obviates the worry of providing for kids or family members. It provides leveraging, ease of management, and tax and creditor efficiency.
The idea behind leveraging is to use someone else’s money to accomplish your goals. In a PSLI, your beneficiaries will receive money from the life insurance company. You will never put more money into the arrangement than what will be returned to them. The number of disputes over claims is very small: you are either dead or alive (though occasionally there are disputes when the insured does not tell the truth on the application).
A PSLI has ease of management because the claim is paid in cash—and quickly. Moreover, the death benefit is income tax-free to the beneficiary, and can be arranged to be estate tax-free and creditor- and divorce-protected through establishing proper ownership.
When Things Go Very Well
I have had many clients who have been more financially successful than they expected. Oftentimes it is because they lived by the same sage advice I received from my first accountant, Herb Schechter, in 1981—“Live on less than you make.” These individuals almost all agree that family support (through education) and community support are important elements of your SOL. And they also want to ensure that some of the money they've accumulated can be passed on to the next generation and the community. In other words, they want to leave a legacy, and a PSLI enables them to do so.
When Things Don’t Go Well
I have also seen situations in which life takes a turn for the worse and things go more poorly than expected. A mishap can occur—a disability, a bad business deal—and you may end up not having accumulated enough money to take care of yourself. In these situations, you may need to borrow from friends or family, or get assistance from the community. Moreover, you may end up feeling regret, which only makes matters worse.
Most people want to leave a positive legacy. But when that’s not possible, they still don’t want to leave a “negative” one. The fact is, with death comes expenses and I have observed that when the next generation has to take care of final expenses, it leaves a bad taste in their mouths. A PSLI will assist in taking care of these expenses and even possibly provide a means to get back some of the money that was spent. With a PSLI, it may be possible to look at money from your friends, family or community as a loan rather than a gift.
When Things are Just Fine
A third situation is one in which you have accumulated a meaningful amount. (This definition, as well as the others, is deliberately vague because everyone would define these amounts differently.) For those who've accumulated a moderate net worth, a PSLI can provide the peace of mind to spend a bit more while you’re alive—for instance, to take your family on a special, never-to-be-forgotten trip. While it’s possible to envision a situation in which you need to go into debt near the end of your life, with a PSLI the proceeds at death can be used to pay it off.
In other words, I am promoting the idea of spending money. We are all going to die at some point, and in my opinion, it’s crucial to live life to its fullest. You’ve likely seen the bumper sticker, “He who dies with the most toys wins.” Ironic or not, that’s not what I believe. I believe the winner is the person who's most enjoyed the journey and who's had the confidence and the financial wherewithal to create experiences or gifts or even material items that make a difference in their lives, the lives of the next generation and of the community. One of the saddest things I’ve seen—and one of the biggest risks we face—is for people to reach their 70s and 80s with regret for the things they didn’t do.
Creating a PSLI, one with coverage that will last your lifetime, is the best risk-mitigator I know. It can clean up any mess you’ve created. It can empower you to do more while you are alive. And it will take care of the inevitable final expenses.
If you or someone you know is interested in learning more, please contact me, Andy Fishman, or Matt Berhow, and we will be more than glad to assist you.
And may you never have regret.