Episode: 10-11-2022 | The Role of Insurance In Your Financial Plan

Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP®

Update On The Stock Markets

Allison Dubreuil, Wealthway Financial Advisors:  Fall is not just for pumpkin spice, but for a lot of people it is open enrollment season. Which means making decisions oftentimes about a lot of insurance coverages. So we thought today we would talk about the role of insurance in your financial plan.

Kevin Zywna, Wealthway Financial Advisors:  Right, we’re going to talk about insurance coverages. A lot of different types of insurances. Where we think it’s appropriate. Some general guidelines on how to use it. What is good for how much to have.  Before we jump into all of that, I do want to make a note about the market. Last show we pretty much dedicated to market talk investment talk. We are officially in a bear market. The US stock market, based on the S&P 500, is in a bear market. That is considered anything greater than a 20% decline from some peak to trough in an index. We are off now about 25% in the S&P 500. We spent last show giving you tips and techniques on how to manage your way through it.

One of the most impactful things that we said is, if you are contributing to your long run retirement plan, like through your company. Most people invest and most people save long term in accompany retirement plan 401 K, TSP, 403B, and so forth. And if you’re contributing, keep going. If you’re not contributing, now is an excellent time to start. If you are contributing and you have excess cash flow, consider increasing the amount of money that you’re contributing to the plan. If you come into a liquidity event, if you sell a house, if you sell a business, if you receive life insurance proceeds, if you have come into an inheritance, now is an excellent and outstanding time to be buying into the equity market.

Buying low, selling high is how you make money and grow your wealth over the long term. The problem is, most people don’t like to buy low. It feels really bad, right? It feels bad to buy low when we’re in a market pullback. And the headlines are all negative. And your brother in law is telling you to get out of the market. And your co-workers are. And the coffee shop barista has an opinion on things. Now is not the time to sell yet. And we made a big point of this last show. The overwhelming majority of individual investors do just that. They do the wrong thing at the wrong time. And so, I’ve got a little bit of data to back that up. And this is consistent throughout industry literature, by the way.

A bank reporting company called EPFR Global that tracks a lot of fund flows, money flows into and out of different types of mutual funds, showed that cash funds money market funds, stable value funds received nearly $89 billion in the week through October 5, while investors withdrew 3.3 billion from global stock funds. So they’re tracking money movements coming out of equity investments out of stock investments, and being put into stable value money market type funds, that, again, my friends is doing the wrong thing at the wrong time. And the majority of individual investors, left to their own devices, do exactly that. Because they don’t understand why the market is pulled back. They feel like they’re losing money. They aren’t losing money. They’re suffering a temporary decline in value. But you don’t lose money until you actually sell out in the last position. Well, that’s what the majority of people do in these circumstances.

So, if you are hearing this, now is not the time to sell. It’s not the time to panic. It’s the time to buy and it’s time to increase your contributions to your retirement plant. If we can save one person out there today, we have done something good. And my mother will be proud of me.

We’re going to go up to Seaford and speak to Jeff. Good evening, Jeff. You’re on Dollars & Common Sense. Oh, we just lost him. Okay, let’s see. We got a little bit of snippet of his call. And so that was in line with what we were talking about. He says he’s lost 48% in his 401K since January. Jeff says he’s 66 and asks, what’s his best move? Well, I just told you. Now people are going to say well Jeff is 66. He’s in retirement or going to retire soon. He shouldn’t be invested in stocks anyway. No, that’s wrong. That’s old, antiquated thinking on proper investment techniques.

Most of us who are 66 have another third of our lives ahead of us. So, another probably 30 years. That’s a long time horizon. When you have a long time horizon, then you have the ability to continue to invest in equities, endure the temporary market downturns and enjoy the long run higher rates of return that you get from equity. So everything I said earlier, Jeff, pretty much applies to you. If you’re still working, keep contributing to your retirement plan. If you’re sitting on some cash, now’s a good time to add it. If you can increase how much you’re contributing to your 401 K plan or company retirement plan. Do that now. That’s our advice.

Allison Dubreuil, Wealthway Financial Advisors:  I guess for those who are retired, the advice might be a little different. If you’re actively withdrawing from your portfolio, hopefully you’ve got a plan for this eventuality because this is something we see on a regular basis. So, we plan for this for our clients. We have a plan B that we can execute, if and when we get into a pullback that’s deep enough and long enough. So, hopefully you’ve done your planning, you have a plan B. But another way to think about it, and I really liked this, is even if you’re not adding each time, you get dividends from your funds. They are purchasing shares at a reduced cost. So, you are essentially, as long as you’re reinvesting your dividends and gains, right, you’re buying low as well. So maybe you take comfort in that too.

Overview Of How Insurance Fits In Your Financial Plan Philosophy

Kevin Zywna, Wealthway Financial Advisors:  We’re going to talk about insurance and proper use of insurance. But first, we’ll give you a little overview of our philosophy about insurance. First of all, we do not sell any insurance. We do give general advice about insurance. But then past the general advice, we would then refer our clients to the right, proper agent that can offer good quality products at a reasonable price. We feel that, you know, insurance is a necessary component of a good financial foundation and a good financial plan.

We think that our clients should use as little insurance as necessary to do the job. And we don’t like to over insure or use too much insurance because one of the main reasons is that insurance companies are not your friend. They are not your good neighbor. And you are not necessarily in good hands with insurance companies. They’re cold calculating profit-making machines. There’s nothing inherently wrong with that. But they are the ones who write the contracts that you sign and agree to, and how they pay out how and when they pay out claims. And so, what insurance companies are really good at are collecting your premium and making funny commercials. Those are the two primary things, I think, they’re best at. The risk mitigation part of their primary function, you never really hear advertised or promoted very much. But that’s the main reason that you’re supposed to purchase insurance, is to transfer a risk you can’t afford to accept to another company that’s bigger, larger and more capitalized, so that if a peril occurs to you, then you can get some compensation back and you are financially protected and you are not wiped out.

But there’s going to be a lot of people in Florida now, after the hurricane has passed through, they’re going to find out how difficult it is to work with insurance companies. So having said that, insurance is still a fundamental component of a good financial foundation. And we’re going to give you some tips and techniques on how to use it properly.

Allison Dubreuil, Wealthway Financial Advisors:  Yes, we’ll run through various types of insurance: from property and casualty to life insurance, possibly disability health insurance (is a big one coming up this time of year for everyone employees and retirees on Medicare). And if we have time, we might get into some basics about long term care insurance. Insurance is an important piece of every financial plan but the insurance that’s right for you is going to be based on your family, your financial situation, and it’s never a one size fits all product.

Car Insurance And Home Insurance

Allison Dubreuil, Wealthway Financial Advisors:  We’ll talk a little bit about the nuances and how you determine what coverage you need and how to find it. I guess we’ll kick things off with property and casualty. So car insurance is pretty straightforward. That is ideally bundled with your homeowners’ insurance. And where we see areas of opportunity with property and casualty insurance is usually in the deductible. Sometimes we find people that have very, very low deductibles. And sometimes you can save a little bit of money in your premiums by accepting a higher deductible. Meaning having a slightly higher deductible on your homeowners’ insurance policy means if you have a claim, which really isn’t very often for many people, you might pay a little bit more out of pocket, but you’d save every month for years on premiums.

Kevin Zywna, Wealthway Financial Advisors: Yes, a fundamental tenant of good risk management is for you to accept the risks that you can afford. And then you transfer away to an insurance company the risk you can’t afford to assume. So that deductible is sort of like that lever that you can raise up and down. For people who have an ample emergency fund, who have stable work prospects, have some savings beyond that in the bank, you can afford to assume, a $500 fender bender, say right instead of $100. So, your deductible the part of the insurance coverage that you were responsible for, you can increase, you can assume more the risk in the event of that type of peril. If you raise the deductible, and you assume more the risk, the insurance premium goes down.

Allison Dubreuil, Wealthway Financial Advisors:  It should, right. One of the things I would mention about homeowners’ insurance is you want to be sure that your policy is a replacement policy. So, you want to make sure that your contract is an agreement that they will reimburse you for the cost to replace your home at the current value, as opposed to what you might have originally paid for it or what it was valued at back when it was built. So that’s a little nuanced that you might want to check on with your homeowners’ policy.

Kevin Zywna, Wealthway Financial Advisors: Replacement value. Yes, same idea about deductibles applies to homeowners insurance as it does to your auto insurance. Usually $1,000, we see pretty common in homeowners’ insurance. But if you have an emergency fund of $20-$25,000, we’ll go ahead and increase that deductible up to $5,000 or in some cases, maybe even $10,000. If conditions are right, by raising the deductible, you assume the risk on the low-end but you still remain protected on the high-end against the catastrophic. And again, you should enjoy lower monthly or annual premiums on that type of insurance. There is some risk trade off there. You are assuming more risk on the low end, but you’re transferring away the risk on the high end. That’s a good efficient use of insurance.

Allison Dubreuil, Wealthway Financial Advisors:  And one other piece of property and casualty is the umbrella liability policy. You might have heard it called personal liability umbrella policy or PLOP. That is coverage that would sit on top of your homeowners and auto policy and would pay if you had a catastrophic loss like, maybe a car accident where you’re at fault, or some sort of lawsuit or if you are in a profession that puts you at risk for being sued.

Kevin Zywna, Wealthway Financial Advisors:  Do a lot of entertaining at your house you’re liable for slips and falls.

Allison Dubreuil, Wealthway Financial Advisors:  You’re going to want an umbrella policy and usually a million dollar umbrella policy is relatively inexpensive. If you bundle this altogether, you should be able to get something like that for a couple $100 a year.

Kevin Zywna, Wealthway Financial Advisors:  Yes, we think an umbrella policy is a great use of insurance coverage because it costs very little usually just a couple 100 bucks a year, it sits on top of your homeowners’ insurance, and it protects you from the catastrophic. So if the worst happens, you typically are protected, and you are not wiped out. It is the nickel and dime little stuff that you should be able to bear out of pocket if you do your financial planning properly through the years.

Life Insurance and Disability Insurance

Allison Dubreuil, Wealthway Financial Advisors:  So, I think that wraps up property and casualty insurance. We want to talk about life insurance and disability. Those are a little more nuanced and detailed because it’s very personal to you and there are a lot of different types of coverage.

Allison Dubreuil, Wealthway Financial Advisors: We’re talking about insurance, the role of insurance in your financial plan, and we covered property and casualty insurance. Now we want to dive into life insurance. Many people know that life insurance is a good, responsible adult thing to have in place. But many people think they should have it just because they are a responsible adult or maybe just because they have a mortgage or some sort of debt. And the need for life insurance is a little more nuanced than that. The need for life insurance is for income replacement, not life replacement, which nobody can replace.

It’s a little misleading. It’s income replacement. It is intended to provide for people who are dependent on you to maintain their standard of living. So, the main people that have a need for life insurance are people with a dependent spouse maybe who doesn’t work or earn as much, and people with children that would obviously be depending on them to maintain their standard of living for the next period of time.

Now, how much insurance? That is a more complicated question that we can’t answer generally on the phone or on the radio for everyone. That’s where you would want to do your planning with a qualified professional. Preferably a certified financial planner that can look at your entire financial situation and determine if you need insurance and how much insurance. We can give you kind of a rundown of the types of insurance so that you know the general direction that you might need to take.

Term Life Insurance Versus Whole Life Insurance

There are temporary insurance policies that are often called term life insurance policies or they could be group life insurance policies through your employer. Then there are whole life insurance policies which typically stay in force for your whole life.

So temporary versus whole life insurance. So now in our professional opinion, the need for life insurance is typically (not always but typically) temporary. Because as you do your financial planning, as you go through life and you accumulate, hopefully some savings, then your need for life insurance goes away. The more you accumulate, the less insurance you would need. Or as you go through phases of life, and you no longer have people dependent on you for income – your children are now grown, they’re hopefully leaving the nest – your need for insurance then reduces. So that’s why we like the use of temporary or term insurance, which is much less expensive.

Kevin Zywna, Wealthway Financial Advisors:  Unfortunately, whole life insurance is wildly oversold in this country, mainly because it provides the greatest payout and commission to the life insurance salesman. But we will state again that most people, not all, don’t need insurance for their whole life. They need it for specific periods of time. And that’s why term insurance, that purposely expires at the end of a decade or 20 years or something like that, that goes away. Hopefully you outlive it, and all you did was pay premiums – you win. But it protected your family and other people dependent on you against your loss of income. And like Allison was saying, if you do your financial planning properly, you accumulate enough assets. And as other people become less dependent on your income, the need for the life insurance naturally evaporates. So that’s a good efficient, cost effective use for most people for insurance.

Group Life Insurance And Supplemental Coverage

Allison Dubreuil, Wealthway Financial Advisors:  So, the first place to look for insurance coverage probably should be your employer. Oftentimes employers provide some sort of coverage, maybe it’s one times your salary, two times your salary, or just a small amount for no cost to you as an employee benefit. You should certainly take advantage of that.

Then oftentimes, you have the option to elect to pay for supplemental coverage through your group plan. This gives you the benefit of group pricing. You don’t have to go through all of the underwriting hoops, the medical exam, the bloodwork, things like that. So, it’s a good first stop to try to fill your insurance needs. But if you leave that employer, that coverage usually goes away, you can’t typically take it with you. So, there is a little bit of uncertainty there.

If there is a reason that you need a permanent policy that is going to stick with you and you think you’re going to change jobs often then we would recommend shopping for a policy out on the open market. And we recommend going with an independent broker that can shop all the carriers versus going directly to one insurance company that’s only going to probably quote their own products.

Kevin Zywna, Wealthway Financial Advisors:  Yes, and each of us has unique characteristics from a health standpoint and a longevity standpoint. Different insurers specialize in different types of coverages and risk, acceptance. So, that’s why you want to shop, a wide range of insurance providers and not just one exclusive agent.

Disability Insurance

Allison Dubreuil, Wealthway Financial Advisors: To go along with that is disability insurance, which would pay income for you for your family for a period of time. If you were unable to work this is probably the most overlooked type of insurance. People just don’t think about it. I think people think they’re always going to be able to work and hopefully you are.

Kevin Zywna, Wealthway Financial Advisors:  Statistically speaking, you are much more likely to be disabled at some point over your lifetime, then you are to die prematurely.

Allison Dubreuil, Wealthway Financial Advisors: If you’re disabled, you’re still alive and needing funds and you may have additional medical expenses along with your disability.

Kevin Zywna, Wealthway Financial Advisors:  Right. And as you’re disabled, you might not be able to work at your current job so you your income goes away. But none of your expenses go away. And in fact, many of those expenses are probably increased due to the disability.

Allison Dubreuil, Wealthway Financial Advisors:  Exactly. So that’s why it could be a greater risk than premature death and life insurance. We always recommend looking at your disability coverage. Again, it’s open enrollment season, a lot of employers provide some base level of disability coverage that if you could not work for a period of time, you would receive some sort of benefit. You should know what your benefit is and how much it would cover and what that would mean for your family. If you are the main breadwinner, and your family relies on you for income because you can go out and get personal policies. They range anywhere from the Ford Focus all the way up to the Cadillac.

Kevin Zywna, Wealthway Financial Advisors:  It’s kind of somewhat of a misnomer. They do this with health insurance, too. It’s like, the more coverage that you get, the better the insurance is assumed to be. Well, that’s true if costs were the same. But you pay more in order to get more coverage. And like I was saying earlier, we don’t like our clients to be over insured. We’d like them to be right insured. So, it is entirely appropriate at some points to just have minimal basic coverage, if you have the rest of your financial house in order.

Allison Dubreuil, Wealthway Financial Advisors:  Right, the need for disability coverage should go away as you age as well. As you get closer and closer to retirement there should be less of a need for you to replace your income if you’ve done your planning properly. So, everything we’ve talked about so far, well in terms of life insurance, and disability is temporary and can be solved. Should probably be solved in relatively low cost temporary ways.

Health Insurance

Allison Dubreuil, Wealthway Financial Advisors:  We are talking about insurance, the role of insurance in your financial plan. We talked about property and casualty and how to assess your deductibles. We talked about the purpose of life insurance, the types of life insurance, disability insurance, and we don’t want to miss health insurance.

Everybody’s coming up in open enrollment season. I think for most people, it’s open enrollment season in the fall and it is open enrollment season for Medicare beneficiaries or participants. So, let’s talk a little bit about health insurance. It’s very important piece to everyone. Everyone feels strongly about their health insurance. A lot of people we find make employment and retirement decisions based on health insurance. I think people feel very strongly to make sure that they have the right coverage. So how do you assess your coverage?

Independent Health Insurance Marketplace

Kevin Zywna, Wealthway Financial Advisors:  I want to add to that historically, most people get their health insurance coverage through their employer, in their place of employment. However, that has never been the case that you have to get your health insurance through your employer. There is an independent insurance marketplace. There always has been. Now, with the laws surrounding Obamacare, there’s a very well defined health insurance marketplace for individual coverage. And for a lot of people, individual coverage with a subsidy, (if you qualify) can be cheaper than your employer’s health insurance coverage. It pays to shop around. Not every employer will allow it. Some employers will allow you to get insurance outside of the company policy and get independent insurance if it’s right for you. So just know that that option exists. And that you should explore it.

Allison Dubreuil, Wealthway Financial Advisors:  Let’s talk about the different types of coverages. We’ll stick with our car metaphor, the Hyundai and the Rolls Royce plan. You can get the Rolls Royce plan where you pay significant premiums, and you’ve got excellent coverage. And you can go anywhere you want to go and see anyone you want to see. But do you really need that coverage?

Kevin Zywna, Wealthway Financial Advisors: And do you want to pay so much for it?

Allison Dubreuil, Wealthway Financial Advisors:  It really depends on you and your use of health care. If you are generally healthy and don’t have any current ongoing medical issues, then we would argue for getting a lower plan, such as a high deductible health plan. Where your deductible is going to be higher. You’d pay out of pocket a little more every time you use health care, the health care system. But you enjoy much lower premiums every month, over the long term.

Essentially, for someone who is healthy and is only going for routine checkups, or preventative care, you pay a little bit more out of pocket, but you don’t go very often. And then if the unexpected happens, like the heart attack or the car accident, there you go. You are covered. You are going to pay your deductible first, and we talked about deductibles earlier in the show, as long as you have a proper emergency fund or you’re hopefully using a health savings account with a high deductible health plan, you should be equipped to handle a deductible,

Kevin Zywna, Wealthway Financial Advisors:  You get to enjoy, on a monthly basis, a lower health insurance premium. And every month you stay healthy and stay out of the healthcare system is a little bit more money in your pocket that you didn’t have to send to an insurance company. So again, it comes down to the risk sharing. And generally speaking, when you do your financial planning properly, you should be willing to assume risk on the low end of those deductibles and co pays and transfer the catastrophic (the ambulance ride the heart attack the car accident) to the insurance company. And so in the parlance of the health care exchange, a Bronze plan (while you know in America, we’re conditioned not to go for a bronze we want gold). But a bronze, in this case, it’s very applicable, it can be just the right type of coverage. You don’t need massive amounts of coverage for small dollar transactions, and therefore you get to enjoy a lower premium.

Allison Dubreuil, Wealthway Financial Advisors:  Yes, but we caveat that by saying you need to make sure you’ve got your other finances in in order. Where you have an emergency fund so you can handle the co pays. Or you’ve got your health savings account that works in conjunction with your high deductible health plan where you have money set aside to pay the deductible if it comes to that. That is an excellent efficient use of insurance.

Kevin Zywna, Wealthway Financial Advisors:  And I will say that some of the worst offenders for lack of health insurance coverage are typically young men in their 20s. Because most young men don’t, if they’re not married, don’t have a family, are single, also feel that they are 18 feet tall and bulletproof. They’re not sick. They never go to the doctor and nothing bad will ever befall them. Therefore, why do I need health care? Why am I going to pay $200 a month? You know what I could do with $200 a month? That’s a lot of nights out, night out at the bar. First, you know, so I’m not going to waste my money on that stupid health insurance. But no matter how healthy you are, you cannot prevent an accident from occurring. And all it takes is one trip to the emergency room. And in most cases, you’re looking at 1000s 10’s of 1000s of dollars for that type of trip. So even if it’s not, if your employer doesn’t offer it, it is a wise financial use of insurance that we would recommend.

Medicare Enrollment

Allison Dubreuil, Wealthway Financial Advisors:  All right. So I think that’s a good overview of health insurance. Well, we mentioned Medicare. It’s going to be open enrollment season for Medicare coming up here soon. Know that you don’t have to go it alone with Medicare. The options can be overwhelming for people who are just entering, just eligible for Medicare at 65. Even for those that are already on Medicare, because prescription drug coverages change year to year continuously between insurance carriers, you don’t have to go it alone. There are independent insurance agents that specialize in Medicare that can help you figure out the best plan for you based on your medical needs and your drug needs. It doesn’t cost any different if you go by your own policy versus using an agent because they’re compensated by the insurance carrier. So, there’s really no downside. Take advantage of a professional that can shop it around for you each year.