Insurance Basics & Beyond - Ted Massaro | M Financial Planning Services

Okay, it looks like we are ready to go. I'll introduce myself. My name is Jennifer Markowski. Good afternoon, and thank you for joining us today. We are discussing protecting those who matter most, insurance basics and beyond. And our presenter today is Ted Massaro, the owner and principal of our firm. Ted, would you like to begin? Yes, thank you. Thank you again for everyone joining us today. I'm trying to provide you some content information on the benefits of life insurance and other types of insurance products that will be important to you and your family and your business where applicable. Obviously, M Financial Planning Services, as you know, is a firm that's been established now since 1982. Fortunately, we are a well-rounded, comprehensive financial planning firm. As you know, for those of you that are clients of our firm, we ascribe to comprehensive financial planning, first and foremost. The importance of that is that we get to know our clients on a complete picture basis, which includes, of course, risk management. Risk management falls under the area of insurance planning, and there are many types of insurance planning that you have to consider as you go through your lifetime. Today's discussion will be on certain types of life disability and long-term care insurance. And of course, we would welcome the opportunity to discuss with each of you individually your personal needs. Obviously, each individual will have different needs for insurance. And of course, we always ascribe to personal planning, and therefore, personal planning means customizing insurance products where needed to fit your specific needs. As you may know, there are three advisors in the firm presently. Myself, my son, Anthony, who joined the firm approximately five years ago after five years at Vanguard, and Ed Garudo, who joined the firm approximately 12 years ago. And again, we all subscribe to comprehensive financial planning, which is the equivalent of having your annual physical. Your annual physical looks at your complete health, and financial physical looks at your complete financial picture. Getting into the insurance side of this, we want to talk about various types of insurance. And if you think about it for a moment, insurance is basically, is it an obligation or an opportunity? Obviously, each situation warrants different types of insurance. The purposes of insurance are either to replace lost income from a key family member, potentially paying estate taxes, which could be quite onerous, depending on the current estate tax law, protecting your home, meaning paying off a mortgage obligation so that the home is free and clear to the remaining family members. Paying for routine tasks. If an individual has a long-term care insurance need, of course, the cost of long-term care today, whether it's at home or a nursing home or assisted living, can be quite expensive. Funding college costs. Many of our clients have children that will be attending college, and therefore, they want to make sure that funds are available to cover that obligation going forward. Supplementing retirement income. Certain types of insurance products can be designed to add a supplemental income in retirement that would just further reinforce your guaranteed sources of income over and above that which you receive potentially from Social Security. Aid in estate distribution. Basically, that's discussing where you have a large estate, but most of the estate is non-liquid, maybe tied up in businesses and real estate. Obviously, life insurance would provide the liquidity to take care of making funds available where needed. Lastly, protecting a family business. Many situations arise where you'll have multiple generations of a family-owned business or partners. Having the partners and your family members involved in an insurance commitment to make sure that that transfer happens on a very seamless, efficient basis, life insurance plays a critical role, and we'll get into that in a moment. How much life insurance do you need? Every situation is different. Every individual has a different set of obligations. Long-term cash needs, short-term cash needs. Long-term cash needs obviously would be for retirement or providing income if you have very young children to the surviving spouse. Short-term cash needs would be to take care of all remaining debt obligations so that the remaining heirs would not have a future commitment to extended debt service. Therefore, you have to look at how much insurance you need based on your individual situation. Again, that's where comprehensive financial planning adds value. When you look at the various insurance products, you'll have some individual considerations to look at. Obviously, the premium cost, cash values where applicable, convertibility, and face value. If we spend a moment on basically those four items, premiums can involve either a very high cost depending on the age you actually obtain the insurance, or if you're prudent enough to get the insurance when you're at a very young age, you obviously can potentially lock up the insurance costs for the rest of your life or for an extended period of time. This is one of the few insurance products that does give you a guaranteed fixed cost potential for life if you so choose. Cash values apply to other products outside of term insurance. Term insurance will never have cash values. Whole life, universal life, index universal life, those types of products will have cash values, which we'll discuss in a little bit. Convertibility. Convertibility applies to term insurance. Many term insurance products today will provide the opportunity to convert that term insurance to a product that'll have a guaranteed fixed cost for the rest of life with no potential future premium increases. Whereas term insurance is a fixed cost for a time, whether it's 10, 15, 20, or 25 years, and then after that period of time, the term insurance will either expire or you'll have to convert it at a much older age, which could be potentially very cost inefficient. The face value is really a function of how much life insurance do I really need. It really comes down to everyone's personal situation, financial obligations, whether they be personal or business, and to the extent that other assets would not be available to take care of those obligations. As I said before, you basically have two types of life insurance options. Term insurance is the equivalent of renting an apartment. As long as you pay the rent on the apartment, you have the apartment. You stop paying the rent on the apartment, you're no longer in the apartment. The term insurance, the same way. Term insurance will remain in effect for as long as you pay the premiums and as long as the term period doesn't expire. Permanent insurance will have various types of permanent insurance. You have traditional whole life. You have variable universal life, index universal life. So you have multiple types of permanent life insurance with a lot of range and flexibility as to how they can be designed. Obviously, many individuals will consider term insurance at a young age because it's very cost efficient. However, as you get older, that advantage will go away. So considering that you may need some insurance for the rest of life, you may want to consider either a combination of or if your budget allows for it, obtaining permanent insurance at a very young age. We're going to talk for a few minutes about the various stages of life insurance needs. And obviously, we're going to cover the young, single, and on your own, newly married, raising a family, the middle years, and empty nesters. Starting with the early stages. I'm going to talk about not just life insurance here, but young individuals replacing future lost income. Young individuals, and when I define young individuals, especially me being 72, that could be a wide ranging age. But seriously, young individuals, especially those under 45, should seriously consider disability insurance because you have an extended period of years that you're going to be earning income. If for some unforeseen reason, you have a medical or accidental injury that causes you a long term disability, and you have no future sources of income, disability insurance will replace that future lost income. I cannot emphasize enough the number of individuals I've seen over the last 40 plus years that unfortunately did not have disability insurance and unfortunately had an accident or an illness that caused them to have an extended disability. Sadly, I've had some situations where I've seen individuals permanently disabled for the rest of life. And thankfully, they had disability insurance that covered a large cost of their cost of living for an extended period of time. Obviously, life insurance will come into play for those that have extended debts. I would presume that most young people would not want to leave the obligations of themselves to someone else. So if you do have a large debt, you may want to have life insurance in place to take care of paying off that debt should the unexpected occur. The other reason to consider this at a young age, as I said before, life insurance is an age-driven product, meaning that the cost of that insurance is based on, well, part of the cost is based on your age. Also, part of that cost factor is based on your health. If you're in good health, and if you're in preferred health, which is a lot of times for young people is an advantage they have, you can lock in that premium cost for the rest of life. It's one of the few types of insurance products that will have a fixed cost that would never go up. So if you do have the cash flow, the available funds to set aside to do that long term, I would encourage you to look at that when you're doing your insurance planning. Obviously, the middle stage is supporting loved ones. If you're married and you have young children, you want to be sure that you have adequate life insurance in place to cover the cost of living for not only your surviving spouse, but also your children, and potentially the cost of secondary education when your children go off to college. These types of expenses can be quite absorbent, and therefore, life insurance is one of the few products that can provide a substantial amount of capital on a very, very cost-efficient basis to a family that's also tax-free. It's one of the few assets that are paid to beneficiaries with not subject to ordinary income taxes or any taxes for that matter. So another reason to look at life insurance is the tax benefits that are afforded to families that can then use that capital to take care of covering the cost of raising the rest of the family, the cost of any debt obligations, and the cost of potential long-term retirement. When we talk about empty nesters, retirees, and wealthy Americans, there are a number of reasons to consider insurance. Presently, today, the estate tax exclusion is very, very generous, meaning that if your estate is under $23 million, your estate tax obligations would be de minimis or very low, if any, outside of potential debt obligations that the estate may owe. However, this estate tax law is potentially going to expire at the end of 2025, and if that estate tax law does expire, it will revert back to the 2017 rules, which will reduce this estate tax exclusion to less than $5 million, excuse me, $5 million, $5.5 million per individual and about $11 million for a family. So again, it will still apply to higher net worth families, but it's definitely something to consider because life insurance can be structured to be totally estate tax-free and income tax-free, and therefore is a very cost-efficient way to fund those tax obligations. Tax-smart wealth transfers. Many individuals are charitably inclined. For example, in 2023, there was an estimated $460 billion given to charities. One of the strategies that are used by individuals for tax-smart wealth transfer is they'll make a charitable donation to a trust, which will then give them the immediate income tax benefits for that, but then they'll use the income that's earned from that charitable trust to cover the cost of life insurance to replace the assets they've now transferred to that trust. This is a very tax-efficient strategy that's used by many individuals, whereby they're able to satisfy their charitable inclinations, but also keep the family whole by using life insurance to replace the asset given to the trust. Life insurance can also be used to preserve assets. Many times we'll see situations where an individual is in a non-liquid situation, meaning that all their assets are tied up in real estate and or business obligations or other fixed obligations that will not be liquid in the event of premature death. Again, life insurance can be used to take care of providing the liquidity to make those assets be able to stay intact where they are or liquidate them on a more timely, efficient basis. So, life insurance can play a role no matter your high net worth, no matter the type of assets you have. It's important to think about life insurance as a way to have liquid funds readily available on a very tax-efficient basis. In a business owner situation, it's also important to think about how do you succeed in keeping the business within the family, let's say. If you have multiple family members and the key patriarch of the family prematurely passes away, where is the liquidity going to come from to provide aid, money to satisfy the obligation of the patriarch's family that is buying out that business owner's interest, and also continue to have the liquidity that the business needs in the event of that patriarch passing away? At the same time, we also have individuals where that will be in a partnership, where you'll have multiple partners. What if one of those individual partners passes away? Where is the liquidity going to come from to pay the deceased partner's family for their interest in the business and allow the business to continue? Life insurance in both of those situations are the only way that you can tax-efficiently and cost-effectively provide for that succession strategy. You also, if you're a business owner, may have key employees. In a key employee situation, you may want to have a structure whereby you'll provide a certain benefit to that key employee's family and the key employee provided they meet certain conditions, such as staying with the firm until retirement, or if they prematurely pass away, providing additional funds to their key employee's family. This is, again, another valuable asset that only life insurance can provide for very cost-effectively on a tax basis and a cash flow basis. Mitigating business risks. Again, here's where disability insurance comes into play. For small business owners that have situations where they have a lot of ongoing operating expenses, you can obtain disability insurance that not only provides you disability income if you are disabled, but also will provide overhead expense insurance whereby certain overhead expenses in the business, such as payroll and other operating expenses, can be covered by the disability insurance. Of course, supplemental benefits are just another way to add an additional supplemental retirement benefit to your business situation for key personnel. Now, we'll touch on, again, disability insurance. I've covered it quite a bit already, but I'll just, again, reiterate. For those younger individuals, I would strongly encourage you, if you do not have disability insurance, definitely look into it while you're still young and healthy. If you do have disability insurance through your employer, be sure that the disability insurance is going to be adequate over and above what your cost of living would be if you were disabled long-term. You can obtain individual disability insurance to complement or further support your group employee benefits. Again, it's just something that you would have to work with your financial advisor to determine how it's structured properly. Long-term care insurance, I'm sure most of us have heard the ongoing issues of long-term care expenses and the fact that, obviously, a large percentage of the population is aging and aging much longer. Many individuals are living well into their late 70s, early 80s, and even into their 90s. As a matter of fact, the required minimum distribution table now goes out to 115, just to illustrate how life expectancy has improved. Today, the cost of long-term care has increased dramatically. It's important to remember that long-term care expenses are not covered by Medicare nor Medicaid, and there are no state programs that cover the cost of long-term care, either at home and or in a facility. Long-term care insurance can provide income to cover the cost of home care, assisted living, or nursing home care. It's important to remember that long-term care insurance, by most carriers today, is federally controlled as far as the mandating of the contracts have to follow certain guidelines with regard to eligibility for benefits. Those contracts all today have the same guidelines, whether it's one carrier versus another, just as long as you remember that you want to have a federally approved long-term care contract. Long-term care insurance is also partially income tax deductible. You would have to check with your CPA to confirm to what extent those premiums are deductible. But again, the government is trying to encourage individuals to look at it, and the way they're encouraging that is, of course, making part of the premium cost tax deductible. The benefits received from long-term care insurance are not taxable as a normal income, and of course, they can provide costs for home care, assisted living care, and or long-term nursing home care. One of the things that I would encourage you to think about, if you look at long-term care insurance, I always classify it as the equivalent of homeowner's insurance on your net worth. If you look at your liquid net worth, would you not want to make sure that that liquid net worth is protected? None of us even think twice about having homeowner's insurance on our home, yet the probability of a claim on a homeowner's is one in 16, whereas the likelihood of a long-term care expense occurring for a couple over 70 is now one in four. So seriously consider that cost while you're still young and relatively healthy. So a quick review, why we should consider it, life insurance, if you have needs that need to be met as far as obligations to other family members, business associates, and your debt or income, or your children and your grandchildren, these are all different reasons life insurance is used. Also strategies that are used in charitable planning, where individuals are using charitable strategies and therefore looking to replace the asset to give to a charity, life insurance can do that very efficiently. Benefits for business owners, as we discussed, business owner succession planning, business partnerships, key employees, and or supplemental retirement benefits. Each of you needs to assess your own potential risks. Again, looking at comprehensive financial planning will be a way to address that risk and be able to accurately determine what is the most appropriate way to get the appropriate type of insurance that is applicable to your situation. Please do not use your neighbor as a discussion point, since your individual needs and your individual costs will be completely different than your neighbor or friend or family member. Obviously we're going to open this up to questions for anyone that may have additional questions at this time, and of course please feel free to reach out to us after this if you have personal questions you'd like to discuss it for you. I'd like to thank you again for your time, and Jennifer, I'll turn it over to you at this time. Ted, I just wanted to clarify a couple of things. You mentioned the tax treatment of the life insurance benefits and the premiums for long-term care. Is there something we should know about tax treatment of disability insurance? Disability insurance, depending on the structure and depending who the premium payer is, there may be the possibility of partial tax deductibility for premiums. Generally, it's not tax deductible on an individual basis. That is, if an individual buys disability insurance, they will not have the ability to deduct that premium cost. But then remember that the disability benefit is totally income tax-free, so you don't need 100% of your income insured when you're receiving disability benefits because you're not paying any income state income tax benefits at the state or federal level. Understood. A question from the box here. What do you see as the most significant trends in the insurance industry right now? Well, I would say a number of trends have occurred over the last 20 years. A couple of them that are most significant, because life expectancy has improved dramatically, the cost of life insurance has dropped dramatically, especially for young individuals. Obviously, the mortality costs have gone down, which means the insurance carriers are not paying death claims as early as they would have maybe 20 years ago, because obviously life expectancy has improved. On the less favorable side, long-term care insurance is getting more challenging to obtain and more costly, because a number of carriers have stopped writing long-term care insurance, because the number of claims have increased dramatically. Also, there was the unfortunate consequence that we had incredibly low interest rates for a 10-year-plus period, which negatively impacted the investment return that long-term care insurance carriers were earning on their investment earnings. Remember that premiums are determined by claims, costs, and investment return. Obviously, if the insurance carriers are not earning a decent return on their investment assets, and they're not permitted to be in the stock market and capitalize on the same type of returns that many of us have experienced in the stock market. The other thing that we see occurring is more and more individuals, especially what we call the betwixt and between couples, those individuals that have young children but also have elderly parents still alive. We call them the betweeners. They're raising children, and they have elderly parents. We're seeing situations now where these individuals are looking at long-term care insurance for their parents if they can still obtain it, if they're still healthy enough to obtain it. They're also looking at making sure that there's adequate life insurance in place for them because of their young children. Any other questions? Looks like we've answered all of those. Thank you, Ted. Did you want to close it out for us? No. Again, I would just reiterate what I said before. For those of you that know me, I'm a firm believer in comprehensive financial planning. I can personally attest to the fact that many of you know that I grew up in poverty. When my father died, we had no life insurance, so I know firsthand what it's like. I would encourage you to always look at that as an asset that you want to be sure that you have in place to make sure that you have adequate funds to continue the family. Any questions, don't hesitate to reach out to us. Thank you, everyone. We appreciate your time today. We will be sharing the replay if you missed any portion or wanted to clarify anything. As always, call us at the office to discuss your particular situation. We always appreciate talking through those details with you. Thank you very much. Thank you, Ted. Thank you. Have a good day, everyone.