Monthly Archives: April 2017

Insurance and Investments

UPDATE : Insurance and Investments
A good financial strategy is not just about “making money;” it is also about protection.

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BY GREG OLIVER

Some people mistake investing for financial planning. Their “financial strategy” is an investing strategy, in which they chase the return and focus on the yield of their portfolio. As they do so, they miss the big picture.

Investing represents but one facet of long-term financial planning. Trying to build wealth is one thing; trying to protect it is another. An effort must be made to manage risk.

Insurance can play a central role in wealth protection. That role is underappreciated – partly because some of the greatest risks to wealth go unnoticed in daily life. Five days a week, investors notice what happens on Wall Street; the market is constantly “top of mind.” What about those “back of mind” things investors may not readily acknowledge?

What if an individual suddenly cannot work? Without disability insurance, a seriously injured or ill person out of the workforce may have to dip into savings to replace income – i.e., reduce his or her net worth. As the Council for Disability Awareness notes, the average length of a long-term disability claim is nearly three years. Workers’ compensation insurance will only pay out if a disability directly relates to an incident that occurs at work, and most long-term disabilities are not workplace related. Disability insurance can commonly replace 40-70% of an individual’s income. Minus disability coverage, imagine the financial impact of going, for instance, three years without work and what that could do to a person’s net worth and retirement savings.1

What if an individual suddenly dies? If a household relies on that person’s income, how does it cope financially with that income abruptly disappearing? Does it spend down its savings or its invested assets? In such a crisis, life insurance can offer relief. The payout from a policy with a six-figure benefit can provide the equivalent of years of income. Optionally, that payout can be invested. Life insurance proceeds are usually exempt from income tax; although any interest received is taxable.2

Most people want a say in what happens to their wealth after they die. Again, insurance can play a role. At a basic level, those with larger estates may use life insurance to address potentially large liabilities, such as business loans, mortgage payments, and estate taxes. An ILIT may also shield the cash value of a life insurance policy from “predators and creditors.” Beyond that, a sizable life insurance policy can be creatively incorporated into an irrevocable life insurance trust (ILIT), through which an individual can plan to exclude life insurance proceeds from his or her taxable estate.3

Yes, the estate tax exemption is high right now: $5.49 million. Even so, if a person dies in 2017 while owning a $5 million life insurance policy and a $500,000 home, his or her estate would be taxed. An ILIT would be a useful estate-planning tool in such a circumstance.3

Why do people underinsure themselves as they strive to build wealth? Partly, it is because death and disability are uncomfortable conversation topics. Many people neglect estate planning due to this same discomfort and because they lack knowledge of just how insurance can be used to promote wealth preservation.

The bottom line? Insurance is a vital, necessary aspect of a long-term financial plan. Insurance may not be as exciting to the average person as investments, but it can certainly help a household maintain some financial equilibrium in a crisis, and it also can become a crucial part of estate planning.

GREG OLIVER
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Citations.
1 - nerdwallet.com/blog/insurance/disability-insurance-explained/ [6/27/16]
2 – tinyurl.com/knroq9u [3/27/17]
3 – thebalance.com/irrevocable-life-insurance-trust-ilit-estate-planning-3505379 [3/21/17]

GREG OLIVER/// 9238946`238946`238946p-92386-9847`-98237489

Have a Plan, Not Just a Stock Portfolio

Design 23

Have a Plan, Not Just a Stock Portfolio
Diversification still matters. One day, this bull market will end.

BY GREG OLIVER

In the first quarter of 2017, the bull market seemed unstoppable. The Dow Jones Industrial Average soared past 20,000 and closed at all-time highs on 12 consecutive trading days. The Nasdaq Composite gained almost 10% in three months.1

An eight-year-old bull market is rare. This current bull is the second longest since the end of World War II; only the 1990-2000 bull run surpasses it. Since 1945, the average bull market has lasted 57 months.2

Everyone knows this bull market will someday end – but who wants to acknowledge that fact when equities have performed so well?

Overly exuberant investors might want to pay attention to the words of Sam Stovall, a longtime, bullish investment strategist and market analyst. Stovall, who used to work for Standard & Poor’s and now works for CFRA, has seen bull and bear markets come and go. As he recently noted to Fortune, epic bull markets usually end “with a bang and not a whimper. Like an incandescent light bulb, they tend to glow brightest just before they go out.”2

History is riddled with examples. Think of the dot-com bust of 2000, the credit crisis of 2008, and the skyrocketing inflation of 1974. These developments wiped out bull markets; this bull market could potentially end as dramatically as those three did.3

A 20% correction would take the Dow down into the 16,000s. Emotionally, that would feel like a much more significant market drop – after all, the last time the blue chips fell 4,000 points was during the 2007-09 bear market.4

Investors must prepare for the worst, even as they celebrate the best. A stock portfolio is not a retirement plan. A diversified investment mix of equity and fixed-income vehicles, augmented by a strong cash position, is wise in any market climate. Those entering retirement should have realistic assessments of the annual income they can withdraw from their savings and the potential returns from their invested assets.

Now is not the time to be greedy. With the markets near historic peaks, diversification still matters, and it can potentially provide a degree of financial insulation when stocks fall. Many investors are tempted to chase the return right now, but their real mission should be chasing their retirement objectives in line with the strategy defined in their retirement plans. In a sense, this record-setting bull market amounts to a distraction – a distraction worth celebrating, but a distraction, nonetheless.

GREG OLIVER
Citations.
1 – money.cnn.com/2017/03/31/investing/trump-rally-first-quarter-wall-street/index.html [3/31/17]
2 – fortune.com/2017/03/09/stock-market-bull-market-longest/ [3/9/17]
3 – kiplinger.com/article/investing/T052-C008-S002-5-reasons-bull-markets-end.html [4/3/14]
4 – thebalance.com/stock-market-crash-of-2008-3305535 [4/3/17]

Teacher Appreciation Week

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The first full week in May is Teacher Appreciation Week – a time when parents, students, and communities thank classroom teachers for their dedication and affirm the difference they make.

I, too, recognize all the great work you do in every week of the school year. You and your colleagues are experts – you share your knowledge in just the right way, with devotion and innovation that truly makes a positive impact on your students. What you do in the classroom helps to improve the world.

My appreciation of the role you play is never-ending.

Thank you,
GREG OLIVER
greg@go2ofs.com