Insurance Planning

Insurance Planning

Core Concepts

Risk Transfer vs Retention Framework

Insurance is a risk-financing decision, not an investment. Classify each exposure by frequency and severity:

• High frequency / low severity (minor repairs, small medical bills): retain. Self-fund through the emergency fund and cash flow; insuring these trades dollars with an insurer plus overhead. Raise deductibles to avoid paying for this layer.
• Low frequency / high severity (premature death, permanent disability, liability judgment, long-term care): transfer. These losses are rare but financially catastrophic, and the premium is small relative to the exposure.
• High frequency / high severity: avoid or mitigate the activity itself — insurance is expensive or unavailable.
• Low frequency / low severity: retain; do not bother insuring.
• Retention capacity grows with wealth: a household with large liquid assets can raise deductibles, extend elimination periods, and eventually self-insure entire categories (e.g., life insurance after financial independence, LTC above a threshold).

Life Insurance Needs Analysis

Two standard approaches; use needs-based as primary and the others as cross-checks:

• Needs-based (capital needs) approach: Sum the survivors' actual needs — final expenses, debt payoff (including mortgage if the plan is to retire it), education funding, and the present value of ongoing income replacement — then subtract existing resources (liquid assets earmarked for survivors, existing coverage, survivor benefits). Coverage = total needs − available resources.
• Human life value (HLV): Present value of the insured's future after-tax earnings, net of self-consumption, over remaining working years. Tends to produce larger numbers; useful as a ceiling and in wrongful-death contexts.
• DIME quick check: Debt + final expenses, Income × years of replacement, Mortgage, Education. Fast but crude — the income multiple ignores the survivor's own earnings, investment returns on proceeds, and can double-count debt service already inside the income need.
• Reassess at every life event (birth, home purchase, divorce, business sale) — need is not static, and it generally declines as assets grow and horizons shorten (a "decreasing need against level coverage" glide path).

Term vs Permanent

• Term: Pure death-benefit protection for a defined period (10/20/30 years). Cheapest per dollar of coverage; matches the temporary nature of most needs (children to independence, mortgage payoff, working years). Prefer guaranteed level premium and a convertibility rider (convert to permanent without new underwriting).
• Permanent — whole life: Guaranteed level premium, guaranteed cash value schedule, potential dividends (participating policies). Premiums roughly 8-15x term for the same face amount at typical issue ages (as of 2026 pricing; verify current quotes).
• Permanent — universal life (UL): Flexible premiums, interest-crediting on cash value; guaranteed-UL variants trade cash value for a lifetime death-benefit guarantee. Underfunded UL can lapse late in life exactly when needed — require in-force illustrations at reviews.
• Permanent — variable life (VUL): Cash value in market subaccounts; policyholder bears investment risk. VUL is a security — see the regulatory note below.
• When permanent is actually warranted: the need itself is permanent — estate liquidity for illiquid estates (business, real estate) and estate tax, often inside an ILIT; lifetime support for a special-needs dependent; business succession funding (buy-sell agreements, key person); equalizing inheritances. Permanent insurance as a default accumulation vehicle for someone who has not maxed tax-advantaged accounts is usually a mis-sale — "buy term and invest the difference" wins when the need is temporary.

Disability Insurance

Disability during working years is more probable than death and destroys the plan's core asset: earning power.

• Own-occupation vs any-occupation: Own-occ pays if you cannot perform your occupation (critical for specialized professionals — surgeon, dentist); any-occ pays only if you cannot work in any reasonable occupation. Many policies are own-occ for 2 years, then any-occ.
• Elimination period: The waiting period before benefits begin (30-365 days; 90 is typical). Coordinate with the emergency fund — a larger cash reserve supports a longer elimination period and a lower premium.
• Benefit period: To age 65/67 is the standard for long-term disability (LTD); short benefit periods (2-5 years) leave the largest risk uncovered.
• Group vs individual: Group LTD is cheap but typically covers 60% of base salary (excluding bonus/commission), is capped, ends at job change, and is non-portable. Individual policies are portable, underwritten once, and can be own-occ with riders (residual/partial disability, cost-of-living adjustment, future increase option).
• Taxation follows the premium payer: employer-paid (or pre-tax) premiums produce taxable benefits; premiums paid by the individual with after-tax dollars produce tax-free benefits. A 60% gross replacement ratio from a taxable group plan can net to well under 50% of take-home pay.

Long-Term Care (LTC)

• Exposure: Extended custodial care. Private-room nursing home costs run roughly $110,000-$130,000/year nationally (as of 2026; highly regional — verify current cost surveys). Typical need is 2-3 years; tail risk (dementia) is 5+ years.
• Traditional LTC insurance: Pure LTC coverage; premiums are not guaranteed and the industry has a history of large in-force rate increases. Choose inflation protection (3% compound) — a level benefit purchased at 55 is badly eroded by 85.
• Hybrid (asset-based) policies: Life insurance or annuity with an LTC rider — return-of-premium/death benefit if care is never needed, guaranteed premiums. Costlier per dollar of LTC benefit but eliminates use-it-or-lose-it and rate-increase risk; funded with a single premium or short pay, often via 1035 exchange from an old policy.
• Self-insuring: Plausible when liquid assets comfortably exceed roughly $2.5-3M per person (as of 2026 cost levels; verify against current regional care costs) and the plan survives a 4-5 year care event without impoverishing the healthy spouse. Between roughly $300K and that threshold is the classic insure zone.
• Medicaid backstop caveat: Medicaid pays for care only after assets are spent down to poverty levels, with a 5-year look-back on transfers, limited facility choice, and state estate recovery. It is a safety net, not a plan; do not present it as the default strategy for clients with meaningful assets.

Annuities as Longevity Risk Transfer

Annuities are the mirror image of life insurance: they insure against living too long.

• SPIA / DIA (income annuities): Single-premium immediate annuities pay income now; deferred income annuities (including QLACs inside retirement accounts) start at a future age (e.g., 80-85), which is cheap pure longevity insurance. Simple, low-overhead, irreversible — mortality credits are the return source. Best fit: covering the gap between essential expenses and guaranteed income (Social Security, pension) for retirees without a pension.
• Deferred variable / indexed annuities: Accumulation products with optional income riders. Understand the cost stack before recommending: M&E charges, subaccount fund fees, and rider fees can total 2.5-3.5%/year on a VA; indexed annuities embed costs in caps/participation rates rather than explicit fees. Surrender schedules commonly run 5-10 years with charges starting at 7-10% (as of 2026; verify the specific contract).
• When each fits: income annuities fit the retiree flooring essential spending; deferred annuities with guarantees fit a narrower band (risk-averse investors who will actually use the rider) and are frequently oversold for the commission.
• 1035 exchange cautions: IRC Section 1035 allows tax-free exchange of annuity-to-annuity and life-to-life/annuity/LTC. An exchange restarts the surrender schedule and may forfeit accrued rider benefits or old-contract guarantees — a new commission is not a reason to exchange. Exchanges of annuities are a recognized FINRA exam focus.

Property, Casualty, and Umbrella Liability

• Homeowners/auto: Insure to full replacement cost (not market value) for the dwelling; raise liability limits to the maximum offered before buying umbrella; use deductibles consistent with the retention framework.
• Umbrella liability: Excess liability above home/auto limits. For HNW clients, size to at least net worth plus a measure of future income exposure; $1M-$5M is common, more for significant wealth. Premiums are modest — roughly $200-$400/year per $1M of coverage (as of 2026; verify current) — making it the cheapest large risk transfer in the plan. Confirm underlying-limit requirements so no gap exists between auto/home limits and the umbrella attachment point.
• HNW-specific gaps: domestic employees (workers' comp/EPLI), directors-and-officers exposure from board seats, valuable articles floaters, short-term rental of residences, teenage drivers, watercraft.

Regulatory Intersection (brief)

• Variable products (VUL, variable annuities) are securities: recommendations fall under Reg BI for broker-dealers and fiduciary duty for RIAs; FINRA Rule 2330 imposes specific suitability, disclosure, and principal-review requirements for deferred variable annuity purchases and exchanges. Sellers need securities registration plus a state insurance license.
• Fixed products (term/whole life, fixed and fixed-indexed annuities) are state-regulated insurance, subject to state suitability/best-interest rules (NAIC model adopted in most states as of 2026). An investment adviser recommending or selling them generally needs a state insurance license; fee-only advisers who cannot sell should still analyze coverage and refer.
• See investment-suitability for the full suitability and Reg BI framework.

Policy Review Cadence and Beneficiary Hygiene

• Annual: confirm coverage still matches needs; request in-force illustrations for UL/VUL; check group coverage after any job change; re-shop term at rate-class improvements (e.g., quit smoking).
• Beneficiary hygiene: review primary and contingent beneficiaries at every life event. Beneficiary designations override the will. Common failures: ex-spouse still named, estate named as beneficiary (creditor exposure, probate delay), minors named directly (court guardianship — use a trust or UTMA), and ILIT-owned policies where premiums are not being paid via proper Crummey notices.
• Ownership check: for estates above the federal exclusion, insured-owned policies are included in the gross estate; ownership by an ILIT keeps proceeds outside (see estate-gifting).