We all have a renewed sense of just how fragile we are, and are evaluating the steps we can take to reduce that fragility. In terms of family financial security, one could consider:
- More insurance (life, long-term care, or disability insurance);
- More savings in tax-preferred retirement accounts to protect against running out money.
- Portfolio changes to reduce investment risk.
- Estate planning for a smooth transmission of assets.
- Living trusts to protect against incapacity.
Some of these financial planning strategies have been dramatically affected by the current volatility we face, and others are becoming more valuable than ever before.
Individuals aren’t the only one’s considering risks. Insurance companies are too.
Some insurance companies that used to take months to update policies, are now providing new updates in only weeks to account for the new COVID-19 risk. In fact, some life insurance companies have ceased offering new policies to those 70 and over altogether!
That’s not the only factor creating changes in the new policies offered either. The ultra-low-interest-rate bond environment that the companies’ assets are generally invested in offers a much lower yield for the company. Lower earnings means fewer benefits or higher premiums to offer the same benefits.
Those that already have a policy with a locked-in premium and benefit may be well situated, and that for some it may be their last chance to get a policy.
Steps you can take now, without adding insurance to the lineup.
There are ideas you can act on to reduce some risks immediately, moves that have little or no costs associated with them. A recent Forbes article has highlighted a survey suggesting a renewed focus on estate planning has arisen as we consider our mortality, and highlighted these steps we often recommend:
- Share passwords and make arrangements for digital assets.
- Create a medical directive (Living Will).
- Aggregate and inventory your assets.
- Create a Will, Power of Attorney, or Trust.
Communication is one of the keys to success, and the key to communication is information. If you don’t know what you own and how you own it, it’s going to be difficult for others to get that information too. If your passwords are all in your fingerprint or face ID, what happens when that fingerprint is no longer available to unlock those accounts?
Once an inventory of both physical and digital assets is created, you can move on to the next step of creating an asset distribution plan.
The plan should answer these questions: Who will inherit? What or how much will each beneficiary inherit? When will they inherit (immediately or at a future date)? If the inheritance is delayed, who will manage the assets in the meantime?
Once you have the answers to these questions, it will be much easier to create a will or trust. At that point you can also better assess your own needs, and consider the divesture of particular assets to reduce confusion and arguments and take them out of the estate settlement process. The sentiments, value, or origin stories of particular objects often get lost because it is believed that the beneficiaries already know those details. Approaching the divesture head-on can preserve that sentimental value because a conversation is had about the divesture as it’s occurring.
Having an estate plan in place provides some peace of mind that may be really needed right now for loved ones, and also could have a tremendous impact should the worst come to pass. Proper estate planning helps preserve not only assets, but also independence, dignity, and values.
Should I be considering other risk mitigation?
It isn’t always wise to reduce risk, and sometimes risk reduction for one item implicitly increases the risk of another. These strategies can have tradeoffs such as:
- Reduction of exposure to gains in the stock market can increase portfolio stability (especially in volatile times), but historically increases the risk of reduction of purchasing power due to inflation.
- Tax-preferred retirement accounts will increase the growth of assets over a long time-horizon, but also subject them to penalties should the money be needed before retirement age.
- A term life-insurance policy may only be needed to protect dependents for a short time, but may lapse before ever being utilized.
There are many factors to take into consideration when determining what the appropriate amount of risk is for a person’s unique circumstances, such as their time horizon, liquidity needs, or dependent’s needs.
Every situation is different, and the professionals at Garden State Trust Company can review these risk factors and tradeoffs with you to assess your risk tolerance and so you can understand what strategies might be most appropriate to create family financial security.
