Save Your Assets!

Most people think of asset protection in terms of keeping assets away from creditors and lawsuits.  In today’s modern society and the profession of financial planning, the definition of the term asset protection covers a much wider range and includes plans, structures and strategies to ensure that your assets will be sufficient to complete your goals and objectives given the typical types of issues that will probably be encountered in life.

In this regard, asset protection means reviewing risks that can be insured and calculating whether to self-insure, partially insure or fully insure such risks.

The risks that can be insured for the assets themselves include, fire, other damages and theft.  Insurable risks that can deplete assets are death, disability, critical illness, the need for long term care and liability.  Insurance products designed for each of these risks creates funds at the time for an event, which is generally the time cash or liquidity is needed to pay expenses.

Some people can easily afford to self-insure these risks because they have built up a significant amount of wealth.  The decision for these people is, “What is the best use of capital – paying insurance premiums in advance of an event or paying the expense associated with an event at the time?”

Asset Protection Using Life Insurance

Life insurance can be used to create cash upon the death of an individual or upon the death of the last surviving member of a couple.  The issue is not isolated to whether the estate has the wealth to meet its need for cash, but rather what is the better use of capital.  Cash or liquidity is needed in an estate to pay final expenses (such as funeral costs), pay off debt, fund a bequest, complete a charitable gift or fund an income tax liability triggered at death.  The choice is whether to use cash at the time of death or shift some capital now into an insurance policy.  The decision is a mix of risk management and investment management.

Asset Protection Using Critical Illness Insurance

Insurance that provides lump-sum benefits following diagnosis of one of a number of specified “critical illnesses” creates cash upon the occurrence of one of the events listed in the contract.  The occurrence of a critical illness can create extra expenses within the family, such as medical consultations, travel for medical assistance, travel expenses for family members, modifications to the home or vehicle, adjustment to an altered lifestyle, etc.  While individuals with a good deal of wealth may be in a financial position to handle expenses and hidden costs related to a critical illness, the use of insurance can be a better use of capital and, from a psychological point of view, insurance money may be easier to spend than capital accumulated over a long term through a lot of hard work.

Asset Protection Using Long-Term Care Insurance

One of the biggest expenses a retired couple can face is the need to provide long-term care for themselves.  If one spouse requires home care or needs to be placed in a facility, the expense will have to come out of their retirement assets.  This could leave the other spouse with a much smaller pool of assets to provide for himself or herself.

The Bottom Line in Asset Protection

Financial projections can be made to fully prepare for retirement.  The basic risks of market volatility and inflation can be modeled to best show how prepared a couple is for retirement.  These same models can show the financial impact of a premature death, critical illness or long-term care on the retirement assets in order to show why insurance may make sense, not from a risk point of view but from a capital point of view.

The bottom line is that financial planning, properly done, should incorporate insurance diversification as well as investment diversification.  The broad definition of asset protection is to ensure that your assets are positioned to meet your needs and can mitigate many of the risks that we all face.

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