Centinel Financial Group

Interesting Articles

PROTECTING YOUR INCOME

If you are in business, you probably insure the components of your business against loss beyond your control. You insure your premises against fire, accidental injury, and theft of property. Your equipment is probably insured. You probably have business interruption insurance to compensate you if your property is rendered unusable due to accidental damage. Whether or not you own a business, you probably insure your car so you can be sure that you’ll always have the means to get to work. You probably insure your dwelling so you can be sure that there will be a roof over your head in the event of a catastrophe.

Life, homeowners, and other types of insurance policies provide important kinds of coverage, but they will not safeguard you from financial impact if a disability prevents you from working. The stark reality is that without disability income insurance, a serious injury or illness could be financially devastating to you and your family.

You may believe you’re less likely to become disabled than to die prematurely, but statistics show exactly the opposite is true. According to tables prepared by the Society of Actuaries in 1985, at any given time in your career, the chance that a long-term disability will occur is several times the likelihood of death. For example, at age 37, the odds of a long-term disability vs. death is 3.3 to 1. At age 42, the odds are 3.5 to 1, at age 37, the odds of a long-term disability vs. death is 3.3 to 1. At age 42, the odds are 3.5 to 1, at age 47, they are 2.8 to 1, and at age 52, they are 2.2 to 1.

Before you read further, please get a piece of blank paper and a writing utensil. On the paper, write the names of 20 people that know each other. Some examples are members of your family or members of a club, service, or religious organization. Once you have finished, circle the ones who have had a disability lasting 90 days or longer. My experience has shown that more than 90 percent of you will have circled at least 1 name on your lists.

If you earn $50,000 per year, in 20 years you will have earned 1 million dollars. Without you in it, will your car earn you that kind of money? Will any of the other things you insured enable you to continue receiving your income? Disability income insurance, also known as disability income replacement insurance, is an important vehicle that will help replace a portion of your income in the event that you become disabled due to accident or illness.

There are several types of disability insurance policies. A properly licensed agent or financial representative can explain which is best for you.

Like most insurance policies, Disability Income Insurance policies contain exclusions, limitations, reductions of benefits and terms for keeping them in-force. Your agent or financial representative can provide you with costs and complete details.

Disability insurance is known by various names such as Disability Income Protection, Disability Income Insurance, or Income Replacement Insurance. The basic function of all of the policies is the same: To replace a portion of your earned income in the event you cannot earn a living due to a sickness or accident. The different names are mostly a factor of what the insurance company chooses to label their product.

There are several factors that affect what your premium will be. Because of this, two people of the same age who are at the same income level may be charged different premiums. The following are the most common factors that affect premiums:

1) Occupation - The more day-to-day hazards involved in your occupation, the higher the premium. For example, someone who works with heavy equipment will pay more than someone who works primarily at a desk. Also, many occupations such as chiropractors, dental assistants, dental hygienists, beauticians, and jewelers may pay a higher premium than accountants and attorneys due to the fact that a relatively small occurrence such as a sprained finger or a strained back can prevent them from working at their occupation.

2) Health - A person with a history of potentially disabling conditions will usually have to pay more for disability than one without such history. A brief list of potentially disabling conditions would include, but would not be limited to, back/spinal injuries or disorders, arthritis, asthma, heart conditions, etc.

3) Benefit Period - The amount of time for which the company will pay for a disability. A benefit period of 2 years will cost substantially less than a lifetime benefit period.

4) Elimination Period (Waiting Period) - The amount of time you must be disabled before a benefit is payable. The most common elimination periods are 30, 60, 90, and 180 days. For example, with a 90 day elimination period, a person must be disabled for 90 days before benefits are payable. Once the 90-day elimination period has passed, payments begin retroactive to the first date of disability. Waiver of Premium (which is a separate feature) will refund premium paid for the first 3 months, once the elimination period has been satisfied.

5) Policy Provisions - For example, a policy that pays both total and partial disability will cost more than one that pays only for total disability. There are several other provisions that can affect the cost of a policy. Be sure you understand all provisions of a policy when comparing it to others. A properly licensed agent or financial representative can help you decide which policy provisions are best for your individual situation.

Disability insurance is one of the most cost-effective ways to help cover your expenses if you should become unable to work due to illness or injury. The purchase of such coverage should be made carefully with the assistance of a qualified professional.

This article is provided for general information only. It is not intended to provide specific advice or recommendations for any individual. You should consult with your financial representative, attorney or accountant with regard to your individual situation.

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SECURE THE FUTURE OF YOUR BUSINESS

When it comes to your business, hoping for the best won’t ensure its future. Take Jack Stanton for example. Jack spent thirty years building a manufacturing giant, Stanton Solutions Corporation. However, due to the rigors of maintaining his company, he had little time for any personal financial and estate planning. Then, Jack died unexpectedly in a boating accident. All of a sudden, Stanton Solutions, a multi-million dollar manufacturing empire was facing an uncertain future caused by the loss of its owner and upper-most key executive.

What would happen to your business and your family should you become disabled or die unexpectedly? Do you have key employees for family members who could step in and run the company in your absence?

Business Continuation Basics

It is essential to the future of your business and your family to have a succession strategy in place. In order for your business to maintain continuity, you need to implement a succession strategy that coincides with your goals and objectives. Your strategy should be flexible enough to handle changes within the company and its related industry(ies). However, one of the keys to a succession strategy is determining who or whom your successor(s) will be.

Deciding on, and preparing a successor may require years to familiarize him or her with the finer points of the business. Thus, it is important to select a replacement as soon as possible in order to maximize the possibility of a successful transition. In smaller businesses, it is not uncommon for one or more family members to be at the top of the list of potential successors.

If you wish to pass your business on to future generations, you will need to make an honest assessment of the respective needs of your family and business, the qualifications of any interested family members, and whether the family and business would be best served by a continued relationship. Communication with family members is extremely important in order to better ascertain overall interest or concern.

You can prepare yourself by honestly evaluating and reflecting on the necessary components of a well-thought-out succession strategy. Here are some points that may require further elaboration:

• a thorough job description of each position, including details regarding areas of responsibility and delegation of duties;

• a management/organizational plan;

• Assuring the availability of cash to meet the demands of federal and/or state estate taxes;

• a list of potential successors to your ownership, taking every candidate’s job experience and academic background into consideration; and

• a mechanism to ensure extensive on-the-job training for the successor(s).

Other Considerations

A succession strategy may also include a buy-sell agreement funded by life insurance. More than likely, your successor may not have the cash, or the ability, to borrow at the time of successorship. Under such an agreement, the death benefit proceeds of the life insurance can be used to provide the cash necessary for a successor to purchase an owner’s share of stock in the event of his or her untimely death.

In addition, it may be prudent to explore how your unexpected disability could affect not only your plans for successorship, but also your financial well-being. Under a disability buyout arrangement, a disability buyout policy provides a successor with cash to purchase shares in the event of the owner’s untimely disability.

You should consult with your insurance, legal and tax professionals to devise a plan of action that provides security for your business and your family. With proper planning, your objectives for business succession and securing your family’s future can be met.

This article is for general information only and is not intended to provide specific advice or recommendations for any individual. You should consult with your advisor, attorney or accountant anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance. You should seek advice based on your particular circumstances from an independent tax advisor.

Most insurance policies contain exclusions, limitations, reductions of benefits and terms for keeping them in force. Your representative will be glad to provide you with costs and complete details.

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A BUSINESS SUCCESSION PLAN CAN GO A LONG WAY

There comes a point in time when almost every small business owner contemplates the future of his or her business. Because “the business” typically is a substantial asset, an owner must address a number of estate planning issues that will affect the future stability of the company. A business succession plan is a comprehensive look at the estate planning picture that can include everything from shareholder buy-sell agreements to management plans and any other documentation that will help ensure the smooth operation of the business. While traditional estate plans are designed with tax minimization in mind, business succession planning, in addition to such considerations, is aimed at maintaining the future health of the business.

Protection for Family Members and Executors

Proprietorships and partnerships must cease operation as such upon the death of the owner or partner. Although a partnership agreement will generally provide for the continuation of the partnership by the surviving owners, it is also important that some provisions be made for acquisition of the deceased partner’s interest. A sole proprietorship cannot be continued in the same manner as can a partnership, but the proprietorship assets can pass by will to the decedent’s intended successor.

If the proprietorship assets are not specifically bequeathed to, say, a child who has been identified as the successor to the decedent, they will pass under the general disposition provisions prepared by a qualified attorney of the will. During the probate process, the executor would be responsible for operating the business, which could result in business losses and lost value. To address this and other potential problems, a business succession plan is critical. Such a plan, which might consist of a buy-sell agreement or carefully drafted will provisions, can help provide answers to the following important questions:

• Who has the authority to continue its operation?

• Will it be sold, liquidated or continued?

• Who are the potential buyers and do they have the cash to affect the purchase in a timely fashion?

To promote continued operation of a sole proprietorship, the owner might leave instructions as part of his or her estate plan setting forth his or her intentions with respect to management of the business following death. These directions might provide some guidance to a successor proprietor such as a spouse or child who might need assistance during the transition period. Since the successor would, however, own all of the business assets and have full control of business operations, the successor could choose not to follow such guidance.

In some instances, a sole proprietor may be able to simplify the transfer of the business at death by converting it to a corporation under state law while alive. Since a corporation has continuity of life, many of the issues confronting a sole proprietor at death can be avoided. Nevertheless, it would still be important for there to be competent management in place to succeed the decedent, and to have a buy-sell plan in place to govern the transfer of his or her shares.

Insurance Plays a Key Role

Typically, an owner’s death or disability can create an array of financial problems affecting both the business and the owner’s family. For instance, issues such as estate taxes, loss of income, or a buyer having adequate cash to purchase the deceased or disabled owner’s shares are problems that cannot be entirely ensured by a succession plan. For this reason, life insurance and disability income insurance go hand-in-hand with business succession planning. Proper insurance coverage can: 1) help an owner’s family meet estate tax obligations, which in many instances may help keep a business in the family (if so desired); 2) help replace an owner’s loss of income due to death or disability; and 3) help a partner(s) or existing employees have the necessary cash to buy out the deceased or disabled owner’s share of the business.

A team consisting of your lawyer, accountant, and financial representative can help you develop your business succession strategy, including all the necessary documents and information. There are established methods for transition that can help leave both your business and successor management free from unnecessary worry or jeopardy. In addition, through life and disability insurance coverage, the transition can be properly funded to help avoid substantial losses that might otherwise occur.

This article is provided for general information only. It is not intended offer specific advice or recommendations for any individual. You should consult with your financial representative, attorney or accountant with regard to your individual situation.

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ASSET ALLOCATION: A KEY TO PORTFOLIO SUCCESS

For many investors, investing typically begins with one stock or mutual fund. Over time, other selections are added because many people understand it may not be prudent to invest everything in a single security, even if it has a “blue chip” reputation. However, just “spreading money around” in a haphazard way may create only an illusion of diversification.

If you have assembled a “hodgepodge” portfolio, you may not know the extent to which your investments are (or are not) consistent with your objectives. How do you go about setting up a framework which tailors your investments to your particular circumstances?

A sound portfolio management strategy begins with asset allocation – that is, dividing your investments among the major asset categories of equities, bonds and cash. Since each type of investment category has unique characteristics, they rarely rise or fall at the same time. Then, you can make finer distinctions within each asset category (i.e., diversification). Combining different asset classes could help reduce risk, although it doesn't eliminate market risk altogether. Still two nagging questions remain: What factors guide the asset allocation process? How much of a portfolio should go into each category.

To answer the first question, the main objective of asset allocation is to match the investment characteristics of the various investment categories to the most important aspects of your personal investment profile – that is, your tolerance for risk, your return and liquidity needs, and your time horizon.

Investing according to your risk tolerance will help keep you from abandoning your investment program during times of market turbulence. One way to measure your risk comfort zone is to ask yourself how much of a loss in a one-year period you could withstand and still stay the course.

Finding an appropriate match for you means balancing your tolerance for risk against the different volatility levels of various asset classes. For example, if you have a low tolerance for risk, that fact may dictate a portfolio that emphasizes conservative investments while sacrificing the potentially higher returns that usually involve a greater degree of risk.

Return need refers to the income and/or growth you expect a portfolio to generate in order to meet your objectives. For example, retirees may prefer a portfolio that emphasizes current income, while younger investors may wish to concentrate on potential growth.

Your personal time horizon extends from when you implement an investment strategy until you need to begin withdrawing money from a portfolio. For example, a very short time horizon (less than 5 years) is probably best served by a conservative portfolio emphasizing safety of principal. On the other hand, the more time you have to invest, the greater risk you may be able to withstand because you have time to recover from market downturns.

The short answer to how much of a portfolio should go into each category is that asset allocation is more a personal process than a strategy based on a set formula. There are guidelines to help establish the general framework of a well-diversified portfolio. For example, you may decide on the need for growth in order to offset the erosion of purchasing power caused by inflation.

However, building an investment portfolio that is right for you involves matching the risk-return tradeoffs of various asset classes to your unique investment profile. One final point that is worthy of emphasis – when you put together your own asset allocation strategy, you should combine all your assets (i.e., your investments and retirement savings). That way you can ensure that all your assets are working together to help meet your goals and objectives. Keep in mind, investment return and principal value will fluctuate with changes in market conditions so that shares may be more or less than original cost. Diversification cannot eliminate the risk of investment losses.