As we have discussed, having a well-designed investment plan is only a necessary condition for investment success. The sufficient condition is integrating it into a well-designed estate, tax, and risk management plan. There are noninvestment risks to consider: mortality, disability, the need for long-term care, and even longevity risk (living longer than expected). If these risks are not integrated into the overall financial plan, even the best investment plan can fail. Consider this example.
John is a thirty-two-year-old investment adviser. He is married and has two young children. He has just finished paying off his college debts, and his income is now sufficient to begin saving (and investing) significant amounts. He has a well-designed investment plan. Unfortunately, John dies in an auto accident. While he had a good investment plan, he did not live long enough to execute it. If he did not have enough life insurance his family will not have sufficient resources to provide for the standard of living John desired.
Analyzing the need for life, health, long-term care, disability, and umbrella coverage is a critical part of the financial-planning process. All types of "personal lines" insurance should be considered, so reviewing all existing policies with a personal lines specialist (home, auto, liability, boats, and art) can add significant value.
There are three main points underlying the philosophy of managing insurance risk:
Insurance should be ...