Welcome to Wealth and Life, where you’ll learn with financial planner, consultant, speaker, and business owner, Tony D’Amico. You’ll hear stories from successful business owners and individuals about how they navigated the inevitable challenges that arose as they achieved each new level of success, and you’ll get insights and strategies from leading wealth planning professionals on how to achieve your next level of success. Now here’s your host, Tony D’Amico.

Tony D’Amico: Kurt, welcome to the Wealth and Life podcast today. Really excited to have you as a guest. I want to introduce Kurt Thomas, third generation owner of J.L. Thomas. Kurt, why don’t you tell us a little bit about yourself and your family business.

Kurt Thomas: We are a brokerage general agency. We wholesale life insurance, long term care insurance, disability insurance and annuities. We work with about 400 agents and advisors primarily in northeast Ohio and what we do is, we facilitate the distribution of life insurance products, long term care products and disability insurance. We represent about 25 different carriers, all the major ones you can think of, like Prudential, Lincoln Financial Group, American General, Principle, et cetera. We train the advisor on the products, we talk about their clients and their particular situation to figure out which solution fits their goals and objectives best.

Kurt Thomas: Our specialty for years, my grandfather, Jerry, started the firm back in 1971, really the sweet spot of our agency has been underwriting. If you have clients that have a health impairment, whether it’s diabetes, cancer, or stroke history, or maybe it’s an occupation, maybe they are a scuba diver, we specialize in finding the right carrier to place that risk.

Tony D’Amico: That’s awesome. I’m actually really excited to have this conversation. When we say, life insurance, it’s like oh geez. But actually, life insurance is a really important tool for certain situations, whether it’s life insurance or disability insurance or perhaps long term care, it is a piece of someone’s comprehensive financial plan. And not everyone needs those types of insurance, but let’s talk about that, if that’s okay with you, let’s maybe talk about insurance planning for business owners because there’s a lot of needs there that business owners have as they are growing their business, perhaps for succession planning purposes and things like that. It’s very important.

Tony D’Amico: What’s your viewpoint or how do you approach insurance planning for a business owner?

Kurt Thomas: Business owners, I like to keep insurance in separate buckets. You have your personal needs and then for the business owners out there, you have your business needs. The most common area of planning that we see for a business owner is buy/sell agreements. A buy/sell agreement isn’t a type of life insurance policy, it’s a legal document that your attorney drafts. And what that document says is, it stipulates what happens if an owner dies, becomes disabled, you can really put anything in there you want, but the two most common items we see for a trigger mechanism is death or disability. If an owner dies or becomes disabled, how does the other owner buy out that deceased owner. There’s four ways you can buy out an owner. You can pay with cash, you can use business revenue, you can go to a bank and borrow money, or you can buy life insurance. Life insurance is the most economical way to buy out a deceased owner.

Tony D’Amico: That’s great. A lot of times too, when we’re working with business owners, we see that their buy/sell agreement, they have one in place, which is awesome. That’s not always the case, but when they have one in place, a lot of times we see that it might not be up to date.

Kurt Thomas: Yes.

Tony D’Amico: So what are some of those things, when you guys evaluate a buy/sell agreement, do you see, hey, okay, wow, this needs to be addressed and be brought up to speed.

Kurt Thomas: Typically, what we see with a business owner, they buy life insurance to fund the agreement and it’s typically a term policy, policies that can last anywhere from 10 to 30 years. Business owners get busy, they are running their business and they are managing their employees.

Tony D’Amico: For sure.

Kurt Thomas: And life insurance isn’t always on the top of their mind.

Tony D’Amico: People aren’t thinking about life insurance typically.

Kurt Thomas: No. So yes, it’s a great thing that they do have a buy/sell agreement, but usually it needs to be reviewed at least every three to five years. And typically what happens is, once that buy/sell agreement gets funded with life insurance, they put the policy in their desk drawer and they forget about it and life goes on. You fast forward 10 years and the buy/sell hasn’t been reviewed and what has happened over the past 10 years to your business, it’s most likely increased in value so if one of the owners dies and that life insurance policy is underfunded, you got yourself a real problem.

Kurt Thomas: We recommend that the business owner review their buy/sell agreements at a minimum every three to five years and you can have multiple policies covering the buy/sell so you don’t have to replace your existing policies, but if you need extra coverage in terms of death benefit, you can have multiple policies to cover that buy/sell need. The buy/sell insurance is based on the valuation of the company. There’s accountants, CPAs, attorneys that specialize in business valuation, that’s typically the number that we want the buy/sell death benefit to be insured for.

Tony D’Amico: Right. And you know, that buy/sell agreement, I think this is like all the other types of planning that we do for business owners, it’s that multi-disciplinary approach. But to have a good buy/sell agreement, you need a certified financial planner or a wealth manager that knows the total picture. You need a legal person that can draft it. You might need an industry consultant that can guide the situation as far as what type of valuation should be used. Is it so many times free cash flow, is it some other way to value the business and a lot of times that could be industry specific, but then you have the life insurance piece as well.

Tony D’Amico: I guess I have a question for you. You have all these different parties, what process do you think works best to work within a wealth management team, if you will, to really kind of do the best that you can for the business owner?

Kurt Thomas: Typically the best starting point is to learn about the business, the business owners, their family, what’s important to them and just what does the business do. When it comes to the actual buy/sell agreement, the first step is to review the existing buy/sell agreement, to read it, because I’ve come across cases where the buy/sell agreement hasn’t been updated. Maybe an owner retired and they need to be removed from the agreement.

Kurt Thomas: There’s two ways you can structure life insurance for a buy/sell and the first way is entity purchase agreement. The second way is cross purchase agreement. Entity purchase agreement means that your company owns the life insurance policy, they pay the premiums and they are the beneficiary. And if an owner dies, the death benefit goes to your company and they use that money to buy out the deceased owner’s share of the business. That’s called entity purchase agreement.

Kurt Thomas: The second way you can structure a buy/sell is cross purchase. Tony and I own a business. I own a policy on Tony, Tony owns one on me. If Tony dies, I get the death benefit and then I use that death benefit to buy out Tony’s estate and retire his shares from the business. What can happen is, and I just had this happen two weeks ago. I got called, one of my agents that I work with, one of his commercial clients, there’s two business owners and they have a buy/sell agreement. It’s an existing buy/sell agreement and it’s funded with life insurance. The company owns those policies, so their corporation owns the policies.

Kurt Thomas: When I reviewed their buy/sell agreement, it specifically says, cross purchase agreement. So the problem with their situation wasn’t the fact … they had life insurance, it’s a good thing, but if one of those owners dies, that death benefit is going to be paid to their company because they set it up as company owned.

Tony D’Amico: Right.

Kurt Thomas: Instead of cross purchase.

Tony D’Amico: And that could be a big problem.

Kurt Thomas: That could be a big problem, because if one owner dies, how does a surviving owner get that death benefit out of the company? It’s probably going to be considered a distribution and it’s going to be taxed.

Tony D’Amico: Sure. And we’re not CPAs, but we really enjoy working with you and your firm and when we do those case review meetings, when we have tax and legal folks present as well, with that said, sometimes we see that the business is perhaps paying for the life insurance, but they are maybe are trying to pay for it with and make a tax deduction out of that and that is obviously … Do you want to talk about the dangers or pitfalls of what could happen if someone does do that?

Kurt Thomas: I get this question a lot. It’s probably the most common question I get, can I deduct my life insurance premiums. And business owners are usually the people that ask this question.

Tony D’Amico: For sure.

Kurt Thomas: The answer to that is no.

Tony D’Amico: Why is that?

Kurt Thomas: Because the death benefit is a tax-free benefit. You can’t deduct a benefit that’s already tax-free in nature and I’m not a CPA, but the IRS doesn’t view life insurance as a necessary business expense item. So you cannot deduct those premiums.

Tony D’Amico: Yeah. Yeah. I was just talking to a CPA firm last week where we ran into that situation and they mentioned that the IRS is starting to really kind of audit those types of situations and if you get caught, not get caught, but if they find that you’re paying with it and deducting that as an expense, it could then possibly make the death benefit taxable.

Kurt Thomas: Exactly.

Tony D’Amico: Which is going to create more problems, because you were counting on that entire death benefit to fund that buy/sell agreement.

Kurt Thomas: And to take a look at which is more beneficial, as a business owner, would you rather have a … say the premium is $5000 for that life insurance policy and the death benefit is $1,000,000. Would you rather deduct $5000 a year or get a $1,000,000 tax free.

Tony D’Amico: Exactly. It’s a no-brainer.

Kurt Thomas: It’s a no-brainer.

Tony D’Amico: Right. Obviously with being a business owner myself, we try to be as tax efficient as possible and try to write off anything that you can legitimately write off, but that would backfire against someone.

Tony D’Amico: I could think of another case too, where we worked on together where they had the death and disability events covered in the buy/sell, but they didn’t have divorce or incarceration and obviously that doesn’t happen as often, but it is something that could potentially happen and there’s a lot of risk that the other business owners have if those items aren’t spelled out. I guess what are your thoughts on that or maybe other situations that you’ve run across?

Kurt Thomas: You want to review that buy/sell agreement with your attorney. If you have a business attorney who specializes in drafting the actual agreement, to review that and then make sure certain items are covered, like divorce. The two typical things that we see are death and disability and on the funding side of things, life insurance is usually the only item that’s being funded. What I commonly run across is business owners don’t fund for a disability event. If a business owner becomes sick, let’s say they have a stroke or get cancer, or they become disabled and they can’t work anymore, how does the business buy out their share of the business.

Tony D’Amico: Right.

Kurt Thomas: And that’s where disability insurance comes into play. It’s the most overlooked aspect of buy/sell planning, disability insurance.

Tony D’Amico: I’m glad that you brought that up because we’ve talked a lot off camera working together over the years, but it’s important for our listeners to know that you have a greater chance of being disabled than you do dying up until age 65.

Kurt Thomas: Right, but we’re kind of programmed maybe in our minds to kind of … what if I die, but what if you become disabled because that’s statistically more likely. And I think a lot of people, too, think that disability insurance is only if you get injured in a car or you fall off a ladder. If you look at the statistics, most people get sick to trigger the disability buy out. You get cancer, you get stroke or you have a heart attack and you can’t work.

Tony D’Amico: When you notice that disability isn’t part of that buy/sell, how do you go about remedying that? What’s your approach?

Kurt Thomas: Same approach as life insurance. You find out the percentage ownership of the business, you find out the value of the business, and then you buy a disability buyout policy and instead of death being the trigger mechanism, it’s disability. If that owner becomes sick or disabled and they can’t perform the material duties of their occupation, the buy/sell policy will pay a lump sum to the business to then buy out that share of the disabled owner.

Tony D’Amico: Sure. Sure. Very important checklist for our business owner folks that are listening to make sure that your buy/sell agreement does cover those different areas of death, disability, divorce, incarceration. Also too, how you value the business before is how it’s being valued today. We run into that. We did one audit of a buy/sell where the way that they valued the business was completely incorrect and it needed to be revamped and it changed things quite a bit. And then you mentioned that disability insurance and that important consideration. Really, that buy/sell agreement is part of a broader succession plan. At least with us, when we’re working with business owners, they sometimes have a succession plan and they sometimes don’t.

Tony D’Amico: How do you guys approach that situation where you maybe run across a business owner and you’re working with them and they don’t really have that person identified who would buy them out, what are some thoughts that come to mind as far as that type of conversation?

Kurt Thomas: If they don’t have somebody identified to take over the business, typically what we recommend is to make sure that you have enough death benefit that if you die, your family gets the fair economic value of the business you spent a lifetime creating.

Tony D’Amico: Yep. Amen.

Kurt Thomas: That’s basically what we recommend.

Tony D’Amico: That’s so important, because they are not in a spot where they have that succession plan, but they’ve sacrificed, they are typically not working 40 hours a week and they built something that has some sort of value and heaven forbid something happen to the ownership, because if there isn’t that succession plan, that business will not retain its economic value.

Kurt Thomas: Correct. Correct.

Tony D’Amico: Very important point.

Kurt Thomas: Now if you do have a key employee that potentially could take over the business one day, what we typically see is key person life insurance planning. What that is, is it protects the business from a key employee dying. Let’s say that you are a manufacturer and you have a very specialized employee that’s very specific in what they do. If that person passes away, is the company going to lose revenue and the answer is, most likely yes.

Tony D’Amico: For sure.

Kurt Thomas: And it might be very difficult to find somebody that can replace that key employee. Key person life insurance, the business owns the policy, they pay the premiums and they are the beneficiary and typically we insure it for 10 times that key employee’s salary. So if they are making a $100,000 a year, we buy a $1,000,000 life insurance policy and the company is the beneficiary. So if that key employee passes away, they can use those funds to offset lost revenue, to find a replacement, to really do whatever you want with the money.

Tony D’Amico: That’s awesome stuff. One of the things that we love about working with you is that, as you mentioned earlier, that you guys are independent. Being able to, if there are these gaps, the goal is to get them only the insurance that they need but the fact that you guys are independent and you basically identify the need, you guys do a great job working in conjunction with us being our clients’ wealth manager, and getting them what they need, but shopping the market to find the best premium with an A-rated company.

Kurt Thomas: Correct.

Tony D’Amico: Do you want to talk about that for a minute, because I just think that’s really important because here is a lot of avenues out there and what we typically see too, when we start working with clients, is they’ve outgrown their advisory team. They might have a captive insurance agent, maybe they have a captive agent for their personal or business insurance lines, especially personal, but talk a little bit about what you guys being independent, what that means and how that works its way into your process.

Kurt Thomas: Every company has a different process. They have different underwriting manuals. They don’t underwrite the same way and you don’t just have medical underwriting, you have financial underwriting. For example, let’s say you’re a start-up business and your revenue is not very large in the beginning. Some carriers are better at offering more death benefit because you’re a start-up than others.

Tony D’Amico: Versus a manufacturing company that’s doing $35 million a year in revenue.

Kurt Thomas: Correct.

Tony D’Amico: It will be a different set of carriers that will have that appetite.

Kurt Thomas: Exactly. And so we take all the information, we summarize it and we basically shop the client to get the best possible offer. With that, we’re not tied to any one specific company, but if we gather the facts from the advisor, we can then go take that to market to get the best policy for your customer.

Tony D’Amico: That’s great. Anything else you feel like we should talk about in dealing with life insurance planning or disability insurance planning for business owners that come to mind?

Kurt Thomas: I would just say constantly review what you have because life goes fast and you might add employees, you might have employees retire, your valuation of your business might change. Always have that business life insurance updated is a very, very key planning point. And really, it should be looked at every, like I said, every three to five years.

Tony D’Amico: Yeah. I would agree. And obviously as a certified financial planner and having my own wealth management firm, I biased, but I think really working with an advisory team that is coordinated and integrated where everyone is coning together to make sure that that business owner is reviewing those items every three years and that there is that cohesion and collaboration between the wealth manager and the insurance specialist and the tax individuals and the legal team and really joining those parties together to get the best result is something I will impart on our listeners.

Tony D’Amico: All right, let’s talk about life insurance planning for, let’s say, just an individual or a family. They are approaching retirement and let’s assume that they have done a great job saving, so they are going to have that financial security heading into retirement and will be able to maintain their lifestyle. As you know in working together with us, that working with what we call a pre-retiree as another major focus for what we do. But let’s talk about life insurance for that particular person as they are heading up to retirement and looking to plan throughout retirement. What are some thoughts that come to your mind? We’ve talked off camera, but I want to ask you, what comes to mind for you?

Kurt Thomas: I guess before I answer that question, when a family is young, say they are in their 30s and 40s and they are just starting out, they typically buy life insurance for three reasons. There’s a million reasons why you buy life insurance, but it’s typically three reasons. Number one is income replacement. If you die, so does your income. The death benefit can replace your income if you pass away. If you have kids, you want to make sure they can go to college. That’s the second reason that we see young families buying life insurance. The third reason is to cover any debts, like a mortgage. And as you get older in life, those three risks will decline in nature.

Tony D’Amico: Exactly right.

Kurt Thomas: So your pre-retiree, say they are 60 years old, their house is paid off, their kids are grown, educated, and gone.

Tony D’Amico: The kids are off the payroll.

Kurt Thomas: And they are near retirement so the need for income replacement has diminished.

Tony D’Amico: And that case is that they’ve done a great job saving and once we do a life insurance analysis and we say, “What if one spouse pre-deceases the other? If one spouse died yesterday, would the surviving spouse be able to maintain their lifestyle?” Obviously you don’t get to keep both social securities benefits-

Kurt Thomas: Correct.

Tony D’Amico: And many times maybe there typically isn’t a life insurance need. Occasionally there is, but let’s talk about it. Let’s say that there isn’t that life insurance need. There is still a lot of other considerations.

Kurt Thomas: I see it all the time. The 60-year old, they say, “Why do I need life insurance, Kurt?” A whole new set of risks will arrive later in your life and there is a million of them, but there is three ones that I typically point out. Number one is long term care. If you have an extended long term care situation-

Tony D’Amico: It’s going to be costly.

Kurt Thomas: It’s going to be costly. And we all have family or friends that have gone through nursing home care, home health care, assisted living facilities. That’s a big issue and a big hole in a lot of people’s retirement planning, is how to address and how to fund and pay for an extended long term care situation. We actually have life insurance policies today that have a long term care rider that lets you use your death benefit while living on a tax-free basis to help pay for long term care.

Tony D’Amico: Yep.

Kurt Thomas: So that’s number one, long term care. The second risk that will arrive is, are you capable of living through an economic life cycle and what I mean by that is, let’s say if you died in 2008 when the financial markets were down. Life insurance can make you whole again with a permanent death benefit. The third, you kind of touched on it earlier, is reduced social security income. If your spouse passes away, you still have retirement income that can be addressed through a life insurance death benefit.

Tony D’Amico: That’s great and let’s talk about long term care for a minute because that’s another often overlooked aspect of retirement planning and people are surprised to find out that once someone reaches the age of 65, there is a little bit greater than a 70% chance that they will need some sort of long term care services in their life. It might not be full fledged nursing home care, but it could be adult day care, home health care, assisted living. All sorts of different varieties of care and, like you mentioned, we all know someone either in our family or other people that we work with that needed it at some point in time. You mentioned one really, kind of one way of insuring for that potential risk. One of the things that we do is try to educate our clients on what are the three different avenues.

Tony D’Amico: One is we call, self-insurance where, again, if somebody has done a really, really good job saving and investing, we can put in a fictitious expense in their financial plan and see if it could withstand that future expense, but it’s costly. The average cost of long term care is about what now?

Kurt Thomas: There’s a bunch of different studies out there and I can tell you personally, my grandfather who started our firm, back in 2009 required 24/7 home health care and it was like $15,000 a month. It really just depends on what kind of care you need, but it’s a substantial expense. And if you look at those stats, women actually go on claim-

Tony D’Amico: And stay longer on claim-

Kurt Thomas: Twice as long as males.

Tony D’Amico: Yep.

Kurt Thomas: So if you’re talking a three or four year event, the key question that you need to ask yourself is, how are you going to pay for it.

Tony D’Amico: That’s exactly it. The probability is there and the costs are significant. And I believe the average has been about $9000 a month, but like you said, it could be higher or lower, that’s an average. Needless to say, if this happens, it’s a very difficult event, but some people could self-insure. Some people don’t want to. On the opposite of the spectrum, we have traditional long term care policies where they maybe have more full coverage. They might offer an inflation rider. But do you want to talk about some of the pros and cons of a traditional long term care policy?

Kurt Thomas: Sure. Traditional long term care insurance is nothing more than a pool of money and that pool of money will grow over time with compound inflation and it will reimburse you for any qualified healthcare expenses that you incur. Nursing home, home healthcare, assisted living facilities. The care has to be received by a licensed healthcare practitioner. That pool of money just grows over time. It’s got a monthly benefit associated with it and it reimburses you for any of those expenses that you have. And in order to go on claim, you have to be unable to perform two of your six activities of daily living or you become severely cognitively impaired. Those policies just reimburse you.

Kurt Thomas: The two common objections that the consumer has with long term care are the premiums that you pay aren’t guaranteed. So the insurance company can change your premiums. Kind of like your car insurance. The rates can go up. Very rarely will they go down.

Tony D’Amico: That has happened over the last five plus years. Why have premiums gone up on traditional long term care policies and maybe talk a little bit about why there is less carriers in that space?

Kurt Thomas: Sure. If you look at the long term care industry, it’s really going through a transformation and when long term care first came out, the actuaries didn’t have enough actuarial data to appropriately price the product. They assumed certain factors like people would cancel their policies. They had gender neutral pricing so a male and a female, both the same age, they priced the same exact way. And as we talked about earlier, women go on claim twice as long as males.

Tony D’Amico: Sure.

Kurt Thomas: So I think if you look at the policies that were sold in the 90s, they were severely mis-priced. It was pretty inexpensive to buy long term care back then and as time moves forward, what’s happened is some of these carriers are now paying claims on those policies.

Tony D’Amico: They have more data.

Kurt Thomas: They have more data now and so they’ve adjusted their policies. They’ve made it a little bit more expensive to buy as compared to the 90s. What’s happened is the enforced box of business, they’ve adjusted those premiums so that they can pay future claims.

Tony D’Amico: They have to make sure they have a certain amount of reserves on hand to be able to … they are required to, right, by state law.

Kurt Thomas: Correct.

Tony D’Amico: To maintain a certain amount of capital or liquidity. There definitely is some pros to having the traditional long term care products because there is more coverage, the inflation rider. But the cons, as you mentioned, there’s that premium instability.

Kurt Thomas: Correct.

Tony D’Amico: And there is less carriers in the market. Still the right thing to do for some people.

Kurt Thomas: And for the listeners that do have long term care, if you did get a rate increase, you still have a really good policy.

Tony D’Amico: Right. It still might be a good policy. It might be a good idea to do a review of that policy and the changes but it’s still might be …

Kurt Thomas: Usually what we do is when a client gets a rate increase, we’ll investigate the reasons why, give them their options, because you can change some certain benefits.

Tony D’Amico: Within the-

Kurt Thomas: Within the contract to maybe keep your premium level. But if you look at what’s available today versus what they bought 10, 15 years ago, they still have a really good policy. And it’s priced right.

Tony D’Amico: Absolutely. We’ve seen that working together where we’ve had somebody with an increase. We did an audit, had you review it, run other quotes, and then it’s like, “Oh, that’s still pretty darn good.” Keep it. But they just need that information so that they can feel good about that.

Kurt Thomas: The other area that the consumer objects to long term care in addition to rate increases is, it’s a use it or lose it benefit. If you pay premiums your whole life and you never require long term care, say you’re the one out of three people that don’t need it, you don’t get a residual death benefit.

Tony D’Amico: Yeah. That’s a policy you hope to never collect on. But different from that is those hybrid policies that you led with, which is a much more popular alternative. Again, not for everyone, but it’s that combination life insurance with long term care and you can structure those policies to be what we call guaranteed through a certain age.

Kurt Thomas: Correct.

Tony D’Amico: You guarantee it through age, let’s say, 105, is that policy will pay out as long as you pay the premiums as stipulated, as designed and as long as you don’t live to 106, it’s guaranteed to pay out those benefits so, from my standpoint, some of the pros are that you have that premium stability. It’s a different type of vehicle than the traditional long term care policy, but it might not cover as much as a traditional long term care. But you could still design it to cover a significant amount. I guess from your viewpoint, what are some of the pros and cons that you see with these hybrid type policies?

Kurt Thomas: The hybrid policies, they started coming into existence probably 10 years ago and it’s really every carrier seems to be introducing some sort of rider that can be added to a life insurance policy to allow to pay for long term care. The consumer has really guided the market. Those policies address the two concerns that the client has with long term care. The hybrid policies, your cost is guaranteed and so is your benefit and what I mean by that is, your premiums cannot change, assuming you pay those premiums and your benefit is guaranteed. If you need long term care, you’re going to get long term care. If you die, you’re going to get a death benefit or maybe it’s a little combination of both. These policies have become really popular because it addresses those two concerns.

Tony D’Amico: And you brought up a great point. If the death benefit is $200,000 and the insurance company pays out, let’s say someone does need long term care services and it pays out that $100,000 of the $200,000, and then that person were to pass away, that remaining $100,000 would then be paid out as a death benefit.

Kurt Thomas: Tax free.

Tony D’Amico: Yes.

Kurt Thomas: Tax free death benefit.

Tony D’Amico: Income tax free, which is really important.

Kurt Thomas: And a lot of these policies, Tony, there’s a difference in with long term care insurance, like the traditional long term care policy, the pool of money, those are reimbursement policies. You have to send in receipts. The care has to be from a qualified, licensed healthcare practitioner. A lot of these contracts today on the hybrid side, are chronic illness riders and those pay indemnity benefits.

Tony D’Amico: Right.

Kurt Thomas: And that’s very important to understand, because indemnity benefits are a cash benefit. You don’t have to send in receipts every month.

Tony D’Amico: They just pay the money directly to-

Kurt Thomas: To the owner of the policy.

Tony D’Amico: The owner of the policy or thankfully these policies designate someone that can basically handle that for you if you are unable to because of-

Kurt Thomas: Correct.

Tony D’Amico: Because of cognitive impairment.

Kurt Thomas: And you can receive informal care. It does not have to be from a licensed healthcare practitioner.

Tony D’Amico: Got you. It could be home health care, adult day care, all those different types of avenues. That’s great. Another thing too that we’ve worked on quite a bit over the years. If you could, talk about what someone should do if they have a policy that maybe has a cash value, because we run into this a lot where maybe somebody got a policy when they were in their 30s and maybe that policy has a cash value and today their needs are different. As you mentioned, maybe they don’t need life insurance, but maybe they want to have a hedge against long term care. What should someone do if they have a life insurance policy that has a cash value?

Kurt Thomas: Policy maintenance is very important. It’s kind of like you take your car to your body shop, they do maintenance on your car. You should do the same thing for your life insurance policy. Over the course of your life, your needs are going to change. If you have an existing life insurance policy that has cash value in it, but you don’t really need the death benefit anymore, you can actually do what’s called a tax-free 1035 exchange to a hybrid contract with a long term care rider. That’s actually the most common funding vehicle for these policies today. Using existing life insurance to basically roll over that cash value to pay the premium.

Tony D’Amico: That’s awesome. Cool. Good. We talked a little bit about disability insurance with business owners, but talking about disability insurance for individuals and families, that’s another, again, really important consideration. They, probability wise, need disability insurance more than they need life insurance until age 65 and a lot of times employers will offer really good disability insurance plans. From our vantage point, sometimes we run into people where they might have a $20 a month charge if they get a higher disability coverage. So we’re often saying that $20 is cheap, just take what you can get through your group plan, through your employer because that ends up being typically the most cost effective way.

Kurt Thomas: Correct.

Tony D’Amico: But if somebody maybe doesn’t have disability insurance through their employer and they want to cover one of their most valuable assets, their ability to earn a paycheck, how would you go about that, helping them out in that situation?

Kurt Thomas: Sure. Disability insurance pays you a monthly benefit typically to age 65 or age 67. Should you become unable to perform the material duties of your occupation because of sickness or injury. And your ability to earn an income is your most important asset. We have policies that can insure against that risk. Disability insurance typically covers up to 60% of your income and the reason why it can’t go any higher is because there has to be some sort of enticement to go back to work otherwise people would just collect disability. Typically what we see is, on a personally owned policy, if you’re paying those premiums with after tax dollars, any benefits that you receive in the future, are going to be tax-free.

Tony D’Amico: Right. Another just like life insurance for business owners. It’s important for disability insurance to pay those premiums with after tax money so that way if you did need it, you’re going to get that benefit tax-free and even though it’s 60%, it still might be closer to what you were bringing home before because your wages are obviously taxed. With that, it’s the same process with life insurance. You go to the open market and you shop around. You want to talk about that a little bit?

Kurt Thomas: Your disability insurance is going to primarily be priced on your occupation. So depending on what you do for a living is going to dictate which company we’re going to go to. That’s step number one, is what occupation. Walk me through your day, what do you do? Do you do manual duties or are you more sitting behind a desk? That will allow us to figure out which company is going to be the best one for you to apply with. And what I come across a lot, and you mentioned it earlier, is oftentimes people have employer provided disability insurance policies and what we recommend is to let the advisor review that contract. A lot of times what we see is people don’t understand if the employer pays those premiums, any future benefits you collect on that policy are going to be taxable income.

Tony D’Amico: Right, if they are paying for it and their deducting that, so very important.

Kurt Thomas: What we’ll do in that situation is if you do have employer provided disability coverage, we can supplement with a personally owned policy.

Tony D’Amico: That’s important. You don’t see that too often but it does happen where employers are deducting that, and if they do, it’s the same thing. Those benefits will become taxable later. Very good important point. Kurt, any other topics that you want to talk about with life insurance for people approaching retirement?

Kurt Thomas: I think the number one area is going to be long term care. I can go through personal stories. My dad is 66. I remember when my grandfather was going through long term care. He firsthand saw how expensive it was and how much drain that can put on someone’s financial assets. My grandfather, when he was doing his planning, when he was 60 himself, there was no such thing as hybrid products or sophisticated life insurance vehicles. What my grandfather did though is, he bought a little sliver of permanent life insurance and he had the wherewithal to pay that $15,000 home health care bill each month, but the day he died, he got his money back because he had permanent life insurance.

Tony D’Amico: It kind of made his estate whole.

Kurt Thomas: Correct.

Tony D’Amico: The fruits of his labor, of starting a business and working it and keeping that there for your family, that’s an awesome story. I really appreciate you sharing that. I think maybe one other thing that comes to mind once you share that story is, there is a client that we work with who, they want to donate a substantial amount of their IRA to charity. Because if you donate your IRA to charity, the charity doesn’t have to pay income tax on that money, where as if you leae that IRA to your family, when they inherit it, they have to pay income tax on it and that could be a substantial piece of that pie. What they did was, they are going to use their IRA, and it’s a pretty substantial IRA, it’s going to go right to charities when they pass away, but they bought life insurance to make their family whole so that life insurance death benefit will cover what the IRA inheritance would have been. There’s all sorts of ways to structure this.

Kurt Thomas: Sure.

Tony D’Amico: And I think that kind of brings us to one of our final talking points before we wrap up, but just that importance of how we work together and we talked a little bit about this, but it really starts off with what we call discovery. Really learning about the business owner or the family. What are their unique needs? How are they positioned now? What are their goals? What’s their family situation like? Because even for business owners, yes the business is part of it, but their family is also part of it. It’s really that discovery, working together as a team across disciplines and then really coming back to them with what they need and what’s best for them and we really appreciate that approach you guys have. We call it that fiduciary approach, looking out for what’s best for them.

Tony D’Amico: But as we wrap up, this podcast is about achieving success, where wealth and life intersect and success means different things to different people at different stages of life, at different stages of business. And Kurt, your family has built what most people would call a very successful business, practice, a great reputation. But when you think about the intersection of wealth and life at this stage for you, what does success look like for you moving forward?

Kurt Thomas: It’s funny you ask me this because three weeks ago, my wife and I had our first baby.

Tony D’Amico: Awesome. Congrats.

Kurt Thomas: Thank you. We had a boy. We named him, Vincent. My idea on success is totally changed. I think being a good father is something that, as soon as he was born, it just hit me. So I think moving forward, my idea of success is just being a good family man.

Tony D’Amico: That’s awesome. That’s cool. Well Kurt, thanks so much for being a guest on the podcast.

Kurt Thomas: Thanks for having me.

Tony D’Amico: Your insights are extremely valuable and again, thanks.

Kurt Thomas: Thank you.

Do you want even more ideas, tools, and resources of how to achieve the next level of success in your wealth planning? Check out wealthandlife.com, where Tony will cover the latest trends and wealth planning best practices for successful business owners, families approaching retirement, and comprehensive wealth management. By subscribing to the Wealth and Life podcast, keep up to date with future episodes. Get it all now at wealthandlife.com.

Wealth and Life is created and hosted by Tony D’Amico, CEO of Fidato Wealth, a registered investment advisor. The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations. To determine which strategies may be appropriate for you, please consult a financial planner prior to making any financial decisions. Any case examples discussed are hypothetical, and any resemblance to a particular person or business is purely incidental. Please visit wealthandlife.com for other important disclosures.