Warren Ward Associates

Peter Townsend Got Old

Considering the frequent allusions to the music of the 60’s which appear in this space, it may not be surprising to learn that many years ago I was personally involved in that genre, managing local bands and producing rock concerts in and around Indianapolis. One of the few perks afforded by that job was my exposure to lots of great musical groups. One of my favorites was the English band, The Who. Their guitar player, Peter Townsend, wrote the "rock opera" Tommy, as well as the somewhat less famous My Generation, which includes the line, "I hope I die before I get old".

Despite that lyric, Peter is indeed aging just like the rest of us. In fact, he’s reached the point at which he could begin receiving Social Security payments were he a US citizen. Since he appears to enjoy continued touring with his band and since his music is being introduced to a whole new generation as the theme of the CSI TV shows, perhaps he has changed his mind regarding his preference for an early death.

All of us, of course, have the right to change our minds and I have recently done so about a related issue. For years, I have recommended that my clients not purchase long term care (LTC) insurance. My hesitation didn’t stem from any sense that it was never going to be needed but out of a concern that the insurance companies might not have had sufficient experience with people needing to collect on the policies. That lack of data left me uncomfortable with their ability to price the policies accurately. The last thing I wanted was to suggest insurance coverage which would later need to be re-priced to cover claims, making it too expensive for my clients to keep in force just when it was needed most.

As with most of the decisions we make regarding financial planning, this one has been re-evaluated many times over the years. The most recent review led me to a different conclusion. A few of these policies have now been available for more than ten years and I think that enough companies have enough experience to price them appropriately.

The availability of insurance in its various forms makes financial planning much easier, allowing us to help clients choose which risks to face on their own and which ones to share with a wider group. For example, we rarely suggest a policy offering very narrow coverage like cancer or accidental death. On the other hand, we almost always recommend term life insurance for people with children they plan to educate, especially when one of the parents is actively working at raising them instead of working outside the home. Likewise, we think liability insurance is an important component of protection, as we wouldn’t want an accident to permanently alter a client’s life by requiring a settlement which wiped out their assets.

Just as we have previously recommended the judicious use of insurance in these circumstances, we are now recommending LTC insurance for some clients, depending on their specific situation. As with all forms of coverage, the greater the perceived risk, the greater the cost. Thus older (or less healthy) clients tend to pay higher premiums than younger (usually healthier) ones. The challenge, of course, is to find a balance between buying too early and perhaps having to pay too long or buying too late and perhaps having to pay too much.

Helping to determine a sensible balance between such time and price factors is an element of financial planning that we deal with frequently. Our discussions with clients aged 62 and above now include LTC insurance, especially in cases when we hope to preserve an estate for their heirs. If you are not a client of Warren Ward Associates, you might wish to contact your own insurance agent about this issue. Because new companies are entering this market all the time, we would suggest that you shop for insurance coverage, as we do for our clients.

We believe that a good financial plan is one which provides our clients with options as their lives take different twists and turns. Based on our latest review, we think it may be time for more people to consider LTC insurance.

The Hundred Year Flood and Other Appealing Folk Tales

For those of you who do not live in or near Columbus, ours is the southern Indiana community whose hospital was forced to evacuate due to recent flooding. I was attending a conference while the heaviest rain was falling and returned a few days later to find both our home and office untouched. Although we were spared, several friends and clients are cleaning up terrible messes and they are just a few of the many families in the area doing the same. FEMA is now on the scene and local volunteers have been hard at work since the rain stopped.

I have heard it said that lightning never strikes in the same place twice. Yet I know it can, because lightning strikes are governed by the laws of physics. The highest point in a landscape last week is probably still the highest point this week. If lightning has struck that place once it could easily strike there again. In the same way, the lowest point in any area is likely to be the one that floods, perhaps more than once.

Witnessing a flood is one of the scariest things that any of us is likely to experience. You can see the water rising but there is almost never anything which can be done to stop it. To help reduce the financial impact of floods, our entire country has been mapped based on the potential for flooding. Most property owners in an area which is likely to flood, even once every 100 years, are required to carry flood insurance. But last week, in Columbus and elsewhere, many of the flooded homes were uninsured because they were in zones considered likely to flood once in 500 years or even less often.

All of this leads to the question, "Should homeowners in the 500-year flood area in southern Indiana or the over-500-year flood area in Iowa have purchased insurance?" Such decisions are rarely simple ones. After watching TV coverage of the destruction, the answer might seem obvious but all insurance costs money and people tend to resist buying protection against an event which seems unlikely to happen. As I understand it, Columbus has experienced three "100-year floods" in the past 95 years. Whether due to changing weather patterns or the fact that our society is now paving areas where water was once absorbed into the ground, I suspect flooding may occur more, rather than less, frequently in the future.

One way to approach any question related to insurance coverage is to think of it as a hedge, a concept which originated with the game of roulette. Hedging allows a player to bet on two or more numbers at once, although with a reduced payout for a winner. In the world of financial planning, insurance offers one of our most useful forms of hedging. We help clients decide which risks to keep for themselves and which ones to share with an insurance company. Decisions about whether to insure, and for how much, can’t be made "in general". They must be considered in the context of a specific situation. A relatively wealthy individual might be quite able to afford insurance but might also be able to survive an uninsured loss. Someone who apparently cannot afford insurance might, in fact, lose everything by going uninsured.

Assessing risk can be very difficult. For example, the city of Columbus is undergoing a series of major renovation projects, including the tear-down and replacement of The Commons, a downtown mall, indoor park and gathering place. Those of you who have been inside The Commons will probably remember Chaos I, a kinetic sculpture by Jean Tinguely. When in motion, gears are turning, balls are traveling down a wire cage and there’s a lot of clanking going on. It is certainly a world class piece of art, yet from another perspective, it’s just a collection of scrap metal. It was constructed almost entirely from items found at Kroot’s, our local salvage yard. What is its value? How much should it have been insured for during the tear-down of the old mall?

Determining the cost of insuring against the risk of flood damage is fairly simple. Your insurance agent can almost certainly arrange coverage for your home (possibly through a FEMA sub-agency) but the decision about purchasing it is still yours to make. Of course, premiums are based on the likelihood of it being flooded. According to FEMA, the average premium in the 100-year flood zone is around $400 per year for structural coverage. Dwellings in lower risk areas can often be covered for less than $150 per year, again for structural damage. Most people should consider insurance on their contents as well.

Helping clients manage risk is an important part of what we do at Warren Ward Associates and helping them make decisions about insurance is a critical part of that process. As no two situations are identical, it isn’t always easy to answer the kind of questions I have raised. If you are a client of WWA, we will work with you on these issues. If not, your insurance agent should have ready answers for your specific case. If your agent is unable to meet your needs, we will try to help you locate one who can.