What to Do When You Become a Millionaire -- Part 2: Protection

Hello and welcome again to Fundamentals of Investing. These videos are designed to help explain important investment concepts you need to know as you work to grow your personal wealth and build your retirement nest egg. I'm Brian Dress, Director of Research here at Left Brain, and I'm joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, thanks for joining us.

Thank you, Brian. Excited to be here.

Yes, thank you. Thank you, Nolan. And again, at Left Brain, we do specialize in working with rising affluent and high net worth investors. As people generate higher incomes from their employment or from their business, a number of financial issues do tend to arise. And again, as we said, the saying goes, more money, more problems. Putting together a checklist for folks who have just come into $1 million of net worth. We just put together part 1, which we cover the investment strategy side of things. And here, this is part 2 of the video or we want to cover protection and we want to cover taxes. So there's a lot that goes into it when you do come to $1 million of net worth, a lot of things you need to consider, a lot of concepts you need to consider. And we want to explain some of those for you here today. The first we're going to cover here in part 2 is protection. So, Nolan, the first thing that comes to mind for me when I hear protection for investors or high net worth individuals is insurance, and that's in a variety of areas. Can you speak to some of the insurance needs that you might see in this area for folks who have just come into that million-dollar net worth area?

So first off, congratulations. If you're one of the successful investors that have reached this, this magic bright line of attaining $1 million in net worth, you should feel proud and excited about your financial future. So congratulations for all that you've done to get here. Our job as investment advisors is to nurture that and to show you how you can protect and grow what you currently have and select hopefully us to help you get to the, to the next million. The next million to get to $2 million hopefully should be easier and quicker than the first million. They say the first million is the toughest. So now let's talk about protection. How do you protect what you have? Insurance is exactly that. You need to transfer your risk to an insurance company. And there's a few areas of risk that we have. The first one that we always think about is our life and life insurance. And most investors will protect their family members, their other spouse, their children, and their loved ones should they have an untimely passing with the purchase of insurance to protect the standard of living. And the first type that we generally consider is term. Most of us, if we're working at an employer, we get term automatically, so we don't think about it. We're big proponents here, though. In addition to having coverage at work, we really think every investor should have a policy that they own personally themselves that go in the safe. So no matter which job or career you switch to, it'll be your decision whether you keep, increase, or decrease that policy, and the decision won't be made for you. So the first decision that we're all going to have to make is term or permanent. Do I get temporary insurance, which costs me less per thousand, but at some point, because it's term, which is another name for temporary, I'm probably not going to have any more if I live past a certain age because that term policy will become so expensive and won't be attractive to keep. Or do I spend more money and get a permanent policy. So that's the first decision in regards to insurance, and that every investor and high net worth achiever is going to have to decide.

All right, Nolan. And then there are a number of other types of insurance. I'd love to have you explain a little bit more about it. A couple that come to mind: disability, long-term care, and umbrella policies. Can you speak about the importance of those policies for high net worth investors?

Sure. Um, so if you're a million-dollar net worth investor and you're in that stage where you're growing your net worth, then it's possible a very valuable thing that you do own is your future stream of income, your ability to go to work every day for an employer or run a business and to be able to generate future income. And depending on your age, it could be that your future income stream is more valuable than the current assets that you've currently accumulated. How do we protect that future stream of income? We can do that by transferring that risk to an insurance company via a disability policy. So if I'm involved in an auto accident or something tragic health-wise or other befalls me, I can have a policy that will pay me future income to help continue to grow my net worth. So that's what a disability policy does.

And speak about long-term care and the importance of getting that in place when you're at an age where you're not too old and difficult to insure.

This is really important and it's becoming a lot more prominent these days. You know, every 7 seconds now here in the US, somebody retires. And a lot of us have loved ones who've needed long-term care. That means that you can't perform all of your activities of daily living So you need assistance. It doesn't always mean I need to go in a nursing home, although I could need skilled nursing care or an assisted living facility. More often than not, long-term care happens in the home, or we have outside home care come to take advantage— come to take care of our loved ones in the home. But that's complicated. It's expensive. I need coordination of care. I need to be able to vet facilities and professionals. And so it's the one thing financially that really can wreak havoc on a well-planned-out retirement and a retirement income scenario. And so long-term care is something that we're starting to see more and more people really want to obtain. And we tend to think of it when people retire, it's something that we want to really check the box on and make sure we have these boxes covered. But I'm going to say earlier, we've started to see investors take a look at this much earlier in their lives than you would expect. We would say age 50 is the time to start thinking about it. Like any other insurance, the older you get, the tougher it is to qualify and the more expensive it becomes. So long-term care is something that investors, high net worth investors, really want to consider. Nursing homes, you know, the average cost of nursing homes, if you need one, is over $70,000 a year nationally and regionally they can be much more. So it is something that investors will want to consider.

My takeaway, Nolan, from everything you've said here is, you know, think about it sooner rather than later, because the older you get, the more difficult and more expensive it is to insure yourself for a number of these different eventualities. So definitely keep that in mind. And then there's one other side of protection, Nolan, and that's trusts and wills. So couple of questions here that you have to address when you're thinking about, you know, what happens when you do pass on, who gets what from your estate and what taxes are to be paid. So can you talk a little bit about the significance of those issues and how we can approach protecting against poor outcome in those, in those cases?

This is kind of a sobering topic. I don't think anybody likes to think about their demise and it's kind of macabre to think about, but I have to think about ahead of time, hey, when I am going to die. And who would I like to have my wealth, my belongings, my things? And who would I like to be responsible for those things? And it's a really important topic. So a lot of people will think about— so there's two things to think about. One is who will get my things, and then the other one is whether I'm going to be taxed on those things. So let's start with the who gets what first. We all need to have some sort of document in place to make that decision. So we have different categories of things. Things that we can name a beneficiary on and things that we cannot. If it's an asset that I cannot name a beneficiary on— my home, my car, my jewelry— then I really need to have a document in place. It's generally a will to tell the courts who gets my stuff upon my passing. And what we all fear is that we don't have our affairs in order, we pass away, and now we have to— our— wherever our executor is has to go to, has to go to court, and those things have to go through probate. None of us want that. The issues become: it's time-consuming to go through probate, it could take weeks or months to get settled. Two, the judge, uh, will determine based off the laws of the state. Three, it's costly. And four, the biggest one is it's public. We like our affairs to be handled privately, quickly, cheaply, efficiently, and we want to determine who gets what. So estate planning becomes really, really important.

And then, Nolan, what's, what's the role of trusts as it all pertains to these matters?

So there's a document called a living trust. What it allowed me to do is add a beneficiary to things who ordinarily would not have a beneficiary. So I have, if I have a bank account, if I have a brokerage account or even my home, I can have those things owned by my living trust. And those things then will not have to go through probate. I pass away, there's a death certificate, and then immediately those things go to my loved ones or whoever I name as my beneficiary of my trust. And they can be handled by a successor trustee. So it's an efficient way to pass assets on.

Nolan, it definitely sounds like you're, you know, your second stop after you figure out the investment plan, your financial model is to the estate planner, the estate attorney, and figuring out how to get all these documents in place so that if anything does come to pass and a demise, you do come to your demise, everything will be set in place. So protection through both insurance and through will and testament and trust. Are a couple of things that we think you need to think of when you do get to that million-dollar net worth. We're going to cut the video off here. We do have a third part of the video which is going to be covering taxes. And if you have interest in learning more about what you need to do about taxes when you reach $1 million in net worth, click on through to the third part of the video and we'll discuss that. Everyone's favorite taxes. Thank you for being with us.