June 3, 2021 | Category: Insurance
If the past year has taught us anything, it's that we must be prepared for the unexpected. Early planning and timely action will bring peace of mind, knowing that your family and assets are protected from different adverse scenarios.
We talked to our licensed personnel at Popular Risk Services about the most common financial concerns and how to prepare to tackle them.
Most people acknowledge the importance of insuring their primary and second homes, vehicles, or business operations. "However, few consider that the greatest asset they have is their own ability to generate income," stated Javier Rodríguez Torres, Life and Employee Benefits manager at Popular Risk Services.
Like any asset, the ability to generate income is exposed to risks. One of those risks is death. For instance, early in a promising career, an adult who dies unexpectedly translates into a family who loses their main source of income for the next 20 to 40 years. It could also involve a business whose operations are interrupted due to the death of an employer or one of its main directors.
To address the previous situation, Rodríguez Torres recommended preparing a plan as soon as you start generating income. It must include both a succession plan for the business—for example, specifying who will succeed the business or whether or not those shares must be sold—and the succession plan for personal assets, ideally, through a will.
According to the law in Puerto Rico, a portion of the estate must be left to the spouse and children (contrary to other jurisdictions, in which you can leave everything to any person). For some, that factor may be limiting, more so when there is not enough capital accrued. This is why life insurance is so important.
"Life insurance is a powerful planning tool because it allows you to appoint any beneficiary, and the amount to be received is tax-free. For instance, if I want to protect my spouse, life insurance is an ideal tool," Rodríguez Torres explained.
Different policies can be selected depending on the insured's age and capital. Thus, an initial policy may be for a term—that is, 10 or 15 years—with a low premium but more benefits. They are useful when the insured is starting to accumulate capital and has other financial priorities.
Eventually, Rodríguez Torres said, it is possible to transition to a permanent policy—that is to say, for the rest of your life—which is usually attractive due to its accrual component (interests). Depending on the terms agreed upon, these funds may be withdrawn for use in retirement planning.
One thing is to protect your ability to generate income in your productive stage. Another is to maintain liquidity while enjoying retirement.
"The question here is how do you protect the assets you've accumulated in case you become disabled and need care during retirement," Rodríguez Torres stated. The answer is a long-term care strategy, the planning of which generally starts at the age of 50.
"Every day we see technological advances that extend our lives, but that does not necessarily mean that we will be 100% healthy. There are often health complications that require constant care. That is a concern that people have and they want to spare their families," he added.
A long-term care strategy may be self-financed—meaning, you accumulated enough capital to pay the monthly medical care and attention services that may be needed—or may be capitalized through policies.
These policies were not that appealing initially, since if people remained healthy during their productive years or retirement, they were considered a loss. The market changed, and today, they include additional or hybrid benefits, such as long-term care, life insurance, and provisions that allow withdrawing the accumulated money to obtain immediate liquidity in case the insured loses their job, or their business goes bankrupt.
If life insurance exists to address the fear of dying too early, annuities exist to address the concern that you will live longer, and the fear that you run out of money before you pass away.
"Traditional annuities work similarly to Social Security: the person contributes a certain amount every certain period, detaches from the money in exchange for a payment promise from the company to receive a monthly payment for the rest of their life or their spouse's life," Rodríguez Torres said.
There are several types of annuities, including the deferred one. In this annuity, the contribution is placed in a growing instrument that earns interests and the person chooses when they want to start receiving the benefit.
"Although there are many annuity variants, annuities are a very important planning tool because they provide the security of recurring income during retirement to complement Social Security and employer pension, if any. In life insurance, disability insurance, or long-term care insurance, people must be insurable (in a good health) at the time of acquiring these policies. But if the person already has health conditions, annuities are an option for retirement to finance a long-term care strategy," Rodríguez Torres added.
In addition to protecting your life and family, full planning includes securing your property—from your primary residence to the summer home, car, boat, and company—against catastrophic events, such as natural disasters.
"When catastrophic events happen, we are not just talking about material loss. If we are not prepared, the financial impact may also throw us into family and emotional disarray. Should the event strike the business, the source of income would be affected, and this brings consequences to our daily lives," mentioned Katherine Betancourt Muriel, account executive at Popular Risk Services.
Due to its location, Puerto Rico is exposed to hurricanes, floods, tsunamis, and earthquakes. Moreover, houses and commercial buildings deteriorate over time, regardless of routine maintenance. Aware of this reality, the first step is to consult an insurance broker to identify the risk exposure for your properties or business.
"Part of our functions includes an inspection visit to identify the client's personal and commercial exposure. For each exposure, we discuss risk management strategies and the options available: whether you transfer the exposure to an insurance company, increase the deductible to pay a lower premium, or retain exposure because you are solvent enough to sustain the loss," pointed out Evelyn Rosa Morel, Popular Risk Services P&C practice manager.
Rosa Morel affirmed that these assessments must be made at least once a year.
Rest assured that everything you value is well protected. At Popular One, our licensed personnel can help protect your assets, prepare for the unexpected, and provide the peace of mind you need. Contact your Private Banker to learn more.
The information provided is for educational purposes and for your independent consideration. This material should not be considered as investment advice, recommendation, or an offer of any particular security, strategy or investment product or service. Readers are urged to seek professional advice with respect to their specific financial and investment matters.
Banco Popular de Puerto Rico, its subsidiaries and affiliates do not offer tax, legal or accounting advice. If you would like to receive legal, tax or accounting advice, you should consult a professional specialized in these areas. Investment products and services are offered by Popular Securities LLC, registered broker dealer and member of FINRA and SIPC. Investment products are not insured by the FDIC, are not deposits or obligations, are not guaranteed by Banco Popular de Puerto Rico and may lose value. Insurance products and services are offered by Popular Risk Services an Insurance broker duly licensed by the Office of the Commissioner of Insurance of Puerto Rico. Popular and Banco Popular de Puerto Rico are not registered brokers. Insurance products are not FDIC insured, or other government agencies, are not deposits or obligations and are not guaranteed by the Bank or its subsidiaries or affiliates. Some insurance products may lose value. Popular Securities and Popular Risk Services are subsidiaries of Popular and affiliates of Banco Popular. Popular One is an integrated services platform through which Popular Securities and Popular Risk Services are offered.
Wealth Management services are generally available to clients who maintain deposits and/or investments of $500,000 or more at Popular.