Rethinking Insurance to Ensure a Secure Future

When Dana Levy couldn’t see his computer screen last year, he figured it was time to take a hard look at his finances.

Fortunately for Levy, a graphic designer, double vision caused by a temporary eye problem disappeared after three weeks. But the determination to tackle financial issues remained for him and his wife, Letitia O’Connor, who together run a business designing and editing museum books.

“Dana’s health problem was a wake-up call for us,” O’Connor said. “We realized it could be a business killer. I didn’t sleep for a month.”

The incident triggered questions about insurance for Levy, 62, and O’Connor, 45, given their age difference and the need to protect their 6-year-old son.

And the couple are also wondering about the appropriateness of some of their investments, a subject they’ve had little enthusiasm for analyzing previously.

“We have busy lives and no interest in investing or finances,” O’Connor said. “I’d rather do yoga or spend time with our son.”

But the couple know they need to spend time on financial planning, especially because they are self-employed entrepreneurs who are solely responsible for planning their own financial futures.

In the past, Levy and O’Connor have entrusted investment and insurance salespeople with this job, sometimes with unhappy consequences. They lost $10,000 several years ago when a broker traded stock options for them without their consent. “It was a nightmare,” Levy said.

Despite their hands-off approach, they have accumulated a substantial base of assets. Their net worth is more than $750,000, most of it equity in their Los Feliz home and two other properties. The remainder is in mutual funds, retirement accounts, annuities and life insurance policies.

Their earnings are relatively high--about $120,000 annually--but so are their expenses, leaving little for savings. Their son’s private school education consumes $10,000 per year and health insurance about $5,000 annually. Another big-ticket annual cost is $10,000 for life insurance.

Nonetheless, “they have enough money to allow them to do what they want, if they are smart about their resources,” said Andrea Spatz, a certified financial planner with Lewis Wallensky Associates in Century City who examined the couple’s finances for The Times.

Their first priority should be to protect their assets through adequate insurance coverage, she said. Like most Americans, the couple have focused more on life insurance than other kinds of income-protection insurance.

With Levy’s recent health scare in mind, the couple should consider disability insurance, Spatz said. This coverage provides 50% to 80% of usual income when illness or injury prevents the insured from working. While Social Security or state disability usually pays some benefits when a person becomes severely disabled, the government programs provide a very small payout--not enough for most people to live on comfortably.

Unfortunately, finding disability insurance for Levy may be virtually impossible, Spatz said. For one thing, self-employed people typically have trouble finding such policies. Also, many companies don’t insure anyone over 60 or don’t extend insurance beyond age 65. Levy’s only chance might be to find an industry association to join to qualify for a group policy.

For Levy, getting coverage “might not be totally impossible but it could be prohibitively expensive,” said Gus Moeller, an insurance broker with Moeller Insurance Services in San Gabriel.

At 45, O’Connor will have an easier time qualifying for the insurance, a move that Spatz encourages.

“The best time to get affordable disability insurance is when you’re least likely to need it,” Spatz said. “I usually tell healthy people in their 20s and 30s to look into it.”

While Levy might be out of luck for disability insurance, he should have no problem purchasing another type of coverage: long-term care. “This is something that, frankly, sounds depressing and grim but is very important,” Spatz said. Long-term-care policies cover all or part of the costs involved in caring for someone at their residence or in a nursing home. Without this insurance, a family’s assets can be drained paying for care, particularly if it’s required for an extended period.

“This is a way to transfer the risk to someone else,” Spatz said. “Dana is the ideal age to purchase this, and he should do it while he is still healthy and will qualify.” Her research turned up a policy that would pay $120 per day for care at an annual cost of $2,300.

For O’Connor, long-term-care insurance is less urgent given that most people do not purchase it until they are in their 50s or 60s. But she can probably count on paying less than $1,000 per year if she wants coverage.

Spatz is among a growing number of planners who believe that the long-term-care insurance industry is sufficiently mature to be reliable. But because the coverage is fairly new, there remains uncertainty about whether insurance companies are pricing it correctly. If they underestimate, they could fail and not provide benefits later. If they overestimate, clients are paying too much for the coverage.

Next, Spatz moved on to life insurance. O’Connor currently has a $500,000 “universal life” policy with annual premiums of $2,500. Levy has a $1-million “term” policy that costs about $8,000 per year.

Universal life includes a cash value, so part of the premium is a savings device. O’Connor’s, for example, currently has a cash value of $8,000.

Levy’s term insurance, on the other hand, has no cash value. Furthermore, it was purchased when he was 52 for a defined term of 30 years. That means the policy expires when he is 82 and would have no value were he to die beyond that age.

“I don’t like the notion that Dana is worth more dead than alive,” O’Connor said. “I also like the idea of having cash value within the insurance policy. It’s like forced savings.”

Nonetheless, financial planners tend to recommend keeping insurance and savings separate. Term policies, which are cheaper than other forms of life insurance, allow individuals to buy insurance for the period it is needed. Levy’s current policy fits that description. When the insurance ends at age 82, Levy’s son will be 26 and presumably self-supporting, while O’Connor will be 65 and presumably retired.

However, a term policy may not make sense if it delivers anxiety rather than peace of mind. A possible compromise is for Levy to convert half his term policy to universal life, creating a hybrid term and cash-value policy, Spatz said. “It might be the best of both worlds to have some of each,” she said. But the catch is that the conversion would require a one-time payment of about $30,000.

While Spatz thinks a hybrid policy is a good idea, funding it through cash savings is not, she said. Instead, she would prefer that the couple consider liquidating other assets, particularly some of their real estate--for the life-insurance conversion or simply to diversify.

Levy and O’Connor did not load up on real estate by design. In 1992, they purchased their current Los Feliz home and intended to sell their former residence, but then decided the real estate market was too soft. Instead, they rented that house.

Now that the market has bounced back, both their rental and current homes have appreciated. As a result, 85% of their net worth is in the two houses and in O’Connor’s share of a Massachusetts condominium where her mother lives.

“You need to diversify because your investments are very heavy in real estate,” Spatz said.

She points out that it isn’t easy to get cash out of real estate if it is needed in an emergency, and the couple’s net worth is at high risk if the real estate market suffers another downturn.

“While the market is so hot, I would recommend selling something,” Spatz said.

The Massachusetts condominium is out of the question while O’Connor’s mother is there, and selling the local rental would trigger a hefty capital gains tax bill, probably around $80,000.

The couple could avoid those taxes by selling their current home and moving back into the rental. Up to $500,000 in gains from the sale of a primary residence are tax-free for the couple. Moving back to the rental for two years would allow them to change its status to “primary residence,” and they could use the tax exemption on that property later.

Of course, if the couple prefer to stay in their current home, they could simply sell their rental house and pay the taxes to free up equity. Whatever they decide to do, Spatz encouraged them to consider becoming less exposed to real estate and to generate some cash.

In addition to converting the life insurance policy, the couple could use the cash to increase their retirement savings and eliminate non-mortgage debt.

Their retirement accounts now total about $120,000. They contribute $2,400 into a tax-deferred simplified employee pension (SEP-IRA) annually, far less than their income would allow, Spatz calculated.

Saving more in this account “should be your No. 1 priority,” Spatz said.

As for specific investment choices, Spatz suggested a portfolio of global and domestic stock funds, with a portion in safer bond funds. For O’Connor’s retirement funds, she suggests more aggressive choices, such as a technology fund, because O’Connor has more time to benefit as these companies grow, even if the market has some rough periods in the meantime.

Spatz also urged the couple to spend some time educating themselves about personal finance. That way, they would never find themselves at the mercy of unscrupulous advisors.

“Investing and finance don’t have to become a passion,” she said. “But you really do need to develop” some expertise.

Graham Witherall is a regular contributor to The Times. To be considered for a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or to money@latimes.com. You can save a step and print or download the questionnaire at https://www.latimes.com/HOME/BUSINESS/FINPLAN/makeover.htm.

Information on choosing a financial planner is available at The Times’ Web site at https://www.latimes.com/finplan. The site offers stories, phone numbers, addresses and links to related sites.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

Investors: Dana Levy and Letitia O’Connor

Income: About $120,000 per year

Goals: Evaluate portfolio and insurance policies.

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Assets

Real estate: Equity of $650,000

Non-retirement savings: $43,000

Retirement savings: $120,000

Insurance value: $8,000

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Recommendations

Reduce proportion of investments in real estate.

Increase retirement savings.

For O’Connor, buy disability insurance.

For Levy, buy long-term-care insurance.

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Recommended Mutual Fund Purchases

Vanguard 500 Index; (800) 662-7447

Accessor Small to Midcap; (800) 882-9612

Fidelity Select Technology; (800) 544-8888

Fidelity Spartan California Municipal Income; (800) 544-8888

Meet the Expert

Andrea Spatz is a certified financial planner with Lewis Wallensky Associates in Century City. She has a bachelor’s degree in economics from UCLA and a master’s in business adminis-tration from Harvard Business School. She serves on the board of the Los Angeles chapter of the International Assn. of Financial Planners and is affiliated with Associated Securities Corp.