1. EXECUTIVE SUMMARY
Personal Recommendations
Life Insurance
o Universal Life on both Charles and Kay
 Recommended amount: $5,000,000 each
Survivorship Life Insurance
o For Estate Equalization
 Recommended amount: $6,000,000
Irrevocable Life Insurance Trust
o Used for Survivorship Life Insurance
Special Needs Trust (for Andrea)
o Amount needed: $350,000
o Funded through Universal Life Insurance
Auto Insurance
o Increase deductible to $500 per car
o Add under- and uninsured motorist coverage
o Increase coverage to $250,000/$500,000/$100,000
Medical Insurance
o Increase deductible to $2,000
Personal Umbrella Policy
o Add Personal Umbrella Policy for $1,000,000
Emergency Fund
o Increase to $84,000
Update Will
o Include pretermitted children
o Include Special Needs Trust
Farm Note Payment Schedule
o Recommend lowering annual payments
Investment Risk
o Consult Investment Advisor on:
 Kay’s 401(k)
 Emergency Fund
 Brokerage Account
Mortgage
o Refinance
Homeowners Insurance
o Increase coverage
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2. o Increase deductible
o Schedule property
o Inflation guard endorsement
o Home business insurance coverage endorsement
Disability-Income Insurance
o Add for both
Long-Term Care Insurance
o Add for both
Business/Farm Recommendations
Liability Insurance for the Family Farm
o Add Commercial General Liability policy
Convert Fertilizer Company to LLC
Buy-Sell Agreement (Fertilizer Company)
o Funded through Life Insurance
Liability Insurance for Fertilizer Business
o Purchase
Errors and Omissions Insurance
o Add for Kay
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3. INTRODUCTION
We have examined the information you provided us last time we met and have
recognized certain areas in which your risk coverage can be improved. Due to your unique and
specific circumstances, in order to accomplish your desired goals, we have set forth our
recommendations on how to manage risk exposures.
The analysis is divided between your personal and business/farm risk exposures. Each
section identifies a risk exposure, explains the need to compensate for that risk, and our
recommendation on how to manage that particular risk exposure. In doing so, we hope that you
use our recommendations to consult with specialists and other advisors who can help you carry
out our recommendations.
Risk can be expensive to manage, however, the consequences of failing to do so can be
drastic and prevent you from accomplishing those goals which you have mentioned. We believe
at WCM Financial Group that risk management is a vital area of the financial planning process.
Alleviating risk exposures can help to eliminate future complications as well as providing a
peace of mind for our clients.
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4. PERSONAL RECOMMENDATIONS
Life Insurance
When analyzing your life insurance coverage we assessed your capital needs at death.
We determined that your current coverage is not sufficient. Currently, you each have term life
policies: $700,000 for Charles and $500,000 for Kay. The company that provides your current
life insurance is rated poorly by Moody’s rating agency. Companies with poor ratings run higher
risk of default, thus leading to a higher risk of not receiving your death benefit. We determined
that your needs will be best satisfied through the purchase of three new life insurance policies
from a life insurance agency with a rating of A or better.
Universal Life Policy on Charles’s and Kay’s Lives
o Each person will have a policy on their life
o Policy will have a minimum level premium and guaranteed death benefit
o We recommend $5,000,000 policies on each life
 Our analysis calculated that $5,000,000 is required to satisfy debt
obligations, as well as other needs, at the death of either Charles or Kay.
The needs we included are
Final Expenses
Readjustment Fund (one month)
Emergency Fund (six months)
Education Fund
Current and long-term debt obligations
Andrea’s lifetime care costs
80% income need
 (Please reference Appendix A – Life Insurance Capital Needs Analysis)
o Universal life allows you to have flexible premiums in the event of a need to
increase or decrease
 Increasing or decreasing premiums alters the final death benefit paid to the
beneficiary or cash value during the life of the policy
Survivorship Life Insurance
o Additionally, we recommend you purchase a survivorship life insurance policy to
satisfy your desire for estate equalization
o Survivorship policies pay the death benefit after the death of the second spouse
o We recommend that you purchase $6,000,000 of survivorship life insurance to
satisfy your goal of estate equalization
 This amount is relatively large due to your desire to transfer the farm
($2,500,000) to Sarah at death
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5. Therefore, you must compensate the same value to Chelsea,
Dennis, and Derek
 This assumes that through the use of each individual life policy
(mentioned above), Andrea’s needs are satisfied separately through the
Special Needs Trust
o Funded through an Irrevocable Life Insurance Trust
Irrevocable Life Insurance Trust
Irrevocable Life Insurance Trusts (ILITs) are established so that the grantor (creator) can
transfer assets into the trust and the trust can, in turn, purchase life insurance on that grantor.
This results in the trust owning the policy on the grantor and it designates those individuals
whom the grantor wishes to be the beneficiaries of the life insurance policy. This ensures that
the insured individual owns no interest in the policy, meaning that it will not be includable in his
or her gross estate. Therefore, it will not be subject to estate taxes at death.
Estate Taxes in the Future
o On January 1, 2013 estate and gift unified credit amounts are likely to change.
Please be aware that the amount of unified credit allowed to individuals after this
date is unknown and subject to legislative action. If no legislation occurs, unified
credit amounts per individual will revert back to pre-2001 amounts of $1,000,000.
Special Needs Trust
Special needs trusts are important for families planning with special needs. In the event of
your deaths, you wished that Andrea’s care be fully funded. In order to fund her care, we
suggest that you add $350,000 to each of your life insurance policies. Special needs trusts are
needed to keep Andrea’s assets outside of her ownership, thus allowing her to receive federal
social security benefits. Based off of the social security administration benefits calculator,
Andrea will receive $18661 in the event of your deaths. The estimated assisted living facility
costs in Texas are $2800.2
Amount Needed: $408,000
o (See Appendix B –Andrea’s Special Needs)
Existing Funds (Grandparent Trust**): $65,000
Total Amount of Insurance Needed: $350,000
1
http://www.ssa.gov/cgi-bin/benefit6.cgi (Assumed Birthdays: Kay – 12/15/1961; Charles – 12/15/1962)
2
http://www.assistedlivingfacilities.org/directory/tx/
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6. **The Grandparent’s existing revocable trust assets should be transferred to the newly created
special needs trust.
Auto Insurance
Your current auto deductible of $100 is very low compared to industry standards. We
suggest you raise the deductible in order to save money on your monthly premiums. We
recommend that you raise the deductible on each car to $500. This amount is within your budget
due to your current financial standing.
Additionally, we recommend the following:
Add underinsured and uninsured motorist coverage
o This will mitigate the risk of being hit by someone with not enough or no auto
insurance
o Having this coverage is faster than recovering your loss from a lawsuit
Increase your coverage to $250,000/$500,000/$100,000
o Your assets can become subject to a lawsuit in the event one of your family
members causes a car accident resulting in catastrophic loss
o This will help to protect your family’s personal assets
Medical Insurance
Your current major medical policy should be sufficient for your current needs. In order
to save money on premiums, we suggest raising the deductible to $2,000. Considering the
number of family members you have, satisfying the $2,000 deductible in a single year is likely to
occur. Over the course of your lives, you should be able to compensate the increase in
deductible through savings in premium payments.
Personal Umbrella Policy
In order to supplement your auto insurance coverage, we recommend purchasing a
Personal Umbrella Policy on each of you. This will add to the existing auto insurance and
protect the farm and other significant assets which you do not want subject to a lawsuit.Personal
umbrella policies offer excess liability coverage and extend broad coverage to potential loss
exposures. The umbrella policy will cover a loss if the loss is not covered by an existing policy.
These policies are reasonable in cost. For example, you can receive a $1,000,000 personal
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7. umbrella policy for less than $350 per year.3 We recommend a $2,000,000 policy due to your
existing net worth. (See Appendix C – Financial Statements)
Emergency Fund
We suggest that you increase the emergency fund to approximately $84,000. This will
provide your family’s nondiscretionary needs in case of emergency for 6 months. Typically, we
recommend that clients have a fund that will satisfy their needs for between 6 and 12 months.
For your specific needs in the event an emergency occurs, the 6 months we recommend would
suffice due to the stability of each of your jobs.
Update Will
As your will sits right now, it is inadequate to fulfill the goals you set forth, as well as the
suggestions we have made to manage the risk areas of your lives. We suggest that you contact
your attorney and update your wills so that your goals may be fulfilled in the event of your
deaths. The following are concerns that you may want to bring up with your attorney:
Include Chelsea, Derek, Dennis, and Andrea in the will
Testamentary Special Needs Trust
o This trust will be established to satisfy Andrea’s special needs
Distribution of Assets (Estate Equalization)
Designation of Guardian (for Andrea)
o In the event of death, you will need a guardian to make decisions for Andrea
Designation of Guardian (for Chelsea, Derek, Dennis)
Farm Note Payment Schedule
Your current farm note payment is relatively high, at $200,000 per year. In order to
satisfy some of the recommendations that we are making, we suggest that you consider lowering
the payment amount if possible. Our recommendations are to help satisfy the risk areas in your
lives. In order to fund these recommendations, the resources saved can be allocated to funding
the certain risk management solutions in our analysis.
3
Principles of Risk Management and Insurance; 11th addition; George E. Rejda, p. 557
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8. Investment Risk
We suggest you contact your investment advisor as to the following investments:
Kay’s 401(k)
o Kay’s risk tolerance is low; however, an investment advisor may suggest some
allocation to equities due to her age and potential future goals
Emergency Fund
o The Emergency Fund is for to fund immediate needs in the event of an
emergency.
o Funds in this account should be allocated to cash or its equivalent
Brokerage Account
o You should ask your investment advisor as to the proper allocation between fixed
income and equities for this account
o Leaving this in cash runs the of the funds losing their purchasing power due to
inflation
Mortgage
We believe the current interest rate that you are paying on your mortgage is high. Due to
your high interest rate, you are spending more than you need on interest payments per month.
We suggest that you refinance to recapture some of the money you spend on interest. The
following are current rates quoted:4
Fixed (APR): 4.229%
ARM (APR): 2.975%
Homeowners Insurance
The current HO-3 policy you have on your home only covers $600,000 of the $685,000
value of your personal residence. We suggest that you increase the coverage to at least 100% of
the replacement cost of the dwelling. Our recommendation is that you increase the coverage to
$685,000. With your current coverage, you will not incur a penalty, due to it being at least 80%
insured. However, increasing your policy coverage to the full replacement cost will eliminate
the risk of loss having to incur the lacking coverage through self-funding in the event of a
complete and total loss of your home. In addition to the increased coverage, we recommend the
following:
Add personal property replacement cost loss settlement endorsement
4
https://mortgage.citimortgage.com
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9. o Under this endorsement, property will be covered on a replacement cost basis
rather than an actual cash value basis
Make sure you look over your HO-3 policy exclusions
o Your coverage covers everything except those specifically excluded
1% deductible is sufficient
o If you believe you can afford a higher deductible, your premium payments will
decrease
Add scheduled personal property endorsement
o Currently, your policy only covers $1,500 worth of jewelry
o This will allow the full $45,000 value of the diamonds to be covered
Add an inflation guard endorsement
o As your house increases in value with inflation, the increased value will be
covered by this endorsement
o Otherwise, over time your house will become underinsured
Add a home business insurance coverage endorsement
o Any essential assets used for the their businesses can be covered, including:
equipment, files, paperwork, and loss of business income
Disability-Income Insurance
It is important to you and your family that you seriously consider investing in some
Disability-Income Insurance. An injury on the job can cause serious financial insecurity, and it is
important that you have a way to fund these substantial work earnings lost from being disabled.
We recommend that the two of you purchase a Disability Insurance Plan. Disability Insurance
pays benefits in monthly income to those who have become Totally Disabled. It is important to
note that you should always consider and understand what your insurance company defines
totally disabled as. The most basic definition of being totally disabled is the complete inability of
the insured to perform each and every duty of his, or her, own occupation.5 As shown in the
graph below, there is a much higher chance of becoming disabled before age 65 than most would
assume. We strongly encourage that you purchase Disability Insurance to cover any losses
incurred from missed work and to help insure financial security.
Elimination Period
o Disability Insurance policies usually contain an elimination period. This is a
waiting period in which the owner of the policy does not receive benefits from the
policy. Elimination periods can range from 30 days to 365 days. We recommend
that you have an elimination period of 90 days. Though this may seem like a
substantial amount of time it can significantly lower your premiums. The longer
your elimination period is the less you have to pay in premiums. After examining
5 th
Principles of Risk Management and Insurance; 11 addition; George E. Rejda, p. 325
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10. your current financial position, we feel that 90 days is a sufficient elimination
period.
Benefit Period
o The benefit period is the length of time that disability benefits are payable after
the elimination period is met. Most Disability Insurance plans offer a benefit
period of 2 years, 5years, 10 years, or up to age 65 or 70. 6 We recommend that
your Disability Insurance policy have a benefit period that will cover you both up
to the age of 65 or 70. This will cause the premium payments to be higher but the
coverage is the most important thing to consider. You have a growing family and
it is important to consider the costs and needs that will remain through age 65 to
70.
Chances of Being Disabled before 65
40%
35%
30%
25%
20%
15%
10%
5%
0%
25 30 35 40 45 50 55
7 Age
6 th
Principles of Risk Management and Insurance; 11 addition; George E. Rejda, p. 326
7
https://advantageagentsalliance.com/Documents/MetLife%20Omni%20Advantage.pdf
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11. Long-Term Care
The chance than any one person will need long-term care during their lifetime is
relatively high. The U.S. Department of Health and Human Services estimates that those who
reach the age of 65 will have a 40% chance of entering a nursing home.8 It is important that you
purchase long-term care insurance because of the dramatic increase in nursing home costs. The
financial burden caused by those who need long-term care can be alleviated with long-term care
insurance.
The cost of long-term care can range between $70,000 and $100,000 annually.9 These
facilities have significantly better resources and provide a better standard of living than those
provided by Medicaid.
We recommend the following for your long-term care insurance:
Comprehensive Policy
o Covers care in a nursing home, assisted living facilities, and hospice care
Elimination Period
o We recommend a 60 day elimination period
o Longer elimination periods reduce premiums
It more cost efficient to purchase long-term care insurance today, rather than purchasing
it later in retirement where the costs can substantially increase.
BUSINESS/FARM RECOMMENDATIONS
Liability Insurance for the Family Farm
A Commercial General Liability or CGL policy would also be beneficial to own for your
farmland. Workers whom you employ can subject your farm to potential liability due to the risk
of injuries. This risk poses a threat to the large value of the farm. The CGL policy can limit the
risk of your farm to potential lawsuits by providing insurance protection to pay in the event of a
major accident.
Due to the farm’s value, we suggest you buy an additional Commercial Umbrella Policy
to cover the value of the farm in excess of the CGL policy. This can supplement the retained
limited covered by the CGL policy and provide additional coverage to prevent the full value of
the farm from being subject to lawsuits.
8
Principles of Risk Management and Insurance; 11th addition; George E. Rejda, p. 321
9
Principles of Risk Management and Insurance; 11th addition; George E. Rejda, p. 321
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12. Limited Liability Company
Limited Liability Companies (LLCs) are easily formed by filing with the Secretary of
State in the state in which you reside. LLCs are formed by the owners (or partners) of a
company which are now “members” of the LLC. The members of the LLC are protected from
lawsuits, therefore limiting their exposure to risks. The LLC shields members from liability by
limiting the members’ liability to the investment in which each member has in the LLC. The
shield provided by the LLC protects the personal assets of each member from being drawn into
lawsuits brought against members.10
Charles’ fertilizer business can benefit greatly by forming an LLC to replace the current
general partnership in which Charles and his two partners run the company. Looking over our
previous discussion, we noted that Charles has a concern that the partners of the fertilizer
company had not signed any type of financial agreement (currently they distribute profits evenly
between the partners).
In the by-laws of the newly formed LLC, the partners can set out an agreement as
to the distribution of profits in the event that one or more partners contribute more
to the business than the others.
Additionally, the LLC can help prevent liabilities such as the one arising from the
former employee lost two fingers in a fertilizer accident.
o At the time of the accident, the fertilizer company’s assets were sufficient
to compensate the employee for his lost digits.
o However, had the company lacked resources to pay the employee, the
partner’s personal assets could have been subject to a lawsuit.
o Losses that could have been incurred upon your family were limitless – if
the victim died for instance.
o The loss of a large, income producing asset, such as the farm, could prove
to be detrimental to your future earnings capacity.
o However, the formation of an LLC for the fertilizer company will shield
your current personal assets from liability of the company – ultimately
reducing your risk dramatically.
Buy-Sell Agreement (Fertilizer Company)
Closely held private companies have a major problem arising when a partner dies. Unless an
agreement is written, the death of one or more partners results in the partnership being dissolved.
Dissolving the partnership will cause the partnership assets to be liquidated (sold) and distributed
between the surviving partners and the heirs of the deceased partner. If the surviving partners
10
http://www.sos.state.tx.us/corp/businessstructure.shtml
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13. wish to continue the same line of business, they will be forced to fund the costs of recreating the
partnership or reorganizing the partnership in some way. Additionally, the surviving partners, as
well as the heirs of the deceased partner may have issues such as estate settlement costs, heirs
becoming partners, and buying the heir’s share in the partnership.11
These issues may be solved through a buy-sell agreement established by the partners of the
fertilizer partnership. The most efficient means of funding a buy-sell agreement are through the
use of an insurance policy. The steps of a buy-sell agreement with the use of life insurance are as
follows:
First, the partnership enters into a buy-sell agreement. The agreement sets forth that the
partnership will purchase the interest of which the deceased partner owns from the heirs
at a predetermined price.
The partner purchases a life insurance policy on each partner’s life. It pays the
premiums, is the owner, and the beneficiary of each policy.
When a partner dies, the partnership receives the death benefit (no income taxes).
The partnership then purchases the deceased partner’s interest from the estate for the
predetermined price.
The heirs of the deceased partner receive the proceeds of the sale.12
This agreement, as applied to the fertilizer business, will provide Charles and his partners a
means of preventing the business from dissolving at one death and provide the heirs with
adequate payments for the deceased partner’s shares.
(See Appendix D – Buy-Sell Agreement)
Liability Insurance for Fertilizer Business
The fertilizer business may also benefit from purchasing some form of commercial
general liability (CGL) policy. CGL policies are used by businesses to cover potential exposures
the business may have in the form of lawsuits. Charles’ fertilizer company has previously dealt
with an employee which they had to compensate due to the loss of fingers on the job. The funds
used to compensate this employee were paid for out of the partnership’s assets. In order to
preserve these assets, purchasing a CGL policy can cover any future liabilities resulting from
business related activities. In the event a claim is made against Charles’ fertilizer company
again, the assets will not only be able to be preserved, but they can be retained to increase future
earnings and expansion of the company.
11
http://vsa.fsonline.com/fso/library/txtech/1b1-05-S.pdf
12
http://vsa.fsonline.com/fso/library/txtech/1b1-05-S.pdf
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14. Farm – Generational Transfer
In reviewing your desire to transfer the farm to Sarah over time, we have decided to
recommend that you transfer her “working equity” in the farm in trust. Additionally, Sarah’s
interest in the farm which she will gain in the event Charles or Kay dies should also be
transferred to the trust. In doing so, the trust document should include a clause requiring Sarah
to sign a prenuptial agreement with whomever she decides to marry. The prenuptial agreement
should set forth that the farm is her separate property, and in the event of a divorce, it would not
be subject to being divided with her husband.
*** Please consult an attorney to draft legal documents such as trusts. Our recommendations are
to help guide the attorney understand your goals and objectives when drafting your legal
documents. These recommendations are not legal advice.
Errors and Omissions Insurance
We recommend that Kay purchase an Errors and Omissions (E&O) Insurance policy. Errors
and Omissions Insurance is a type of professional liability policy. Many professionals need E&O
insurance, including:
Architects
Insurance Agents
Real Estate Agents
Brokers
Attorneys
Engineers
And many others who give advice to clients.
Errors and Omissions Insurance is designed to meet the needs of each different profession
and professional. There are many new liabilities appearing the today’s service related industries.
It is important to not only purchase insurance that covers a business’s basic needs and risks, but
to also hold insurance to cover any damages that are created through the service that a business is
providing. Errors and Omissions Insurance protects businesses and professionals from such
claims and liabilities.13It is generally paid on a claims-made basis. This is because the insurance
covers errors made during the current policy period.14
It is important to note that while E&O Insurance has moderately few exclusions claims that
result from dishonest, criminal, fraudulent, or malicious acts by the insured are specifically
excluded.15
13
http://www.errorsandomissionsinsuranceco.com/
14
Principles of Risk Management and Insurance; 11th addition; George E. Rejda, p. 611
15
Principles of Risk Management and Insurance; 11th addition; George E. Rejda, p. 611
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15. CONCLUSION
The detailed recommendations mentioned above were created after a thorough risk
assessment. After examining your current risk coverage, we concluded that the current coverage
was inadequate to you family’s needs. We separate your risk exposures into personal exposures
and business/farm exposures. Along with the identification of each exposure we explained your
specific needs in managing the risk and our recommendations on what we believe is the best risk
management solution.
The first issue we analyzed was your personal risk exposures. We determined that a
greater need for life insurance is needed to fulfill expressed goals. Concerning Andrea, a special
needs trust is needed to meet her future needs in the event of your deaths. Your auto, medical,
and homeowners policies need alterations to limit risk exposures and broaden coverage.
Additionally, we recommend purchasing the following insurance policies: personal umbrella
policy, disability-income insurance, and long-term care insurance. Other areas of concern are
increasing your emergency fund, updating your will, decreasing farm note payments, mortgage
refinancing, and consulting an investment advisor concerning your asset allocations.
The other issue analyzed was your business/farm risk exposures. First, we recommend
that you purchase liability insurance for the family farm. We also recommended that Charles
convert his fertilizer company to an LLC, create a buy-sell agreement with his partners, and
purchase liability insurance on the company. Finally, we recommend Kay purchase Errors and
Omissions insurance for her engineering occupation.
In future meetings we may discuss the following areas of concern:
529 Plans for education funding
o (See Appendix E – College Costs)
Andrea’s college needs as she approaches college age
Retirement Planning
Updates on what recommendations you chose to follow
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