Blog
Risk Management and Insurance Planning in a Financial Plan
Michael H. Baker, CFP®, CIMA® RICP®, RMA®
Date
Jan 5, 2026
Category
Content
When most people think of financial planning, they think of offense: investing, growing assets, and chasing returns. But a truly comprehensive plan must also play defense.
Risk management is the foundation that ensures your offensive strategy can survive the unexpected. Without it, a single event, a premature death, a long-term illness, or a lawsuit can undo decades of accumulation.
For families in Fort Mill and the greater Charlotte area, effective risk management involves more than just buying a policy; it requires integrating protection strategies directly into your broader wealth plan. With that in mind, let’s look at the core components of risk management, why they matter, and the potential benefits and tradeoffs of different insurance vehicles.
What Is Risk Management in Financial Planning?
Risk management is the process of identifying potential threats to your financial security and implementing strategies to transfer, mitigate, or accept those risks.
In a financial plan, this typically focuses on three "human capital" risks:
Mortality Risk: Dying too soon (Life Insurance).
Morbidity Risk: Living with an illness or injury that stops income (Disability Insurance).
Longevity/Frailty Risk: Needing expensive care later in life (Long-Term Care Insurance).
1. Life Insurance: Protecting Income and Legacy
Life insurance is often misunderstood as a death benefit. In reality, it is a tool to replace the economic value you provide to your family or business.
Types to Consider
Term Insurance: Pure protection for a specific period (e.g., 20 years). It is generally low-cost and ideal for covering temporary needs like a mortgage or raising children.
Permanent Insurance (Whole/Universal): Provides a death benefit and a cash value component that can grow over time. It is often used for estate tax liquidity or legacy goals.
Possible Advantages
Tax-Free Benefit: Life insurance proceeds are generally received income-tax-free by beneficiaries.
Estate Liquidity: For business owners or those with illiquid assets (like real estate), insurance provides immediate cash to pay estate taxes or buy out partners.
Possible Tradeoffs
Cost: Permanent policies have significantly higher premiums than term policies.
Complexity: Universal life policies often have flexible premiums and interest rates, requiring ongoing monitoring to ensure the policy doesn't lapse.
2. Disability Insurance: Protecting the "Earning Machine"
Your ability to earn an income is likely your largest asset—far more valuable than your home or 401(k). If you are a professional earning $150,000 a year, and you have 20 years left to work, your "human capital" is worth $3 million. Disability insurance protects that asset.
Possible Advantages
Income Continuity: Replaces a portion of your income (typically 60%) if you cannot work due to illness or injury.
"Own-Occupation" Definitions: High-quality policies pay benefits if you cannot perform the duties of your specific job, even if you could technically work in a different field.
Possible Tradeoffs
Underwriting Rigor: Obtaining coverage requires medical exams and financial documentation.
Cost: Premiums can be expensive, especially for specialized professions (e.g., physicians or dentists).
3. Long-Term Care (LTC): The South Carolina Context
With the cost of assisted living in South Carolina averaging over $4,900 per month (and skilled nursing significantly higher), a long-term care event can rapidly deplete a retirement portfolio.
The South Carolina Partnership Program
South Carolina participates in the Long-Term Care Insurance Partnership Program. This is a critical consideration for local residents.
How it works: For every dollar your partnership-qualified policy pays out in benefits, you get to keep a dollar of assets above the usual Medicaid threshold.
The Benefit: It allows you to protect a specific amount of your estate for your heirs while still potentially qualifying for state aid if your care needs eventually exceed your insurance limits.
Possible Advantages
Asset Protection: Prevents you from having to "spend down" all your assets to pay for care.
Care Coordination: Many policies include services to help find and manage care providers, relieving the burden on family members.
Possible Tradeoffs
Use-It-or-Lose-It Risk: With traditional LTC insurance, if you never need care, you (generally) don't get your premiums back. Note: Hybrid life/LTC policies can mitigate this tradeoff.
Premium Increases: Traditional policies are subject to rate hikes, though South Carolina rate stability rules offer some consumer protection.
Estate Planning Nuance: Beneficiary Laws
Risk management also involves legal housekeeping. Under South Carolina law (Section 62-2-507), a divorce or annulment generally revokes any revocable beneficiary designation to a former spouse.
The Risk: If you want an ex-spouse to remain a beneficiary (e.g., to support children), you must explicitly state this in a new document or the divorce decree. Relying on an old policy designation can lead to unintended disinheritance or legal battles.
How to Approach the Decision
Building a defensive moat around your wealth is a process, not a product purchase. A prudent approach includes:
Conduct a "Gap Analysis": Calculate exactly what your family would need if your income stopped tomorrow. Compare this against your current assets and group coverage.
Audit Your Beneficiaries: Review every insurance policy and retirement account to ensure beneficiary designations match your current wishes and estate documents.
Evaluate the "Hybrid" Option: If you are hesitant about traditional Long-Term Care insurance, ask about "asset-based" policies that provide a death benefit if you don't need care, and a care benefit if you do.
Consult a Fiduciary: Insurance agents are often incentivized to sell products. A fiduciary financial planner can help you determine how much insurance you actually need before you shop for a policy.
Important Disclosures
This material is general in nature and for informational purposes only. It does not take into account your specific objectives, financial situation, or needs and does not constitute personalized investment, tax, or legal advice. All investing involves risk, including the possible loss of principal. Insurance guarantees are backed by the financial strength and claims-paying ability of the issuing company. South Carolina Partnership Program details and local cost data are subject to change. Before making any decision about your risk management strategy, you should carefully review your options and consult a qualified insurance professional and certified financial planner.
Investment advisory and financial planning services offered through Advisory Alpha, LLC, a SEC Registered Investment Advisor. Insurance, Consulting and Education services offered through Vertex Capital Advisors. Vertex Capital Advisors is a separate and unaffiliated entity from Advisory Alpha, LLC. All written content on this site is for information purposes only. Opinions expressed herein are solely those of Michael H. Baker, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. This website may provide links to others for the convenience of our users. Michael H. Baker has no control over the accuracy or content of these other websites. Please note: When you access a link to a third-party website you assume total responsibility for your use of linked website. Links and references to other websites and third-party content providers are offered for your convenience. We do not necessarily prepare, monitor, review or update the information provided by third parties. We make no representation or warranty with respect to the completeness, timeliness, suitability, or reliability of the referenced content.
