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Many believe that receiving a large inheritance or winning the lottery will end their financial problems and set them on the road to success. But unfortunately many lottery winners go bankrupt and end up working at the jobs they left when they won the lottery.
According to Richard Murray, a financial advisor at Bernstein Private Wealth Management, “whether you make $50,000 or $50 million, the basics of financial investing are the same — the only difference is access to resources.”
If you lack healthy money habits and financial literacy before you receive an inheritance, lottery win, or other financial windfall, you’re more likely to spend all your earnings or lose it to unscrupulous people claiming to help you invest your money.
Murray, who manages clients with net worths of $5 million or higher, and his colleague, James Seth Thompson, spoke to Insider about the basics of financial planning that everyone should be familiar with, regardless of income.
Sometimes people are forced into situations where they’re responsible with turning money into a game plan for life and a legacy. James Seth Thompson, senior vice president and head of diverse markets strategy at Bernstein, said this is typically what happens to athletes, entertainers, and celebrities who may be the first in their family to have access to money.
Thompson notes that there is no cookie-cutter financial strategy that works for everyone. However, everyone needs a thorough planning process for successful outcomes.
For starters, regardless of your income, you need a budget. To do this, Murray recommends defining your core (essential) needs versus your surplus (discretionary) capital. Look at your spending patterns and asset allocations to determine the amount of money you can live off of and the amount needed for your lifestyle, versus what you actually have in your accounts.
At any income level, it also helps to have a financial expert who will ensure you make the best decisions with your money. This team should include an accountant, financial advisor, and estates attorney.
Murray said your team should be people you trust because the power of the advice is priceless and helps you have confidence and comfort that your assets are taken care of and aligned with your values. He noted that many multicultural investors are looking to manage their money with an environmental or social purpose.
Think about a revocable trust, life insurance trusts, a will, and power of attorney for healthcare and finances as building blocks. As your wealth increases, it becomes more complex because you have tax concerns and picking which investment vehicle is the best. This is where your accountant working with your financial advisor is key.
Murray emphasizes the importance of a comprehensive financial plan that considers how life insurance works with your trust and estate planning. You’ll want to work with your team of trusted experts to figure out which life insurance — term or permanent or a combination of both — is most important.
The difference between term life insurance and permanent life insurance is similar to the difference between renting an apartment and owning a home. When you rent, you have a lease for a certain term. When that lease is over, you can renew — but most likely with a rent increase. Likewise, term insurance lasts for a specified period, and when it’s up you can reapply for coverage, but the premiums most likely will go up as you age and your health deteriorates.
Permanent life insurance has a death benefit for your beneficiaries and a cash value that you can use during your lifetime. It’s like owning a home, where you gain equity that can be used as collateral — and your home can be left to your heirs leaving a legacy.
Murray said permanent life insurance is not just for the wealthy, though many wealthy individuals use permanent life insurance to endow universities or leave estate gifts to charities by naming the charity or university as the beneficiary while being able to take advantage of the cash value for other needs.
Murray gave the example of a client considering selling his business. He said the client is considering how the upfront cash and equity can facilitate generational wealth transfers for his kids, nieces, and nephews through trusts and estate planning to continue a legacy and through the creation of private foundations and charitable trusts. Private foundations and charitable trusts use permanent life insurance as a source of funding.
First-generation millionaires and life insurance scammers
Unfortunately, there are some looking to take advantage of others and their financial naivete.
Murray works with clients like entertainers and athletes, and he said they get presented with offers for life insurance because it’s an easier conversation and entry point to financial planning, especially those unfamiliar with investing because life insurance is something they’re familiar with.
However, he said they are often pitched expensive life insurance policies that do not work for them, like million dollar whole life policies. Whole life insurance is one of the more conservative permanent life insurance products. The cash value typically grows at a slower rate than indexed universal life insurance. Simply buying life insurance without understanding the different products, the financial risks, and rewards is not the best strategy.
Thompson said you shouldn’t simply set a financial plan then and forget it. Your plan should adapt and adjust to your life changes. Your life insurance needs will change as you age, and you’ll need to consider children, marriage, divorce, retirement, and caring for aging parents.
As your income and net worth increase over time, you’ll have more assets and more things you have to consider. Thompson said this is when good advice is most valued. He also noted that it isn’t prudent to give advice without understanding the individual’s financial situation and knowledge level. Regardless of your income, your risk tolerance and goals will be different.
Ronda Lee is an associate editor for insurance at Personal Finance Insider covering life, auto, homeowners, and renters insurance for consumers. She is also a licensed attorney who practiced litigation and insurance defense.