By Linda Leitz
Some financial advisors say, “If you sell insurance, you sell fear, and if you sell investments, you sell greed.” Fee-Only planners don’t characterize what we do as selling, and we prefer the motivation of meeting goals to greed or fear. But it can be difficult to discuss subjects like disability and death without the client feeling some fear of negative uninsured outcomes.
Many consumers see the wisdom of life insurance, so we might not have to point out the need. During working years, and especially when there are minor children in the home, most people who seek our advice will agree they need to act to cover the potential financial loss from the death of a breadwinner in the household as well as financial replacement of the activities of a nonworking caregiving parent. For most of our clients, term policies meet these needs at a reasonable cost.
Mark Maurer, CFP®, president and CEO of insurance advisor LLIS, helps clients decide when to get life insurance. He sees that the best time to lock in low rates is when clients are young and healthy. But he also recognizes that’s when resources seem most limited by the demands of building the foundation for wealth and supporting minor children. Many clients see this as a time of limited resources, so they need to decide where to devote those resources.
Pension maximization is a less commonly used technique that should be considered for the small percentage of clients who have defined benefit plans. Most defined benefit plans will offer a survivor benefit for the nonparticipant spouse. That seems attractive, but it might not be the best option. Maurer points out that, in some instances, a layering of life insurance policies—buying multiple term policies for different periods—can fill the role of a potential survivor benefit from a pension more cost effectively than the reduction in benefits for a survivor benefit. Layered life insurance policies also provide the greatest coverage for an early death and the least for later in life, when less cash is needed.
In addition to layered life insurance potentially being more cost-efficient than taking a survivor benefit on a pension, it’s possible to eliminate the insurance if the nonparticipant spouse dies before the spouse who was employed by the company providing the pension. Also, in some cases, the couple realizes that the surviving spouse won’t really need the pension for living expenses, so the life insurance can be eliminated while both are living. This same approach can also insure against the loss of one of the Social Security benefits at the death of a spouse. If both benefits make a big difference in cash flow for the household, life insurance could provide cash for the loss of the lower Social Security payment.
Maurer points out that young people are much more likely to become disabled during their working life than to die. But because people don’t like to think about disability, they don’t want to insure against it. Another deterrent to many clients purchasing disability insurance is that it tends to be more expensive than life insurance. Underwriters understand the likelihood of disability or death at a young age and price insurance premiums accordingly, so it’s expensive for a young person to get a disability policy. This is especially true of a policy that pays on the disability keeping the insured from maintaining the same career rather than just any career.
For advisors struggling with having clients realize the wisdom of this less popular insurance coverage, Maurer emphasizes that even coverage that is limited in terms of time and amount is better than none. He emphasizes that disability insurance is particularly important for individuals who are the only source of income for their support.
In addition to avoiding the issue of potentially being disabled during their working life, people don’t want to think about needing long-term care. A good planning approach is to include in our conversations with clients the question of how they would handle an expense for care costing between $50,000 and $250,000 a year, says Brian Gordon, CLPC, and president of Gordon Associates Long Term Care Planning (see his article on “Planning for Publicly Funded Long-Term Care Insurance” in this issue of the NAPFA Advisor). We’re planners, so we shouldn’t just figure it out with the client when it happens. Gordon has had financial planners call him and say, “My client asked me about long-term care. Can you get me some quotes?” We should be proactive—not reactive—in addressing long-term care needs, including providing insurance quotes to provide good information for the client to process in their decision. After all, Gordon says, “If you don’t have a plan for long-term care, it could send ‘the plan’ down the drain.”
Some clients may say they’ll “self-insure,” which Gordon points out is not an accurate term. Insurance companies have huge reserves in assets to cover claims and are regulated. A client might decide they can self-fund long-term care, but “A lot of people who got where they are, didn’t get there by self-funding everything,” Gordon says. And many people who could afford to self-fund like the idea of keeping more of their financial legacy intact through the use of insurance. Insurance won’t necessarily cover the entire cost of long-term care, but it can take the edge off fully funding it.
Having a robust discussion and documenting it well is important. Besides fulfilling our fiduciary duty, there could be implications beyond how the client pays for care. Gordon told of a financial advisor who was approached by the adult children of a client who had passed away after having long-term care for some time. The client didn’t have long-term care insurance, and the client’s heirs, who were adult children, asked why there wasn’t insurance. The financial advisor gave a short reply that there was a discussion, but insurance didn’t seem necessary. The heirs all moved their inherited eight-figure investment portfolios from the advisor because it seemed to them that the long-term care discussion was inadequate.
Folks who’ve paid for policies but no longer have a relationship with the selling agent might be able to get third-party help. For example, on a fee-for-service basis, Gordon Associates will work to connect the family with geriatric care managers, help determine if the policyholder qualifies for benefits, work with the insurance company, and connect with other services as needed.
While Fee-Only planners tend to gasp at the idea of annuities and see them as high-cost insurance products masquerading as investments, annuities can serve a purpose. Fixed annuities can be part of a diversified portfolio. And immediate annuities can provide a steady cash flow stream for folks who want that security and don’t have a defined benefit plan. Just as we don’t try to time investment markets, Maurer warns against waiting until interest rates increase to get into these potential solutions.
Linda Leitz, Ph.D., CFP®, is a NAPFA-Registered Advisor in Colorado Springs, CO.
image credit: istock.com/Martin Barraud