Why Life Insurance Shouldn’t Be an Afterthought

Many life insurance policies now include living benefits such as LTC and disability coverage.

By Howard Sharfman

A volatile economy and rampant inflation have raised widespread concern among retirees and near-retirees about how long their nest eggs will last. Amid this anxiety-inducing environment, I don’t believe financial advisors are talking enough with clients about the potential benefits of life insurance.

There are a few reasons why they’re shying away from these conversations. First, I think that advisors often don’t want to be reputationally connected with the idea of being insurance salespeople. Second, many advisors don’t know much about life insurance or have a lot of interest in learning more. Third, the advisor does not have the staff and service team to help manage the insurance into the future. These are all sad truths because they hurt the clients.

In addition, advisors may not feel comfortable asking their clients the types of questions that insurance professionals must ask. These could involve health, habits, bankruptcy, or where a client’s money is earned. Many advisors don’t feel they need to know clients at that level. Instead, they predominantly focus on increasing the value of a client’s investment portfolio as much and as quickly as possible while factoring in risk tolerance and downside protection. This is an important job, but it would be more helpful if they included all financial security tools.

A More Holistic Approach

I believe that a wealth manager or wealth advisor should advise not just on the wealth inside a stock portfolio but on a client’s overall wealth considerations. This might entail various aspects related to income or estate taxes, and even whether a client provides financial support for any family members due to health issues.

I talk to advisors all the time about how a more holistic approach would not only be good for their business but is also just the right thing to do for clients. So, I recommend that advisors engage in deeper conversations with their clients that go beyond investments and related concepts. Instead, they should be asking more comprehensive questions and listening carefully to their clients’ responses.

Insurance Insight

When discussing life insurance, a few standout considerations might include peace of mind, predictable and non-correlated benefits, and completion of the client’s investment-plan. For instance, if you told a client that by saving a certain percentage of their income between now and a given retirement age they would be able to retire comfortably, that sounds great but it lacks completion.

That’s because investment goal needs time to come to fruition. If that client only lives one more year, the best investment manager in the world wouldn’t be able to help them reach an investment goal that typically requires 30 years to achieve. Life insurance can complete the concept of retirement readiness and make up for time since it’s immediate, predictable and guaranteed.

In fact, a recent study from Ernst & Young shows that investors with life insurance and annuities in their portfolio have better returns than those that don’t have a holistic plan. This study is a great tool for client conversations and is an example of a quick, actionable, and meaningful resource demonstrating how life insurance completes the concept.

Another important consideration for life insurance is the potentially enormous expense of long-term care (LTC) and disability, which could wreak havoc on a client’s portfolio, economics and retirement. Many life insurance policies now offer living benefits that can include LTC coverage. Such a rider means that the policy would not just help beneficiaries but can allow the policyholder to draw on the death benefit for long-term care, durable medical equipment, home healthcare or related considerations.

Advisors should speak to all of their clients about long-term-care and disability coverage. They should also partner with an expert in the field if they do not want to invest the time needed to become an expert.

Specific Solutions

There are only two types of money when it comes to planning for retirement — enough and not enough. One of my clients is 56 and recently completed a 20-year term life insurance policy. I asked him what he feels his long-term need is for insurance now. He responded that his kids are generally self-sufficient but might need $100,000 or $200,000 each at some point, and that he could spare that amount if necessary. So, I asked if he and his spouse could maintain their current lifestyle in that scenario, and he said no.

The reality is that he probably has as much of a survivor need today as he did 20 years ago. He can’t fill all of it with permanent insurance because the expense is too great at his age. Instead, he bought a 10-year term policy as a stopgap from age 58 to 68, and he’s planning to continue working for at least that long. He also added a permanent policy with long-term-care coverage in order to ladder his insurance similar to how bonds are often laddered.

My client is starting now with $1 million in insurance coverage, which will decrease to $600,000 in 10 years when his term insurance expires and his permanent policy with the long-term-care rider kicks in. To be honest, he probably needs even more coverage to be on the safe side. But determining the right combination is an art and a science, and someone can only buy what they can afford.

A Portfolio of Policies

In most cases, I believe that people should create a portfolio of insurance, including a combination of short- and long-term policies. What becomes more difficult when someone reaches their mid-50s is utilizing life insurance as a savings vehicle. It’s still great for protection and LTC at that age, but only average for accumulation. If a person is between about 35 and 45, I think it’s great for all three considerations.

Matching the asset and liability is fundamental to implementing effective and affordable insurance coverage. Let’s say that someone is interested in insurance that covers college tuition for their kids, paying off their mortgage, replacing their income and paying estate taxes. For college tuition, if the kids are about 8 or 10, then a 15-year term policy could address that issue. Similarly, if the mortgage has about a decade left on it, a 10-year term policy might cover that concern.

For income protection, if someone is young and plans to work for another 40 years, a permanent policy could make sense. But if they’re 60 and expect to work until about 70, a 10-year term policy might be sufficient.

But a permanent policy would be needed if someone wants insurance for estate taxes or is interested in cash accumulation through life insurance. And if a person seeks LTC coverage through life insurance, I recommend a permanent policy. Short-term policies with LTC riders can give people a false sense of security: The reality is that coverage will also expire at the conclusion of the policy.

Addressing Influencers

It’s important to note that life insurance can sometimes be portrayed negatively by TV or social media personalities. Although I could probably find 10 people who say that life insurance is amazing, for every person who believes it’s not a good deal, the critics might have louder voices.

I recommend that advisors and clients to do their own research, make informed decisions and try not to be overly affected by financial “influencers” — who may be more focused on building their audiences than providing the best possible advice. Speak to a financial security professional who actually specializes in financial security.

Additional Reading: Let’s Get Real About Life Insurance

Life insurance is a complex product that needs professional expertise to be best implemented. It’s not something that can be conveniently categorized as good or bad in all circumstances. While the name “life insurance” might carry negative connotations for some people, I believe the emphasis should be on what an asset does rather than what it’s called. It is my job as a financial security advisor to make sure the money outlives the client. This is important work and extremely important to our clients.

If an asset can help protect me and my family, I’m interested in learning more about it. My hunch is that many of your clients feel the same way.

Howard Sharfman, senior managing director of NFP Insurance Solutions, a wealth-transfer consulting and planning firm, has been recognized as an innovative leader in the insurance business for over two decades. His practice focuses on servicing families with multigenerational wealth, family offices, private equity managers and the advisors who serve ultra-high net worth clients. His firm has additional expertise in executive benefits, corporate benefits, general insurance and risk management.





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