When it comes to your clients’ risk management and insurance needs, you might use financial planning software to present various planning topics, goals, and needs separately. This can make it easier for you and your client to assess and tackle each issue individually. The downside of this approach is that it doesn’t clearly show how a shortfall in one goal could threaten another.
I’m not suggesting that you abandon the planning tools you already use. I am saying it’s crucial to understand how insurance fits into clients’ overall financial picture. When clients are underinsured, their entire financial plan may be at risk.
Dealing with insurance needs as a stand-alone topic is okay if clients are properly insured. But when they’re not? It can be disastrous. Most planning topics can be addressed by looking at a variety of solutions; when situations change, the client’s plan can change accordingly. For example, if a client isn’t on track to meet his or her retirement income goal, some options include reducing expenses or working a few years longer. But when an unexpected event such as a death or disability occurs without having appropriate insurance coverage, the impact on other goals can be enormous. Further, attempting to stick to a tighter budget or having the spouse work for a few extra years probably won't be enough to get those other goals back on track.
From a strictly mathematical viewpoint, when a death or disability occurs, the family faces a loss of future earnings. Insurance is intended to replace those earnings. It can support their current lifestyle and expenses, plus enable the family to continue saving toward long-term financial goals.
By ensuring that your clients have proper coverage, you’ll strengthen your relationships and further entrench yourself as their trusted advisor. Even if you’re simply establishing small term policies for younger clients, positioning yourself as an insurance expert can open doors to bigger opportunities.
To start, divide your clients into groups based on their insurance needs or by insurance product. These groups will look different depending on your book, but here’s a sample breakdown:
- Young families: Early in their planning life cycle, possibly with young children, these clients typically need life and disability insurance.
- Single clients: Unmarried clients should think about replacing their income in case of disability.
- High-income earners: These clients are generally the best candidates for permanent life insurance, particularly retirement supplement-type strategies.
- Pre-retirees and early retirees: Long-term care becomes a concern for these clients. Depending on their asset levels and goals, legacy and estate planning may also be topics to consider.
Next, let’s take a look at how to address each group’s general insurance needs.
In the insurance planning spectrum, these clients’ needs are generally the most straightforward. Even those who haven’t been educated about insurance will likely understand that their income is crucial to their family’s financial security. But how much coverage do they need?
The calculations themselves are relatively simple, and a variety of life insurance needs calculators are available through financial planning software. Keep in mind, though, that these calculations are estimates based on a set of assumptions. The number you calculate isn’t the exact amount of coverage the client needs, but it will give you a starting point and a mathematical backing for explaining the need to your client.
Unmarried clients may not think they have to worry about insurance coverage since they don’t have families to provide for. In some respects, that reasoning is correct. But even clients without a spouse or children may have goals that could require income replacement. Perhaps they plan to pay for a niece's or nephew’s college education or to help their parents live comfortably as they age.
More important, what if the client becomes sick or hurt and can’t work? Disability insurance is something of a misnomer, as a policyholder doesn’t need to be disabled in the way clients might assume. Under a policy that protects a worker in his or her own occupation, disability simply means that the client has an illness or injury that prevents him or her from being able to fulfill the primary duties of the job.
For your high-income clients, consider using life insurance as part of a retirement savings strategy. When a client has maxed out his or her qualified retirement savings options, is properly funding shorter-term goals, and is looking for an additional retirement savings vehicle, this can be a worthwhile approach.
- Life insurance cash values accumulate tax-free.
- As long as the product is not a modified endowment contract, income can be removed from the policy tax-free if managed properly.
- Different insurance products that can be used for this purpose include variable universal life, indexed universal life, and whole life policies.
Essentially, you need to weigh the tax advantages of using a life insurance policy against the additional costs of the policy itself. It’s important to note that policies used for this purpose must be carefully designed and continually monitored.
Pre-Retirees and Early Retirees
For older clients, a major concern is potential long-term care costs, which could cripple an otherwise solid retirement strategy. Traditional long-term care insurance may not be the answer for every client, however. Some clients may be better served by life insurance with long-term care benefits, linked-benefit or asset-based products, or annuity products with long-term care riders.
Other planning opportunities may arise with retirees who intend to leave an inheritance. Some clients may also be facing the possibility of significant estate taxes. Business owner clients may be looking for an efficient way to pass on their business interest and could have a mix of heirs (some involved and some uninvolved in the business itself). Life insurance can be used to address a variety of legacy and estate planning goals, providing a clear, fixed benefit to heirs that typically won’t be subject to income taxes, may avoid estate taxes if owned outside of the estate, and generally won’t be affected by financial markets or other risk factors.
Protecting Clients at Every Stage
At each stage of clients’ lives, they face a variety of threats that could derail their financial plans. Although these possibilities may be emotional to discuss, doing so is essential for their financial well-being. By identifying threats to their financial plans, opportunities will likely follow as you help provide appropriate insurance solutions designed to keep clients on track to meet their goals.
Do you use insurance planning as a retirement savings strategy? Do you rely on financial planning software to determine clients’ insurance needs? Please share your thoughts with us below!