Members of the “mass affluent” — those with investable assets of between $100,000 and $1 million — are generally considered to be more sophisticated at planning their financial futures, and they typically rely on assistance from financial advisors. It also is assumed this cohort recognizes that a diversified approach to investing helps limit volatility and risk.
What seems to get overlooked, however, is the diversification of their approach to overall financial planning. In this situation, the best practice is to encourage clients to pair growth strategies with the right protection products, such as life and disability insurance policies.
The results of a recent poll conducted by the MetLife Premier Client Group suggest that protection products, such as life insurance, are underused by the mass affluent. Even more alarming, someone’s income stream is far and away their most valuable asset, yet many are reluctant to think about the possibility that injury or illness could easily prevent them from earning a paycheck, dramatically affecting their future savings. Planning for one’s death or disability is a very difficult emotional hurdle, but it needs to be done. In fact, the U.S. Social Security Administration says that more than one in four of today’s 20-year-olds will become disabled before reaching age 67.
The MetLife Financial Planning Perspectives Poll surveyed adults identified as mass affluent and provided a glimpse into their mindset. The results indicate that there is still work to do when it comes to educating investors on how to implement a well-rounded approach to long-term financial planning.
» Seventy-two percent of respondents said they have a financial plan in place and believe they are on the right track, yet 55 percent said that protecting their assets and growing their assets were not equally important to them.
» Roughly two-thirds of those surveyed don’t know exactly how much coverage they should have in place when it comes to life insurance, disability insurance and annuities.
» Nearly 75 percent of those surveyed are participating in retirement and savings plans, yet a much smaller number of people have invested in protection products such as long-term care insurance (34 percent) and disability insurance (32 percent).
The results of this poll are troubling, but not surprising when I recall interactions I’ve had with my clients. For many, discussing a potential calamity is a painful conversation, but addressing these topics helps explain the importance of implementing defensive planning strategies.
So, how do you start an uncomfortable conversation like this? It helps to take a compassionate yet logical approach. It’s a good idea to ask for permission first, recognizing the difficulty of what you are about to say. But let the client know that they need to do this for the sake of their financial plan and their family’s needs. In the end, the client will be relieved that they have addressed any potential pitfalls and won’t have to think about it again for a while.
First, I go through a fact-finding stage in order to paint the full picture of a client’s current financial situation and what it would look like during a hardship. What would the surviving family members’ financial situation be if their loved one passed away? What are the monthly monetary needs of the spouse and children (bills, expenses, etc.)? I lay out likely scenarios and detail those costs so that the client can start to map out what to expect.
This approach helps the client find a place of peace with their family and their livelihood as well as relief in sitting down and getting these issues addressed.
Let’s assume that, based on our fact-finding process and analysis, the client needs $1 million of insurance to maintain their current standard of living. I’d then start by educating them on the pros and cons of term and permanent insurance.
Term insurance is less expensive, so the client can buy a larger policy, but they might outlive that term and never realize a monetary benefit. That could be considered a downside for some people.
Permanent insurance policies are designed to last throughout a client’s entire life. The benefit will be there when they pass away, whether that is tomorrow or in 40 years. This is certainly a more attractive option, since the client knows they are getting a definite payout to their beneficiaries. But that certainty comes at a cost, which is significantly higher than the cost of term life insurance.
An innovative solution is to blend permanent and term insurance. Let’s suppose the same client buys $250,000 as permanent insurance and the remaining $750,000 as term insurance. They’ll have $1 million in coverage starting tomorrow and for the next 30 years. After 30 years, presumably when the client has fewer expenses (no mortgage or children living at home), the term insurance drops off and goes away, but they have the remaining $250,000 permanent insurance for the rest of their life. This approach helps alleviate some of the uncertainty of life insurance while keeping the costs in check.
The same approach can be taken with long-term care insurance (LTCi). Traditional LTCi is a pure insurance product, like auto and homeowners coverage. If your house never burns down, you certainly are happy it didn’t. But if it does burn down, you’re relieved that you had insurance. Unfortunately, when it comes to our own lives, it’s tough for some people to make that comparison.
To further complicate the matter, clients typically consider LTCi during a time in their lives when they are getting ready for retirement. The cost of the premium, the uncertainty that they will ever need it, and the possibility of the premium increasing make LTCi an unattractive product at face value. Soon-to-be retirees typically are more focused on their projected income streams from savings, investments and Social Security. The added expense and uncertainty over LTCi is often too much to ask of those who are thinking about how they are going to fulfill their retirement needs, even though they know they are vulnerable without the coverage.
This is where hybrid life insurance-LTCi policies come in. This blended product allows the client to get a significant advance on their death benefit for use toward long-term care later in life. It takes much of the uncertainty out of the product because the client knows the premium isn’t going to increase. For example, if a client has a $200,000 life insurance product with an LTC rider on it and they use only half of that amount, the other half is not lost; it is passed on in the form of a death benefit to their named beneficiaries.
These newer products alleviate some of the variability and uncertainty that make life insurance and LTCi unattractive to the consumer. Blending insurance products prepares the client for any outcome. I’m confident that solutions will continue to be introduced to address investing consumers’ needs, but it’s up to us as advisors to communicate the benefits of these products properly to our clients.