The mere word “insurance” may invoke a variety of negative client responses, ranging from a mere negative thought to an urge to flee. These responses have been reinforced by years of aggressive sales practices by insurance salespeople. The truly comprehensive wealth management provider will be licensed to sell insurance and, in contrast, approaches a sale of insurance as an important part of client’s financial solutions. The lack of insurance planning can be devastating if the client or family suffers an illness, injury or death.
One of the first questions an insurance-licensed financial advisor should ask is if his/her client has life insurance. A single male/female with no children typically does not need the product, but once a spouse and child enter the picture, the discussion of a term policy or perhaps term plus a permanent insurance policy (whole life or variable universal life) should begin. The question of how much insurance coverage should a family have is a subject of exhaustive debate; our firm typically recommends seven to ten times annual earnings plus debt with a combination of 75 percent term life and 25 percent permanent life insurance. This is merely a rule of thumb, and each families situation should be carefully considered as additional or less need may be more appropriate. The cost of necessary child care and loss of the primary caregiver’s income underscores the need for this coverage, among other additional costs created by an untimely death. If either spouse passed, the loss of income can be covered for many years, and the mortgage and other debt may be paid off. The lack of life insurance for a family with a modest nest egg may result in wipe out the savings. For a family without a nest egg, it can cause financial catastrophe.
Health insurance offerings have changed drastically due to the steep rise in health insurance costs. Many employers either drop coverage altogether or reduce their employer contribution, placing more of the financial burden on the employee. The more fortunate of employees work for larger, well capitalized corporations that spread their health care costs among a larger pool of employees, so employee cost is low. If you’re not one of the fortunate ones you’ll need to consider alternatives and those alternatives can still be expensive, less comprehensive or not even attainable if health issues are prevalent. Many policies can now be purchased on-line. One way to keep monthly costs low is to consider a high deductible plan. You are still receiving coverage, but at the same time keeping your monthly out of pocket expenses lower. Anyone should have some type of coverage; whether it is a full comprehensive plan or just a catastrophic plan. If employer provided coverage is not adequate, consider a supplemental plan. A major illness can easily wipe out savings.
Did you know that you are far more likely to be injured or disabled than killed in an accident? Disability insurance is another important insurance product for wage earners, especially in certain professions. Surgeons, dentists, carpenters, electricians or any person employed in a profession that works with their hands should consider disability insurance to replace any inability to perform their job duties if injured or become ill – either for a period of time or if permanently disabled. Of course, any worker that is the primary wage earner in their family that is concerned with becoming injured or ill should consider disability as well, regardless of profession. Some employers provide this coverage – especially those in potentially hazardous professions, but more often they do not. It is generally cheaper to purchase coverage from your employer, but you’ll need to first determine whether coverage is appropriate, then whether coverage is provided at work, and, if so, if this coverage is adequate. Sometimes it is appropriate to supplement a company policy with an individual long-term policy when future financial needs are considered. Keep in mind that some relief to a disability is provided by worker’s compensation (if the injury occurs at work) and social security disability benefits. When asking your advisor/agent about individual policy elements, understand the benefit period and elimination period. Of course, you’ll need to make sure your policy provides adequate coverage. Most long-term disability policies provide a replacement of up to 60 percent of base salary to a maximum of $5000 per month. Make sure you read the in detail about what disabilities are covered. Policy premiums vary greatly depending on coverage and riders.
Planning to pay for health care needs in retirement has typically been postponed in the face of declines in investment portfolios. This does not diminish the importance of considering long term care (LTC) insurance. Many studies estimate that 50 percent of adults will need some form of care in their later years. Consider that the average cost of health care in Austin, TX is $187 per day for a private nursing home or $68,255 per year. The average cost of an assisted living facility is $3,544 per month or $42,528 per year.1 If you want a highly-regarded or fancier facility, you may pay substantially more. While the average stay in a nursing home is generally less than three years, this expense can put a major dent in retirement savings or wipe it out completely. One study showed that 62% of personal bankruptcies were the result of excessive medical bills.2 Don’t wait until your sixties to address the need. The younger a couple is when they quote LTC care rates, the lower the annual cost. Most insurers offer a “couples discount” that offers a substantial reduction on the annual premium. Riders tend to be complex and extensive, so consulting your advisor/agent is a good idea. Worried about not using the policy? Consider the new hybrid products that offer universal life insurance that come with accelerated-death benefit riders to cover LTC needs.
Medicare supplement insurance is designed to provide benefits for certain medical expenses not covered by Medicare. For many seniors, these expenses can be significant, so it may be a good idea to engage in a cost-benefit analysis to determine whether purchasing a policy is a good idea. The best time to buy a supplemental policy is within six months after enrollment in Medicare part B. This is the only time insurers must accept you regardless of preexisting health conditions. Another important fact is that benefits are identical for all companies offering a Medicare Supplemental Insurance plan. Not only are the benefits identical, but the claims paying requirements are also almost identical. The key here is that premiums do vary, so it pays to shop around. Finally, be aware that premiums are adjusted annually to keep up with inflation, so, potentially; your premiums could increase annually. Make sure you purchase an “issue age” or “community rated” (ask your agent!) policy with the lowest premium. They are slightly more expensive up-front, but the premiums don’t increase every year just because you get older.
It’s a good idea to review your risk management strategy every five years or whenever there is a major change in financial goals or family circumstances. It’s as important as planning for retirement. Just as you cannot afford to ignore putting away earnings every month so money is available in retirement, you cannot afford to not plan for an unexpected, illness, disability, or death that could deplete that very same retirement nest egg.
1Source: John Hancock 2008 Cost of Care Survey
2Source: Harvard University