Planning Around The Myths of Life Insurance
August 10, 2016 by Greg Riedel and Sean Scaturro
Quite often, your clients are objecting for all the wrong reasons
With increased health care costs and the rising costs of living and investment volatility, your clients are facing more challenges and are equipped with fewer resources to count on to meet their long term goals.
Given these challenges, a complete financial planning picture should be captured. Envision that you are building your client’s home; you start with ensuring that the foundation is strong and can withstand certain stress tests.
That financial foundation is built with a healthy emergency savings account, adequate insurance policies and appropriate cash flow or a spending plan.
Without these basic building blocks, the impact of a life event can be devastating and can prevent goals from being obtained and can also cost an advisor a good client relationship. Putting up the walls, decorating the interior and keeping the house clean are all parts of the ongoing planning process with the common thread being the client’s objectives.
Each generation has differing needs, wants and dreams; each stage of life presents new things to plan for. In effort to help your clients connect their visions to action plans, life insurance should be presented in the context of a full financial plan. Doing so can help to better communicate the individualized value of life insurance as well as help address the different demands of each generation and overcome several myths that many consumers still have.
Myth #1 – I am young, I don’t need life insurance
Millennials are a considerable growing population that tend to shop differently, save more than prior generations and also can be skeptic of financial advice offered to them. Finding new and innovative ways to reach this group can be a challenge. With more and more insurance or financial advice firms moving to a mobile device platform, education and marketing material needs to be interactive, engaging and to the point.
With the various celebrity personas, financial advisors, firms and online tools, customers are riddled with what information to trust and who to turn to for direction. According to a recent Mintel report 56% of surveyed people feel that insurance agents are the best source for information on insurance products.
However, the same report shows that 64% of millennials believe that an online tool or website is the best source for their financial planning needs. And while many young people are taking an active approach in their financial planning needs, many millennials have misconceptions about the costs of life insurance and whether they should have a policy or not.
This presents a challenge for the industry; as financial literacy is a broad topic and not yet mastered by any one firm, the industry is caught in a balancing act dangling between creating paralysis by analysis and making information too short and sweet. Life insurance, namely term life, is still seen as a stop loss by some consumers; It is somewhat reluctantly purchased and thought of as only a temporary need.
Families or individuals that are not providing care for another person may have needs that are lesser, however they still have needs. Forecasting future income and expenses or family changes can help your client understand the impact that a life or health change can have on their ability to get adequate life insurance coverage. This can help equip them with the information needed to make a sound decision on better protecting their future. From a planning perspective, planning for salary increases, the cost of buying a new home or having children should be presented within a plan to illustrate how the client’s life insurance needs will evolve.
Living benefits become increasingly important. Looking at ways to nurture client relationships, manufacturers can focus on product innovation, specifically features like guaranteed insurability riders or enhanced conversion features. These features can paint a compelling picture about the need to prepare for the future, while building in ability to navigate through future liabilities without running the risk of making your client insurance rich and cash flow poor. By engaging your client at key moments during the lifecycle of their coverage, you will better sustain that relationship and be able to help keep their plans on course.
Myth #2 – My employer will provide me with enough life insurance
Identifying an amount needed for life insurance is challenging for consumers for a number of reasons, and while the industry has tried to streamline the decision making process or simplify the algorithms to a consumable format, the consumer decision is still not any easier.
Advisors may not get the opportunity to even talk to the individual client’s needs as many people still feel that group insurance is enough coverage for their families. Most corporate employers provide paid for group coverage by factoring a multiple of the employee’s income, typically two times the worker’s base wages. The U.S. Census Bureau reported that the median household income across all jobs in America was $51,939 for 2014 which would leave the average worker with just over $100,000 to replace income, pay off debt, manage future expenses for education etc.
Considering military benefits, Service members are provided with Servicemembers’ Group Life Insurance (SGLI), which offers a base protection amount of $400,000 for the service member and up to $100,000 for a spouse through the Family Servicemembers’ Group Life Insurance (FSGLI) program.
While a young single enlisted member may feel that the amount is well more than their needs, a more tenured member will likely be liable for a mortgage, have desires for their children to go to college and will have an income that needs to be replaced. Group coverage may be the solution for some, however, for most families it will serve to only soften the financial blow of losing a loved one.
According to the 2014 LIMRA National Insurance Barometer, nearly 4 in 10 adults are only insured with a group policy, many of the surveyed cite cost as the reason that they didn’t pursue individual policies. However, the study also states that two thirds of adults overestimate the cost of insurance by more than double. Additionally, nearly 40% of individuals are simply uncertain of the amount needed or which type to buy. This will continue to be a moving target for the industry with educational material needing to adapt and be able to speak to multiple audiences and demographics that all have very different needs.
Myth #3 – I won’t need life insurance when I am retired, I’ll buy term and invest the rest
Consumer cost sensitivity can prevent some individuals from purchasing altogether, but it can also lend creditability to financial strategies that could be misaligned as well.
With some financial gurus strongly advocating to buy cheap term and invest the difference of what they would have paid into a whole life or universal life policy, their advice could be painting a false picture of security for investors. Regardless of the rates of return used in any analysis, the concept that temporarily planning for one of life’s certainties is short sided.
Inherently, this philosophy relies on the capital markets and an investor’s ability to make a manageable investment plan and more importantly, stick to it. However, when considering the behavioral aspects of investing, the individual investor tends to buy and sell in a herd mentality, selling at the wrong time and investing based on publicized tips or news.
Additionally, the philosophy takes little consideration to the risk tolerance or risk capacity that an investor will need to have in effort to have their needs met by their investments.
Additionally, savers are entering retirement with debt and obligations that have not been as prevalent in prior generations. More and more families are interdependent with parents assisting adult children or vice versa, adult children financially supporting their parents that may have not financially recovered from 2008’s market crash.
A 2015 Transamerica Center for Retirement Studies survey reports that 21% of surveyed retirees were still actively paying for a mortgage and 25% were trying to manage credit card debt. While the buy term and invest the rest strategy can bear fruit assuming life goes according to plan, many retirees are in need to cover financial risks that may not have been in the plan when it was originally created. Additionally, 16% of respondents offered that they were actively creating a legacy or inheritance plan, which if planned for temporarily, may rule out it being achieved.
The changing needs of the client over their working years require more thought and planning than a simplistic stop-loss strategy. The unfortunate “smear-campaign” has consumers thinking of life insurance as a necessary evil and not understanding how it can help to achieve their wants and dreams.
The industry needs to continue making the decision making process easier and products need to be designed with the client/customer needs in mind first. While not all advisors are Certified Financial Planners (CFP®), advisors should be following a comprehensive advice process. The more holistic the discussion, the better that you understand the needs, wants and dreams of your client, the better strategies you are able to design and nurture to ensure that those plans are seen through to realization. ◊