As if you don't have enough on your plate--reevaluating client risk tolerance, rebalancing portfolios, developing plans to bring goals within reach--I am about to add one more essential item to your agenda: Make sure your clients' insurance portfolios are in great shape because they may need them now more than ever.
This came home to me when I reassessed my personal situation. Before the market turned inside out, my husband and I had a nest egg that should have provided a long and comfortable retirement. As I look at our financial landscape today, two things are evident: I need to work until my late 60s, and I must save aggressively if we want to have any hope of returning to our former financial position before I retire. But what if I can't earn an income? Pondering the consequences caused me to review my life, disability, and long-term care coverage. Many of your clients are in similar situations.
Many advisors say that they are uncomfortable bringing up the subject of insurance if their sole focus has been on the client's investment portfolio. It is time to get over your reluctance. Clients are more receptive to conversations about helping to protect their family's financial future than they were just a year ago. Well before their scheduled annual review, consider sending them a letter saying that an insurance review will be on the meeting agenda. If you have a personal story or experience about why insurance should become a priority, share it with your clients in the letter.
Make It Real
Many financial professionals start the insurance discussion by talking about the various roadblocks that can prevent clients from reaching their investment goals. Your clients have probably been concerned about the risk of another market downturn or the threat of a long-term bear market. As a financial professional, you should address other risks as well, including death, disability, long-term care expenses, lawsuits, fires, and so forth. But avoid statistics and bring the risk close to home. With extended families living miles apart, even your middle-aged clients may have trouble grasping the consequences of a family death, of a debilitating health issue, or of the aging process in general. It is your job to make it personal and real.
Ask about the changes that have occurred in your client's life since he or she purchased insurance. Is there something going on now that concerns your client--an aging parent, a special-needs child, health challenges, an impending retirement, and so forth? How does your client feel this has affected his or her financial security?
A few years ago, I met with a business owner who was inquiring about key person insurance. I asked him to imagine that he had died the night before. "Everyone arrives at work this morning, but you are late. Your wife comes to the office to deliver the bad news," I said. "Jim, what would you want to happen at your company over the next week . . . and over the next six months?" He said that he would want all his contracts fulfilled and his clients satisfied. We talked about what that would take, and I suggested that he write a letter to his business manager expressing his wishes.
Moving on from there, I asked him to imagine that he was an employee who had just gotten the bad news. What would his reaction be after the initial shock and sympathy for the family? Would he think, "I have to brush off my resume because I have two kids getting ready for college?" We developed a plan that would reward employees for staying until those contracts were wrapped up, and I asked him to write another letter to all of his employees explaining how he planned to provide for them.
All of this came at a cost that we built into his key person life insurance. When we next met, he invited his wife, business manager, and attorney into the meeting to tell them his plan and how he was financing it. What started out as a simple transaction turned into an exploration and resolution.
Sufficient and Efficient Insurance
The next order of business is determining the right amount and the right kind of insurance. Does your client think his or her current level of coverage is about right? What does your client like about the insurance products he or she has now? What would your client change? Is the selection of beneficiaries still valid? Is it consistent with the estate plan?
Too often the insurance analysis is limited to substituting a similar product at a lower price rather than looking at what the client needs in coverage today. Most financial planning software packages that project retirement shortfalls will automatically produce a life, disability, and long-term care insurance need with little additional input. The art is selecting the best product for the situation; it is not that one type of insurance is better than another but that one might be more appropriate for the client's needs.
The conventional choice has been to cover the survivor need with term insurance until the insured person retired. But that was yesterday. With investment portfolios down, and with predictions of higher taxes, longer life spans, and a prolonged bear market, life insurance may remain important well into retirement.
Is the existing term policy still appropriate? How long is the premium guaranteed to stay at its existing level? When does the conversion privilege expire? What kind of products can the term be converted to and are they competitive? Compare the existing product to today's term substitute: a universal life (UL) policy with provisions that keep the policy in force even if the cash value is depleted. These products add flexibility by allowing the policyowner to shorten or extend the guaranteed period by changing the premiums. And the policyowner can choose to prepay the premiums during his or her working years. But don't be misled by the nickname "no-lapse"; the UL policy's guarantee can be affected by withdrawals, loans, or other factors. Read the policy details carefully.
Replacement vs. Policy Management
Don't be tempted by the promise of lower premiums to replace a policy prematurely. You get what you pay for. With the required adoption of the 2000 Commissioners' Standard Ordinary tables, today's products don't afford the cash accumulation potential of older products. While that may not seem important if it is the death benefit you are buying, think of cash accumulation as trade-in value. What will the trade-in value be in 10 years when the next generation of life insurance policies offers features that better fit your client's needs?
Another trap is to justify a replacement by comparing the policies' cash value projected 20 to 40 years into the future. The insurance company can no more predict the future than you or I can. Take a short-term point of view and look at the next 10 years. And since we never know what life will bring, don't discount the importance of having the surrender charges behind you so that the cash value is available for emergencies.
The solution may not be to replace the existing coverage but to manage it better. Whole life premiums can be reduced with dividends and accumulated paid-up additions. You can change any number of factors in a UL policy. The point is that there are many good reasons to replace an existing insurance product, but before considering a replacement, be sure you actually read the existing contract, understand the features, and analyze a current inforce ledger.
Trust-Owned Policies as Legacy
If the irrevocable life insurance trust was sold with the idea of "paying for estate taxes," there may be little incentive to pay premiums now that the client feels less prosperous and the estate tax exemptions have risen to $3,500,000. Before surrendering the policy, consider that life insurance is a cost-effective way to create wealth and doesn't require transferring large amounts of wealth today.
So instead of concentrating on taxes, focus the discussion on the larger theme of "exploring your legacy." What does the client want to leave for his or her children and community? Here is where insurance can be the simplest solution to fill the gap between what the client wants and what he or she is able to do.
Your clients already trust you with their investments; help them plan for their family's financial future, too. An insurance review is one simple way to ensure that your clients have enough of the right type of coverage and that they have chosen the right beneficiaries.
Tere D'Amato is the vice president of advanced planning at Commonwealth Financial Network in Waltham, Massachusetts. She can be reached at firstname.lastname@example.org.