Advisors Counseled To Assess Clients’ Mortality Risk
A well-known financial services consultant says investment advisors should include the risk of premature death in the mathematical models they use to analyze client portfolios.
Louis Harvey, president of Dalbar Inc., Boston, says professional advisors often talk about the importance of buying a wide range of stocks, bonds and other securities to guard against market fluctuations.
Advisors also speak in general terms about the importance of buying life insurance to protect spouses and children, Harvey says.
But the Sept. 11 attacks and consumers worries about the subsequent anthrax scare, show that advisors ought to take advice about life insurance a step further, he says.
Instead of simply talking about life insurance, advisors should include the risk of premature death in the same sets of equations they use to calculate retirement asset needs, Harvey says.
“The basic idea is to look at mortality risk from a portfolio perspective,” he says.
Harvey has tried to help investment advisors act on that recommendation by posting a guide to mortality risk on the Dalbar Web site, at http://www.dalbar.com.
A client who dies in any given year needs enough life insurance to increase assets to the desired level; cope with the effects of inflation on estate assets; and make up for years of savings lost due to premature death, the guide says.
Until recently, life insurers built most advertising campaigns around the need for death benefits.
In recent decades, financial professionals have focused far more on “longevity risk”the risk of outliving retirement savings. But, at the consumer level, clients still “react much more vigorously to savings on taxes than income for life,” Harvey says.
He emphasizes that tolerance for mortality risk varies from client to client, just as tolerance for investment risk varies.
Advisors might be able to analyze this mortality risk to calm some clients, simply by converting premature death into a risk that can be quantified and included in investment planning, according to Harvey.
Demographic experts say the Sept. 11 attacks will have a noticeable but relatively small effect on the U.S. death rate for working-age adults.
The attacks probably killed fewer than 6,000 people, according to published reports. Meanwhile, figures from the U.S. Census Bureau show that more than 500,000 adults between the ages of 18 and 65 die from all causes every year.
Many U.S. life carriers report receiving few or no attack-related claims.
Reproduced from National Underwriter Life & Health/Financial Services Edition, November 26, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.