In the coming years, many more carriers will offer products that allow owners of permanent policies to convert the cash value or death benefit into a single premium immediate annuity-like life income option.
So predicted Michael Staeb during a panel discussion of young advisor team (YAT) members at the career conference and annual meeting of the National Assocation of Insurance and Financial Advisors, being held in San Diego Sept. 6-8. The Saturday “YAT Forum,” attended by advisors under age 40, alternatively explored health-related risks that clients must face, how advisors can establish a personal brand, the financial concerns of women and social media best practices.
Protecting against three risks
Staeb, a principal of Staeb Brokerage, identified dying too soon, living too long, and getting sick “along the way” as the three top health-related risk clients must plan for. Too often, however, they spend more money than necessary for financial protection because advisors fail to bring to the client’s attention cost-effective solutions.
In respect to life insurance, said Staeb, one such option is laddering: buying multiple policies, each insuring for a different fixed term, rather than purchasing a single policy covering an insured’s full income replacement needs.
In Staeb’s example, an insured who needs $2 million in coverage buys four policies. Each carrying a face amount of $500,000, the policies include three term life contracts (10-, 20- and 30-year term), plus a permanent life policy.
As the insured ages, Staeb said, the amount of coverage needed to protect against a premature death declines. Hence the rationale for implementing a laddering strategy.
Turning to the second risk–outliving one’s retirement savings–Staeb said there are “a ton of” lifetime income annuities on the market to address this issue, but few offerings among life products that pay benefits as an income stream. He noted he was familiar with just two carriers (he did not disclose the companies) that offer a fixed period income benefit built into a guaranteed universal life contract. Neither carrier offers an income for life option.
One of the products allows policy holders to accelerate about 98 percent of the contract face amount (recommended only after age 85) as a 10-year income stream. “This income stream can be used as back-up savings if your other retirement assets run out, thus helping you if you need to bridge the last few years of life expectancy,” said Staeb. “This option is especially important for women, who tend to live longer than men.”
As to the third retirement risk, a disability that would prevent an individual from working, Staeb said advisors must learn to distinguish between two life insurance policy riders: (1) a waiver of deductions; and (2) waiver of specified premiums. He said he recommends the latter for permanent policies, as it would fully replace the policyholder’s premium payments, including amounts thereof directed to the cash value component. The waiver of monthly deduction, in contrast, only covers a policy’s cost of insurance (COI).
Staeb added that, after earlier opposing chronic (or long-term) care and critical illness benefit riders on permanent life policies, he now supports these indemnity options because (as he learned in a recent seminar) of the riders’ flexibility.
With these indemnity benefits, even if you’re not incurring disability-related expenses, you can get the benefit and use it for other needs, such as paying off a mortgage or replacing retirement plan contributions. To protect again all contingencies, an advisor might recommend a client purchase two life policies, each carrying one or the other rider.
“There are pros and cons to both riders,” he said. “Having both options available in the event of an accident or illness is better than having just one that may or may not pay, depending on the source and duration of the illness.”
“Lean In” and on Each Other
How can female advisors positively impact the lives of women? An obvious starting point would be to engage them in financial planning discussions.
Yet too often, said panelist Deanna Brown, advisors fail to do so. The main reasons: The male spouse recruited the advisor; or by disposition or interest, the man in the family is the one who handles the finances.