Potential disability is the most under-addressed topic of conversation between financial advisors and their clients.
Life insurance coverage is also frequently overlooked.
Asset-Map recently conducted a survey of 225,000 households to determine whether clients would generally be underinsured in the event of a loss of life. The data revealed that over 14,000 clients were “grossly undercovered” (with an exposure of at least $1 million) relative to their income, adding up to approximately $43 billion total in underinsurance.
Another study we ran for the same 225,000 households indicated that average household debt, typically due to a mortgage, closely matched average annual household income. But average life insurance coverage, including both household parties, was only about three times income.
This data clearly demonstrates a lack of communication between advisors and clients in regard to human life value. Although it’s common to insure assets like a home or car for their full value, too many people are underinsured relative to the economic impact they will likely generate in their lifetime.
A person’s ability to work is critical because paying debts, covering capital expenses and generating long-term security all typically depend on consistent income. As financial advisors looking out for our clients’ best interests, we must do a better job of preventing uninsured and underinsured scenarios.
That starts with assessing why the issue is occurring in the first place. Are advisors uncomfortable having life insurance conversations because we feel more knowledgeable about investment management? Are we uncertain how to communicate the human life value that an individual can generate for his or her household?
Opportunity to Initiate Conversation
I believe the data we’ve uncovered offers a great opportunity to initiate an industry conversation. The percentage of Americans who own life insurance has greatly declined in recent decades and it’s probably a systemic problem. Although some clients might not want to discuss life insurance as part of financial planning, the hard truth is that untimely death can destroy a family legacy unless appropriate preparations are made.
In many instances, life insurance has been the pivotal reason why a family could afford to keep their home after the death of a parent. Unfortunately, there are also many instances of people unexpectedly passing away without a policy and leaving their dependents in difficult financial straits on top of the emotional loss.
Some people might choose to forgo or cancel coverage because they believe their spouse makes enough money to render a policy unnecessary. But what happens if both spouses die in the same accident and leave children behind? In addition to the emotional trauma they must endure, survivors can find their financial futures fundamentally altered by the absence of an adequate life insurance policy.
The potential consequences are too severe for this topic to continue being under-addressed. Whether a client expresses reluctance to pay life insurance premiums or an advisor doesn’t feel comfortable discussing the subject, greater effort should be made to explore available options. The data depicts a potential crisis of inadequate coverage and it’s up to us to help address it.
Adam Holt, CFP, ChFC, is the chief executive officer and founder of Asset-Map, a company that develops visual communication tools.