It almost goes without saying: the economic downturn has caused significant problems that are difficult for financial advisors to solve. But there is one widespread problem that's relatively easy to correct: insufficient protection against the financial consequences of an early death. Your clients understand and are concerned about this risk; this is why life insurance is so prevalent. The protection of dependents in case of premature death is based, of course, on two pillars: financial assets and life insurance coverage. This is what's left to support dependents when a working person dies.
While the value of most of your clients' financial assets has decreased, I doubt the size of the legacy they'd like to leave has also been adjusted downward. But, how many have increased their life insurance coverage to make up for significant market losses? Your clients have likely done little to replace the assets they can no longer pass on.
A recent survey by New York Life Insurance Company provides important insight on this issue. The study was conducted last spring, prior to the market downturn. A strong majority, 84 percent, were confident they had enough life insurance. But the survey found that many of the respondents had a wide variety of goals for the financial protection of their dependents. Most wanted dependents to be able to replace the income they were earning for at least several years, without having to draw their accumulations down. Indeed, at this time, drawing down accumulations would often require selling equities at reduced prices, which would be an extra burden on long term financial security. When a calculation was done of the amount needed to provide the level of replacement income the respondents desired, this need alone often exceeded the amount of life insurance protection they had.
Most people also wanted their life insurance to cover the costs of their funeral, hospital bills and other final expenses. More than four in ten wanted their mortgage paid off if they died prematurely, so their spouses would not be burdened by payments. More than half of parents surveyed wanted their life insurance to contribute to their children's college education costs. Fifty-six percent were making contributions to retirement savings from their earnings and half wanted to leave money for their spouse's retirements if they died early. This money would be over and above the money they wanted to leave to help their spouses pay for basic living expenses.
When the needs of the survey respondents were assessed, three in five had less than three-quarters of the coverage to meet the needs they identified. Indeed, 48 percent had less than half of their self-identified need. And remember, this was last spring, prior to the tremendous loss of equity and home values.
I imagine many clients are now "gun shy" about risk, and it's difficult to get them to properly re-balance. But the mortality costs embedded in life insurance are so low that it's inexpensive to get clients to the appropriate levels of life insurance protection.
The New York Life study provides useful guidance for the type of discussion you should have with your clients. What would they want to happen if they did die prematurely? Would they want their dependents burdened with final costs? For how many years, if any, would they want to provide income to their spouse? Are the assumptions they made about these needs still valid with their portfolios down 30 percent or 40 percent? Are their retirement accumulations enough to provide the spouse with financial security in old age, and if not, how much would they like their life insurance to contribute toward retirement? Do they want their mortgage paid off, their children's college costs paid for? And so on.
Clients are feeling extremely vulnerable. A discussion of life insurance coverage levels should be high on your list of priorities.
Mathew Greenwald is president of Washington, D.C.-based Mathew Greenwald and Associates.
