The Coronavirus pandemic has impaired the personal and business balance sheets of many clients and caused them to rethink their plans for the future. Uncertainty and a diminished sense of financial security have crept into plans for providing for survivor income, disability income, long-term care needs and plans to provide for heirs.
Insurance is one way to provide for a certainty of result that will enable clients to meet their planning goals. Reviewing and updating insurance coverage can restore a sense of financial security during this uncertain time.
How Can I Provide for My Survivors if Something Were to Happen to Me?
Life insurance is a good way to bridge the gap between what your survivors will have and what they will need. Determining how much life insurance is needed to replace a family breadwinner’s earning capacity involves two steps. First, project how much money is needed to provide for living expenses for the remaining life of the survivor, including major expenses like college, mortgages and comfortable retirement expenses. Second, identify the resources available to meet those needs if you were no longer providing your income to the family—current savings, income expected to be earned by a working spouse, Social Security benefits, etc. Find the gap between these resources and your projected expenses, and that is the initial insurance need. (Note: there are several approaches for determining this gap—which are beyond the scope of this article).
The next step is to determine what type of life insurance fits your needs. Term insurance is often the most suitable and least expensive product for needs lasting no later than someone’s mid-60s in age. Permanent insurance is usually more suitable for needs lasting beyond age 60. Life insurance costs have decreased in recent years as people live longer and premiums have been adjusted lower to reflect this metric and this opportunity alone should incentivize people to revisit their life insurance coverage. Click here to learn more on life insurance and methods to review existing life insurance coverage.
If I Become Disabled, How Will I Support Myself (and My Family)?
Long Term Disability insurance can make up for lost income due to disability. Similar to determining life insurance needs, uncovering disability needs is also a two-step process. First, if you were to become disabled tomorrow, what expenses would you need to cover without having any earned income? What new expenses may be required, or would you be able to adjust your lifestyle and expenses to a lower level? Second, what resources do you have excluding your income—as above, savings, another working spouse, and Social Security perhaps. The gap between these needs and resources represents the appropriate amount of long-term disability insurance for you.
While long term disability insurance can fill this gap, it is important to understand that policies vary widely in their ability to provide benefits. The best policies provide benefits if the insured is unable to perform the duties of their own occupation—even if they could perform the duties of any occupation. Less generous policies only provide benefits if someone is unable to perform the duties of any occupation. That is, if they can perform any occupation even if it has nothing to do with their prior position, they receive no benefits. Coverage can be provided by an employer and/or an individual policy. Employer plans often—but not always—provide limited benefits at low cost. Individual policies provide greater benefits—at a much higher cost. It is important to understand that if you make premiums payments directly the benefits are tax-free. When premiums are paid by your employer the benefits are taxable. These policies can be complex so read the fine print carefully to determine under what circumstances benefits are paid and select the right plan for you.
How Will I Pay for Care When I Get Older?
Long term care (LTC) needs are increasingly on clients’ minds with people now living longer. Increasing longevity is resulting in more people considering long term care insurance to fund elderly healthcare expenses due to frailty, Alzheimer’s, and other health problems. In past years, there were only limited (and expensive) options for providing care through assisted living facilities and nursing homes. Today, there are additional (and less costly) options available including home health care, adult day care and continuing care retirement communities. Identifying the LTC need is similar to the analyses above—how much will care cost and what will be the resources available to meet those needs? Cost of care ranges from relatively inexpensive home care to very expensive nursing home care. Resources may include savings and the availability of family members to provide care.
The types and costs of long-term care (LTC) insurance products available have changed dramatically in recent years. When LTC products first came on the market 20+ years ago, the insurance industry severely misjudged costs. Those products were priced too low and, as a result, have experienced dramatic premium increases in recent years. Newer products have more realistic—albeit higher—pricing and more funding options. Some products are funded with periodic premiums while others are funded with a lump sum up front. Many new policies have guaranteed premiums and offer a return of premium option if the policies are not used.
How Can I Provide for My Heirs?
As clients revisit their estate plans, they may consider if life insurance should play a role. Life insurance can complement client estate plans in three ways. First, life insurance provides liquidity needed to pay taxes, expenses, and/or provide for survivor income. Second, life insurance provides a hedge against estate strategies that do not fulfill their objectives. Below are two examples where life insurance can provide an effective hedge.
- Some estate strategies work best if you live a long time—for example, gifting funds out of your estate and successfully investing them over a long period of time. An early death decreases the odds that this strategy will succeed—and life insurance can provide a hedge against that early death.
- Estate strategies may also depend on the successful growth of the assets transferred—and that may not happen. Business and/or investment assets may decline in value after a transfer. Life insurance can provide funds to offset those asset declines upon the death of the insured.
Finally, some clients want to assure that they leave their heirs a certain amount—no matter what happens to their balance sheet. Life insurance can provide peace of mind that they will achieve that goal.
Properly arranged, life insurance can provide both an income and estate tax free benefit to heirs. This can be facilitated through the use of an Irrevocable Life Insurance Trust (ILIT). Additionally, the most common product used to fulfill estate goals is a Second-to-Die policy, which insures two individuals and pays out at the death of the second spouse when estate taxes are generally due. Due to improvements in mortality and premium guarantees, these products are priced more attractively today than they were in the past.
Coronavirus Impact on Purchasing Insurance Now?
The insurance industry has developed creative solutions to address the difficulties involved in medical underwriting using traditional methods during the Coronavirus pandemic. No one wants to have a medical exam conducted by a stranger in their home right now. Doctor’s offices are not able to process requests for medical records. New methods include having the applicant access their own medical records online, prescription drug records, lab tests done for prior medical procedures, etc. Some carriers are loosening their requirements for testing for certain face amounts of coverage.
As a counter to the above, some underwriting restrictions are being put into place. Some carriers will no longer insure applicants at older ages (over 70) and have put a temporary freeze on others—those who have traveled overseas within certain time periods, for example.
The Coronavirus pandemic has caused many clients to rethink their financial plans and identify areas of concern related to financial security. Insurance can be one way to restore that financial security.
Call your Round Table Wealth Management Advisor for assistance in updating your financial plans, including a comprehensive insurance review. The review will make sure your products are the most appropriate and cost effective in our current and uncertain environment.