As your clients who are 50 and older begin thinking about retirement, insurance becomes an increasingly important risk-management tool.
You cannot look at clients’ insurance needs in isolation, says Heather Holjevac, an independent fee-for-service certified financial planner and an FP Canada fellow. Instead, insurance is part of clients’ overall financial plan and each client’s specific needs are different. For example, Holjevac says, some clients may own their homes, be debt-free and have grown children, thereby reducing their need for insurance.
Other clients might not be as fortunate. They may still have a mortgage or other debt, as well as dependants, including a spouse, children or aging parents.
Some older clients may already have some form of insurance, thanks to prior purchases or employer plans, such as individual or group life; disability insurance (DI); or critical illness (CI) or long-term care (LTC).
In some cases, a client may have bought cheaper term insurance when they were younger in anticipation that they might not need additional coverage in their later years. But they could find that they need coverage after the expiration of their current term policies – which generally expire no later than age 75.
Given differing client circumstances, Alim Dhanji, senior financial planner with Assante Financial Management Ltd. and senior insurance advisor with Assante Estates & Insurance Services Inc. in Vancouver, suggests that you conduct a thorough analysis to determine a client’s insurance needs.
Questions you need to ask include: “Are you the family’s sole breadwinner? What would happen if you die or become disabled? Will you leave sufficient money to take care of debts and other expenses? Will your survivors afford to maintain their lifestyle? How long will your responsibilities for dependants last? Do you want to leave a legacy?”
The answers to these questions will allow you to determine any gaps in insurance by matching your clients’ assets and their needs to their liabilities, says Tony Mahabir, chairman and CEO of Canfin Financial Group of Cos. in Toronto.
Dhanji says clients often assume that their group insurance is sufficient to cover their risks. But, he warns, clients must be reminded that group insurance coverage can change if their employment situation changes. As well, he says, group insurance is usually insufficient and should be topped up with private insurance.
One of the biggest risks that group policies usually cover is income replacement through DI. Typically, DI covers up to about two-thirds of monthly income if a client is disabled, but the amount of coverage is capped at a specified dollar amount. If older clients do not already have DI, it is usually too expensive to acquire. DI coverage runs out at age 65, which means that even if a client acquires DI at, say, age 50, he or she may not derive sufficient value from such coverage.
The same limitation applies to CI and LTC, both of which can be beneficial for your older clients. CI pays a lump sum when a client suffers a defined serious illness, while LTC covers the cost of care.
Holjevac advises that if older clients can afford to buy CI and LTC, buying policies that return all or a portion of the premiums should the client die without using the benefits of the policy is prudent.
As clients get older, they tend to make greater use of the health-care system. A group insurance plan typically covers all or a significant percentage of medical expenses (for employees only).
When clients are no longer working, many assume that the public health-care system will take care of their needs. However, while the health-care system provides medically necessary care, such as hospital, diagnostic and physician services, clients must pay for dental and vision care, some prescription drugs and services deemed inessential.
Dhanji suggest clients get private health insurance to cover these costs. Premiums depend on the plan, as well as the client’s age and health condition. Some plans offer limited coverage without a health examination.
Dhanji recommends that clients who have been members of group plans acquire “follow me” or “rollover” health insurance when they leave their jobs if the option is available. By choosing this option, clients do not have to provide medical evidence to qualify.
Mahabir suggests that clients who are members of associations that offer group health insurance benefits should maintain their membership so that they can benefit from lower group rates.
To ensure that your older clients have adequate coverage, look at the gap between their assets and their liabilities, which is usually indicative of the amount of life insurance required, Mahabir says. This gap is the financial risk clients and their families face.
Dhanji suggests that older clients who may have acquired term insurance earlier should convert that policy to a permanent policy, such as whole life, universal life or term-100. Alternatively, ensure your clients have sufficient permanent insurance so they won’t leave a financial burden on their survivors, but still fulfil their wishes, such as leaving a legacy.
In addition to ensuring the financial security of your clients’ dependents, life insurance can be used to offset capital gains taxes payable at death, leave a legacy, provide estate equalization and pay final expenses.
Although clients may need insurance, the decision often comes down to whether they have enough free cash flow to pay for the coverage. “As age goes up, fewer and fewer people are willing to pay for insurance,” says Lawrence Geller, president of L.I. Geller Insurance Agencies Ltd. in Campbellville, Ont.
In most cases, Geller says, a client does not end up buying the amount of insurance or the product determined by a needs analysis because he or she cannot afford the cost of the premiums.IE