Preparedness is not a future state, but a right-now imperative
by Kurt FasenMr. Fasen is senior vice president and head of ING U.S., which has re-branded as Voya Financial (NYSE: VOYA) insurance sales support for the retail life, employee benefits and annuity businesses. He has over 20 years of industry experience, including as a distributor. Connect with him by e-mail: [email protected].
Advisors everywhere are well aware of the continuing retirement savings crisis, which shows little sign of changing. Even as lifespans are lengthening and the once ironclad promises of Social Security are weakening, many people have not yet awakened to the fragility of their future financial security.
The 2013 Retirement Confidence Study by the Employee Benefit Research Institute, for example, found that 57 percent of U.S. workers have less than $25,000 in savings and investments, not counting money invested in their homes. Not surprisingly, such a dismal lack of preparedness takes a toll on people’s psyches. In fact, ING U.S.’s Retirement Revealed study1 found that nearly half (48 percent) of respondents did not feel prepared for retirement.
Such facts are frustrating to advisors, especially since most of them continually remind clients and prospects alike that retirement preparedness is not a future state but rather a right-now imperative. Advisors also typically encourage clients to fully fund their employer-sponsored retirement savings plans, such as 401(k)s, to take advantage of potential tax-deferred growth and, in some cases, employers’ matching funds.
Missing Retirement Link: Insurance
It’s possible that advisors can fall short with this advice, however, if they are not also leveraging insurance to preserve a client’s retirement momentum. In an ideal world, clients save like clockwork, building to a well-financed retirement. But, real life is rarely this tidy – and everything from premature death, to illness, to job loss, to other financial constraints can send a retirement strategy into a tailspin.To keep your clients’ retirement on track, here are four insurance-powered strategies to help them at key junctures in their lives.
1. Group Life Insurance – Easy to Buy, Solid Protection
If a client is diligently contributing to a 401(k) but then dies prematurely, the future of any accumulated savings is very much in peril as family members struggle to overcome the loss of income. The sad part is that group life insurance is typically easy to purchase during company enrollment periods.
Sometimes the basic one-times-salary death benefit is provided by the employer at no cost, and step-ups to higher death benefit levels are affordable, often with no required underwriting. Encourage clients to secure this essential protection for their retirement security, if they haven’t already done so.
2. Worksite Benefits – Affordable Coverage for the Unexpected
Many advisors overlook the power of other insurance solutions that are available in the client’s workplace. Once he or she is covered by group life insurance, their 401(k) is still exposed to possible financial stresses caused by serious illnesses or accidents.
It’s an unavoidable fact that many people do not have the cash flow to deal with these types of events. The 2011 National Bureau of Economic Research Financially Fragile Households report found that nearly half of Americans are “financially fragile” – meaning that they are unable to access $2,000 easily for an unexpected expense.
The pressure to take out a loan from a 401(k) can be overwhelming in such dire circumstances: at best, the client loses the benefit of compound interest or, at worst, may not be able to pay it back. Rather than putting their retirement at risk, clients may be able to purchase critical illness or disability coverage with a small monthly deduction from their paychecks. The beauty of these policies is that the payable benefits they provide can be used for anything, including a client’s mortgage or car payment. With this protection, the impulse to tap into the 401(k) is greatly diminished. Make sure you explain the importance of worksite benefits as an alternative to accessing a retirement plan for unexpected emergencies.
3. Individual Life – Protection Plus Financial Flexibility
The first two insurance categories above – group life and worksite benefits – provide quick, typically tax-free money that can help to preserve the integrity of a client’s vital retirement savings, what ING U.S. likes to refer to as “orange money.” With these protections in place, advisors can help the client explore individual life insurance options that bring more financial flexibility into the retirement equation.
This conversation may be an eye-opener for clients. According to a 2012 ING U.S. consumer insurance study2, respondents were most familiar with life insurance’s protection benefits (the death benefit), placing the greatest value on uses such as replacing lost income (26 percent) and paying off debt (23 percent). By contrast, very few respondents highlighted life insurance’s ability to protect retirement savings (4 percent) or build wealth (1 percent).
As we noted, 401(k) plans are the primary mechanism for retirement savings. But, in some cases a client may be maxed out in a plan, or the employer may not offer such an option at all. A cash-value life insurance policy provides the ability to accumulate cash value that may provide some financial flexibility later in the client’s career. Just because an employer’s pension calculus or Social Security’s rules favor a specific timeframe for retirement doesn’t mean it’s what your client would prefer. By putting money into a life policy, the client may be in a position to retire a little earlier, taking out supplemental retirement income as needed on a tax-favored basis. Encourage clients to consider the benefits of individually-owned cash value life insurance to provide additional income when other plans are maxed out or are unavailable.
4. Annuities – Income Security When It Counts
Advisors know that annuities are insurance contracts, though many clients might not make the connection. While withdrawals from 401(k) accounts are commonly used to create retirement income, many people are concerned about outliving their savings, particularly considering increasing life spans and continually rising health care costs. Today, uniquely-designed income annuities can play an important role, providing a certain amount of annual guaranteed income, typically with upside potential based on interest rates or some other mechanism. This reliable income also may help clients avoid becoming jumpy when market changes potentially impact their 401(k) account values and the income those values might provide. Help clients understand the importance of reliable income provided by an income annuity so they can worry less about income and more about enjoying retirement.
A Holistic View of Retirement
Despite of their power, these four insurance strategies often are not front-of-mind for many advisors, who view their primary focus as creating retirement solutions. Yet, these solutions can be fragile – and they don’t need to be. A more holistic view of retirement planning – one that harnesses effective employer-sponsored and individual insurance programs – can preserve clients’ retirement savings momentum and deepen their bonds with the advisors who bring these often-overlooked insurance solutions to light.
1 Retirement Revealed findings are from an online survey conducted by ORC International in October 2011. Respondents were 4,050 adults between the ages of 25 and 69 who are employed full-time with an annual household income of $40,000 or greater. Data was weighted to make the results representative of the U.S. population.
2 Insurance Revealed findings are from an online survey conducted by Praxis Research Partners in July 2012. Respondents were 1,006 adults over the age of 25 with an annual household income of $50,000 or greater. Data were weighted to make the results representative of the U.S. population.