Premium Advice — Severance planning with insurance

Last month, I wrote about the Worskis*, a couple in their late 50s who had recently found themselves out of work due to economic challenges facing their now former employer. Click here to read that article.

Many of you had further ideas and questions. I’ll address a few of them in this space.

1. The Worskis are in their late 50s. What kind of disability protection are you recommending to them, to provide benefits into retirement?

Many advisors look at disability insurance as a protection plan that is only viable to recommend until a client reaches his late 50s or possibly early 60s. This is primarily because many disability plans only provide income protection until age 65. Another factor at play: the Worskis are about to start their own business, and do not have a track record of self-employed income. Underwriters need a history of income from the insured individual to ensure that a client is buying disability coverage to protect against lost income, not generate better income on claim than when they’d be working. The risk of anti-selection is real if clients are financially better off disabled than when working.

Regardless of the lack of income history in their new ventures, most carriers have introductory plans for new businesses that can provide a base level of protection for between $500 and $2,000 per month. In addition, multiple carriers have accident-only coverage for the senior years, potentially up to age 90, that can provide disability income in the event of an accident-caused disability. Benefits may reduce in later years, but an accident-only base with potential for a sickness rider can provide quality protection for these situations.

For the Worskis, they are confident that they will be able to make supplementary income for 10 to 12 years, creating a need to protect that income well past the age of 65.

2. Why didn’t you discuss critical illness (CI) or long-term care (LTC) insurance for these clients?

These are important products for many clients and should be a key consideration for everyone. By no means did I intend to diminish their importance. However, in this instance, I chose to have the advisor focus on the types of coverage that the clients understood and were in danger of losing after leaving their benefit plan.

So let’s consider CI first. At the age of 58, being approved for CI is in some ways similar to being underwritten for life insurance at age 70. Actuarially, there’s a decent chance that you are within 15 years of a claim. This creates pressure on underwriters to ensure no undue risk is put on the books, and they will look closer at risk factors.

It will be tougher to qualify for CI at age 58 than it is at age 48 or 38. The premiums will increase proportionately as well. While CI premiums at these older ages can still be a better means of creating capital than self-funding for a health event, it could become a more difficult sale.

As for LTC, I would have discussed this as a primary protection vehicle if their fact pattern had been different, for instance, if they hadn’t chosen to continue working in some capacity, and been so cost conscious. Their immediate concerns were protecting against a health event if they couldn’t work, and to minimize overall costs until they had their businesses up and running.

Since LTC creates cash flow in the event of a client’s inability to perform “activities of daily living,” such as bathing, eating, toileting, transferring, etc., but disability insurance creates cash flow in the event that a client cannot perform work duties, disability insurance also fit with their concerns.

Ideally, the potential for all of these products should be addressed with any client, but with a limited budget, priorities will have to be set, and choices made.

3. As an investment-focused advisor, I usually focus my attention in these situations on the pension asset transfer. Do you have any thoughts on when I should lead with the pension transfer versus insurance protection?

It all depends on the client(s) and their most immediate concerns. I do know of an investment advisor who used individual health as an introductory subject for the employees of a plant that was shutting down. He presented a seminar to all employees, immediately generated over $80,000 of premium of individual health sales for benefit continuation, and within six months, ended up managing over $5 million in pension assets from those employees.

However, not everyone will have that exact sales success. Whether choosing to cover all product needs yourself, or team up with a complementary specialist in insurance investments, the choice can be yours, based on your business model. Taking a client-centric approach and uncovering their immediate concerns is always the best means of doing great planning with clients. Whether your main expertise is in investments or insurance, comprehensive planning involves both asset management and protection products. By keeping all tools at your disposal for your clients’ use, you will always be better equipped to provide excellent advice for your clients.

The case described last month was an example of a specific set of facts. Every client situation will be different, and their priorities and concerns will differ as well. By keeping your mind open to all avenues, you hold the greatest chance of success in delivering added value to your clients in this stressful time of need.

*Not their real names.

Chris Paterson is vice-president of sales, living benefits, at Manulife Financial and has over 13 years of experience marketing various insurance products.

(02/09/09)