Estate planning. Life Insurance. Guardianship of minors. These are topics that the average client doesn’t even want to see on the agenda. It is a reminder that they’re not invincible; that bad things do happen to good people. A famous movie director once said, “I don’t want to achieve immortality through my work. I want to achieve it through not dying.” Similarly, breadwinners don’t like to think about what happens if they’re gone and their spouse, who has elected to stay home to raise the family, no longer has a source of income. Parents don’t want to decide who is going to raise the children if something happens to both partners at the same time. But it is a subject that should be discussed among family members and with wealth advisors.
SHWM Certified Financial Planner™, Lauren Starks, recently discussed why she is compelled to broach this difficult subject with clients and some of the ways she walks them through the process of determining which and how much life insurance coverage they should have.
Reflecting on her experience with clients, Lauren said, “When we talk about life insurance, clients become apprehensive. Sometimes, I am allowed to see a client’s perception of their own immortality. It’s one of those things we know we need, but don’t want to address. We like to think that we’ll live forever. That we’ll see our children grow up, get married, start families of their own. We dream about retirement and all the things we’ll do when we don’t have to work another day. We know that death is inevitable, but we don’t need to think about that right now; do we?”
In addressing how much life insurance coverage is needed (if any), some clients think their assets are enough. Some think it is cost prohibitive and some simply believe that their partner can just go back to work.
SHWM’s review of life insurance starts by asking the question, “Is life insurance really needed?” According to Lauren, “There are a number of valid reasons for needing or wanting life insurance coverage, but we often find that clients are continuing to pay for coverage that no longer has a meaningful place in their overall plan. If we determine that life insurance coverage is needed, we determine the appropriate amount and type. We want clients to have neither too much nor too little (and be overexposed to risk), instead, something that’s just right for their situation.”
Lauren illustrates with a couple of examples. “If the objective is to insure against a breadwinner’s lost income, we use the family’s living expenses as the basis for our calculations and we may recommend using term life insurance that will provide coverage for a specific period of time. If we are looking to lessen the impact of estate taxes at a client’s death, we may recommend putting a permanent policy such as a second-to-die policy in place.”
Once life insurance is purchased, SHWM’s financial planners periodically recalculate the amount of coverage needed. Financial circumstances and other life changes can mean more or less coverage is called for.
Lauren noted that the absence of life insurance coverage has begun to make an appearance on social media in, of all places, crowdfunding. She says that, “What began as a way to quickly raise capital for a start-up business, has morphed into a way for people to raise money for just about anything. I see social media shares of ‘help me pay for my child to go to private school,’ to ‘help my son go to baseball camp,’ and the one that always catches me off guard, “My spouse just died, we had no life insurance, we need help.”
A personal experience brought this into sharp focus for her. “Recently, I had an acquaintance pass away rather unexpectedly. He was a businessman who had started and managed at least five moderately successful small businesses in the metro-Atlanta area. In his early 40s when the tragedy struck, he left behind a wife and three small children. With liquidity tied up in his businesses, the only assets his wife had was the balance in their checking account. Sure, he owned businesses. He was in partnerships with several people and owned a large, occupied real estate development. One would think ‘a successful businessman like that has his life in order…there must have been in-force life insurance.’”
But, there wasn’t. In fact, there was not even a small policy to assist with funeral expenses. His wife turned to crowdfunding. “I watched in horror as she had to detail why she needed to do this, in hopes of stirring sympathy and charity out of her friends, family, and community. In what should have been a private time for her and her children, instead she described their struggles on a webpage for all to read.”
As financial planners, we spend our days helping clients design long-term plans that enable them to achieve their financial goals. As part of that process, we also assess potential threats like the unexpected death of a family member or key business employee that could thwart the plan. Because SHWM does not sell any insurance products, we are able to offer a truly objective review of a client’s insurance situation.
For more information on our approach to life insurance coverage and other services for affluent individuals and families, contact Lauren Starks (firstname.lastname@example.org) . You may also like our supplemental article on things we look for when reviewing life insurance policies.