What’s the Right Risk Management Strategy for Each Generation?
by Michelle Innis, Commonwealth Financial Network
Every generation of people has different financial and risk management needs, and those needs evolve over time. There is no one product that fits all clients at all stages of life—that’s where you come in. Helping your clients identify key concerns at various milestones is a great way to start a conversation about their present and future circumstances. Talking to clients about life insurance is particularly important, as they may not be aware of gaps in their financial plan, and insurance can be a powerful risk management strategy to fill in those gaps.
Here, I’ll discuss different financial concerns across generations, as well as the types of insurance products that may address each of these concerns. I’ll also offer tips for having an effective insurance conversation.
Concern #1: Paying off debt
Debt, particularly from student loans, is a primary concern for millennials. It is important for these younger clients to be aware that not all student loans are forgiven at death. Private student loans that are co-signed by a parent may obligate that parent to repay the loan if the student passes away. And depending on the loan agreement, the loan may need to be paid back immediately or at an accelerated pace. Most clients will not want their families to have to take on these large student loans in the event of their passing.
Risk management strategy. Generally, term insurance is ideal for millennials. They are new to the workforce and just starting to earn an income. They are also young and likely the healthiest they are ever going to be, so the premium for term insurance will be low and affordable.
How to have an effective conversation. It’s difficult to consider mortality at such a young age, but understanding debt and the risk of passing it on to family members can be a large motivator. When discussing debt with your millennial clients, be sure to go over how term insurance can provide an inexpensive way for them to protect their families and secure their insurability while they are still young and healthy.
Concern #2: Income protection for family
Millennials are just beginning their careers and starting their families. Often, they haven’t considered what could happen to their loved ones if they were to pass away early. A client’s spouse may not be able to pay for the mortgage and other monthly expenses alone, and if the client has children, he or she will need to consider the cost of child care and tuition as well.
Risk management strategy. The client’s financial situation will help to determine the appropriate type of insurance product. In most situations, however, term insurance will be the best option.
How to have an effective conversation. When talking to clients about life insurance, most of them will say they want to ensure that, after their death, their families will continue to live a normal lifestyle. Addressing the cost of continuing this lifestyle can open up a discussion of the need for life insurance. There are things your clients may not have considered beyond paying for the mortgage and child care. For example, who will do the cooking, cleaning, and maintenance on the home if they are not around? Discussing these kinds of questions and implementing a plan to ensure that the family is provided for financially will ease some of the burden.
Concern #1: Balancing insurance needs with budget realities
Gen Xers are more financially established than are millennials, but they still have budgeting concerns. They’re saving for retirement and possibly paying for their children’s education costs. Life insurance is important to them, but they have to align their coverage needs with their budget realities.
Risk management strategy. In most cases, term insurance can be an effective and affordable way to fulfill death benefit needs. Depending on their budget, your Generation X clients could use a blend of both permanent and term insurance. Permanent insurance would provide coverage to meet long-term protection needs, while term insurance would cover the short-term need from now until retirement.
How to have an effective conversation. Gen Xers may be aware of the gaps in their insurance needs, but they may think they can’t afford to fill them. It’s important to work with your clients to identify these gaps and determine how long they will last. After talking with you, your Generation X clients may discover that they don’t need as much insurance as they had originally thought or that they may not need it permanently.
Concern #2: Maxing out retirement accounts
High-earning Gen Xers are maxing out their 401(k)s and IRAs, but still, they may not have enough income to maintain their standard of living into retirement. They might know that life insurance could provide a supplement to their existing retirement assets, as well as a death benefit. But what type of life insurance would best cater to their individual circumstances and needs?
Risk management strategy. Permanent cash value life insurance is a great option for these clients. The cash value of a permanent life insurance policy may be able to provide a tax-deferred supplement to their retirement. The client’s risk tolerance can be used to determine whether variable universal life, indexed universal life, or whole life insurance is most suitable.
How to have an effective conversation. Begin by asking your clients if they are maxing out their qualified savings program, and then determine whether this income will allow them to maintain their desired standard of living. If there is a gap in income, present the idea of using insurance as an opportunity to increase retirement income. This approach can be particularly interesting to small business owners looking to supplement their existing retirement plans.
Concern #1: Outliving assets
Due to healthier lifestyles and medical advances, many baby boomers are living much longer than they anticipated. Their top concerns include outliving their sources of income, as well as not leaving enough assets for their spouse.
Risk management strategy. Permanent cash value life insurance can provide additional assets later in life through withdrawals and policy loans. It can also provide a death benefit to the surviving spouse to fill the gap in income needs. In addition, many permanent life insurance policies either include or have the option to include a chronic illness rider, which allows the insured person to access the death benefit if the need for care arises.
How to have an effective conversation. Longevity is a difficult topic to introduce, but it’s important to discuss life expectancy with clients and determine if they are keeping pace with their retirement savings. Will your client have enough assets to provide support for his or her spouse after he or she has passed away? Does your client have a pension that will terminate upon his or her death? When talking to clients about life insurance, asking these questions can help you introduce certain products as a solution for their long-term planning needs.
Concern #2: Legacy planning
Leaving an inheritance to family members or charity may be an important part of a client’s plan. Your clients may have assets that they never intend to use during their retirement, so they need to find the best way to efficiently transfer those assets to their heirs.
Risk management strategy. Life insurance can be a useful tool to leverage these unused assets. Generally, guaranteed universal life insurance works best for legacy planning, but the insurance product will vary depending on the client’s situation. These policies are often funded using an annual gift exclusion or required minimum distributions.
How to have an effective conversation. Conversations regarding legacy planning usually begin by discussing the client’s goals for money that is not intended for use in retirement. Do they wish to provide an inheritance to their children or grandchildren? Is there a charity to which they want to leave a gift? Once you’ve identified what your client would like to do with the unused assets, you can help determine the best plan for transferring them.
With each generation of clients comes a different set of concerns. The key is to determine the right risk management tool based on where your clients are in the course of their lives. Introducing and navigating these kinds of conversations can be tough, but by doing so, you can help your clients find the insurance products that are right for their needs at this—and any—moment in time.
What are your strategies for talking to clients about life insurance? How do your clients leverage insurance to help protect and support themselves and their families? Please share your thoughts with us below!
Commonwealth Financial Network is the nation’s largest privately held independent broker/dealer-RIA. This post originally appeared on Commonwealth Independent Advisor, the firm’s corporate blog.
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