People have many reasons for not being involved with a financial planner. Some are deterred because they consider financial planners to be merely glorified insurance sales people. While this is clearly a misconception, one aspect of thorough financial planning is to make sure a client’s assets are protected, and insurance is a valuable tool for this purpose. The planner would be remiss if he or she did not discuss it with clients when appropriate.
One type of insurance that might immediately come to mind is life insurance. Not everyone needs life insurance, but anyone who has a family to support or other people depending on his or her income should have this coverage. It can also be useful to provide a bequest for heirs or leave a gift to charity. Perhaps there is a large mortgage on the home or a vacation property, and the client wants to ensure that it gets paid off so heirs will not be forced to sell if they don’t want to.
Life insurance is a complex subject; there are many different options, and always new twists being introduced. A planner can help clients to figure out whether they need life insurance, as well as how much and what type would be most appropriate.
Another insurance consideration that’s often overlooked is disability income insurance. People will obtain insurance coverage for their property and possessions, but overlook the value of their ‘human capital,’ the ability to go to work and earn a living. For those in the early stages of their career, human capital may be their most valuable asset. Most people take the ability to work for granted, and don’t give much thought to the possibility of accident or illness depriving them of this capacity. But how would they pay their mortgage or put food on the table if they were unable to work?
Those in good health and practicing healthy habits might think a disability won’t happen to them, but catastrophe can strike anyone. It might surprise some people to learn that they are much more likely to need disability insurance than life insurance during their working years.
According to recent statistics, about 25% of those just entering the workforce will have a disability lasting 90 days or more sometime during their career. Social Security might help somewhat, but there is a 5 month period before a person is eligible, and the rules to qualify are very strict, so it shouldn’t be too heavily relied on. But disability income insurance can save the day. Some people have coverage through their employer, but it may not be sufficient, for instance if a large part of compensation is via bonus rather than base salary. In such cases a separate individual policy might be advisable.
Some things to consider when choosing a disability policy are the elimination period (length of time of disability until the benefits begin), the percentage of income it will replace, and the definition of disability. Social Security will pay only if you are unable to perform any job, while most private policies are less restrictive, based on inability to perform your own occupation or possibly a related one. There are other variables and complexities as well, and like life insurance, this is where a savvy financial planner can put a client on the right track!