Needed: Versatility for Multiple Life Stages

Research Findings:

A survey conducted online by Harris Interactive on behalf of Northwestern Mutual from August 10-14, 2012 among 2,097 American adults ages 18 and older, featured in Insurance Newsnet finds that the motivation behind life insurance purchase and ownership differs considerably by age and lifestyle. Key findings:

  • Younger Insureds (18 – 34) are most likely to have purchased life insurance due to the birth of a child (28%)
  • 55+Insureds: 36% were prompted to buy as a result of marriage; 31% as part of a retirement plan
  • 45 – 54 Year Old Insureds – were prompted by marriage (39%) ; Retirement planning (25%) and homeownership (25%).
    • This group had the highest percentage (69%) of those who said they feel secure as a result of owning life insurance

Implications: Life Insurance Serves Different Functions by Consumer Life Stages

David Simbro, senior vice president at Northwestern Mutual believes this illustrates the great versatility of life insurance products: Life Insurance Serves different functions by life stage:

It is important to have a financial plan that can both support you and evolve across the span of your lifetime as your financial situation changes. Life insurance can be a stable and yet flexible cornerstone of a financial plan – protection if you need it while also helping you meet financial goals at various life stages.

When asked what aspects of life insurance provide peace of mind, responses differed by generation:

  • Debt Settlement- 18 – 34:  35% are significantly more likely than those ages 35-54 to have peace of mind as a result of knowing all their debts are paid
  • Family Protection- 35 – 44 (34%) and 45 – 54 (36%): derive the greatest peace of mind knowing that their family will be provided for in the event of their unexpected death.
  • Retirement- 55+: 31% find the most peace of mind in knowing that they will have enough money to live in retirement

Takeaways: In summary,

  • Young people focus on building wealth and paying down debt,
  • Those heading into retirement are concerned with managing their longevity risk.

This range of concerns shows why it is critical that a long-term financial plan have built-in flexibility. Life Insurance can fit at every stage, and is necessary at every stage. Unfortunately, many people do not recognize the need for or the flexibility of life insurance as an important part of their financial portfolios.

 Life Insurance Flexibility Not Well Understood

The Harris/Northwestern poll also indicates that people are not always fully leveraging the financial security of life insurance. Few noninsureds understood the role of life insurance in providing for:

  • Education (15 percent)
  • Childcare expenses (11 percent)
  • 33% weren’t certain what expenses they would need to cover at all.

Even among insureds, many still overlook potential uses of life insurance:

  • 52% say they were motivated to purchase it in order to provide for loved ones.
  • Only 6% were motivated to purchase a life insurance policy to fund an inheritance for heirs or charities/non-profit organizations.

Simbro points to an important marketing challenge – to educate the public about the flexibility inherent in life insurance:

A lot of people assume that life insurance is a basic inflexible product, but the fact is that our life products aren’t just flexible, they’re double-jointed – they have both living and death benefits that can be an appropriate foundation for many individuals.

An Approach to Planning for Flexibility

To provide yourself a benefit that will provide an adequate level of benefit to cover your debts and the needs of your beneficiaries, while allowing you the flexibility to plan for cash needs that arise, you should allocate a certain monthly amount of your financial portfolio toward two components:
  • Life insurance component.
  • Savings component.
Finding the perfect mix means that you need to determine how much to allocate to take care of both life insurance and savings elements of your longer term planning needs.
  • A cash value life insurance held for a longer period can provide you funds for unexpected financial needs.
  • A term insurance policy can allow you to maximize the amount you put into a separate savings vehicle, provided you plan for the eventual premium increase.

Is There a Perfect Product Solution?

Don’t Settle For A Stock Answer: I recently attended a seminar in which a local financial planner was asked why it was important to have an attorney draft your will when there are now lower cost online resources for this. His answer:

Sure, you can get a will online. You can also do your own dental work.

The Right Answer: Offering a simplistic stock answer for such a complex a question hurt his credibility.  The planner had likely picked up this answer at a sales seminar in which he had been coached to overcome objections rather than to actually listen, analyze, and provide a thoughtful analysis based on a client’s unique life needs.  A more accurate answer would have been:

It depends on the complexity of your situation. For clear and simple family planning circumstances, a basic will should suffice. The more complex your estate and personal circumstances, the more you may benefit from professional advice.

Is There a Right Life Insurance Policy?

This anecdote illustrates that there are various approaches to planning that can involve diferent product solutions. While life insurance products provide great flexibility, planning can be challenging. As Simbro states:

There are many factors that impact what type and how much insurance you need, and getting it right for your personal situation is best accomplished via a thoughtful planning process with the help of a trusted financial professional.

Permanent cash-value policies provide guaranteed level premiums, varying degrees of flexibility in premium payments, cash values you can access during life, and tax deferred growth. They include:

  • Whole life.
  • Universal life.
  • Equity indexed life.

Term life alternatives that provide temporary coverage at lower premiums include

  • Annually increasing premium Term life.
  • Level Premium term life.
  • Term life that provides a return of cash value.

Finding the right product solutions to fit your unique circumstances means taking into consideration the following factors:

  • Your needs at your current stage of life.
  • Your changing future needs.
  • Your ability to pay a sufficient premium level to provide for both.

Takeaways

  • The most important takeaway is that you can’t afford to neglect your life insurance needs. As your situation in life changes, so do your needs, and you need to keep up with them.
  • Analyze your current and future needs to ensure you are providing yourself:
    • Adequate coverage,
    • Flexibility for future and unforeseen changes, and
    • Affordable premium payments.
  • “You get what you pay for” – Too low a premium may compromise your plan: it can cause your policy (term or permanent) to require increased premiums later that you might not be able to afford; or it could compromise your planning flexibility over time.
  • Research resources online to help with your planning, such as these from Northwestern:
Snap! principle of life insurance premiums:
While you shouldn’t overspend, remember this principle: skimping on life insurance premium is only cheating yourself.
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