Income Insurances and Pre Retirement Planning
As we dig further into the area of insurance, let me make a statement that will help guide you through the fundamentals. You should have assets insurance, not liabilities. This can sometimes be a difficult and emotional pill to swallow. I know a lot of parents who have fallen prey to the misguided statement that you need to insure your children. Let me be clear on this: You do not need to insure your child, and you should slam the door on anyone whose foot is still in it after making that assertion.
Yes, it may feel like the right thing to do, especially when some commission-hungry sales rep is trying to lay a guilt trip on you by using your own children to generate a sale, but it is an unnecessary expense. Children are a financial drain until they are self-sufficient, so there is no need to insure them. What you should be insuring is the life of whoever is raising the children and running the household, which is a risk that you may not be in a position to manage.
You may find it easier to break risks down into pre retirement planning and post- retirement categories. Take life insurance as an example. Life insurance is most necessary during the years when you and/or your spouse are generating income to support family and you have children who need clothing, shelter, and education. This is when the need for life insurance is typically at its peak because there is a dire need to fund ongoing responsibilities should someone die prematurely.
Bring back the point I made earlier—you should have assets insurance, not liabilities. As you grow older and you build assets, those assets can offset the need for insurance unless you want to protect the assets in your estate because your life insurance needs could remain constant. Estate planning is a critical part of your overall financial plan but not a primary focus other than funding any estate needs that impact your pre retirement planning.
Be aware that other risk expenses also transition during your lifetime. The need for homeowners and auto insurance tend to be higher during your working years than in retirement as many couples downsize their family residence and drive less expensive cars for longer periods of time. As we get older, we try to simplify our lives, resulting in an overall reduction of risk and therefore a cost reduction as well.
Postretirement risks are clearly led by health insurance and related expenses such as long-term care insurance, nursing-home insurance, and other expenses not covered by Medicare. Another big risk is that you’ll outlive your money. It’s fascinating to me that so little is written about outliving your income and possible solutions that guarantee continuity in cash flow. This is where the insurance industry has missed a terrific opportunity to bring value to consumers.
We reduce risks all the time, from wearing seat belts when we drive to brushing and flossing our teeth to prevent dental disease to wearing life preservers on a boat. For ages, the insurance industry has offered what I call “income insurance” or “insured income,” and what the industry calls annuitization. Annuitization is simply a stream of guaranteed payments. Gee, with a name like annuitization, you wonder why it doesn’t fly off the shelves!
In all fairness, though, historically, the income insurance offered by the industry has not been nearly as attractive as it is today. As a result, product distributors like broker dealers and banks didn’t focus their attention on the product in the past. You’ll see that income insurance should be a key piece of the strategy as we move into discussions on matching investment products with our retirement goals.