Mary Quist-Newins, MBA, MSFS, CFP®, ChFC®, CLU®
Putting a Risk Management in Place for Survivors
In my last blog, we looked at how often the economic contributions of women are undervalued, as well as how often women can be left without resources as widows. Both point to the importance of planning for survivor needs.
While we may naturally think about this aspect of our finances as having life insurance, that’s just part of the equation. Remember that insurance is just a product, and a product is not a plan. Planning is a process, that begins with setting goals or needs, analyzing our situation, evaluating strategies and tactics, then acting. Buying insurance is a tactic, not a plan.
The power of planning was reaffirmed to me when I was just starting out as a fledgling financial planner in 1990. I had a young couple as clients that I’ll call Kayla and Josh – both in the prime of their lives. They had two beautiful babies under three years old. Kayla was a stay-at-home mom and Josh worked as an engineer for a major corporate employer in town. Our goal/need discussion revealed that Kayla wanted to move back to the East Coast, and continue at home with her kids while going back to school to get her law degree. She also wanted to have enough funds for an emergency reserve and send both children to college. By doing a full financial plan, including risk management analysis, we determined that the insurance and assets they owned covered all these needs. What a gift that was! Soon after we completed the plan, Josh had a brain aneurysm and died suddenly. By having a plan in place, Kayla knew exactly what her resources were and what she was able to do at the worst time of her life. She quickly relocated back to her home state, stayed home with the kids until they were older, continued her education and realized her dream of becoming an attorney – all without also having the burden of financial worry.
Besides preparing for the unthinkable, a plan provides peace of mind. Here are four steps to having a survivor risk management plan in place:
1.Set goals, identify needs
Whether single or in a partner relationship, think through survivor needs and goals. Write down your goals so you have a clear picture. Do this with your partner, if you have one. If you need help with this exercise, check out the Moneyweave® Academy SMART Goals Workbook.
2. Size the gap/s
Based on your own situation and goals, analyze how much survivors might need to fill gaps in final expenses, income and/or capital. For a good picture of how this works and applies to you, we have an easy-to-use calculator on the Moneyweave® Academy website. Understanding survivor income and capital gaps is empowering. It helps loved ones proactively plan for options and action.
3. Evaluate gap-filling options
There is no “one size” fits all” protection plan or insurance solution. If there are gaps identified in your analysis, there are three options as far as insurance goes:
Transfer ALL the risk to an insurance company. The most expensive option is to buy insurance to meet all the needs identified.
Transfer SOME of the risk to insurance. Many people – especially those with income needs to cover -- choose this alternative. For example, you might opt to have just enough insurance to cover final expenses, just 5 – 10 years of lost income, have an emergency reserve, and pay for education needs. Quantifying these and other needs helps determine what insurance will or will not cover.
Transfer NONE of the risk to insurance. It’s possible the analysis reveals that there are sufficient assets to cover all anticipated goals and needs – in other words, “self-insure.” For most of us, this is not the case and in the absence of adequate resources to meet even basic needs, we put our survivors at substantial risk. What are not options here are denial or “I/we will deal with this if the time comes.
Since “self-insuring” is not realistic for most, or this loss and opt to transfer at least part of the shortfall to an insurance carrier. When evaluating life insurance options, the major types are term, universal and whole life. Below is a high-level overview. A good resource for more detailed information is the nonprofit Life Happens website.
- Term life is like “renting” insurance, is the cheapest and often best for shorter term needs. or “level” term which is level for a fixed period of time – like 10, 20 and 30 years.
- Universal life is essentially the equivalent of “buying term and investing the difference. It has a term portion that is the pure cost of insurance (or “net amount at risk” to the insurer), along with an investment portion (cash value) that exceeds the cost. There are some tax benefits with universal life in that the cash portion can grow on a tax-deferred basis and may be surrendered without incurring income taxes. Universal life is more expensive than term but costs less than whole life since it does not guarantee that premiums will not change if the insurer experiences adverse mortality and/or investment performance.
- Whole life is a “bundled” product that includes both insurance protection and some cash value build up. It basically guarantees that premiums will not change, regardless of the mortality or investment experience of the insurer.
4. Take Action
If you’re a DIY kind of person, there are many resources available online for independent brokers who can help you evaluate costs and purchase different kinds of insurance. Their focus is selling product and are not much help in the planning aspects (steps 1 – 3) but may offer some valuable information on insurance costs and help with underwriting.
It can be overwhelming to put a comprehensive protection plan in place that incorporates goal setting, analysis, evaluating options and implementing the best package for you and your family. If you’re looking for help, consider hiring a well-qualified professional advisor – specifically those that have rigorous credentials in insurance planning – Certified Financial Planners® (CFP®), Chartered Life Underwriters® (CLU®) or Chartered Financial Consultants® (ChFC®). It can be enormously helpful to have an objective party help you crystallize goals/needs, run analyses, evaluate options and walk you through the process of obtaining coverage. The CFP® Board website offers great questions to ask when vetting any financial advisor.
There’s a lot to think through, whether you need insurance or not and if so, how much, and what kind. Focusing on the plan – not the product – is worth all the effort in peace of mind. For women, it’s an essential part of appreciating our own economic value, managing our financial risks, and being prepared. It may be one of the greatest gifts we ever give our family and they’re worth it.