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Understanding the Role of Insurance in Financial Planning

Tony Steuer June 27, 2024


What role does insurance play in financial planning? Do any research on the topic and you’ll find results that mention benefits like diversity, predictability and security, tax savings, and risk mitigation. I want to take a step back from these broad benefits that often look at insurance as an investment vehicle and emphasize that insurance is insurance.

Insurance is fundamentally meant to protect against risks, not as an investment vehicle. Insurance exists first and foremost to provide risk protection in case of unexpected events. It should not be viewed as a primary investment or wealth-building tool.

Financial advisors may avoid conversations about insurance because they’ve encountered agents trying to sell expensive and unnecessary policies as investments. However, they do need to discuss insurance to ensure clients have adequate protection against risks. Advisors should aim to filter out the hype and misconceptions to have constructive insurance conversations focused on clients’ real risks and needs.

Assessing Client Risks and Needs

A key part of financial planning is assessing what risks your clients need to protect themselves and their families against. This involves taking a close look at their unique situation and exposures.

First, consider whether the client has dependents relying on their income. If so, life insurance should be strongly considered to replace that income in the event of premature death. The payout from a life insurance policy can help ensure dependents are taken care of financially.

Next, think about the duration of the need for coverage. If their kids are young, a 20- or 30-year term-life insurance policy may be most appropriate. As they grow older and become independent, the need for a death benefit decreases. Map the ideal policy length to the years when income replacement is crucial.

Beyond life insurance, examine other risks that should be protected against. Does the client own a home? Make sure they have adequate homeowners’ insurance to cover damage. Do they drive a car? Ensure auto liability limits are sufficient. Have a conversation about disability insurance, which can replace income if they are hurt or sick and can’t work.

The key is to check not just that a client has an insurance policy in a certain category. Dig deeper into whether they have proper coverage levels, limits, and duration to fully protect against the major risks they face.

A best practice is to create a checklist of insurance policy types to go through with clients at least annually. For each policy, look at factors like:

  • Is this an individual or group policy? Group plans often have coverage gaps.
  • What events and losses does the policy cover? How do exclusions impact the client?
  • What are the coverage amounts and durations? Do they align with the client’s risks and needs?
  • Does the deductible or waiting period fit within the client’s finances?
  • Is the insurance provider reputable and financially stable?

This regular check-in ensures you cover all the bases—life, health, disability, long-term care, homeowners, auto, umbrella liability—so your client is prepared before the need arises.

The Importance of Disability Insurance

Disability insurance is one of the most overlooked types of coverage in financial planning. However, it is crucial to have proper disability insurance in place during a person’s working years when their income-earning potential is at its peak.

Many people believe they are covered by disability insurance through their employer. While group policies offered through an employer are better than nothing, they often have caps on monthly payouts and only cover a portion of a person’s income. For high earners and single-income households in particular, an individual disability insurance policy is essential to fill the gaps left by an employer group policy.

This is especially important for younger individuals who have many working years ahead of them—their biggest asset is their future income. Relying solely on group policies could leave them vastly underinsured.

Disability insurance remains a critical component of financial planning through a person’s working years up until the point they transition into retirement. Once retirement is on the horizon, the focus shifts to long-term care planning and managing risks associated with aging.

Long-term Care Planning for Retirement

As people transition into retirement in their 50s and 60s, long-term care planning becomes crucial. This is the ideal time to start conversations about how to live out their golden years. Long-term care planning goes beyond just insurance products—it requires developing an overall aging plan tailored to each individual or couple’s needs.

Will they age solo or with a partner? Do they want to downsize or stay in their current home? What medical and mobility assistance might they require in the future? Retirement marks the end of peak earning years, so proactive planning is needed to protect assets and maintain quality of life.

The risks of aging cannot be ignored. As a financial planner, you’re already having open conversations with your clients to plan for their retirement. Ensure you’re discussing insurance as part of the plan as well. Whether those discussions include moving to a one-story home, setting aside funds to pay for future care, or purchasing long-term care insurance, planning ahead is vital.

Continuing the Insurance Conversation

Life is full of major events—births, deaths, marriages, divorces, new jobs, retirement. These events can significantly impact a person’s insurance needs and coverage. As a financial planner, it’s crucial to continue having insurance conversations with clients throughout their lives and reevaluate policies during any major life changes.

Rather than just asking clients if they have an insurance policy in place, take time to discuss whether they have the right policies and adequate coverage levels. Don’t assume that just because a client has life insurance, disability insurance, or other policies, they are sufficiently protected. Review the details of their plans regularly. Use your checklist to have comprehensive discussions around insurance.

The worst time to start conversations about insurance needs is right after a loss or negative event when it’s too late. Be proactive in having ongoing insurance conversations with clients throughout major milestones in life. Don’t allow great clients to be underinsured simply because the topic doesn’t come up. Make sure insurance planning is a key part of your financial planning process.

For help in building a relationship with a trusted insurance partner, read my previous Heart of Advice blog, What Financial Planners Need to Know About Working with Insurance Professionals.

DISCLAIMER: The eMoney Advisor Blog is meant as an educational and informative resource for financial professionals and individuals alike. It is not meant to be, and should not be taken as financial, legal, tax or other professional advice. Those seeking professional advice may do so by consulting with a professional advisor. eMoney Advisor will not be liable for any actions you may take based on the content of this blog.

The views and opinions expressed by this blog post guest are solely those of the guest and do not necessarily reflect the opinions of eMoney Advisor, LLC. eMoney Advisor is not responsible for the content, views or opinions presented by our guest, nor may eMoney Advisor be held liable for any actions taken by you based on the content, views or opinions of the guest.

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About the Author

Tony Steuer, CLU, LA, CPFFE, is a financial wellness advocate dedicated to helping people make smart money choices by providing the knowledge and resources to put financial literacy into action. During his career as a fee-based life and disability insurance analyst, he provided consulting for the clients of many financial planners and attorneys and has helped countless people through his articles and books about insurance including Questions and Answers on Life Insurance, The Questions and Answers on Life Insurance Workbook, The Questions and Answers on Disability Insurance Workbook, The Questions and Answers on Insurance Planner, and Insurance Made Easy.

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