Producers often plan a separate "income planning" meeting with clients who are heading into retirement, generally when these clients are in their late 50s to mid-60s. During this period, it's important to select age-appropriate investment vehicles to help protect clients from factors such as longer life expectancies, long-term health care issues, inflation, and investment risk.
There are a variety of products that can help meet your clients' retirement needs. For those with longer life expectancies, there are immediate annuities available with attractive features, such as lifetime income payments that increase based on a CPI index or offer liquidity options during the payout phase. Another good choice is fixed index annuities that allow for participation in an equity index during the accumulation stage and guaranteed lifetime income benefits, without annuitization, when the client is ready to take income.
By isolating income planning, however, advisors may very well miss important factors that can affect a client's livelihood in either a positive or negative way, particularly when they have been primarily concerned with accumulation. For instance, any planning that primarily focuses on life expectancy, inflation, and investment risk does not deal with the risk to expenses associated with poor health, disability, and income reductions that may occur at death.
Life insurance, LTCI considerations
Today, agents need to be aware that life insurance and long term care policies can have a positive impact on a client's retirement income. To ensure this, agents should combine an income planning meeting with probing questions about the risks that death and long term care expenses pose to the income needed at retirement -- inflation and a long life may not be the biggest risks. For example, some life policies may have been purchased at a time when family issues, including a mortgage, were a major concern. In such situations, term insurance could well have been the product of choice, a product that may no longer be appropriate when entering retirement age. This may be the time to acquire permanent insurance to ensure retiree income lost at death.
Death usually ends or reduces a defined benefit pension plan, leaving the surviving spouse with less income and health benefits. Death also ends or reduces Social Security income. If retirees already own permanent life policies, they may be poorly priced or have short guarantees. It is often possible to combine one or more old plans into a modern plan with higher death benefits and better guarantees at a much better price.
A life insurance policy can be "redefined" to meet the client's current death benefit requirements, thus protecting the survivor's retirement.
Long term care expense is another factor that can impact a client's income. For example, if a client is receiving pension income of $6,000 per month and they need to go into a nursing home that costs $8,000 per month, then the stay-at-home spouse loses that $6,000 income and incurs an additional $2,000 bill that goes toward paying for the nursing home stay.
In some instances, the spouse may be able to keep a small portion of the income if the loss creates a poverty situation. If the couple has assets that are either jointly or individually owned, the at-home spouse would be required to subsidize the nursing home expenses until the jointly or singly owned assets were reduced to a certain level. The in-care spouse needs to spend down to less than $2,000 of personal assets, and then the at-home spouse is allowed to keep up to a maximum of about $100,000 personal assets from the nursing home expense.
Long term care insurance would pay all or most of the nursing home bills, leaving the at-home spouse with family income, assets and a retirement secure from loss. One way to do this is to set aside a lump sum and purchase an immediate annuity to provide the needed protection.
The other major risk to income flow is death. Pension payouts and Social Security payments are reduced or terminated at death, and the best protection against this is an adequate permanent life insurance policy.
With a broad-range approach that includes long term care and death benefit components, clients can have a program that meets their income requirements and gives proper protection, while providing for their beneficiaries. In other words, matching the right assets to client's needs will increase the possibilities for a more secure retirement.
Discussion and execution
While this strategy serves the best interests of clients, it is often easier to discuss than it is to execute satisfactorily, particularly since it involves considerable product knowledge.
However, learning to ask the right questions makes the process much easier and helps advisors obtain the information needed to help match clients' needs as they move from accumulating assets to withdrawing them. Here are five key questions to ask clients:
- "Have you set aside money to fund long term care for yourself, spouse or both? If you have, how much?"
- "Are you aware that your spouse's income goes with them if they should enter a nursing home?"
- "Have you considered how you would replace the retirement income lost at your death or that of your spouse, or if either of you were to go into a nursing home?
- "In addition to an income stream that you cannot outlive, inflation will have an impact on your income soon after you retire. Are you aware of what will be needed to offset what is lost to inflation?
- "Are you aware that your retirement years may come close to or equal your working years?"
Moving clients from an asset accumulation focus to a retirement plan that emphasizes an income stream for what can be as much as one-third of an individual's life span requires complete answers to these questions and an all-inclusive approach. Yet this is exactly where advisors find themselves today, particularly when the 78.5 million boomers are moving into the retirement period of their lives.
David Colburn, LUTCF is a brokerage manager at First American Insurance Underwriters Inc. He can be reached at 800-444-8715 or dcolburn@faiu.com. Carol Ruggiero is vice president of annuity sales at First American Insurance Underwriters Inc. She can be reached at 800-444-8715 or cruggiero@faiu.com.
