Ben Jones – Now, I feel really fortunate to have the opportunity to sit down with you and LIMRA because you guys do a lot of research. And particularly today, we’re spending time discussing the aspects of risk management, and particularly with respect to a financial plan and that of premature death. And it’s kind of a morbid topic, but you guys have recently done a consumer study around the perceptions of insurance. I think it’s called the Insurance Barometer Study.
Alison Salka – Mm-hmm.
Ben Jones – I want to make sure I get that right. And there’s a lot of good information in there. It’s 50 pages. I read it all the way through.
Alison Salka – We like to be thorough, and I’m glad you did. Thank you.
Ben Jones – Maybe first you can tell us a little bit about how and why LIMRA started doing the Insurance Barometer Study. Because it’s been around, if I recall from the paper, about nine years.
Alison Salka – Yes. So really it fits very well with our core mission which is to help our members better understand the markets. So if they want to understand who is buying life insurance and who is not buying life insurance and how and why they make those decisions, the Barometer report again is an annual report we do with Life Happens that is designed to provide actionable insights there. So again, our members, advisors can better understand their consumers, design the right campaigns to educate them and hopefully help people help themselves.
Ben Jones – I guess maybe first we could start with, from the study this year, what did we learn about the need for life insurance?
Alison Salka – So one of the key questions we ask is about ownership. We know that about 57% of Americans own some sort of life insurance, and that’s down six percentage points since we did the first study in 2011. So we know that the number of people covered is declining slightly, but we also know that the need is still there. More than 1/3 of American families would experience financial trouble within a month if the primary wage earner died, and more than half would have financial trouble within a year. So that suggests that there certainly is a need.
Emily Larsen – Wow. That is shocking to hear that so many people are not managing this risk. The annual Barometer Study that LIMRA does is free to its members, so we’ll put a link on our show notes page for this episode at bmogam.com/betterconversations. With regard to the study, Ben asked Alison about some of the findings in the report including why people choose to buy life insurance and their primary financial concerns.
Alison Salka – We ask people what are their top financial concerns. And we have tracked that over time. And those have actually been largely static. So consumers’ top concerns are interestingly not having their life end prematurely, but essentially —
Ben Jones – I hope not.
Alison Salka – Right. Outliving their retirement savings. So the primary concern for consumers is to save for retirement. And after that, the next concern is saving for an emergency fund. And I think those are two big concerns because they are two that are very important if you’re unable to meet those needs. And the third is being able to support oneself if they become ill or disabled. So really, those top three concerns are taking care of themselves, making sure that they can be independent or take care of themselves if things happen.
Ben Jones – I noticed that these have been relatively static over time. And it seems like the retirement industry has done a good job of getting themselves to the top of everybody’s priority list. But how come you don’t think that planning for the unexpected is on people’s top priorities or radar, the risk management aspect of that.
Alison Salka – Well, I think part of it, you have to look at kind of human nature. It’s a lot more pleasant for me to think about my retirement because I can do things that I want to do. There are all sorts of firms that have great pictures of people walking hand in hand on the beach, and so again, you’ve got some aspiration there. It’s something I want to save for. It’s something that makes me happy. So preparing or taking care of my family is also something satisfying that I know I need to do, but it’s something I may want to spend less time thinking about. The other thing is, retirement plans, they’re very available in the workplace. Life insurance is as well, but I think retirement gets more visibility.
Ben Jones – I want to walk through some of the things you learned about in the study. You mentioned there are a couple of reasons that people do buy life insurance, and they seemed fairly concrete, the top of the list. So tell me a little bit about why do people actually go out and seek out life insurance.
Alison Salka – Sure, and they are not surprisingly for reasons that you would expect. To pay for final expenses, for example, funeral/burial; to replace the income that would be lost; and then to pay off a mortgage. So it’s people taking care of their heirs or their survivors to make sure that, again, they’re taken care of.
Ben Jones – Maybe you could share some of the reasons that people don’t buy life insurance, because I think that was fairly informative as well.
Alison Salka – Sure. Yes, and I think you could file these under things people know that they should do but just have a hard time actually doing. So when we ask them, we get their thoughts. So the top three reasons people said they don’t buy life insurance are, it’s too expensive. The majority of people who said they don’t have insurance said that it’s because it’s too expensive. The others said they had other financial priorities that took precedence over that. And then the third group said they felt that they already had enough coverage. And that was about half of the respondents who said that. But I wanted to make a quick point about those who do say it’s too expensive. A lot of times that’s a function of them not knowing how much insurance costs because we found that most consumers estimate the cost of coverage to be more than three times what it actually costs. And almost half of millennials overestimated the cost at five times the actual amount. So again, here’s an opportunity for an advisor to be very helpful because one, if you don’t understand something and you have the misperception that it’s expensive, of course you’re going to be avoiding it or kind of have to be forced to consider it. And I think that this is where a little bit of education can be helpful.
Ben Jones – You know, I think that was probably my favorite stat from the entire study was the millennials all thought that term life insurance would cost more than $1,000 a year, which was significantly higher than the actual cost. Why do you think there’s such a misconception for that age group in particular?
Alison Salka – Well, I think sometimes — and this is in general — sometimes I think they may just have a — they’re not sure why, and so they say expensive because it seems like the most logical, or it seems like an acceptable reason to say no. So I think there may be some of that in there. But I also think millennials are probably the least likely of all the generations to have actually done a lot in terms of looking at financial services and products. So they’re probably least educated in how much things cost generally, financial products and services cost generally. So I think if they have the lowest levels of financial knowledge, they are more likely to underestimate or overestimate or just not know how much things — have a better estimate of how much things are.
Ben Jones – I do want to touch on this because the millennial thing is interesting in that in the study, I think when we talked about the reasons people buy life insurance, when they bought life insurance was also fairly interesting. It really happens around these life events, correct?
Alison Salka – Absolutely.
Ben Jones – And so many — depending on where they are on the millennial spectrum, they might not have got married yet. They might not have had their first child yet. They might not have bought their first home. And I keep reading that millennials actually don’t buy homes, but maybe they’re just delayed. So those life triggers maybe just haven’t happened for them that’s caused that.
Alison Salka – Right. I had seen some statistic that said people now consider — don’t think they’re grown up until age 30, which, you know, is older than it’s been previously. But I think you’re right, because life insurance buying behavior is oftentimes spurred by recent life events. And if those are being put off, then yes, the purchase process is being put off too. But our research finds that people who have a significant change in their life recently — getting married, buying a house, having or adopting a child — are more likely to buy. This is well known, but our research now has been able to actually measure the strength of the effect for each of these as well as identify some other life changes that people hadn’t thought about. One other thing we found is that these events stack. So if you have more than one, you’re more and more likely to buy. So some of the recent things that we’ve looked at in terms of life changes, job losses, believe it or not. Things like job losses increase somebody’s likelihood to buy insurance. And we thought that was interesting because we thought the biggest ones would be having a child, and this approaches the same level of likelihood. And we thought it might be because people who have lost a job now have experienced what it’s like to lose a stream of income, and may be more likely to protect it or want to protect it when they get another job.
Ben Jones – That’s really fascinating. I think when we had our kids, we went out and of course increased our life insurance, which I think many people do. But for advisors that are working with their clients through different life transitions, this is really a check-in point for them along that client journey.
Alison Salka – Yeah, absolutely. And so again, if we were putting — trying to put numbers around this. So people who get married are two times more likely to buy life insurance in the next two years. Same for people who adopt a child. People who recently purchased a house are one and a half times more likely, things like that. People who are starting a business, two times more likely. People who recently had a death in their family are one and a half times more likely. Again, people who recently lost their jobs are two and a half times more likely.
Ben Jones – Wow, that’s up there.
Alison Salka – So again — right. So I think understanding and reaching out to people when they have life changes is probably a very good strategy.
Ben Jones – Alison is a wealth of knowledge on this topic. She and LIMRA provide us with insightful perspective around the consumers’ mindset about insurance. Now, when your clients have those important life transition events or as part of a comprehensive financial planning process, there are a lot of options to consider. For this perspective, we thought it would be helpful to get a practitioner’s view. Jeremy and I spoke about the nitty gritty details about what types of life insurance are available, what works best in unique situations, and the various features and benefits and the fine print of insurance contracts. Jeremy highlighted the importance of providing families with options if premature death was to occur.
Jeremy Barlow –Yeah, I mean, when we sit down initially with our clients, there’s a theme that we hit over and over, which is, if you have a comprehensive financial plan, it works whether you get sick or hurt, live for a really long time, or die before what we might consider life expectancy. So if we focus just in that aspect, that life insurance as a critical point of assuring that the family lives on, life lives on, your spouse, your partner, your family, your business has a legacy and has continuity. If that’s important, then it has to be a part of the plan. It can’t be side-stepped as a low probability but something that is maybe catastrophic in nature.
Ben Jones – Well, and I think what you’re saying is, you can’t predict the future. And so in a comprehensive financial plan, you have to plan for all potential outcomes.
Jeremy Barlow –That’s important.
Ben Jones – Yeah. I do have a question about who should be insured, because I think a lot of people immediately — the more traditional sense think oh, there’s a breadwinner and what not. But family dynamics have changed significantly in the last 30 years. There’s two earners in a lot of families. Not everybody has the opportunity to stay home. In some cases, there’s a female breadwinner and the husband stays home and takes care of the kids. So these dynamics have changed. So how do you think about who should be insured? Should everyone be insured in the relationship? Should one person be insured, or both the breadwinners? Just walk me through exactly how you think through that.
Jeremy Barlow – Sure. No, I think that’s very fair. And we try to attack it from an economic loss perspective. I’ll maybe just use my own family’s example for a moment. My spouse is at home with our five children. So again, I would be considered primary breadwinner, and we can talk about an alternative situation there. So our values in our family is that my wife will carry life insurance to pay off any debts, provide education that we want for our kids and give me some flexibility. I may not quit my job as an advisor. I may continue to work part-time. Again, I’ve got young children in elementary school. But I don’t know that I need a long-term income plan from a life insurance plan for my wife. Conversely –
Ben Jones – But you might hire a nanny to help out. You might –
Jeremy Barlow – That’s right. In the moment, I’m the manny. If something happens, I’m caring for those, and so I want to have that flexibility. I want to have the flexibility that at a moment’s notice, I can split for a sick kid and just do all of the things that I would want to be able to do that we value so much in our family. So for my spouse, that’s really important that we’ve monitored our debt, a modest level, and the legacy, and then a modest amount of flexibility capital that we can have. A question that you asked a minute ago, other individuals in the family, maybe I’ll just speak to.
Ben Jones – Please.
Jeremy Barlow – So we talked about primary breadwinner and maybe a non-breadwinning spouse. But our kids, it might surprise some, it might not surprise anybody, that as an insurance advisor, I have life insurance on my kids. And so life insurance for my kids is not because I’m hoping for a windfall, of course. That is entirely not the point. But it does provide some future guarantees. It provides that if my kid’s health changed, for example, an onset of diabetes or they picked up an avocation like rock climbing or some dangerous hobbies that they’ll always have that insurance coverage, and it’s very inexpensive. And it also allows them in the future to secure additional insurance without any question. So if their health changes or their hobbies, again, become more dangerous, they can always have some modest baseline that the insurance company would allow them to secure an additional amount in the future as well.
Ben Jones – Now, let’s talk about one thing we didn’t talk about is two earners.
Jeremy Barlow –Okay, yeah.
Ben Jones – So walk me through that.
Jeremy Barlow – Yeah, so double income household, double income no kid, double income with a family, again, with a business, there’s so many different hypotheticals. Pretty routinely, the conversation with a double income family is, I don’t want to leave the family better off. I don’t want to leave the family worse off. What does that mean for income and debt, and those are the primary considerations. So it may not be that we end up at a 10X salary. It may end up that we, similar to our situation, we might say, would it be helpful to wipe out all debts? Do we want to provide a legacy for the family or for the business, etc.? And then do we want to have some flexible capital? Again, optionality at that point in time, many people think that at the time of death, you close door one and open door two and just walk through it. Of course there’s — anybody that’s experienced that with a close family member, there’s a time of transition that is several months to several years in duration. And so I am a proponent of options. As a double income family ends up being a lower amount per spouse because we don’t need to worry about a significant amount of long-term income, so be it. That’s great.
Ben Jones – So there’s a lot of people out there who get insurance through their work.
Jeremy Barlow – Sure.
Ben Jones – So what are the pros and cons of getting this group life insurance policy, and why or why not would you want to do that?
Jeremy Barlow – My dad, the wisest man I ever knew, told me you can’t beat free. And so if you are dealing with — if I’m dealing with a client who has an employer sponsored life insurance policy, and they provide it at no cost, that’s a fairly no-brainer option to pick that up. So there are times where group life insurance will offer a supplemental type plan, and it comes maybe even at a discounted volume where you have law of large numbers again. So those are two positives. One is free, and second is less expensive. There’s going to be limits generally on what you could secure through your company without having to go — you know and the client’s company — without having to go through some sort of a medical evaluation. And so I have some clients — I’m dealing with a client right now whose spouse has a health consideration. And so they’re trying to gobble up what options they have for life insurance without a medical evaluation. So that’s a huge pro, I think. So having some life insurance without a medical evaluation for some might be really beneficial. Otherwise, the cost is modest — not always less expensive than doing it individually, but there are times where that price is really competitive. Let’s pivot. On the individual side, almost always there’s going to be a medical evaluation. So if that is the downside, then that’s a hurdle that has to overcome. Pricing is, again, comparable relative to a health evaluation. I think the most important consideration when designing a life insurance plan considering group and individual is the concept of portability. So, portability means, if I’m at company A and I plan to be there for the rest of my career, that’s great. But the what-if planning says, company B knocks on your door, or company A closes their doors, a situation where I need to have optionality is really important. So we stress to our clients that, particularly our young professional clients, that having that option to take it with you, having taken the medical exam and having that in your rearview, knowing that you have this guaranteed component, that’s really important.
Ben Jones – Maybe you could share an example, one of each, if you’d be comfortable with this, as to when one type of insurance may be more applicable than another. So like, at what point of the financial planning process do you get to this and then choose one of the other? Maybe you could share some examples.
Jeremy Barlow – The permanent insurance pricing you could say requires a significant amount of more cash flow, maybe 10 times that of a term insurance. And even that number could change based on health and design, etc. But we could start there. If cash flow is the first hurdle to overcome, then the conversation related to the death benefit if, say, you and I are having this conversation, and we’ve decided that $1M of life insurance — life insurance is appropriate for you. Not what type, it’s just, we’ve decided that’s an appropriate amount, and you’re a young professional coming out of grad school, you have some debt. You’ve bought a home. You have a family. Again, some of these traditional situations. We might address cash flow right away regardless of the philosophy of, I want it to last forever, or I want to have some build-up in cash. It’s just, I am limited in my resources.
Ben Jones – Cash flow is one consideration.
Jeremy Barlow –Cash flow.
Ben Jones – Okay.
Jeremy Barlow –So second, philosophy. You attack this with some level of your own perspective to this conversation. There are many people that have an opinion on what type of insurance. Again, I try to come in agnostic to a client. So if cash flow is off the table, and now we’re just speaking about designing a plan, I think maybe the question is, where does permanent insurance fit? So if we were going back to the conversation where we could maybe take you through a few life stages, we’re 30-some years old coming out of graduate school and we secure a significant amount of life insurance, might be heavily term life insurance. For some of our clients as their revenue and their income changes in their 40s and 50s, their capacity to save and plan evolves. We use a tool called Conversion for some of our clients with some of their life insurance. And you’ll notice I use the word “some” because many people — it’s not an all one or all other. For many of our clients, it’s a hybrid of a term life insurance and a permanent life insurance plan to meet the death benefit need and then evolve to a point where I’m in my 50s and 60s where I want to have death benefit that’s in-force when I die. Period. That might not be the large volume that I had when I had a lot of debt and young children, but I want to have some death benefit when I die, when that becomes more –
Ben Jones – Likely.
Jeremy Barlow –— likely, right. As I age and get into retirement. In conjunction with that, a concept that we visit with our clients about is having some safe money in retirement. So can that be in bonds? Can that be in money markets? Can that be in cash? Of course. One tool that we find is really efficient is using a traditional whole life policy with some guaranteed cash value, guaranteed death benefit, and if a person has been funding that for a period of time, there are some features in a life insurance policy that allow you to stop making premium payments in retirement but still continue to have life insurance death benefit. It’s important. And also having some equity or cash value, cash surrender accumulation value that you have access to in retirement. So for example, the market — say you have a portfolio that is mostly invested in stock market, and you have a little bit of cash either in life insurance or in the bank. And the market drops a bit, and you still need income. You still need to pay for food and heat, etc. If that’s something that speaks to you, then having this barbell type of strategy, having equities and then having some safe money when the market dips, that’s a strategy where having some permanent life insurance both for the death benefit and cash, can actually be really productive.
Emily Larsen – With so many options, it’s easy to understand why having a trusted financial advisor to guide clients through risk management discussions is so valuable. We heard Carl Richards on episode 11 talk about the most valuable client conversations lying at the intersection of life and money, and this one really seems to hit that mark. If we circle back to our discussion with Alison, she actually addresses the concerns and emotions people have about their financial situations in order to help guide your conversations with clients.
Alison Salka – Understanding what’s heaviest on consumers’ minds can help guide a discussion when talking about the need for life insurance or other financial advice. So our survey found health related financial risks, this is consistently on the top of things that consumers are concerned about. This actually rated above the living expense category, which I thought was really interesting — meaning that they’re more concerned about this than meeting day to day living expenses. People see this as important and will likely devote resources to addressing these concerns, or at least they are open to addressing these concerns.
Ben Jones – Wow. Based on this year’s study, how would you characterize the overall opportunity for advisors to help address consumers’ risk management needs?
Alison Salka – Oh, I would say it is a great time to do that. I mean, I think it’s always a good time because, frankly, you always want to be able to help people meet their needs. But I think looking at the index, understanding what their concerns are, which are health related financial risks, be able to meet their savings goals, living expenses, means that the need is there. And again, we talked earlier about how people are most confident when they get information from their financial advisor, or those are the people that they trust, suggests that now is a good time to have those conversations.
Emily Larsen – The gravity of what life insurance means for your clients can make it a difficult conversation to engage in, and Jeremy knows what it’s like to have a relationship with a client that hinges heavily on trust. So Ben asked Jeremy what it’s like to have these conversations that can sometimes be uncomfortable.
Jeremy Barlow –When an advisor and a client are sitting, if you will, on the same side of the table, not a — I’m here to sell you something, but as an advisor, I try to be right there to say, I’m aware of the fact that many people don’t want to have more than enough. So let’s just come to a sense of agreement. That’s the middle of the conversation. The beginning of the conversation is very candid. It’s, if we take you out of the picture and your income is no longer available to the family, what would you do? It’s a very open-ended, basic — I’m hopeful that the person, the client, the prospect is not looking at me saying, I know this guy is just trying to sell me a bunch of stuff, but the conversation is surrounded more around what their family would do and planning. Does it look like we’re going to go live with our in-laws? Am I going to make my spouse go live with, in our case, her parents? I try to approach that as a just — it’s a dialog more than a hammer looking for a nail, if you will. But I think this is where an advisor is the most valuable. And be aware, people trust you. Be respectful of that trust. Don’t shy away from it. Get into the details of their lives and their businesses.
Ben Jones – As Jeremy said, these conversations can be really hard and difficult to engage in, but they’re also where an advisor is able to add considerable value. I hope you will use some of these insights to consider what actions you can take to help clients address the risk management aspects of their financial plan. Consider these questions as a starting point. What are we doing to address risk management for our clients today? What should we be doing to provide our clients optionality should life happen going forward? What skills and knowledge do we need to gain or source to effectively help our clients address these issues? We hope you’ve got some ideas to make your next conversation on these topics a better one, and we want to thank Alison and Jeremy for taking time to share their wisdom and ideas on this topic with us.
Ben Jones – Thank you for listening to Better Conversations. Better Outcomes. This podcast is presented by BMO Global Asset Management. To access the resources discussed in today’s show, please visit us at www.bmogam.com/betterconversations.
Emily Larsen – We love feedback, and would love to hear what you thought about today’s episode. You can send an e-mail to [email protected].
Ben Jones – And we really respond.
Emily Larsen – We do.
Ben Jones – If you thought of someone during today’s episode, we would be flattered if you’d take a moment and share this podcast with them. You can listen and subscribe to our show on Apple Podcasts, or whatever your favorite podcast provider is. And, of course, we would very greatly appreciate if you’d take a moment to rate or review us on that app. This show and resources are supported by a very talented team of dedicated professionals at BMO, including Pat Bordak, Gayle Gipson, Matt Perry, Derek Devereaux. The show is edited and produced by Jonah Geil-Neufeld and Annie Fassler of Puddle Creative. And these are the real people that make this show happen, so thank you. Until next time, I’m Ben Jones.
Emily Larsen – And I’m Emily Larson. From all of us at BMO Global Asset Management hoping you have a productive and wonderful week.
Disclosure – The views expressed here are those of the participants and not those of BMO Global Asset Management, its affiliates, or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry, strategy, or security. This presentation may contain forward looking statements. Investors are cautioned not to place undue reliance on such statements as actual results could vary. This presentation is for general information purposes only and does not constitute investment, legal, or tax advice and is not intended as an endorsement of any specific investment product or service. Individual investors are to consult with an investment, legal, and/or tax professional about their personal situation. Past performance is not indicative of future results. Life insurance policies have exclusions and/or limitations. The cost and availability of life insurance depends upon factors such as age, health and the type and amount of insurance purchased. Additionally if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims paying ability of the insurance company. BMO Asset Management Corp. is the investment advisor to the BMO Funds. BMO Investment Distributors, LLC is the distributor. Member FINRA/SIPC. BMO Asset Management Corp. and BMO Investment Distributors are affiliated companies. Further information can be found at www.bmo.com.