Practice Management

Redefining ‘Pay Yourself First’

By Jon Shuman

Those who are most successful at saving money live the meaning of the phrase, “pay yourself first.”  It refers to putting your savings on automatic, such as earmarking a portion of each paycheck to a savings or investment account.

Contributions to an employer-sponsored retirement savings plan such as a 401(k) is an example of paying yourself first, something financial advisors and insurance agents often recommend to their clients. But for affluent or high-net-worth individuals such as executives, business owners and professionals, paying yourself first has a broader meaning. 

It’s not enough for more affluent individuals to just accumulate assets over a long career to attain financial security.  For them, it’s equally important to protect those assets against an unpredictable disability or even a premature death. For instance, a 40-year-old executive who earns $200,000 a year risks in excess of $5 million to disability or death before age 65.

Owners and partners of small- to mid-sized companies and professionals who understand the risks they face typically redirect some of their compensation to employee benefits such as life and disability insurance. Doing so provides a layer of financial security and can potentially offer tax benefits as well.

Business owners who purchase life and disability insurance with corporate dollars may also obtain a tax deduction for the business. It’s another way to pay yourself first, making the most of your own assets before paying bills for services, creditors and others.

But not all life and disability benefits are created equal. As an advisor or agent, you can provide significant value to executives and business owners by recommending the right products and benefits to protect themselves throughout their careers.

Because of their higher earnings, executives, business owners and professionals need life insurance policies that offer higher death benefits than typically available through group term life.  While death benefits in this marketplace start at around $50,000, there is significant demand for benefits as high as $3 million or more.

Premiums for the policies should be flexible, meaning that they can be employer-paid, contributory (employer and employee both pay) or voluntary (employee paid). Often times, higher-net-worth individuals want the ability to pay additional premiums to potentially accumulate account value and attain additional financial security.

Cash values may be used for other financial needs, including supplemental retirement income. Some executives “overfund” or contribute more cash to the policy than is required to simply maintain their life insurance protection and then take tax-free policy loans once they are required to help supplement their income and lifestyle. Variable life insurance, which provides policyholders with equity-based investment options, is particularly popular for this purpose.

Another important consideration in the high-net-worth market is that prospective insureds tend to be older and therefore sometimes have health issues that can make obtaining life insurance more challenging.  Guaranteed issue underwriting for older ages, even to age 70 for basic employer-paid coverage, helps individuals with health problems secure the coverage they need at an affordable price.

In life insurance as in life, one size rarely fits all. That’s why individualized needs can sometimes be met with optional coverage in the form of policy riders. Some of the most popular riders include accidental death benefits, children’s level term, spouse level term, waiver of monthly charges and accelerated benefits for terminal illnesses. Because high-net-worth individuals sometimes use the cash value within life policies to meet other financial needs, another popular rider is over-loan protection. An over-loan rider helps ensure that any policy loans do not exceed the policy’s cash value and potentially cause tax problems or coverage lapses.

Disability protection is also critical and in demand, especially by professionals who understand how much they have to lose if a disabling accident or illness prevents them from earning a living. Lately, the window of insurability for many people is opening wider.

As Americans live longer, healthier and more productive lives, it’s not unusual to see business owners or professionals continue working well into their 60’s and even 70’s. Running a successful business or professional practice is part of who they are and, often, how they define themselves.

That’s why group disability policies designed for executives increasingly offer maximum issue ages as high as 80. Rates have also decreased for workers at older ages as more people remain healthy enough to continue working well past the traditional retirement age of 65.

For greater financial security, advisors and agents should recommend group disability policies that are conditionally renewable for life as long as the insured is actively at work and not disabled. The best policies allow insureds to increase their coverage as their incomes rise, without the need for an application or underwriting.

Again, guaranteed issue is an important consideration. As executive compensation is variable, disability coverage needs to be more flexible to accommodate fluctuations in income. Coverage should be portable as well.

Life and disability insurance offers important protection for most working Americans and their families.  The benefits are especially important for high-net-worth individuals and should be part of their “pay-yourself-first” financial plan.

Jonathan Shuman leads sales of workplace benefits for Massachusetts Mutual Life Insurance Co. (MassMutual).

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