Are your clients unknowlingly living with risk they could limit? If they’re taking on the full risk of a potential serious health event, then they need to understand how it might affect their finances and retirement.
As their trusted advisor, you’re in the position to educate your clients about the impact of health and personal care costs. Do they know?:
- More and more Canadians are realizing that a serious health event can impact their retirement savings plans. 4 out of 5 Canadians surveyed who have experienced a significant health event saw their retirement plans derailed.1
- A 65-year-old couple has a better than 90% chance one of them will experience a serious health event before age 93,2 and the cost of 20 hours per week of personal in-home health care is approximately $26,000 today — which means by the time that couple turns age 85, it would be over $56,000 per year.3
Then help your clients understand what “self-insuring” that risk entails, and how they could transfer — or share — some of that risk. It’s important for them to know their options:
Self-insuring or self-funding
Your clients use their assets to pay for the effects of a serious health event; for example, recovering from a critical illness or needing long-term care beyond what government programs subsidize. If clients experience a health event that impacts their financial well-being before retirement, but recover enough to go back to work, they’d need more assets to hit their retirement goal targets. Also, they’ll need more assets/savings to offset the risk in retirement, since not working means they won’t be able to replenish their assets and savings.
Your clients purchase health insurance — such as critical illness insurance (CII) or long-term care insurance (LTCI) — to protect themselves from losses associated with a serious illness or need for care. Remember that costs can also involve lost income, bonuses and increased household expenses.
Self-insuring risks underestimating the need or being unprepared for the significant impact of a castastrophic need. Transferring the risk could result in over-insuring, using assets that could be better deployed elsewhere. That’s why this third strategy can work well for many clients:
Sharing the risk
If clients have significant assets — the means to self-fund — then some additional support from CII or LTCI can cover a catastrophic health risk, if projections in clients’ plans turn out to be too optimistic. If they don’t have the assets to take on the risk, then an incident can be catastrophic to their retirement well-being.
In the years leading up to retirement, the direct and indirect costs incurred as a result of a health event can impact retirement plans in three ways:
- reduced savings delay retirement
- physical and emotional strain – caused from being forced to retire earlier than expected, long before clients intended
- impact on savings and long-term health changes retirement lifestyle expectations and legacy plans
For clients who are currently self-funding this risk, help them understand the magnitude of the risk, and the amount of savings and investments that would have to be put aside for a major health event. If this results in a substantial reduction of available retirement income, they may have to make decisions about their plan, such as spending or lifestyle choices.
For those who want to transfer the risk, you can add various solutions to their portfolios to address and mitigate the risk, such as CII and LTCI. Payout annuities can also play an important role, ensuring lifetime guaranteed income, which can help cover basic needs.
You can position insurance — both health and life insurance — as part of a client’s basic needs, which would include paying some of the insurance premiums associated with adding solutions such as CII and LTCI.
After explaining the strategies, show clients how each strategy would work for them:
- Self-insuring or self-funding – plan for future needs by allocating a portion of existing assets to a “health fund.” This approach requires discipline. It risks underestimating the level of care needed, how much it will cost, and how long it will be needed.
- Transfer some of the risk to insurance – if clients’ assets aren’t liquid, an unexpected serious illness or need for care, early in retirement, can seriously impact their portfolios. For this type of risk, critical illness insurance or traditional long-term care insurance, with shorter waiting periods, are possible solutions.
- Share the risk – self-fund their care initially and transfer only the risk of a catastrophic need — one that is higher or lasts longer than expected — to long-term care insurance.
Both the second and third options use insurance to turn a potential financial catastrophe into a manageable, affordable premium.
No matter which method they choose, work with your clients holistically to:
- develop and manage their financial or retirement plans, and keep them up to date;
- ensure the investment portfolio reflects the decisions clients make across all of the risks that could prevent or derail achieving their goals;
- ensure clients understand the risks and in turn understand the various suite of solutions you can introduce to mitigate the risks, including life insurance, health insurance, and wealth management products; and
- understand the adjustments they might have to make to their savings, investments, income streams, and lifestyles resulting from serious health events, if they decided to self-insure some of the risks.
Look for a follow-up article on the Retirement Resource Centre featuring a case study about the potentially negative consequences of self-funding and a financial advisor’s solutions.
For more information about strategies for funding your clients’ future health and personal care:
- Talk with a member of Sun Life’s Insurance Sales Team about health insurance strategies.
- Talk with a member of Sun Life’s Wealth Sales Team about payout annuities.
Learn more about Money for Life, Sun Life’s customized approach to financial and retirement planning.4
You might also like…
- The number one reason Canadians change their retirement date: health
- Explaining — in plain language — the difference between a RRIF and a payout annuity to your clients
- Money for Life: Why Health?
1 Sun Life Canadian Health Index 2014.
2 Incidence rates for the calculation of health risks are from Canadian Critical Illness tables, published by Canadian Institute of Actuaries, 2012.
3 Examples are for Ontario, from report “Long Term Care in Ontario 2013,” Taking Care Inc. Health care inflation based on 4% annual rate.
4 Only advisors who hold CFP (Certified Financial Planner), CH.F.C (Chartered Financial Consultant), F.Pl. (Financial Planner in Quebec), or equivalent designations are certified as financial planners.
Rocco Taglioni, Senior Vice-President, Head of Distribution, Individual Insurance and Wealth, is responsible for the overall leadership of Sun Life Financial’s distribution organizations across its Retail business in Canada. His role encompasses the leadership of the distribution company, as President Sun Life Financial Distributors Inc., as well as the Insurance and Wealth wholesaling sales organizations. Through the various leadership teams he oversees the development, direction, and execution of the Distribution strategies centered on wealth management, protection, retirement, and estate and financial planning.
Since joining Sun Life in 2004, Rocco has held various executive leadership roles, including Vice-President Business Development, Group Benefits; Head of Individual Wealth Management; Senior-Vice-President, Client Solutions; and most recently Senior Vice-President, Distribution and Marketing, Individual Insurance and Wealth. Throughout his tenure at Sun Life, Rocco has led various business strategies centered on building, transforming, and evolving organizations and teams to drive higher levels of performance and success.
Rocco has 36 years of experience in strategic leadership in the insurance and investment industries. He has served on and is a member of a number of boards. Rocco is currently President and Chair, Sun Life Financial Distributors (Canada) Inc. and is a member of the Sun Life Financial Investment Services (Canada) Inc. board. He is a member of various industry associations, including Advocis, GAMA Canada, the Canadian Pension and Benefits Institute, and the Association of Canadian Pension Management.
Rocco holds a Bachelor of Arts in Economics from York University.