QPRC

Qualified Plans & Retirement Counseling

The Role of Insurance

in Retirement Planning
by

Bruce A. Tannahill, JD, CPA/PFS, CLU, ChFC, AEP

Abstract: Many things can prevent a

retirement plan from working as
planned. Part of the planning
process should include an assessment of the risks the plan and client
face and how to help protect the
plan against those risks. Insurance is
available to help minimize the impact
of some risks. Health insurance, disability income insurance, long-term
care insurance, life insurance, and
property and casualty insurance
should all be considered in a clients
retirement planning. Business owners may have additional insurance
needs to consider.

An important part of retirement

planning is considering contingencies
that can derail the retirement plan,
either before retirement or during
retirement. These can include:
Underperforming investments,
An employers bankruptcy that
reduces the anticipated pension
benefit,
Divorce,
Unemployment,
Medical expenses not fully covered
by insurance,
Disability,
The need for long-term care, or
The death of a spouse.
Fortunately, insurance is available
for some of these contingencies to
reduce the impact they may have on a
This issue of the Journal went to press
in June 2013. Copyright 2013,
Society of Financial Service Professionals.
All rights reserved.

clients overall finances, including his or

her retirement plan. This column will
discuss some types of insurance that can
help keep a retirement plan on track.
Health Insurance
Medical expenses can consume a
large part of a clients income, even
with insurance. A 2012 Deloitte survey found that 24% of total health
care expenses of higher-income individuals went to out-of-pocket medical
expenses.1 While health insurance is
expensive, being without health
insurance can be devastating. A 2009
study reported that illness or medical
bills contributed to 62.1% of bankruptcies filed in 2007. 2 Less than
25% were uninsured when they filed
for bankruptcy but 40% had experienced a lapse in coverage in the two
years prior to filing.
Many clients understand the
importance of health insurance, either
intuitively, from personal experience,
or based on the experience of family,
friends, and coworkers. Maintaining
some level of health insurance can
reduce both the immediate impact of
medical expenses and the long-term
impact on a clients finances.
Critical illness insurance may help
supplement a clients health insurance
coverage. When the insured is diagnosed with a covered condition, these
benefits can help pay living expenses,
supplement health insurance or disability income insurance benefits, or
continue contributions to retirement
savings plans. Coverage is available for

a specific disease or a number of diseases and conditions.3

The Patient Protection and
Affordable Care Act is making major
changes to health insurance in the
United States. Its ultimate results are
unknown at this time. The advisor and
client should try to anticipate what
additional coverage will be needed and
plan to have resources to pay for it.
Disability Income
Insurance
Most peoples largest asset is their
future earning ability. Losing that ability can wreak havoc with their retirement plans and other financial plans.
Retirement planners normally assume a
clients employment earnings will continue without interruption until retirement. Disability can make this less
likely to happen. The Social Security
Administration reports that just over
one in four of todays 20-year-olds will
become disabled before they reach age
674 and that there were over 2.5 million disabled workers under the age of
50 in December 2012.5
The potential earnings lost to disability can be staggering. A 25-year-old
who plans to work for 40 years with
average annual earnings of $50,000
would lose $2,000,000 of future earnings. Future pay increases could make
the potential loss $3.8 million.6
One of the often overlooked problems from a long-term disability is the
impact on retirement funds. When an
individuals earnings stop, his or her contributions to an employer-sponsored

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QUALIFIED PLANS & RETIREMENT COUNSELING

retirement plan also stop. An individual

covered by a pension plan will likely no
longer accrue any benefits once he or
she takes disability status. Even clients
with the financial ability to make contributions will not be eligible to make IRA
or qualified plan contributions if they
do not have earned income. Using retirement accounts to pay living expenses
would compound the problem.
Disability income insurance
sources include employer-provided
insurance, plans sponsored by a professional association, and individual policies. Leaving the sponsoring employer
or association may mean losing the
coverage. In addition, there is the risk
that the employer or association will
drop its current coverage, forcing a
client to obtain personal coverage,
which could be much more expensive.
Important considerations for any
disability coverage are the elimination
period and the disability definition.
The elimination period is similar to a
deductible, requiring the client be disabled for a specified time before any
benefits are paid. Common elimination periods are 30 and 90 days. Naturally, the longer the elimination period,
the smaller the premiums. Some individual policies include a rider that pays
a monthly benefit to qualified retirement plans, in addition to the regular
disability benefit.
The disability definition determines if an individuals disability qualifies him or her for benefits. The preferred definition provides that the
insured qualifies for benefits if unable
to perform the normal duties of his or
her own occupation. This definition
examines whether the insureds disability prevents him or her working
in his or her current job or in a simi-

lar job. Other definitions may provide benefits only if the individual
cannot perform any job for which his
or her training and experience qualify
him or her, or if the individual is
unable to work at all.
Neither Social Security Disability
Insurance nor Workers Compensation
is likely to provide an income if a client
becomes disabled. The requirements for
those programs make it unwise to rely
on them. To qualify for Social Security
Disability Insurance,7 an individual
must meet requirements on how much
he or she has worked and how recently,
and must have a medical condition that
makes him or her unable to work for at
least one year or will result in death.
Even those who seemingly meet the
working and medical requirements are
often denied benefits. Approximately
65% of applications for Social Security
Disability Income are initially denied.8
The average monthly benefit payment
in February 2013 was $1,130.9
Workers Compensation benefits
are only available if the disability results
from a work-related injury or illness.
However, only approximately 10% of
disabilities are work-related.10 Even
those who qualify may have difficulty
collecting benefits, only receive benefits
based on a determination of the
amount of disability, or only receive
benefits for a limited period of time.
Long-Term Care Insurance
Retirement planning should consider that a client may need to pay for
some form of long-term care. Longterm care insurance actuaries surveyed
by the American Association for LongTerm Care Insurance in 2012 reported
that someone buying long-term care
insurance with a 90-day elimination

period at age 60 or older had approximately a 35% chance of using policy

benefits.11 A 2012 study found that
the median cost for one person living
in a one-bedroom apartment in an
assisted living facility was $3,300 per
month. The median daily cost of a
semi-private room in a nursing home
was $200 and the median cost of a
home health care aide was $19 per
hour.12 Forty-two percent of people
admitted to a nursing home stayed for
one to 5 years, with 12% staying for
more than 5 years.13
Planning for long-term care needs
should involve consideration of how to
meet a clients potential long-term care
needs, not just buying long-term care
insurance. Important features to consider are the elimination period, initial
benefit, the ability to purchase increased
coverage, and inflation protection. In
addition to traditional long-term care
insurance, some life insurance policies
and annuities offer benefits if the
insured needs long-term care.
Life Insurance
Life insurance can play several
important roles in retirement planning.
First, it allows a surviving spouse to
replace some or all of the retirement
savings the deceased spouse or partner
would have accumulated from his or
her earnings. Second, cash value can
provide a source of supplemental retirement income. If a client anticipates
using life insurance cash value to supplement retirement income, the policy
design and funding should reflect that
purpose.14 Third, life insurance proceeds can cover the costs of hiring
someone to take on the household
responsibilities handled by a deceased
spouse or partner. [Finally, a life settle-

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QUALIFIED PLANS & RETIREMENT COUNSELING

ment may provide an additional source

of cash for retirement income.]
Property and
Casualty Insurance
It is also important for a client to
have sufficient property and casualty
insurance. A homes fair market value
may not reflect what it would cost to
rebuild it, especially in areas that have
recently suffered a drop in the value of
homes. To the extent available, personal property insurance should also
provide for replacement coverage, not
depreciated value payment. Frequently,
the majority of a clients personal property will be several years old. Without
replacement value coverage, a fire or
other loss could result in the client
replacing damaged property with lower
quality items, not replacing certain
items, or using income or savings to
supplement the insurance payment.
Clients often believe their homeowners insurance covers damages from
floods. Flood coverage is only available
with a separate flood insurance policy.
According to the National Flood Insurance Program Web site, almost 25%
of all flood claims occur in moderateto-low risk areas.15
Certain types of risks, such as hurricanes and earthquakes, may be subject to
increased deductibles. Clients whose
homeowners policies have increased
deductibles should plan how they would
pay those deductibles. Similarly, a client
who increases a deductible to reduce premiums should have a plan for paying
the deductible if a loss occurs.
For Business Owners
Many business owners overlook
important insurance needs. Adding
business interruption insurance to its

property insurance helps protects a

business against its loss of income
when it cannot operate after a disaster.
While property insurance covers the
loss to property, it does not cover lost
revenue. Business interruption insurance can allow the business to meet its
fixed expenses, including payroll, rent,
and utilities, and to recover at least
some lost profits.
Businesses often purchase term
insurance for key person coverage and
buy-sell needs. While they are to be
applauded for their foresight, term
insurance protects only against the
death of the insured. A key person or
owner is more likely to leave the business while alive. The use of a cash value
policy, given time to build cash value,
may help provide funds to replace a key
person or to provide a down payment
on the purchase of a departing owners
interest. Disability income insurance
specifically designed for these situations
should be considered to supplement the
life insurance chosen.
Conclusion
The risks that may prevent a client
from obtaining his or her retirement
goals include more than investment
risk and inflation risk. Medical
expenses, disability, long-term care
needs, death of a spouse or partner,
and property losses can also derail the
retirement plan. Insurance can play an
important role in keeping the retirement plan on track.
Due to the varied insurance coverage, a financial professional should rely
on individuals who are experienced in
the type of coverage needed. The Society of Financial Service Professionals
is an excellent resource for identifying
professionals in each area.

The author appreciates the assistance of

Tom Petsche, CLU, ChFC, RHU, in providing information on disability insurance,
and the assistance of Mickey Batsell, CLU,
CASL, MBA, in providing information on
long-term care planning and insurance.
Bruce A. Tannahill, JD, CPA/PFS, CLU,
ChFC, AEP, is Director of Advanced Markets
for Aviva Life and Annuity. He focuses on
helping insurance professionals identify
sales opportunities in estate business planning and retirement. He received his BSBA
from the University of Dayton and his JD
from the University of Missouri at Kansas
City School of Law. He may be contacted at
bruce.tannahill@avivausa.com.

(1) Deloitte, The Hidden Costs of U.S. Health

Care: Consumer Discretionary Health Care
Spending, accessible at deloitte.com.
(2) D.U. Himmelstein, D.Thorn, E. Warren, et
al., Medical Bankruptcy in the United States,
2007: Results of a National Study. American
Journal of Medicine 122 (2009): 741-746.
(3) Edward Mueller, A Primer on Critical Illness Insurance. Society of Financial Service
Professionals, Employee Benefits Newsletter,
February 2012.
(4) Social Security Administration, Fact Sheet,
February 7, 2013.
(5) Ibid.
(6) What You Need to Know about Disability
Insurance, published by the LIFE Foundation.
(7) Social Security Disability Insurance is often
confused with Supplemental Security Income
(SSI). SSI provides benefits to individuals with
low income and resources who are age 65 or
older, blind, or disabled. Social Security Disability Income benefits are paid from the Social
Security Trust Fund while SSI benefits are paid
from general tax revenues.
(8) Social Security Administration Disabled
Worker Beneficiary Statistics by calendar year,
http://www.socialsecurity.gov/OACT/STATS/d
ibStat.html, last visited March 3, 2013.
(9) Social Security Administration, Graphs of
Disabled Workers, http://www.socialsecurity.gov/
OACT/STATS/dibGraphs.html#3, last visited
March 3, 2013.
(10) What You Need to Know about Dis-

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QUALIFIED PLANS & RETIREMENT COUNSELING

ability Insurance.
(11) American Association for Long-Term Care
Insurance, http://www.aaltci.org/long-termcare-insurance/learning-center/probability-longterm-care.php, last visited March 5, 2013.
(12) Genworth Financial, Inc., Genworth

2012 Cost of Care Survey. (Richmond, VA,

Genworth Financial, Inc., April 2012).
(13) American Association for Long-Term Care
Insurance 2008 LTCi SourceBook.
(14) For a fuller discussion of how life insurance
can be used as a source of retirement income,

see B. Tannahill, Life Insurances Role in

Retirement Planning, Journal of Financial
Service Professionals 66, no.1 (2012): 33-35.
(15) http://www.floodsmart.gov/floodsmart/
pages/residential_coverage/homeowner.jsp, last
visited March 3, 2013.

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