In the dynamic world of financial planning, the traditional stronghold of life insurance is experiencing a remarkable shift. While life insurance remains an important component of many comprehensive financial plans, savers looking to protect themselves from financial calamity or just to de-risk their retirements now have a far larger universe of financial solutions at their disposal than they did just a few decades ago. And evidence suggests they are making use of these alternative solutions at an increasing rate. A recent analysis by McKinsey, focusing on the top 20 publicly traded life insurers, banks, and asset management companies, revealed a staggering decline in the market capitalization of life insurers relative to the broader financial services sector. From a dominant 40 percent in 1985, this share of market capitalization had dwindled to a mere 9 percent by the year 2020. This dramatic decline in life insurers’ share of the financial services sector indicates a seismic transformation has taken place in consumer preferences and underscores the pressing need to explore alternative avenues for Fortunately, we believe there exists a plethora of options that provide comparable benefits while offering greater flexibility, customization, and potential for growth.
Understanding Traditional Life Insurance
Before delving into alternative solutions, it’s essential to grasp the foundational principles of traditional life insurance. Conventional policies, such as term life insurance and whole life insurance, have long served as stalwarts in providing a safety net for loved ones in the event of the policyholder’s passing. The benefits of these products are clear: they can provide material financial support for beneficiaries in the event of an untimely death. They can also help cover final expenses, and some products may potentially even provide cash flow to policyholders during retirement. However, these policies often come with a number of potential drawbacks, including fixed coverage options, lack of investment components, limited flexibility and liquidity, policy lapse risks, and, in the case of whole life insurance products, may come with substantial premium costs. They may also be difficult for many people to access due to the complexity of underwriting such policies. And not all agent selling insurance products are held to a fiduciary standard. These shortcomings have left many individuals seeking more adaptable and robust alternatives.
Exploring Alternative Options
In contrast to previous generations, today’s savers are not forced to choose from such a narrow set of imperfect financial products. Instead, an array of alternatives solutions have emerged in the ever-evolving world of financial products, offering greater flexibility and customization, as well as increased growth potential. Below are some noteworthy options worth exploring:
- Health Savings Accounts (HSAs)
Health Savings Accounts (HSAs) have emerged as a popular alternative to traditional life insurance, particularly for individuals seeking tax-efficient ways to save for medical expenses. HSAs offer a triple tax advantage, allowing contributions to be made on a pre-tax basis, growth to occur tax-free, and withdrawals for qualified medical expenses to be tax-free. HSAs provide flexibility in investment options, and unused funds roll over from year to year, making them an attractive option for long-term healthcare planning.
- Term Life Insurance
Term life insurance with living benefits is an intriguing alternative to traditional whole life insurance. While these policies provide the usual death benefits typically associated with both term and whole life insurance, they can also provide policyholders with certain benefits while they are alive, such as accelerated death benefits or critical illness riders at far lower cost than traditional whole life policies. These policies provide financial assistance by offering funds to cover medical expenses or replace lost income in the event of a critical illness diagnosis, disability, or terminal illness.
- Income Replacement Strategies
Income replacement strategies involve building a diversified portfolio of income-producing assets, such as dividend-paying stocks, bonds, real estate, or annuities, to generate passive income streams. These strategies can ensure a steady stream of income to cover living expenses or replace lost income in retirement or during unexpected events. While they may not offer a lump-sum death benefit like traditional life insurance, income replacement strategies provide greater flexibility, customization, and growth potential. The proliferation of publicly available investment products covering a wide range of asset classes has made income replacement strategies far easier to access in recent years.
- Emergency Funds and Cash Reserves
While certainly not a new strategy, emergency funds and cash reserves can act as a highly effective alternative to traditional life insurance. In fact, emergency funds and cash reserves serve as a foundational element of achieving financial security, offering a safety net for unexpected expenses such as medical bills, car repairs, or job loss. Importantly, emergency funds provide liquidity and peace of mind without relying on debt or depleting long-term savings, and, unlike some life insurance products, there is no risk of paying for protection that isn’t ultimately used. Any emergency funds that you do not use remain your property. By maintaining an adequate emergency fund, individuals can weather unforeseen emergencies with confidence and financial stability. This method combined with the income replacement strategies is commonly known as self-insuring.
Assessing Your Unique Needs
When considering alternatives to traditional life insurance, it’s crucial to assess your family health history, individual financial circumstances, goals, and preferences. Start by evaluating your current financial situation, including income, expenses, assets, and liabilities. Identify your short-term and long-term financial goals, considering factors such as retirement planning, education funding, debt repayment, and emergency savings. Assess your risk tolerance, investment time horizon, and personal values when exploring alternative options. Research and compare the features, benefits, costs, and risks associated with each option to determine which aligns best with your needs and preferences. It’s quite possible that some combination of the above strategies, along with some level of life insurance coverage, may be the most effective solution for you.
Conclusion
While traditional life insurance remains a valuable tool for financial protection, we believe it’s essential to explore alternative options that may better suit your personal needs or potentially work in tandem with some form of life insurance coverage. With careful planning you can build a comprehensive financial plan that provides peace of mind and confidence in the face of life’s uncertainties. For more information on this topic, set up a free financial assessment with one of our portfolio managers and find out which solution may be best suited for you.
This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy”, dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article does not constitute legal, tax, accounting, investment or other professional advice. The views expressed are those of the author(s) as of the date of publication of this report and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other investment strategy in the future, there are no assurances that any predicted results will actually occur.
