The vast majority of employee benefit professionals have long seen voluntary worksite benefits as a singularly purposed solution designed to defray the first-dollar expenses associated with core medical deductibles, co-pays, experimental treatment and non-medical everyday living expenses associated with illnesses and injuries. The problem is this is only part of the story. An adjustment to your approach may allow you to have far greater impact with your clients and have a dramatic impact on your firm’s revenue.
One such VB strategy, when presented and deployed, can change some unwanted loans or early distributions from 401(K). At its core, this strategy is about positioning and education more than it is product design. The fact is, a well-communicated critical illness program can serve as a hedge that protects the current wealth management strategy of employees against life’s unexpected events.
Why is this positioning strategy concept worth learning?
Approximately 20% of 401(k) participants take loans against their retirement, according to the Center for Retirement Research at Boston College. Further, 11% of plan participants borrow from their 401(k) plan each year and about 20% currently have a loan outstanding to their account, based on data from Vanguard Group. Many are the direct result of medical misfortune. This can have dramatic implications to financial advisers who rely on “assets under management” calculations to determine fees.
With 11% of the employee population taking new loans every year, and pay downs at alarmingly low rates, the problem will only worsen. The ability to leverage a lump-sum critical illness policy is one way to help curtail a large portion of these loans. It ensures those who select coverage will reap the benefits of their protection instead of taking large sums out of their cash-value life insurance or retirement plans.
This is a great way to establish relationships with financial adviser groups to strategically cross sell. Undoubtedly, they will love that you have brought them a way to protect their interests.
Your clients will likewise benefit greatly from this strategy. One of the biggest risks that employers who have employee populations with outstanding 401(k) loans face is unwanted re-entry into the workforce with the specific intention to recoup and replace lost investment dollars. Often the employees in question are highly compensated and/or become part of a protected class becoming a new extended liability on many fronts.
Alternatively, by leaning on a lump-sum critical illness strategy, companies can mitigate unnecessary loans and give the employees peace of mind in the process. An additional benefit for employers comes from allowing natural turnover and succession to deliver lower compensation and less insurance risk. The evolution of voluntary benefits as a strategy to reduce the implications of shifted risk that comes from cost containment gives brokers the ability to drive their conversations to new levels that the C-suite will appreciate.
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