Skills development should be part of an income protection plan

It is no secret America needs lifetime income protection to address life’s financial risks. The questions are: what type of protection, where to get the cash needed to buy protection and in what amounts?

For most people, their most valuable asset is their ability to earn an income that is sufficient to pay their expected future living expenses, including retirement. If for some reason they lose their earning ability, their dependents could suffer economic losses and diminished lifestyles. They buy disability insurance to protect themselves against that risk.

I believe, however, that the industry needs to rethink how it offers income protection. I believe this new, broader approach should allow consumers to better understand what their financial lives will look like, their need for lifelong income and help them prepare for life’s uncertainties.

I see five income protection stages in life. Each of these stages requires cash investment and can use financial solutions to minimize the risk of income loss. Let’s look at each stage.

Stage 1: Investing in an education

The first step in income protection is to acquire skills sufficient to earn a living wage. Most people are not born into families that have the financial resources to fully fund higher education. To our benefit, we are beneficiaries of free, publicly funded universal elementary and secondary education. If we decide to gain the knowledge to pursue a trade or profession, we need to find the money to pay for that education. That is where a critical cost benefit decision needs to be made. For the most part, we have unnecessarily directed most everyone down a path to obtaining a college education with assurances that the education will guarantee a high-paying job.

Unfortunately, one must choose a field of learning very carefully. With the average four-year college education costing between $38,000 at an in-state public college or university to over $140,000 at private institutions, how this decision is made couldn’t be more important. Choose a trade or profession that is not in demand, and you have wasted time, money and work that will not pay off. As an added impact for these students, they will have the pleasure of repaying student loans for a good portion of their adult lives.

To make the education cost/benefit decision, individuals need to balance the desire to learn a subject and its potential to provide future income. Ultimately, the trade-off is to choose an area of knowledge (e.g., technology, science, computing, marketing, management) that we enjoy and have a passion for, that is in demand by employers and can produce a reasonable level of future income that will provide for our needs. If the education decision is made properly, the likelihood of emerging with the ability to earn a living wage is increased dramatically.

Finding new and better utilization of existing solutions to provide cash for higher education is step one in effective lifetime income protection.

Stage 2: Reskilling

The Cambridge dictionary defines reskilling as the process of learning a new skill so you can do a different job or of training people to do a different job. During 2020 we witnessed thousands of people (e.g., airline pilots, Broadway performers) whose jobs disintegrated. These people were faced with the need to find an entirely new profession or field of work. They were faced with the need, cost and challenge to reskill. For others reskilling is a task that they will need to embrace in the next decade as new Fourth Industrial Revolution technologies, such as artificial intelligence, are rolled out.

The financial question is, Who pays for reskilling? Today the answer is that the impacted employee usually pays. Our federal and state governments have not as yet funded broad-based programs to allow individuals to be trained for new jobs. Some companies, such as Amazon, have established programs to help workers obtain new skills as their old jobs are eliminated due to implementation of new technologies. If workers are not lucky enough to be employed by one of these organizations, the cost burden will fall fully on them. Where do they get the funds to get the technical or professional training needed to pursue a more employable field of knowledge? This effort may involve going back to school for a year or more.

Could the industry develop products that pay benefits to fund reskilling costs? For example, cash value insurance products may be a source of needed funds.

Stage 3: Upskilling

Upskilling is another action workers must pay for today. Upskilling is the process of acquiring advanced skills through additional education and training. This is the proactive action taken to add better skills such as stronger technology or project management abilities that produce higher personal productivity and better job performance. In short, workers become more skilled employees qualifying for higher compensation.

As we experience technological change, such as the implementation of artificial intelligence, updated skills are needed. If workers are not investing in themselves, either by taking advantage of programs offered by their employer or through their own initiative, they are likely falling behind and becoming a less valuable asset. If skills diminish so will income earning capabilities. Workers must invest to keep an employable skills mix.

As individuals plan their cash flow, they need to allocate spending a portion of their budget on upskilling to help protect that inflow of cash into the future. Could the industry add benefits to its products that help offset these costs?

Stage 4: Buying protection during the working years

Actions taken to reskill or upskill are driven by the individual. On the other hand, the impact of an illness or accident is unexpected and not within their control. That is where having the proper insurance coverages in place comes in. The industry needs to do a better job of telling the story that disability insurance provisions protect against these unexpected events. Individuals need to work with financial professionals to get the most comprehensive coverage by buying whatever combination of policies — disability, life or annuity — that delivers a total cost-effective solution. Making the dollars spent on insurance cover multiple risks should be the goal.

Stage 5: Buying protection for the non-working years

The need for income protection does not stop once full-time employment ceases. Individuals need guaranteed lifetime income to protect against outliving their money. The only real source of such income today is the Social Security retirement benefit. Having cash to pay for all living expenses, including likely higher medical costs, is essential for everyone.

Maybe the industry could better position annuity and life insurance products as those that can provide lifelong income or spending protection?

Where financial products fit

The financial services industry has the product solutions and advice capabilities to help consumers navigate the five stages. In my view the keys needed to obtain more consumer purchases of these products are to better educate the consumer about what their financial life will likely look like, what resources they will need and where they can go to get the coaching to be successful financially and to better position available products. Personal financial literacy levels are not good at all age levels. The industry needs to better educate the consumer about their financial challenges throughout life. Protecting recurring cash income during all stages is paramount in the journey to lifetime financial security.

Harry N. Stout has been the president of Fidelity & Guaranty Life, deputy chief executive of Old Mutual Financial Network, and managing director of Insurance Insight Group. He is also the author of The FinancialVerse personal finance books and of a new book, Today’s Annuities — A Tool to Create Protected Lifetime Income.