How to advise client families moving to one income

As family responsibilities grow, one partner may decide to reduce work hours or leave the workforce altogether to care for children or aging parents, or to take on other duties or meaningful projects. Financial advisors play a key role helping families consider how they can afford to live on a reduced income and how insurance needs will change.

It’s a good start if clients are asking about reducing income ahead of time, because it means they’re putting thought into it, said Maya Patrie, senior investment counsellor and portfolio manager with BMO Private Wealth in Edmonton.

Advisors should ensure that both partners are present for the conversation, Patrie said. “Sometimes, I will find only one partner comes to meetings. And if it’s a family decision, you need both parties present.”

Because advisors tend to focus on the numbers, taking time to understand the soft side of why a client wants to leave work is a great way for an advisor to add value, said Scott Sather, founder and president of Awaken Wealth Management in Regina. Advisors will get to know their clients better and deepen their relationships, he said.

Sather and his wife wanted one parent at home during their children’s teen years, he said. While a lot of people think teenagers are self-sufficient, “they are not,” he said. “They’re emotional messes.” His wife worked part time so she was present to help the kids debrief their day when they arrived home after school; they wouldn’t have wanted to talk by suppertime, Sather said.

When an advisor works with a family to assess whether they can afford to live on one income, the advisor should build a net worth statement by establishing an inventory of assets and liabilities, Patrie said.

Advisors should also help clients create a cash flow statement, Sather said. Clients should know how much they’re paying for basic expenses such as their mortgage and utilities.

“Here’s the income that’s going to come in, [and] here’s the bills that we have to pay,” he said. “And then deciding is that enough? Are we still able to do the saving? Are we still able to do the lifestyle side of things?”

While families can make lifestyle changes, such as buying generic brands, they may also want to consider there are things money can’t buy.

“How’s it going to feel when you both have to work knowing that you can’t get off to be able to see the [kid’s] recital or the big game?” Sather said. “Maybe we’re not buying the best quality of things, but we’re able to have those experiences instead.”

Sather also noted that, even if the working partner’s income rises to cover the other partner’s prior contribution, the investment plan needs to be updated from a know-your-client perspective. For example, long-term risk tolerance may not change, but the clients may want to switch some investments to shorter-term ones as the family may want more liquidity.

Reassessing insurance needs

“One of the common misconceptions is that only the breadwinner needs to be insured because they’re the one with the income,” said Kate Norris, a financial planner with Sun Life in Airdrie, Alta. But if, for example, the at-home partner gets sick, the income earner may have to take time off work. Additional expenses may include child care, home cleaning and meal preparation.

The at-home partner typically won’t qualify for disability insurance without earned income, but they can buy critical illness insurance.

“You only die once, but disability, critical illness — those can happen multiple times, at any point,” Sather said.

On the flip side, the family will need income replacement if the breadwinner becomes disabled, critically ill or dies.

Clients should understand what their employee benefits cover, and identify gaps. For example, a client might think they’re covered with group life insurance, when it covers only accidental death at work, Norris said. And group disability insurance might cover only base salary, not bonuses. A client can usually increase their group coverage at their own cost if they undergo medical underwriting, Norris said, which would typically be less expensive than taking out an individual policy for comparable protection.

“We want to make sure we’re maxing out what’s available through the group,” she said.

The cost of disability, critical illness and life insurance, as well as health and dental insurance, can add up. Some employers may allow an employee to keep their benefits if they work a minimum number of part-time hours, Sather suggested.

Mortgages may be best covered with a term policy. Unlike with mortgage insurance when the bank is the beneficiary, Sather noted that as the beneficiary of term insurance, a client can choose how to use the money — for example, the mortgage could be paid off or renegotiated. And, while mortgage insurance ends after the mortgage has been paid, the client could choose to renew a term policy or convert it into permanent life insurance.

For life insurance, each spouse should ideally have their own policy, Norris said, rather than a joint first-to-die policy: If one spouse dies, a surviving partner with children would need their own life insurance policy as they’ll need coverage if they die, too. A joint policy is typically used for estate planning and to leave a legacy, she added.