Some clients view financial advisors who sell life insurance with certain suspicion. After all, a financial advisor is supposed to be the untouchable fiduciary working solely on the client's behalf, while insurance sales reps peddling their policies rank just above used car salespersons in the minds of many people. The truth is that most financial advisors wear multiple hats, and a life insurance policy has a part in almost any serious financial plan.
Serving the Client
Most people have a legitimate need for a life insurance policy, but exactly what kind depends on the family situation.
One typical reason for life insurance is when one partner is making more money than the other is, and wants to ensure an unchanged living standard for the other partner. That could mean having enough insurance to cover the outstanding mortgage and future college for the kids, and providing an income-generating nest egg to supplement the partner's smaller paycheck until retirement and beyond. Securing the future of grown children with special needs is another case in which a life insurance policy can save the day. Simply put, people should consider life insurance if their sudden loss of life would mean hardship for their dependents. What good is a clever 401(K) portfolio strategy if the main contributor to the plan passes away and the widower or widow has to leave his or her house?
Still, the difficulty in broaching the subject makes some financial advisors hesitant to venture into this area. Clients may react with distrust, or even recoil at the morbidity of discussing their potential deaths. A client who agrees to get life insurance but ends up being turned down for something unflattering, such as being overweight, may get insulted and turn elsewhere altogether.
It is easier for a financial advisor to focus on stocks and funds, and on building nice investment models, while leaving the insurance part behind. However, most financial advisors face the situation and include life insurance in their overall strategy. This can be motivated by duty, profit, or a combination of both.
A financial advisor who makes a living through commissions has a strong financial incentive to include life insurance, as some insurance companies pay rather well for selling their products. The commission can be up to 70% of the first year's premium, followed by 3 to 5% per year as long as the policy remains in effect.
Adding "insurance agent" to the list of qualifications should be fairly easy for a current financial advisor, as the barrier to entry in this field is relatively low. Still, it may be worth the extra time and effort to obtain formal qualifications, such as becoming a Chartered Life Underwriter, Certified Insurance Counselor or a Fellow at Life Management Institute. It ensures that advisors are comfortable with every aspect of the product that they are selling, which can prevent embarrassing moments when clients have unexpected questions. Having proper credentials also demonstrates seriousness to more sophisticated clients.
Another approach is to separate the insurance discussion from the rest, and pass the torch to another person once the wealth planning is complete. This has multiple advantages.
First, it avoids the unpleasant feelings and potential blowback from a rejected insurance application. Second, it frees up the advisor's time to focus on his or her area of investment expertise, while leaving insurance planning in the hands of another dedicated expert. Third, a working relationship with the insurance expert can lead to great synergies. For example, a fee-only financial advisor who is not qualified to sell insurance anyway can make the insurance representative very happy by providing valuable leads. Since the insurance rep has many clients of his or her own, it's a good bet that many of them need financial advice.