Monday, June 20, 2016

How a Financial Advisor Can Guide Clients’ Life Insurance Decisions

Life insurance seems straightforward enough on the surface — a policyholder makes premium payments so that beneficiaries will receive a lump-sum death benefit upon the policyholder’s death, thereby ensuring family and other heirs will be taken care of.

The situation is complicated by the different types of life insurance, however. While term life insurance policies offer insurance during a specified coverage period — for example, insuring against a death when children are young — permanent policies such as whole life insurance combine a death benefit with a cash value investment component that may supplement other retirement savings. This means that life insurance decisions should be made in the context of an overall financial plan.

We asked Stephen Hart, a financial advisor and a member of NerdWallet’s Ask an Advisor network, about how financial advisors can guide clients through the array of life insurance options available to them.

How should people make decisions about life insurance?

Clients should work with an advisor who upholds the fiduciary standard, meaning they are obligated to put their clients’ interests ahead of their own.

Next, clients should understand that life insurance needs will change over time, and so will the insurance products that may be beneficial to you. For example, a young, unmarried person may be OK with a small amount of term life insurance. A middle-aged professional with a family probably needs a great deal more coverage and may consider a permanent policy to build cash value. An empty-nester nearing retirement who has built up a large portfolio probably needs less coverage but might want to begin looking at annuities and long-term care coverage.

Depending on life stage, your total death benefit might cover mortgage/debt, your children’s education, lifestyle expenses for at least a set period of time (possibly including retirement) and final expenses.

It’s important to fully understand how life insurance products work and how they help with long-term goals and objectives. Financial planning is rooted in using assets in the most efficient way possible, and there is no cookie-cutter solution.

How should financial advisors guide clients through these options?

Whether a client chooses a term policy or a permanent policy can depend on several factors. Most importantly, term life insurance is usually low-cost but will expire after a certain period of time, while a permanent policy is more expensive but will build cash value that can be used later. If your goal is to simply cover the worst-case scenario at the lowest cost, start with term. If you’re looking to build value over time, look to permanent.

The key is that life insurance should always be framed inside the overall financial plan. Too often, the decision about life insurance is made in a silo, which leads to individuals being underinsured or overinsured. Much like Goldilocks, you want to find the amount and type that is “just right” when used in coordination with your long-term plan. It’s important to keep in mind that life insurance is “a” solution, not “the” solution.

The specific question that should be addressed is: “What do you want your life insurance to do for you?” While this can drift into the “term or perm” territory, it is more important to address goals and objectives.

» MORE: How to find the best whole life insurance policy

What is the main challenge of incorporating insurance plans into an overall investment strategy?

There is far too much marketing and sales noise when it comes to evaluating life insurance. Some people outside of the insurance industry may tell clients that all life insurance agents are just out to make commissions, and those inside the industry tell clients those people are wrong. For the clients, it’s about finding an advisor they trust to guide them through the decision-making process. Some advisors will sell the policies themselves, and others will recommend someone else. The important factor is to never buy without considering the impacts on your overall financial situation.

Stephen Hart is a senior financial planner and wealth management advisor at Talis Advisory Services in Plano, Texas.

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