Some clients view financial advisors who sell life insurance with a certain suspicion. After all, a financial advisor is supposed to be the untouchable fiduciary working solely on the client's behalf. For some, it might seem incompatible to have an advisor who also sells life insurance. However, the truth is most financial advisors wear multiple hats, and a life insurance policy has a part in almost any serious financial plan.
There are many reasons why financial advisors might consider selling life insurance as part of the services they offer their clients. These include the ability to better meet their clients' needs by providing more comprehensive wealth planning services and the opportunity to earn commissions. The downsides include the challenges some advisors have in broaching the topic of life insurance with their clients and the need to become an expert in a new field.
Key Takeaways
- Many financial advisors view life insurance as an important part of the financial planning and wealth protection services they offer their clients.
- Life insurance offers financial protection to surviving beneficiaries in the event the insured policyholder dies.
- A financial advisor who sells life insurance can earn a large initial commission based on the first year's premium and 3% to 5% annual commissions for as long as the policy remains in effect.
- In lieu of selling life insurance directly, a financial advisor can provide their clients with referrals to qualified insurance professionals.
Why It Makes Sense for Financial Advisors to Sell Life Insurance
Most people have a legitimate need for a life insurance policy, but exactly what kind depends on the family situation. Financial advisors who have already established a trusted relationship with their clients are in a unique position to answer these questions as part of the client's wealth protection and estate planning process.
One typical reason for life insurance is when one partner is making more money than the other 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 expenses for the kids. It could also mean providing an income-generating nest egg to supplement the partner's smaller paycheck until retirement and beyond. Securing the future of grown children with disabilities 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 their house?
A Drawback to Selling Life Insurance
The difficulty in broaching the subject of life insurance 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 in underwriting for something unflattering, such as being overweight, may get insulted and turn elsewhere altogether.
It may be easier for a financial advisor to focus on stocks, mutual funds, and designing investment strategies, leaving the insurance part behind. However, many 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.
Making Money by Selling Insurance Products
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 initial commission can be a sizeable portion of the first year's premium, followed by 3% to 5% commissions 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 (CLU), Certified Insurance Counselor, or a Fellow at Life Management Institute. It ensures that advisors are comfortable with every aspect of the product they are selling, which can prevent embarrassing moments when clients have unexpected questions. Having proper credentials also demonstrates seriousness to more sophisticated clients.
Working With Insurance Professionals
Another approach is for the financial advisor to pass the torch to an insurance professional 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 their area of investment expertise, while leaving insurance planning in the hands of another dedicated expert.
Lastly, a working relationship with an insurance expert can lead to great synergies. For example, a fee-only financial advisor who opts not to go through the qualification process to sell insurance can make an insurance representative very happy by providing valuable leads. Since the insurance rep has many clients of their own, it's a good bet that many of them need financial advice. Thus, both parties can benefit from reciprocal leads, helping each other to generate ongoing business.
FAQs
Some financial advisors emphasize the importance of key person insurance to safeguard the future of the business. By recommending life insurance solutions, advisors demonstrate their commitment to protecting the viability and success of businesses, both small and large.
Why do financial advisors sell life insurance? ›
There are many reasons why financial advisors might consider selling life insurance as part of the services they offer their clients. These include the ability to better meet their clients' needs by providing more comprehensive wealth planning services and the opportunity to earn commissions.
Why do brokers and financial advisors recommend whole life insurance? ›
And with whole life insurance, the death benefit never expires. So long as you pay the required premiums and keep your policy in place, it will pay a death benefit someday. In addition, whole life insurance also accumulates cash value that's tax-advantaged and guaranteed to grow.
How do financial advisors make money from insurance? ›
Financial advisors who are registered representatives of a broker/dealer or agents of an insurance company are paid differently. They are paid a commission by their underlying broker/dealer or insurance company when a customer purchases a product, such as a mutual fund, annuity or life insurance policy.
Why is everyone selling life insurance? ›
For some, the desire to sell a policy comes from wanting to use the money to make a large purchase or settle debt. Instead of taking out a loan with interest, policyholders can sell their unwanted life insurance for a lump sum payment and use that money to fund their purchase(s) or pay off outstanding debts.
Do financial advisors recommend life insurance? ›
Term life insurance is often best, financial advisors say — but most people buy another kind. Consumers can buy two types of life insurance: term or permanent. The latter category includes whole life and universal life.
Why millionaires are buying life insurance? ›
Tax Laws Favor Life Insurance
One reason why the wealthier may consider purchasing life insurance has to do with taxation. Tax law grants tax benefits to life insurance premiums and proceeds, affording asset protection in the process. The proceeds of life insurance are also tax-free to the beneficiary.
What do financial advisors say about whole life insurance? ›
The Bottom Line
Whole life insurance is an effective tool as part of a long-term financial solution. It offers lifelong coverage, death benefit protection and the potential for tax-deferred growth through policy loans and withdrawals.
Why does Suze Orman not like whole life insurance? ›
Suze Orman isn't a fan of whole life insurance, and especially not as an investment. Investment portfolios for whole life policies usually have expensive fees and are overly conservative. Keep your investments and insurance separate, and stick to term life insurance instead of whole life.
Why does Suze Orman recommend term life insurance? ›
Most people only need life insurance for a limited time
The biggest reason Orman recommends term life coverage for most people is because this type of policy provides all the protection they need. Life insurance is intended to replace income or services the policyholder provides.
The value of paying a financial advisor 1% is going to vary by person. But, if you're already working with an advisor, the simplest way to determine whether a 1% fee is reasonable may be to look at what they've helped you accomplish.
Are financial advisors really worth it? ›
A financial advisor is worth paying for if they provide help you need, whether because you don't have the time or financial acumen or you simply don't want to deal with your finances. An advisor may be especially valuable if you have complicated finances that would benefit from professional help.
What is the average return of a financial advisor? ›
Industry studies estimate that professional financial advice can add up to 5.1% to portfolio returns over the long term, depending on the time period and how returns are calculated.
Why is life insurance so hard to sell? ›
Life insurance is a very difficult product to sell. Simply getting your prospect to acknowledge and discuss the fact they are going to die is a hard first step. When and if you clear that hurdle, your next task is creating urgency so they buy right away.
Can you become rich selling life insurance? ›
Some agents, advisors, and multi-line agents made a million dollars in the first year they worked with us selling life insurance! While most of the others it took 2, 3, or more years to make a million dollars per year selling life insurance.
Why do most life insurance agents fail? ›
Insurance agents succeed when they prioritize their customers' needs over their own profits. The most commonly cited reason insurance agents fail is that they fail to listen to their customers and take the time to find the best product to suit their needs.
Why would a company buy a life insurance policy? ›
Features and benefits
A business owner who owns a whole life insurance policy can borrow against the accumulated cash value for a variety of purposes, including to help the business weather uncertain economic times, pay overhead expenses, or provide supplemental cash flow1.
What role does life insurance play in a financial plan? ›
Insurance can help mitigate risk in your financial plan.
Perhaps the most common reason to own life insurance is to reduce risk. If your family's primary income provider passes away, life insurance can help fill the resulting financial void. But life insurance can mitigate risk in other ways.
Can a fiduciary sell life insurance? ›
What Does it Mean to Be A Fiduciary When Managing Life Insurance Policies? Did you know you can sell all or a portion of a life insurance policy, even term insurance? A fiduciary is an individual or organization who holds a legal and ethical relationship of trust with their clients.
Why are banks offering life insurance? ›
Bank-owned life insurance (BOLI) is a form of life insurance used in the banking industry. Banks use it as a tax shelter and to fund employee benefits.
