The holiday season now firmly has it’s grip around many of us and since we opted not to produce an end of the year podcast that answered questions we receive from various readers and listeners, I figured I’d entertain a question that came up recently that has been asked probably twice before in emails sent to us. Recently, this email showed up in our inbox:
Just curious. You’ve spent a lot of time highlighting the merits of life insurance as more than just something I buy to give my wife and kids money should I die and I find it very interesting. However, why don’t I find other financial advisors talking about this? To date, I’ve worked with four different advisors and only one of them really cared about how much life insurance I had (the others didn’t even really want to talk about life insurance). So why don’t they know about all of this?
Thank you for your time – Seth W.
Seth was gracious enough to grant my request to make my response in a public blog format so here’s the answer, for Seth and anyone else who has wondered this same thing.
Life Insurance is a Tool, a Complex Tool
There are actually a few different answers to Seth’s question, but I’ll start with the more naïve one. Life insurance is a tool just like all of the other financial tools that exist. Financial advisors (and other derivatives of financial product salespeople) learn some of the most basic applications of these tools.
Some (not many) choose to deepen their knowledge of these products while others consider what they learned in the first week or two of their license prep exams to be good enough. So it’s a simple situation where the green button does this and the red button does that and as long as we only have to solve this or that everything will be fine.
But life insurance, just like a lot of other financial products, is a tad more complex than what most people learn in an exam prep book. I’ve mentioned before that some people view a cardboard box simply as a means to carry or store objects while others can envision a multitude of additional applications.
And this doesn’t just apply to life insurance. I’ve made a handful of 529 Plan recommendations, none of which were concerned with accumulating assets to pay for college but rather seizing opportunistic tax deductions for parents who had children either already in or very soon entering college. Even 529 Plans have multiple strategic applications.
Becoming a financial advisor by definition doesn’t mean that one has obtained some large degree of financial expertise. Technically it means you were able to pass a test called the Uniform Investment Advisor Law Examination or a version that is combined with the Uniform Securities Agent State Law Examination. A three hour 130 questions test that requires a score of 72% or more to pass and costs a mere $155 is all that stands between anyone in the United States and the title of Financial Advisor.
And you know how many questions on that exam address the topic of insurance? None. You can see a breakdown of the test’s main categories here.
Several advisors obtain their Certified Financial Planner® designation, and one would think that this is where they could become proficient in insurance, but that’s an incorrect assumption. The CFP exam is mostly worried with testing one’s general knowledge of financial products and their most common application. In the eyes of the CFP exam, life insurance is all about risk transfer, just like 529 plans are all about accumulating assets to pay for college. The more advanced-thinking strategies are left unearthed.
Now to be a tad more cynical I’ll point out that financial advisors have a financial incentive to be ignorant to life insurance beyond a simple transfer of risk and search for the cheapest premium possible to do that.
As someone who has worked in the investment industry I can tell you from first hand experience (as well as share numerous stories from others who have also worked in the industry) that most people who work in the industry either as bona-fide “advisors” or even simply as registered representatives measure their value and success by the assets they accumulate. And this focus on accumulated assets isn’t just for posture; it’s for putting food on the table.
Financial advisors mostly build practices focused on maximizing fee income, and fees are generally generated as a percentage of assets managed. For those who aren’t actually advisors, the same thing can be accomplished through a 12b-1 fee.
This one is very simple, more dollars going elsewhere to be saved means less money saved in the account from which I can charge you a management fee, which ultimately means less income for me the advisor. I don’t want to know about life insurance as an asset class because there is more money to be made through the fee generating managed account.
And this doesn’t only apply to financial advisors or investment salespeople. There are a some insurance agents who would rather not discuss life insurance as an asset class due solely to the fact that it often forces them to write life insurance policies that have dramatically lower commissions, and for the whole life focused agent, it can seriously reduce the residual income that is possible if you simply bought standard whole life insurance.
But Maybe your World View is Skewed
While I definitely understand that there are a number of financial advisors out there who won’t give a discussion about life insurance the time of day, I’m also aware of many who are actively learning about life insurance’s application beyond just a simple risk transfer tool and discussing it with their clients.
We work with several financial advisors across the country who have turned to us for our expertise on this subject, and almost all of them are stunned and a little embarrassed that it’s taken them this long to come to understand this aspect of life insurance.
As we’ve already established, the barrier to entry is not all that high for a financial advisor (nor is it very high for an insurance agent), and just because you are one doesn’t mean you are a good one.