The holiday season now firmly has its 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.
I'm Uncomfortable Talking About Death…
Throughout the years, various people have come to us looking to hire us to assist with their attempt to sell more life insurance. This has come in many forms some have worked (paying us as consultants to assist with selection and explanation of products) while others haven't (setting up an infrastructure to act as a brokerage general agency and contract producers).
During this time, we had the opportunity to interact with a number of financial advisors and ask them about life insurance and their feelings about it when it comes to discussing it with their clients.
The number one theme we hear about is the advisors comfort level with various aspects of the life insurance discussion.
Some dislike the idea of having such a gloomy conversation because they have to discuss the uncomfortable topic of a client's death.
I'm also Uncomfortable Talking about my Client's Health
Another common theme among financial advisors that approached us for help with life insurance was a discomfort discussing health related issues with clients. Perhaps they just felt awkward talking about a procedure performed in a more delicate area. Or maybe the aversion stemmed more from a lack of confidence in discussing health as this wasn't an area of expertise. Whatever the root cause, I can recall maybe one person who we've worked with who appeared to have no problem discussing health issues with his clients. Everyone else wanted nothing to do with it.
Life insurance field underwriting (one of the many jobs held by your standard life insurance agent) involves considerable conversation about the health of prospective life insurance buyers. Life insurers have relied on this information for years a first line discovery about an applicants well being and personal lifestyle. While some agents can get buy with a less than comprehensive approach to knowing their clients' true health history, taking this approach places the agent–and in many cases the applicant for life insurance–at a serious disadvantage.
Case in point, I once argued a standard offer up to preferred plus. The underwriter's original justification for the standard offer hinged on a strange interpretation of the urinalysis results from the medical exam.
The Life Insurance Industry also gets in Its Own Way
Then there are those who feel that life insurance is a huge time drain due to the paperwork and cumbersome application/underwriting process (we agree).
The process for beginning a life insurance sale can be quite involved and includes steps far more complex than the long paper trail generated by an investment transaction.
While the industry has made efforts to streamline the process, and is making progress, it still has a long way to go in the pursuit of creating a new business process that both client and agent will feel works easily.
So our anecdotal collection of thoughts comes down to discomfort over discussing death or health and the desire to avoid laborious paper-pushing and weaving through the complex new business process.
Other data backs this up…
It's a tad dated at this point, but it's the last time anyone addressed this subject. A survey conducted by Saybrus Partners back in 2013 found that financial advisors largely avoided discussing life insurance with their clients because “the subject is unsexy, time-consuming and/or too complicated.”
Nearly 50% of those polled stated that life insurance was a distraction from their regular practice. 17% declared it too complicated.
Additionally, Saybrus discovered a number of financial advisors didn't feel comfortable given the complexity and ongoing changes being made to life insurance contracts. In other words, they couldn't keep up with the industry so they avoided talking about it.
Varying comfort levels with discussing death, health history, or remaining current on the life insurance product market certainly play a role in discouraging financial advisors from actively engaging in the sale of life insurance products. But other factors play a role in advisors' decision to avoid life insurance discussions.
The sale of any other life insurance product beyond term insurance has the potential to eat into the budget for investing. While some may use this reality to suggest they are simply trying to maximize wealth through stock market et. al. investing, the more likely truth is advisors worry that fewer dollars available for the products they have to sell means less money overall for them.
Buy term and invest the difference from the outset was a means to free up cash so registered representatives looking to sell mutual funds could sell more of them–and then A.L. Williams latched on to it as a way to get rich selling term insurance.
Avoiding a life insurance discussion is both a faster way to more money and a way to ensure higher sales for the product of focus. Most advisors measure their success by the value of the assets they accumulate and manage on their behalf of their clients. Usually, they only consider that assets that sit in investment brokerage style accounts because this is where they can generate “fee” income.
A large focus on life insurance distracts from the accumulation of assets and comes at the cost of reducing fee income generated from accumulating those assets. Put even more simply, there's more money made more quickly on simply gathering assets to manage.