Matt Danielsson has 21+ years of freelance writing experience and 7+ years as a financial advisor. He is the founder of Danielsson Enterprise.
Updated November 29, 2022 Fact checked by Fact checked by Yarilet PerezYarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.
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.
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?
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.
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.
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.