The two things I dislike the most as a CPA and financial planner are when the client calls you to tell you about the life insurance policy that they just bought, and when they send you pages of forecasts and illustrations from an insurance agent making a pitch and expect a quick answer.
The after-the-fact conversation is rooted in the type of relationship that you have with your client. If you are their tax person or corporate accountant, you may understand why they’d tell you after they made the purchase. They probably wondered what kind of tax break they may get for purchasing the life insurance. But clearly this client doesn’t see you as their financial advisor. This problem would hurt even more if you think you are their financial advisor. Obviously, they disagree with you, and that’s a bigger problem.
Getting pages of insurance company forecasts after they’ve been pitched by an agent isn’t a whole lot better. It also reveals their vision of you in less than a holistic way, but also implies that they’ve made a purchasing decision, and they simply want your blessing. That blessing can’t be given in five minutes, and if you spend the time to carefully review the proposals and all of the relevant facts to determine if the purchase is appropriate, you know that you’ll get puzzling questions about the bill. This scenario sounds like a lose-lose situation for the client and the firm.
Let’s now approach this proactively, and see how to deliver the greatest value to your clients.
Whether your firm decides to actually sell life insurance or not is irrelevant to offering the appropriate advice. I believe that as a financial planner it is your fiduciary responsibility to offer advice regarding the client’s life insurance needs and current portfolio of policies. If you do choose to sell insurance and receive commissions, be sure to be aware of your disclosure requirements. Under the CPA, PFS, CFP or RIA rules of your state, you may be required to offer full disclosure of the conflict and any compensation you may receive. I feel that disclosure should include the nature, frequency and amount of the compensation to be received. This would include any soft benefits in lieu of or beyond actual cash payments.
Your first responsibility is to decide whether your insurance advice is a limited scope engagement with respect to life insurance or part of a comprehensive financial plan under which insurance advice must be included. If it is a limited scope engagement, have an engagement letter prepared for that service and stick to the terms of the engagement letter. If it is a part of a comprehensive financial plan, your scope of work is no less with respect to the life insurance, and it must now be considered with all of the relevant facts, circumstances, goals and objectives of the client.
When you assume …
Most life insurance consultations should start with a needs analysis. How much, if any, life insurance is needed for the client in question? It’s not enough for you to use a calculator and create all of the assumptions needed for that calculation. You should consult with your client regarding the assumptions and proceed with agreed-upon variables. Common examples of assumptions where agreement may be needed are with post-death financial decisions. With experience, you’ll know if the client assumptions make sense and can challenge their thoughts.
A common assumption that I see is surviving spouses telling me that they’ll go back to work or solicit help from family or friends for issues like child care or home maintenance. In all cases, I would challenge these as unreasonable. They are unreasonable based on my real-life experience after witnessing clients that went through the traumatic loss of a spouse. What they thought they’d be able to do when theorizing about the possibility of losing a spouse and what they actually do after the fact are often very different. Also, it isn’t really fair to make your personal financial decisions based upon the future actions of other people. You cannot be sure that others may be willing or able at the time to change their lifestyle to bail you out of what could have been eliminated or aided by owning the proper amount of life insurance.
The second consideration is what type of insurance to own. With this, everyone has an opinion. I’ve met agents who only use whole life, others who swear by some sort of universal life policy, and others for whom term insurance is their favorite. I too have my preferences, and the choice is different in nearly all cases. In my opinion, some products are better than others for certain situations. In all situations, however, it’s wise to evaluate the offerings from multiple carriers.
Understanding the range of products that may be suitable is not an easy task. Even term insurance, which seems pretty straightforward, has its own set of variables. First is for how long to guarantee the premium. You can lock in rates for very long periods or as short as annual renewable where the premium rises each year. Second is to evaluate the conversion rights in the policy. My experience has been that limitations are not ideal and often the conversion options are not too attractive.
When it comes to evaluating permanent options, your work is going to take longer. Not only must you compare one permanent option to the others, but you must compare multiple carriers within each asset class of life insurance. This can get very tricky as there are many options that an agent has to choose from when preparing the illustration. If your client is a serious buyer, you may have them medically underwritten upfront. Most agents guess at the medical condition, only to be sorely disappointed to find out that the better health ratings were not available for your client due to family history or their own medical condition.
- Will your client use traditional carriers or one that touts itself as a no-load insurance provider? Beware here. Most “no-load” insurance providers that I’ve met don’t charge fees and claim they are paid by the companies (which sounds like commission to me). Compare the no-load carriers to the traditional carriers and find out which makes more sense.
- Will your client pay premiums for life or an abbreviated period?
- Will your client use cash value buildup to reduce premiums or add to the death benefit?
- Will your client buy paid-up additions with the dividends if they buy from a mutual company?
- Will your client have the cash to pay premiums annually or may they need flexibility?
- Will your client write checks for the premium or take advantage of low interest rates and use premium financing techniques?
- The financial condition of the issuer?
- What will the internal rates of return be on cash surrender value and death benefit?
There are many other valid points of comparison. Ask the agents to go through each with you and do not let any assumption or policy feature go unexamined without knowing your client’s options.
Who benefits?
Ownership and beneficiary elections are very important. Ownership matters for asset protection, tax and estate planning. Owning a policy the wrong way could have repercussions that last forever.
The same is true for a beneficiary election. Many simply name a spouse with their children equally as the contingent. This usually makes me cringe, as this election typically does not optimize any estate planning or future asset protection possibilities with these elections. Proper beneficiary elections become even more important when the insurance is used for business purposes.
When evaluating existing life insurance holdings, the process isn’t too different. The main difference is that the policy is issued and in force, and making certain changes may not be possible unless your client can get medically underwritten at a favorable health rating in order to change the policy or purchase a new one.
Use a similar process as you did when making the purchase recommendation. The difference here is that you now get to see how the insurer performed compared to what they projected through the original illustration at purchase. I’ve seen some huge surprises here where policies are on the path to implosion without a substantial infusion of cash. This is most common in the various universal life policy options. Had you not done the analysis, it is very possible that your client wouldn’t find out about the policy’s deficiency until it became a problem that would require a large deposit to rectify.
This happens when the illustration forecasts one thing but reality dishes out another. In variable universal life, it could be with the underperformance of subaccounts or an aggressive rate-of-return forecast that is not sustainable. In traditional universal life, it could be that interest rates inside the policy have plummeted compared to the rate that was illustrated. This is not something to take lightly. The longer that these policies have been in place. the older your clients are, and the fewer choices they have. Replacement may not be an option due to age and mortality costs or the health of your client.
With the likely return of death taxes for millions of Americans under the Biden proposals, this will not be the last time that you will visit these issues. Get a head start on them now and proactively do a deeper analysis of your clients’ life insurance needs or existing life insurance portfolio now.
