“Unless there’s a need for liquidity, we don’t want our clients putting money into permanent life insurance. We want that money here as assets under management.”
I first heard that said over 30 years ago by an investment advisor who didn’t sell life insurance. I understood their point of view. Fast-forward three decades, and I still hear the same refrain from that type of advisor. But notably, I also hear it from or about investment advisors and financial planners who also do, or at least can, sell life insurance. And that sets the stage for a discourse that, beyond being of great commercial interest to the advisory community, is downright critical to clients who need life insurance advice. Here’s why.
The State of Incorporation
In “Life Insurance Planning for the Merely Well-to-Do,” “A Boomer at the Crossroads of a Vintage Policy” and other articles, I wrote about how advisors whose repertoire includes life insurance can show their clients the many benefits of incorporating cash value life insurance into their plans. While I’ve never had a crowd control problem from readers offering feedback on the articles, I’ve discussed them with a few agents and other advisors. Of late, the feedback has taken a noticeable turn, which goes something like, “Regardless of how solid your advice may be, more advisors to this demographic who can sell (or arrange for the sale of) permanent life insurance won’t do that. In your financial planning parlance, they won’t introduce permanent life insurance to address the issues these clients will encounter when they move from the accumulation phase of their financial lifecycle to the conservation phase. It’s just not a conversation that serves those advisors’ interests. Yes, they’ll sell term, disability and maybe long-term care insurance to address specific needs, but not permanent life insurance. We both know that some ‘observers’ will rush to judgment about those advisors’ motives. But they should first hear the advisors’ side of the story because they’ll likely have much to say.”
The Question Presented
Let’s start with the implications to clients of an approach to planning that prioritizes assets under management. I was taught that one of the benefits of working with a financial advisor is that they can show the client how the three phases of their financial lifecycle—accumulation, conservation and distribution—aren’t entirely separate and distinct. Rather, they’re part of a continuum, with no clear lines indicating when one stops and the other begins. Because those phases are a continuum, the advisor can show the client how the planning they do today can anticipate and facilitate the planning they’ll need to do tomorrow. For example, a client in the accumulation phase can do their risk management, retirement and tax planning in a way that can make those components of planning in the next phase easier, cheaper and, no doubt, less stressful.
So, at first blush, one might reasonably ask. “How can an advisor who won’t present permanent life insurance have a comprehensive, objective approach to helping clients navigate that continuum in the way I describe? How does that advisor respond when an astute client asks, ‘What happens when that term policy you recommended runs its course and I still need or want the coverage but can’t replace it for whatever reason? I could be up the proverbial creek. Wouldn’t it make sense to hedge that risk by having at least some coverage that I can’t outlive? If I use term insurance, I would be managing risk for the near term but courting it for the long term. What’s more, I’ve read enough to know that a good policy from a strong company can be a pretty useful asset to have for all kinds of reasons at that juncture.’” Fair points, don’t you think?
The Advisor Responds
I sense that the advisor, meaning again, the one who won’t recommend permanent insurance, will have at least a three-part response. First, they’ll say that based on their conservative projections, by the time the carefully selected term policy runs its course, the client’s net worth will be more than adequate to eliminate the need for insurance. Second, they’ll express a lack of confidence, borne of experience, in the ability of permanent life insurance to play a strong supporting role in their clients’ plans. Life insurance has become too complicated, service-intensive, and, frankly, generally problematic to be in their client’s best interest. Third, they’ll explain that, as businesspeople, the realities of their practice economics and the need to manage their own risks tell them to steer clear of an area they believe harbors multi-dimensional risk.
The bottom line is that this kind of advisor sees too many factors militating against incorporating permanent insurance in their clients’ plans. Yes, they can bring in an insurance specialist or firm to handle this aspect of the plan, but I suspect they’ll conclude that doing so will only bring them back to where they didn’t want to be in the first place, which is selling (or being associated with the sale of) permanent life insurance. In the end, they’ll tell their clients.“We’re obliged by the rules of our engagement and our industry guidelines to show you this approach for your consideration. But we don’t recommend it for the reasons we discussed.” In that way, by at least putting the concept into play as a step for the client to consider, the advisor should be less open to second-guessing, or worse, by the client or their counsel. And with all that’s going on in the financial services industry with respect to fiduciary obligations and best interest, that’s a smart move.
However comprehensive and nuanced that three-part response may be, there’ll be those who counter it with, “Gimme a break! It’s about AUM, period. It’s about building your revenue and your brand.”
By the way, there are some practical reasons why an approach incorporating permanent insurance into the plan could be a nonstarter, regardless of the advisor’s point of view. For one, the client’s health could preclude them from qualifying for a well-priced policy. For another, the client might reject out of hand the idea of “investing” in a cash value life insurance policy.
Will Advisors’ Upside be Clients’ Downside?
While fascinated by it, I don’t have a stake in the outcome of this discourse. I’m just a commentator, not someone trying to run a business. But I’ll tell you who does have a stake in that outcome, and that’s those merely well-to-to clients. That’s because the ranks of professionals who can and will provide quality life insurance advice and then sell and service the appropriate products are thinning rapidly. Yet, I can’t think of a time when the merely well-to-do have needed both the advice and the products more than they do today. If I had a solution to this dilemma, I’d offer it. Maybe those who are more creative than I can help.
Charles L. Ratner writes on life insurance and estate planning, and is based in Cleveland, Ohio.
