From the September 2012 issue of Investment Advisor • Subscribe!

Life Partners: Grow Your Practice With an Insurance Partner

When financial advisors and life insurance experts team up, clients benefit and practices grow

Photo-Illustration by Stephen Swintek/GettyImages Photo-Illustration by Stephen Swintek/GettyImages

Between the ongoing market volatility and the rapid evolution in insurance products, it’s easy to see why many financial advisors aren’t talking to their clients about life insurance. They’re already stretched, and learning about complex products takes them away from their bread-and-butter business. What they may not be aware of, however, is that offering life insurance to clients can help them build their practices, increase client retention and satisfaction, and enhance their clients’ portfolios.

The good news for financial advisors is that they don’t need to become life insurance experts and reinvent themselves; they simply need to find the right partner.

Joining forces with a dedicated life insurance specialist helps advisors differentiate themselves in the marketplace, retain clients and generate additional revenue. Most importantly, a partnership gives advisors the opportunity to present new options to their clients without diluting the main focus of their business.

For most financial advisors, a life insurance discussion with their clients is reactive in nature. Working with a partner can help ensure clients’ life insurance needs are not overlooked.

Despite the benefits, data confirms that most financial advisors aren’t discussing life insurance with their clients, much less making it a part of their portfolios. Just under half of U.S. adults who have a financial advisor and a financial plan have discussed life insurance, according to a recent survey by Saybrus Partners Inc.

Of those, just under a quarter (24%) said their advisor had recommended adding life insurance. Nearly half of respondents with life insurance said their advisors never reviewed their existing policy.

So why are financial planners not putting life insurance in the mix for their clients? They already face overwhelming demands from their core businesses. And, because of the complexities of various life insurance policy types and tax issues, they may lack confidence in their own knowledge. With the time investment required to stay abreast of such topics, many planners choose instead to focus on existing areas of expertise.

The Right Time for Life Insurance

Life insurance is a foundation of financial planning and a critical tool for protecting wealth. It’s also timely now. With the volatility in financial markets, many people are looking for more predictability in their assets. Of course, life insurance is not correlated to the market, and its guarantees are not subject to market losses.

While financial planners should have a working knowledge of life insurance, they don’t have to become experts. That’s the role of their life insurance partners: to stay a step ahead of developments in the fast-changing field and be deeply knowledgeable about products and the multiple ways they can be used to help clients meet their goals.

Clients appear to be receptive. More than four out of five (83%) survey respondents with life insurance said they would be interested in adding additional features to their existing policies. The survey, which was conducted in July 2011 by Harris Interactive, polled 2,410 adults; of the total respondents, 786 have a financial advisor.

While protecting family and heirs is the most widely known use of life insurance, it can also be effective in meeting other client needs. For example, clients frequently have money in accumulation vehicles like IRAs or annuities and intend to leave them to their heirs. However, such assets are usually not the best choice for wealth transfer, especially from a tax perspective.

For clients who have not yet reached retirement, life insurance also offers potential for tax-advantaged cash accumulation, which can be accessed for any reason, including supplemental retirement income.

Survey respondents also noted a number of other life insurance benefits that would interest them, such as the ability to receive the payout as income if they were diagnosed with a terminal illness, coverage for long-term care needs, and waiver of premium payments if they became disabled.

Who Needs Life Insurance?

While many people could benefit from life insurance, there are certain categories of clients that provide clear opportunities. A good life insurance partner can help a financial advisor identify and assist these clients.

Wealthy families. The first is wealthy families with middle-aged or older members. With their income needs met, they are looking for wealth protection and transfer strategies. The opportunity for this group is to identify unused and underperforming assets and use them to purchase permanent life insurance, potentially with a long-term care rider. This helps protect their wealth and allows for tax-advantaged wealth transfer to heirs.

In one example, a husband and wife had a variable annuity with a guaranteed death benefit they’d purchased in the late 1990s. The annuity wasn’t performing well, and the clients’ needs had changed over the past decade. By transferring their assets to a life insurance policy, they were able to meet their primary goal of leaving an inheritance for their children. In that case, the original $460,000 asset was used to fund a policy with a $763,000 tax-free death benefit.

Business owners. The second group is business owners who use life insurance for succession planning. To ensure that the business continues, partners can take out life insurance policies on each other. If one dies, the other gets the proceeds and can use the money for the business. Alternatively, a business owner may have a life insurance policy that is payable to an heir, who may use the money to buy all or part of the business.  Business owners typically also need key person insurance.

High-income earners. The third category includes successful individuals who are 55 or younger and still in their prime earning years. They need life insurance to protect their families against the loss of their income in the case of a premature death. Additionally, they may have maxed out their Roth IRA, 401(k) or similar plans and are looking for additional ways to set aside funds for retirement. A permanent life insurance policy offers death benefit protection as well as tax-efficient cash accumulation so they can supplement their retirement savings and later withdraw cash tax free for planned or unforeseen events.

Life insurance holders. The fourth category is people who have a life insurance policy that was written some time ago, perhaps as long as 10–15 years ago. These policies may need to be reviewed and updated. There may be new riders that would be beneficial, for example, or the interest rate environment or tax laws may have changed. It’s important to make sure the policies are functioning as they were intended.

Life After Death

When life insurance is included in a client’s portfolio, it creates an opportunity for the financial advisor to stay connected to family members and other heirs. The advisor can assist in the death benefit withdrawal and help disburse or re-invest the money, potentially adding the next generation to his or her client roster and garnering more investment assets.

Financial advisors enjoy real and substantial advantages when they team up with a life insurance specialist. Putting that partnership in place doesn’t have to be difficult. It involves choosing a knowledgeable partner, setting up an agreement, working together to identify appropriate clients, counseling clients, ensuring that the policy is issued and setting up a regular schedule to assess new clients and follow up on existing ones.

Financial advisors who want to stand out in the marketplace, strengthen client loyalty and expand their practices and revenue should take a fresh look at offering life insurance. In most cases, it’s a winning idea for financial advisors and, most importantly, clients.

Six Steps to a Successful Partnership

Offering clients life insurance options has big benefits for advisors, including increased income, client retention, practice growth and market differentiation.

These six steps detail how financial advisors can launch and maintain a productive partnership with life insurance experts. Once advisors have their partnership up and running, they may wonder how they ever did business without the important planning and protection options offered by life insurance.

  1. Find a partner you like and trust. This is key and creates the foundation for success. The insurance partner’s primary focus should be life and long-term care insurance to ensure that the relationship will be complementary, not competitive. Ideally, the partner will also have a working knowledge of the software and planning tools the financial advisor uses.

    If advisors don’t know any life insurance experts, they can ask for recommendations from colleagues and consult professional organizations. Look for professional certifications and check with state insurance departments and regulatory agencies for a history of complaints.

  2. Define roles and responsibilities. Both parties should be clear on their responsibilities as well as parameters in the relationship. They should work out an agreement and commit it to paper. While it’s not a legal document, a written plan that includes goals, mutual expectations and commitments, and action steps is essential and can ensure the plan is successfully implemented.

  3. Perform an assessment of your clients. Among the advisor’s client base, there are sure to be several people or families who have needs that can be addressed with life insurance. The financial advisor and the insurance expert should collaborate in this process since they bring different areas of expertise to the table. The financial advisor will have background knowledge of the clients, their goals and individual situations. The insurance expert will help to identify the clients who would most benefit from a life insurance discussion and how to approach them.

  4. Set up introductory meetings with clients. At the meeting, which the advisor arranges, the life insurance expert should review all available options and make recommendations. Both professionals should understand that while the insurance expert is providing valuable information and products, the primary relationship is between the financial advisor and the client. The advisor knows the client and is in the best position to help the client define and achieve goals.

  5. Facilitate the application and underwriting process. The insurance expert’s role includes assisting with completing the application, making sure all the documentation, including medical records, is submitted, and being the liaison between the carrier, the financial advisor and the client.

  6. Establish a schedule for periodic assessments. The partners should set up a schedule—perhaps quarterly or semiannually—to assess new clients and determine if life insurance could be beneficial for them. They should also be aware of external conditions and events that affect the policy and policyholder, from changing family dynamics to fluctuating interest rates. Remember, the whole point of the partnership is to protect the client by developing and monitoring the best possible financial plan.
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