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Helping your clients understand their life value

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In my last post of 2012, I gave my opinion on what it will take to succeed in our business this year and into the future. I explained how tough this economic environment has been on our industry, financial professionals and, most importantly, consumers. But, I want to reiterate there is promise — if you are willing to put in the work.

Truth is, this is an era of unique opportunity in our industry. At no point in history have Americans been this underinsured. Our opportunity lies in helping clients adopt a protection philosophy that focuses first on protecting wealth. Coming out of the economic downturn, clients are more focused on the need to protect their assets from catastrophic losses, more so than they are interested in accumulating riches or assets to recover from a lost decade of investing. Furthermore, they are much more acutely aware of the risks associated with building wealth. 

Ultimately, your clients should recognize the importance of protecting their family’s future financial interest and the vital role that life insurance can play. If they don’t, well, here’s where you have a tough job to do.   

A good place to start your pitch is around the concepts of maximum protection and economic life value. When producers present these concepts to their clients, they’re encouraging them to adopt a protection-oriented wealth building strategy. That’s not traditionally as flashy as the systems or products that may have the potential for higher returns, but I think it’s what today’s consumer not only needs, but wants.

As I have warned before, this isn’t easy. It takes heavy mental lifting — by you and your client. It involves helping clients understand that protecting wealth and addressing life’s eroding factors (such as taxes, disability, catastrophic losses, death, low interest rates and stock market volatility) are more important than growing more wealth. This could be a mind-shift for them, frankly, as it is for our industry. But what will work in our favor is that clients will understand now more than ever that they can’t control the wealth-building risks associated with the market. They will be more attracted to safety.

The maximum protection concept is easier to explain if you use a familiar analogy with your clients such as car insurance. Use the analogy of a car accident, and explain to clients how most insurance companies will repair the vehicle or completely replace it — known as full replacement. It’s this tangible, full-replacement value analogy that will get clients thinking about their own full-replacement value.

Even then, it is difficult to get a client to understand exactly how much he or she is worth.  Several things should be factored in, including the client’s paycheck, the benefits he or she receives from work and the value of the personal services the client provides his or her family.

Helping your clients understand the value they bring to their families is important if they’re going to have adequate amounts of life insurance. Here are three methods I like to use for determining a client’s economic life value:

  • A defined multiple of current income similar to the multiples used by underwriters to determine appropriate face amounts of life insurance
  • A calculation of current annual income multiplied by the number of working years left
  • A calculation that helps determine how big a nest egg needs to be to provide enough interest income to replace an individual’s salary

The numeric results of these calculations can be eye-popping. You don’t want consumers to get sticker shock and reject the idea of maximum economic life value, so it’s important to explain that the coverage they have now — versus the coverage they should have — would have a bottom line impact on the amount of income provided to keep their family financially safe in the event of an unexpected death.

Hopefully the process is powerful enough to encourage action from the client.

The lasting result of these difficult conversations with your clients will be appreciation; first and foremost, of the role you are playing in helping protect their family and their future. 

For more from Jeffrey Smith, see:

This information is provided for overview or general educational purposes only. This is not to be considered, or intended to be legal or tax advice. Changes in the tax law may affect the information provided. Investors should consult with their legal or tax advisors for personalized assistance, including any specific state law requirements.