One of the biggest challenges most financial professionals face is helping clients (and prospects) truly understand life insurance. The harsh reality is that life insurance is a very complicated, misunderstood, and often overlooked piece of a comprehensive financial plan.

The best solution I have found is to make this difficult discussion an educational process versus a sales process. What most families want, need, and truly appreciate is to simplify life insurance into something they can grasp. This will allow them to make an educated and informed decision. In other words, what most clients really want is a basic understanding of the good, the bad, and the ugly regarding:

  • What they currently own
  • The other options available to them
  • The “right amount” of life insurance to buy

Below is a brief overview of a simple three-step process that addresses these key topics.

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1. Understand exactly what they own now. 

Begin by asking each client, “On a scale from 1–10, with 10 being an expert in life insurance, how would you rate yourself when it comes to your knowledge and understanding of life insurance?” You will find that the large majority will rate themselves at a six or less. 

Another helpful way to gauge your client’s level of life insurance knowledge is to say, “If I asked you to explain exactly how your existing group policy (or individual policy) works right now, do you think you give me the good, the bad, and the ugly?” Again, you’ll find that the large majority don’t know the features and benefits of the policies they currently own.

Ultimately, the large majority of your prospects who already own life insurance likely purchased something that was “sold” to them, but was not fully understood or appropriate. Also, these prospects may own a policy that was the right fit at that particular time in their lives, but no longer works given their current family situation. For example, their income or net worth may have risen significantly, they may have more children now, they may have a new income or estate tax need, etc. 

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2. Explain the different kinds of life insurance and how they work.

One of the most helpful exercises you can go through with clients or prospects is to explain the basics of:

Term Insurance: Key topics for discussion include the different kinds, riders, time frames, convertibility features, pros and cons, etc.

Universal Life Insurance:  Key topics for discussion include the various types, costs and fees, riders, cash value, where this usually fits best, pros and cons, etc.

Whole Life Insurance: Key topics for discussion include the lifetime death benefit, cash value, loans, level premiums, riders, dividends (if applicable), rates of return (both guaranteed and assumed), pros and cons, etc.

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3. Discuss “the right amount” of life insurance.

Ask each client, “Can you help me understand how you came up with the amount of life insurance you currently own?” Although this answer can vary, some of the most common responses are: to pay off their mortgage or other debts, to pay for the kids’ college, to help get to retirement, or that they don’t really know.

Also ask each client, “Do you feel like what you currently own is the right amount, not enough, or too much?” The large majority of clients will say they do not own enough. 

Many financial professionals have different opinions on what the right amount of life insurance should be. I firmly believe there is only one answer to this question: The right amount of insurance is as much as they can get. This usually equates to about 20 times their income when they are younger, 15 times their annual income when they are older, and 10 times their income when they are age 70 or older. The easiest way to justify this amount is to back up this recommendation using two facts. First, insurance companies are not allowed to over-insure someone’s life, nor is it in their best interest to do so. Therefore, there is no such thing as having too much life insurance. Second, I have yet to hear of a story where a surviving spouse (or heir) said to a life insurance agent, “This is too much money.”

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Explaining the next steps

After you take your client or prospect through this simple three-step process (and assuming there is a life insurance need) then you should further explain the following important details:

Step One: The client applies for life insurance by completing a simple application.

Step Two: A mini-physical exam is scheduled at the client’s preferred time and place.

Step Three: The insurance company will request and review the client’s medical records.

Step Four: The agent will receive an official offer from the life insurance carrier.

Once you receive the offer, which contains their health rating and the specific prices, set a time to meet and review it. At this point, you can begin working together to determine which kind of life insurance makes the most sense, as well as how much coverage makes sense. I strongly suggest that you do not provide any recommendations regarding specific life insurance amounts or types until you have received the actual offer.

Minimizing pressure and expectations

I also recommend that you make sure every client knows:

  • There is no cost to apply for life insurance
  • There is no cost when the insurance company acquires their medical records
  • There is no obligation to purchase any life insurance
  • Every client reserves the right to accept all, some, or none of your recommendations

Once you take client through this three-step educational process, you will usually find that there is an opportunity for changes and improvements. The key is that by educating versus selling, the client is much more likely to recognize that there is a life insurance need, as well as become empowered to address that need — a true win-win for everyone involved, both directly and indirectly.