6 essential ingredients to life insurance advice

Life insurance is the last, largest, most-neglected asset on clients' balance sheets and in desperate need of management.

There’s never been a better time to provide life insurance advice. Guiding clients through a proven decision-making process to products in their best interests can be a terrific way to build a business.

Advice differs from product sales in that advice follows an established decision-making framework that’s been tested in the courts and proven reliable over almost 200 years. Examples include ERISA for retirement plans, the Uniform Prudent Investor Act for private trusts (to include life insurance trusts), and fiduciary standards for investment advisers, trustees and investment committee members. The West Point Draft of Best Practice Standards applies to life insurance this same universal decision-making framework already widely accepted in the investment business.

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The elements of such an established and proven decision-making process generally include The West Point Draft of Best Practice Standards which is comprised of the same 6 steps as follows:

1. Define. Just like the investment adviser is a member of the planning team, life insurance advisers distinguish themselves by first discussing their role on the planning team. Too often, conversations about life insurance start with some flavor-of-the-day product. Instead, starting the conversation with your role in the planning process distinguishes you as an adviser who is serving the client’s best interests, and leads to better relationships with and more referrals from the client’s CPA, attorney, etc.

2. Analyze. In the same way the investments for clients seeking income will be different from the investments for clients seeking growth, some life insurance products are designed for maximum accumulation for a defined contribution whereas others are designed to minimize premiums for a defined death benefit. Different life insurance products are also designed for different risk profiles. As such, advising clients about the prudent selection and proper management of life insurance requires an understanding of their circumstances, goals and objectives.

3. Strategize. The rate of return reasonable to expect from any financial strategy is most influenced by its underlying asset allocation. Most universal life and whole life products are required as a practical matter to invest cash values predominantly in high-grade bonds and government-backed mortgages. On the other hand, variable products allow for allocation to various asset classes. As such, product type is a function of the risk tolerances of the client, corresponding asset-class preferences, the time horizon and expected outcomes.

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4. Formalize. The life insurance industry is full of constraints and conflicts. With more than 10,000 pricing combinations and permutations for every product, cost of insurance charges being the largest expense (not commissions), and as much as an 80% variance between best-available rates and terms and worst-available rates and terms, no insurer, product, compensation model, distribution system, nor proprietary product is inherently better for all clients or all situations. Understand the universe of products for the peer-group identified in Step 3 and discuss constraints and conflicts.

5. Implement. A search for best-available rates and terms considers at least the financial strength and claims-paying ability of the insurer, the competitiveness of internal policy charges, the stability of the insurers pricing representations, the accessibility to/restrictions on policy cash values, and the historical performance of invested assets underlying policy cash values; and avoids illustration comparisons now considered misleading, fundamentally inappropriate and unreliable by financial, insurance and banking industry authorities. Additional considerations can be underwriting capabilities and ongoing service and reporting.

6. Monitor. Life insurance has been the most disappointing asset type relative to client expectations for decades due in part to lack of monitoring, reporting and management. Advising about the prudent selection and proper management of life insurance, therefore, involves periodically checking on changes in the health, risk tolerance, time horizon, performance expectations and/or planning objectives of the client, changes in the financial stability and claim-paying ability of the insurer, and/or changes in internal costs, investment performance and/or the funding adequacy of policy holdings.

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Life insurance is the last, largest, most-neglected asset on clients’ balance sheets and in desperate need of management. Now is the time to talk to clients about life insurance portfolio management.

Barry D. Flagg is the founder of Veralytic Inc., an online publisher of life insurance pricing and performance research, and product suitability ratings. Follow him on Twitter @BarryDFlagg.