Is Your Client’s Life Insurance Policy Really Protecting Them?

Partnering with a financial security professional can help you better steer clients away from common pitfalls.

By Howard Sharfman

When I meet with clients for the first time, I often ask them what they believe to be the most important asset in their overall portfolio. I rarely hear them say life insurance, but more often than not, it is. Life insurance is a critical component of a well-rounded financial plan, yet it’s often overlooked and rarely revisited.

Many individuals hold life insurance policies that represent a significant portion of their total assets. Yet they fail to reassess their coverage regularly, even as their circumstances change. This can leave them vulnerable to unexpected events in their personal or financial life. Financial advisors who work closely with financial security professionals can help alleviate some of the missteps clients face.

The 2020 Insurance Barometer Study by LIMRA and Life Happens found that only 39% of Americans had reviewed their life insurance coverage in the past year. This means that the majority of Americans are not keeping their life insurance coverage up-to-date with their changing needs.

Even if a financial advisor partners with a financial security professional, it’s still important for the advisor to understand how life insurance works, how it can help their clients, and what can go wrong.

The Basics

People buy life insurance because they love someone or they owe someone. In other words, it serves two primary purposes: protecting loved ones and settling financial obligations. These policies provide tax-deferred growth and tax-free payouts, making them a financially advantageous choice.

When a person dies, life insurance can offer almost immediate financial support. It can address tax concerns, replace lost income and allow for sound decision-making during the period of grief. Ultimately, life insurance eases the complexities that follow a loss, benefiting the departed’s loved ones.

5 key considerations

Using life insurance in a financial strategy requires careful planning. Here are some key considerations to ensure a client’s life insurance policies align with their evolving circumstances:

  • Matching Needs: Choose the right type of life insurance for your client. Term life insurance fits short-term liabilities, while permanent life insurance suits ongoing commitments, like caring for a child with special needs.
  • Adapting to Changes: Life insurance requires regular attention and review. Factors like inflation, changing expenses and family dynamics can impact the amount of coverage necessary. It’s a mistake to assume a policy purchased years ago still meets current needs.
  • Understanding Commitment: Be realistic about premium commitments. While some policies offer flexibility, it’s important to anticipate and plan for the financial commitment, especially if locking in a long-term payment plan. Also, be aware of and avoid overcommitting. Finding the right balance between adequate coverage and financial sustainability is crucial to prevent straining finances by buying more insurance than necessary during challenging times.
  • Active Management: Neglecting to manage the policy properly is a significant misstep. Regularly review the policy, adjust death benefits and premiums as needed, and stay informed about the insurance company’s performance.
  • Health Changes: Contact the insurance company for a policy reconsideration if health improves. Updating the terms is essential if positive changes could impact the policy.

Regular Reviews Help

Let’s say a couple is holding a life insurance policy they purchased years ago. It met their needs at the time but they never reviewed it. Fast forward, and the policy has become a substantial asset, yet they remain oblivious to its potential. That’s not uncommon: Many policies are sold by transactional brokers who lack the commitment to ongoing client service. Scheduling a review with a financial security professional could help this couple.

Each situation is unique, but we recommend reviewing coverage at least every other year in addition to when significant life events happen. By committing to the review process with a financial security professional, a client will ensure their family is always protected and they are on a path to meet their financial goals.

Holistic Planning

To best serve clients, accountants, attorneys and investment managers should team up with financial security professionals who specialize in life insurance. This collaboration ensures a well-rounded strategy and allows each professional to do what they do best.

For example, investment managers can focus on market-related plans, financial security professionals can address time-sensitive life insurance needs, and lawyers can craft estate plans that include life insurance as an asset. Meanwhile, accountants can identify opportunities to include insurance solutions in tax-efficient planning. The key is recognizing each professional’s strengths, acknowledging limitations, and partnering for a comprehensive client-focused approach.

Financial advisors and financial security professionals should have in-depth conversations with clients about their economic situation, health, spending habits, income, investment preferences and goals. This information is crucial for advisors to provide personalized recommendations tailored to the client’s needs and circumstances. Without these insights, it’s challenging to offer the best advice. Simply put, asking the right questions and understanding these aspects is key wto crafting effective and customized insurance solutions for clients.

We are very fortunate to work with a major wealth management team at one of the largest wirehouses. As part of their dedicated insurance team, we get involved during their initial meeting with every prospective and current client. Our collaborative approach includes sharing ideas and determining the best course of action for the client, be it an insurance-related solution or not.

What Makes a Good Match?

The life insurance industry is set up such that almost any financial security professional has access to similar insurance products. However, three key areas distinguish good financial security professionals from great ones: knowledge, independence and service. The ability to explain complex insurance products and tailor them to specific situations is invaluable. Financial security professionals should possess an in-depth understanding of insurance options and also how they fit into an overall financial plan.

Advisors should team up with financial security professionals licensed for the specific products their clients need. Market-risk products require Finra licensing. Advisors should seek professionals who are familiar their client base and have a nuanced understanding of their clients’ needs. The financial security professional should also have expertise in the specialty the  clients need help with, such as executive benefits, long-term care or special needs planning.

Financial advisors should also look to team up with financial security professionals who stand on common ground regarding payment structures, dedication to clients and how they run their practices.  A mismatch in fundamental views or a lack of a succession plan could be problematic.

A financial security professional should also be willing to add value when working with your clients, even if the professional doesn’t immediately benefit. We tell our clients and advisor partners, if it is important to you, it is important to us.

The Importance of Regular Collaboration

Partnering with a financial security professional is a long-term relationship. You and your partners should regularly review a client’s policies to ensure they align with the overall financial plan.

I’ve mentioned this already, but it bears repeating: It’s easy to assume that once a policy is in place, it will continue to serve its purpose without needing adjustment. However, the reality is quite different. Life is dynamic, and financial situations can change significantly over the years. Failing to revisit life insurance coverage allows for inadequate protection or paying for unnecessary coverage.

Assessing Unique Needs and Risk Tolerance

Financial security professionals can ensure life insurance coverage aligns with a client’s current financial situation. This includes identifying gaps in coverage, recommending suitable insurance policies and ensuring clients are adequately protected against unexpected events. This can only be done by asking personal financial questions and having a client who is open about their goals, beliefs and concerns. Concerns — which may include retirement, protecting family or losing money — should be addressed in review meetings.

In-force illustrations — which provide a snapshot of your client’s current policy values and projects future values — should be used during annual reviews. It’s essential to understand how the policy is performing and whether any adjustments are needed.

I had a prospective client whose child with special needs would require long-term care and financial support. The prospective client had already set up a special-needs trust to provide for their child’s future. Initially, they had a term insurance policy that would expire in five years. However, the child had long-term needs and a life expectancy that far exceeded the policy’s term. With guidance, the prospect was able to accurately assess their needs and secure a permanent insurance policy with a long-term care rider that was tailored to their specific needs.

Navigating Complexities and Making a Difference

Reviewing life insurance coverage is a fundamental aspect of a financial plan that should never be overlooked. The partnership of advisors and financial security professionals is essential in helping individuals navigate the complexities of life insurance.

By helping your clients obtain regular reviews, discuss changes in their lives and understand their risk tolerance, you can ensure that their life insurance remains a reliable cornerstone of their financial security. Differentiating yourself through knowledge and exceptional service can set you on the path to becoming a trusted financial professional who truly makes a difference in your clients’ lives.

Howard Sharfman, senior managing director of NFP Insurance Solutions, a wealth-transfer consulting and planning firm, has been recognized as an innovative leader in the insurance business for over two decades. His practice focuses on servicing families with multigenerational wealth, family offices, private equity managers and the advisors who serve ultra-high net worth clients. His firm has additional expertise in executive benefits, corporate benefits, general insurance and risk management.

Latest news

More Retirees are ‘Unretiring,’ Survey Reveals

Advisors say near-retirees and retirees are much less prepared for retirement than they think they are, according to Allspring.

Advisors Dabbling in DC Market Seek Greater Support: Cerulli

Providing them with tools, education and guidance would help them grow their retirement-plan businesses, says Cerulli Associates.

Executives Traveling on Corporate Jets Face IRS Scrutiny

Do you have executive clients who might be using a corporate jet for personal use? Tell them the IRS has announced a crackdown.

U.S. Solo Renters Age 50+ Way Up

The number living alone rose by more than half a million, but there’s been a growing trend of older people living with roommates.

SEC Settles Charges Against Former Advisor

The former advisor, Andrew Komarow, was known in the industry for working with special needs families and neurodivergent clients.

SEC Fines TIAA Unit $2.2M for Violating Reg BI

The SEC said a TIAA broker-dealer charged some retail customers too much to invest in mutual-fund choices in an IRA.