Managing your money can be confusing. That’s why a lot of people drag their feet when it comes to getting a grasp on their financial life.
And yet we all make that new year’s resolution to save more or spend less or pay off debts. So we have to start somewhere.
Luckily, there are financial advisors out there to help us make sense of investments and retirement plans. What about if you need help making life insurance decisions?
You can use a life insurance agent or a broker to buy life insurance. But if you’re already going to see a financial advisor for other advice, you might be tempted to ask them some questions about life insurance while you’re at it.
Start with these six questions if you want to find out how a financial advisor can help you buy life insurance.
What can a financial advisor help me with?
First things first: What does a financial advisor do?
It never hurts to get a second opinion on a topic, especially when that topic is your money, and especially when that opinion is coming from an expert.
In a nutshell, a financial advisor will look at your current financial situation, talk to you about what your exact goals and needs are for the future, and help you make the right decisions getting there. The main benefit of a financial advisor is that they won’t just give you boilerplate advice; they’ll know you at an individual level and offer a tailored plan of action. An investment advisor can go beyond giving advice and actually help manage your assets.
While you can do a lot of work on your financial plan with a DIY attitude and grow your wealth with robo-advisors, only a financial advisor can truly provide an expert and personalized walk-through of your entire plan. There’s some additional cost added to seeing a financial advisor compared to doing things on your own, but you can think of it as an investment: Ideally, the money you put into an advisor will pay off (literally) down the line thanks to the smart choices he or she helps you make.
How would life insurance fit into my holistic financial plan?
A financial advisor can help with every part of your financial plan. Whether it’s figuring out the best way to pay for college, what you need to do to make sure you have enough money for a home down payment in five years, or how to set yourself up for retirement in 30 years, a financial advisor will guide you.
Of course, if you die, none of those plans really matter, do they?
If you’re not around to contribute to an IRA or participate in a 401(k) or make mortgage payments on your dream home, all of that planning was for nothing. That’s why time is the biggest threat to your financial plans. That’s also why life insurance is an integral piece of a holistic financial plan.
Life insurance is a "self-completing financial product," meaning that you get the full benefit no matter when you die over the life of the policy. It isn’t like a retirement account, where you need decades for it to reach its full potential. That makes life insurance necessary for the accumulation phase of your financial plan, the part when you’re waiting for everything else to reach its full potential. Plus, it can protect your family from debt; you won’t leave them with an unpaid mortgage in the event that you pass before it’s paid off.
For these reasons, it can make sense to include buying life insurance when you’re dealing with the rest of your financial plan: It’s so integral that’s it’s a natural part of the conversation. But it might not always be the right move.
Should I buy life insurance from a financial advisor?
Okay, so you know what a financial advisor does, and why life insurance is so important to your overall financial plan. So does it make sense to just buy your life insurance there?
When deciding whether or not you should buy from a financial advisor or elsewhere, there’s one big pro and one big con you need to consider.
The pro: Your financial advisor knows your financial situation
In order to know how much life insurance you should buy, you need to understand your financial needs. This is tied to different aspects of your financial situation like your expenses, your debts, and your future goals.
And who knows all of that information? Your financial advisor.
It’s easy to say that you need to make sure you have enough life insurance coverage to handle your spouse’s retirement. It’s another thing to calculate that amount – accurately, that is. Luckily, it’s literally a financial advisor’s job to understand your current financial situation and where it’s going.
Financial advisors who are also licensed life insurance agents can help clients consolidate the process of creating a full financial plan, while also putting their intimate knowledge of assets and goals to even better use.
The con: They might not be the expert you need
You know the old saying, "A jack of all trades is a master of none?" Besides being the inspiration for a very good Netflix show, it might also apply to who you buy your life insurance from.
Your financial advisor might have a basic understanding of life insurance, and they’ll almost certainly know how a lump sum of several thousand (or several hundred thousand) dollars can help patch any holes in your financial safety net. Unfortunately, that might be where their knowledge ends, and that can leave you wanting more out of the person who is going to help you insure your family’s future.
If you go with a dedicated independent life insurance agent or broker, you’re more likely to get the expertise you need. You’ll have someone who knows everything from which riders you should look into to what the current rates are for the top-rated life insurance companies. They can get you accurate life insurance quotes and walk you through the application and underwriting process.
In short, you use a financial advisor because you want someone dedicated to helping you through your financial plan and investment options. In most cases, you should extend that to your life insurance needs and get a dedicated expert who can help you there, too.
What’s the difference between whole life insurance and term life insurance?
You need to know the difference between whole and term life insurance for two reasons:
It’ll drastically affect how you use your policy over the years, and
You might be getting upsold by whoever is selling you your life insurance policy.
Term life insurance lasts for a specified amount of time (the term) and expires once that time is up. If you die over the course of the term, your beneficiary gets paid the death benefit. Simple as that. Term life insurance works for most customers who need life insurance, because that’s usually all that’s needed for good-value financial protection.
Whole life insurance lasts for as long as you pay the premiums. It also has a cash value component that may rise in value – sort of like a life insurance policy and savings account in one. That makes them appealing, but they can be up to four times more expensive than term life insurance policies. The cash value accumulation is also usually not as rewarding as if you just invested on your own.
So that addresses point number one above. Four times the cost over 30 or more years? That adds up. Fast. You’re probably better off buying term and investing the difference and coming out on top.
But what about that second point, about being upsold? Independent agents and brokers who sell life insurance policies work on commission – they get a cut from the insurer for every policy they sell. The commission is typically based on the cost of the policy. (Agents and brokers who are paid a flat fee, rather than a commission, exist but are rare.)
Maybe some of you have caught on already, but for those of you who haven’t: That means you should probably be wary if someone is trying to sell you a whole life insurance policy when all you want is a basic financial safety net so your family can pay bills and debts. Also be cautious if the premiums quoted are a stretch for your budget. Whole life insurance has gotten a bad rap because some agents try to force it on clients to get a higher commission. The higher cost of whole life insurance is usually only good for the person selling it.
That said, whole life insurance policies can be a good financial vehicle for people who have complex financial needs, or need permanent life insurance for estate planning. But if your advisor recommends one to you, be sure to get a good explanation as to why they think so. If they can’t justify it, or if your budget can’t handle the premiums, take a pass.
What fees are involved in seeing a financial advisor?
Outside of life insurance commissions, you should know in general how financial advisors get paid. Keep in mind that that’s different than how much a financial advisor is paid, and both are equally important.
Our friends over at Guidevine have a good rundown of how financial advisors are paid. It’s basically broken up into two parts: commission and fee.
Commission-based advisors are just that – paid on commission. This can be the life insurance example we spoke about above, or based on investment purchases and trading. There’s a potential conflict of interest, but it can work for people who have (and understand) complex financial plans and need someone to do some of the legwork for them.
Beginners and people with simpler plans will likely stick with fee-based advisors. The fee can be fixed, broken down hourly – you pay $250 an hour to sit down with an advisor and/or have them work on your financial plan – or as a percentage of your assets. This makes things a little more cut and dry as far as what you’ll owe, but can come with its own drawbacks (for instance, advisors who take a fee that’s a percentage of assets may not work with portfolios under $200,000).
Whatever your advisor charges, know what it will be going in. After all, you’re seeing a financial advisor to get a better handle on your money. The last thing you want is to be losing more than you came in with because you didn’t know how you were going to be charged. We recommend Guidevine for finding a financial advisor; not only do they make the normally-tedious process of comparing advisors incredibly simple, but you can find out right away during your research how an advisor will charge you, which means no surprises for you later on down the road.
So should you buy life insurance through your financial advisor? That depends on your individual situation, but it doesn’t hurt to bring up the topic when you meet. At best, your advisor will be a licensed expert who keeps up with the industry and knows exactly how to get you the insurance product you need. At the very least, maybe you can get broad advice on how to use insurance with your financial situation, and you can take that information with you as you shop on your own.
If you do decide to pursue life insurance through your financial advisor, be sure to get free life insurance quotes. That way you can compare your own research to what your advisor suggests, and understand their recommendation. It’s hard to put a price on that kind of financial literacy.