How financial advisors can strive for a higher standard when recommending life insurance

Some of you may not believe me when I tell you that the reason financial advisors don’t like talking about life insurance is that we in the industry encourage such discussions. Our customers have been taught that insurance is never a good idea, since we know what’s good for us – and, frankly, most of us are now chronically underinsured. Yet there’s a good argument that it’s good for society, and that we should actually promote it, because life insurance is such a powerful way to protect and improve the lot of others.

It’s already a given that those who need life insurance are those who are most likely to be overqualified for traditional loans and investment products, and for whom there is little, if any, life insurance available in the market. But now researchers Daniel Bechtholdt and Goolam Chandan have found that this ought to be one of the more irrefutable reasons to encourage the use of insurance, since the survivors of a person who dies young tend to be the ones who are less likely to be underinsured.

But a few seconds of research, during which you can learn a lot about yourself, and then a few minutes of research on the subject, almost always show that the reason the subject won’t appear on the conference table of an advisor is because the advisor doesn’t like the subject, and simply doesn’t want to have to talk about it. Most clients won’t. Some families have so many opportunities to get into financial trouble – social, medical, cultural, economic, and even social pressures – that not talking about insurance is understandable. But other families may be equipped and encouraged to go ahead and get the insurance, simply because the problem is important. For the families who can’t, a good advisor can explain why this is better than ignoring the problem.

There are two different reasons for such talks. One is that they are sensible. People who aren’t sufficiently well-insured are disproportionately likely to end up bankrupt. (Why anyone, or even someone for whom that matter, should be so overinsured is beyond me.) It’s also a good idea for people to have some kind of retirement assets to go with whatever income they’re planning to receive.

The other good reason to talk about life insurance is, in my experience, that it is a much better idea than investing for life, for many reasons. But it is also best done by the family who needs it.

As I already noted, family members are more likely to find what they need when they need it. (Meanwhile, it is pretty clear that fewer advisors are interested in talking to their clients about financial matters, which can only be a good thing, since what is discussed on the topic is far more likely to be useful than what is not.)

Most advisors do talk to clients about investing for life, of course, but why assume all of them know what they’re talking about? An underutilized resource is insurance, and yet one study found that “36% of advisors believe that they know at least half of their clients’ preferred investment choices, whereas only 5% of clients said that their advisors knew half of their clients’ portfolios.”

The problem isn’t that advisors themselves are underqualified to discuss these things – in all likelihood the majority are some combination of highly qualified and very knowledgeable – but that many clients aren’t likely to be underqualified, either. If you really can’t be bothered to find out, an adviser can explain the issues.