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Top Mistakes Advisors Make With Insurance Coverage

July 16, 2015

When it comes to insurance services, the world of financial advisors can be a tale of haves and have-nots. In one camp are advisors who provide insurance services of some kind, typically through an affiliated broker-dealer or through an outsourced provider. Then there are advisors who avoid insurance, and its commissions, like the plague.

The gap between service models can be maddening for clients, especially those who transition between advisors. It also elevates the risks that clients face when preparing for retirement or a serious life event, such as the passing of a spouse.

Sadly, the problem is indicative of a larger emerging financial crisis in the U.S. — underinsurance. Data gathered in 2014 by Limra, an insurance-industry association, shows more than 50% of middle-market consumers aged 25 to 64 lack individual life insurance coverage. Additionally, 44% of those without it report a real need for such coverage. Meanwhile, high-net-worth investors are frequently underinsured and often make costly mistakes when selecting coverage, according to a 2014 report from Ace Private Risk Services.

Fortunately, well-informed advisors can make a difference in reversing some of these damaging trends. As always, greater awareness of insurance pitfalls is the key to righting the ship. Below are the top four mistakes we see from advisors and how they can be overcome.

Focusing on sales, not service. Many firms view insurance as nothing more than an ancillary revenue stream. In some cases, insurance-licensed advisors view placing a term-life policy or long-term-care policy as simply a commission opportunity. However, these advisors fail to understand the ongoing service that policies need. Most do not have a proper system in place to provide continuing policy reviews. This leads to missed opportunities for servicing their clients — or worse, policies that become outdated.

Advisors, however, can fix this by using a customer-relationship-management (CRM) system or an Excel spreadsheet to keep a list of all policies with their renewal dates. Running a quarterly report of renewing policies will highlight those that are eligible for review. Variable or indexed life and annuities and disability insurance should be reviewed for performance and increase options each year. Other life insurance and long-term-care policies should be reviewed every three years.

Note: Changes in a client’s financial situation should also prompt a review of insurances.

Ignoring insurance. This is the most common mistake: assuming that clients are “all set” with their insurance coverage or have adequate outside resources helping them. Most insurance agents fail miserably at servicing policies (read: their clients!) or simply leverage existing insurance to sell more. Leaving clients to handle their insurance themselves usually means no one is handling it.

This leads to two problems: First, problems with existing insurance policies may not be found until it is too late (or costly) to solve them; and second, clients are susceptible to overoptimistic sales presentations for products that do not fit in their financial plan or investment strategy.

Said another way — if you aren’t talking to your clients about their insurance, someone else is.

Fortunately, you don’t have to become an insurance expert, but you need to have a resource available for your clients. Leveraging an insurance expert to service your clients’ existing insurance and provide insight on policies they are considering can be a huge added value for your clients.

Using a career agent. Career agents are employed by a single life insurance carrier. They receive benefits and are incentivized to sell for this carrier with annual trips and internal support. Since they are allowed to place business with other carriers, they can market themselves as independent or as insurance brokers. However, they have biases toward the carrier they work for, either as direct employees or as business partners who receive subsidies for their practice. We see this when agents show various carriers on analyses, but recommend their employer or partners in the vast majority of situations.

This situation is not ideal for clients. They should be working with someone who is “carrier-neutral” and not someone who may alter illustrations or analyses to give his or her own insurance company a competitive advantage.

In these cases, advisors must be strong advocates for their clients’ best interests. Advisors must ask agents if they are career agents or otherwise beholden to a single insurance carrier. Find out which carriers they actually represent and how they select carriers for analyses. You can also look at the required disclosures on their business cards or websites — or simply run their BrokerCheck on Finra.

Doing it yourself. For advisory firms that handle insurance for their clients, do analyses, make recommendations and execute the applications and underwriting, this process can work. But it becomes a mistake if the costs of selling insurance are more than the commissions they make.

The real problem is that the insurance industry is still doing business as if it were 1970. This is, after all, an industry where it’s not uncommon to leave behind mile-long paper trails. Many advisors might miss certain forms and end up going back and forth with an increasingly frustrated client. Add to that the snail’s pace of underwriting, and the follow-up seems never ending. When firms dedicate more time and resources to insurance than they make in revenue, there is a serious cost/benefit issue.

In the end, as an advisor you should leverage objective insurance professionals who can take over as much of the insurance process as you feel comfortable with. Whether it’s underwriting or explaining insurance jargon, those advisors who use unbiased resources can offload unprofitable work while helping secure the client’s future well-being.