Insurers experiencing big drop in sales this year

Life insurance is a critical component of clients’ financial plans, yet it is one that many clients ignore. Some do not see life insurance as a necessity or a requirement, as is the case with home or car insurance. And life insurance forces clients to face their own mortality.

But as a financial advisor, it is important for you to determine whether your clients need life insurance, recognizing that each client has a unique set of risks.

In order to do so, you must have a complete picture of your client’s personal situation and determine what’s important to them, says Randy McCord, executive business director and founder of National Best Financial Network in Calgary.

McCord uses what he calls a “five-finger rule” in assessing life insurance needs. This process involves asking clients the following five questions:

  1. What assets do you have?
  2. How much do you owe?
  3. Who are you responsible for?
  4. For how long will you have these responsibilities?
  5. Do you expect anything to change?

Some clients might also want to leave a legacy, which must be taken into consideration when assessing life insurance needs.

The discovery process can help to answer several questions regarding what would happen if the client were to die. For example, is the client the family’s sole breadwinner? Will he or she leave sufficient money to take care of debts and other expenses? Can the survivors afford to maintain their lifestyle? Will family members have to sell the home? Will the widowed spouse have sufficient funds to take care of the children’s education?

Here are some of the variables that must be considered in determining clients’ life insurance needs:

> Assets and liabilities
McCord’s “five finger” approach is basically aimed at establishing clients’ assets as well as their current and future liabilities. He uses an asset/liability worksheet to get as many details from clients as possible.

Determining current assets and liabilities is usually easy because they are known. However, future expenses, such as the cost of children’s education, lifestyle expenses, income replacement and estate taxes, must be estimated.

You should also find out if the client has life insurance coverage through an employer. This is useful for assessing your client’s current situation. But remember that such coverage can change if the client’s employment situation changes.

> Mind the gap
The difference between a client’s assets and his or her liabilities represents the financial risk the individual or the family faces. Put simply, this gap is indicative of the amount of life insurance the client requires. Your clients’ desire to leave an inheritance for their heirs or other beneficiaries must also be taken into account in determining insurance requirements.

> Cost of coverage
Often, clients cannot afford the required coverage determined by a needs analysis, McCord says. If affordability of the premium payments is a problem, you should be able to find alternative products that cover their needs.

Look at different product variations, using, for example, less expensive term insurance instead of permanent insurance. Explain the merits of the various products to clients so they know they are making the choice that best suits their needs.

Photo copyright: flytnt/123RF