The insurance puzzle

To make matters worse, determining what type of life insurance to buy rarely is straightforward. Because the purpose of insurance is to protect against risks and plan for the unknown, clients are forced to make difficult decisions – how much coverage to buy; how long they’ll need their policy in place – based upon a slew of uncertainties about the future.

Add to the mix a range of complex products and features, unfamiliar language and multiple policy providers, and it’s no wonder clients would rather visit their dentist, as one survey found, than discuss life insurance.

“[Insurance] can be pretty overwhelming for the client,” says David Stewart, executive vice president of national sales and training with Financial Horizons Inc. in Kitchener, Ont.

Furthermore, research shows that many financial advisors are doing a poor job of making the process easier for clients. A recent study by Connecticut-based global insurance association LIMRA International Inc. revealed that 71% of consumers were more confused about insurance after having met with an advisor than they were beforehand.

“They meet with a financial advisor, who is supposed to simplify this stuff, and, instead, advisors use jargon and presentations that complicate the process,” says Joey Davenport, president of financial training firm Hoopis Performance Network in Chicago.

By breaking down the life insurance sales procedure into simple steps, you can make the process less intimidating for clients and smoother for yourself.

– Starting the conversation

Even raising the topic of insurance can be a challenge, particularly if you’re more accustomed to talking to clients about other aspects of their finances, such as investing.

“A lot of advisors just don’t know how to start the discussion about life insurance,” says Jim Ruta, managing partner and vice president of global sales with InforcePRO in Mississauga, Ont.

Compared with investment planning, which is more numbers-based, Ruta says, “Insurance is a softer, more emotional product. It takes a different mentality.”

Research shows that insurance advisors who build relationships with clients are more successful than those focused on simply making a sale, according to Davenport.

“The days of going in and pitching people – trying to sell product – [are gone, because] consumers are too savvy these days,” Davenport says. “They’re looking for a relationship to be built.”

Building a relationship begins by asking probing questions – not only about your client’s financial situation, but about the things that are important to him or her, says Helena Smeenk Pritchard, who provides life insurance sales coaching and training with Helena Smeenk Pritchard & Associates in London, Ont.

“The right questions to ask are the questions that help the advisor understand a client’s value system,” Smeenk Pritchard says. She suggests asking such questions as: “What do you want your life insurance to do? What happens if you die too soon? How do you want to be remembered? What legacy do you want to leave?”

Then, let your client do the talking. Davenport urges advisors to follow the 70/30 rule during an initial meeting with a client: spend 70% of the time listening and 30% of the time speaking. And when you’re speaking, he adds, you should be asking questions.

“You’re not pitching or positioning,” says Davenport. “You’re trying to discover more about [the client].”

– Determining coverage

Assessing the amount of life insurance coverage that a client needs can be as simple as a 10-second calculation or as comprehensive as an in-depth questionnaire that takes an hour or more. And, oftentimes, both methods produce very similar results. “It will get us into the same ballpark,” Ruta says.

Although it’s important to ensure you’re collecting all of the necessary information about a client, Ruta recommends opting for a method that isn’t overly onerous or time-consuming for clients because that could deter them from making the purchase altogether.

“I’m in favour of a briefer version,” says Ruta. “Obviously, more complex calculations are sometimes required. But I think that for basic, plain-vanilla protection, for preserving lifestyle and legacy for a family, a lot of that can be handled very simply.”

For a preliminary estimation of the coverage a client might need, Ruta’s rule of thumb is $1 million of life insurance to replace every $50,000 of family income.

Other advisors recommend that clients buy coverage worth five or 10 times their annual income, depending upon the age of their children.

Needs analysis tools, offered by many insurance companies and managing general agencies, can you help you gauge your client’s needs better. Most of these tools collect a similar set of information about a client’s age, gender and dependents, along with such financial details as income, assets and investments, mortgages and other debts, existing life insurance coverage, estimated final expense costs and desired replacement income.

Most of this information is straightforward. However, your clients may need guidance in completing some components of the questionnaire, such as estimating the income needs of their survivors. Rules of thumb suggest that clients should plan to replace 60% or 70% of their income for their survivors. By asking questions about things like lifestyle, travelling, hobbies and goals, you can help your clients more accurately determine the appropriate amount for their circumstances.

Although needs analysis tools can help to provide a rough idea of clients’ coverage needs, Jack Bendahan, senior life insurance advisor with LifeMan.ca in Markham, Ont., finds that these tools often produce figures that are lower than the level of coverage he recommends for clients.

“A needs analysis is not a bad indicator,” Bendahan says. “But, when a couple sits down and actually thinks about how much they would need if one of them was to go, it usually ends up being more than what they see there.”

Bendahan finds that having an open conversation about what a client wants for his or her family, rather than relying exclusively on the needs analysis, is effective. Bendahan also draws upon some of his own personal experiences in having lost loved ones, as well as other clients’ experiences, to provide real-life examples of the challenges a client could face.

For many clients, however, the level of coverage they buy is determined by, above all else, the premiums they can afford.

“A lot of the time, budget is really the big concern of [clients],” Bendahan says.

– Assessing health

Because a client’s ability to get insurance at all depends on his or her health, you should inquire about the general state of your client’s health early in the sales process.

“You need to ask early on,” Stewart says, “because you could do a lot of work and then find out that you have to find a different kind of solution.”

If your client does have health concerns, Bendahan recommends conducting a general inquiry before submitting a formal application. Approach one or more insurers with anonymous information about your client’s situation, such as age, weight and medical details, to find out whether he or she is likely to be approved.

If the response indicates that your client probably will be rated or declined by a traditional insurer, Bendahan says, have the client apply for non-medical insurance before completing a traditional application: “Then, at least, the client has that as a safety net in case [he or she] gets declined.”

– Choosing a policy

When determining the type of life insurance product best suited to your client, a key consideration is the length of time the client will need the coverage in place.

Begin by explaining the basic difference between term and permanent insurance before delving into whole life, universal life (UL) and other types of policies, Smeenk Pritchard says. She recommends asking: “Do you want this insurance protection to be there when you die, or only if you die before a certain age?”

Many clients opt for term insurance, simply because it’s the most affordable option. In cases in which your client’s insurance needs are tied to a specific time frame, such as the duration of a mortgage or the period in which his or her children will be financially dependent, term insurance often makes the most sense.

However, given that Canadians’ mortgage terms are getting longer, on average, and many children are living with their parents well beyond age 20 as the children struggle to become financially independent, many parent clients need longer terms, according to Bendahan. He urges his clients to opt for a term of at least 20 years, and almost always advises against term 10, since extending the coverage beyond the initial term could become considerably more expensive if the client’s needs change.

Permanent insurance caters to clients who want the comfort of knowing their policy will be in place as long as they live, including clients using their insurance policy for final expenses or other estate planning needs. Permanent insurance also is well suited to clients with extra cash to stash away, as these policies provide a tax-sheltered investment vehicle.

Given the higher price of permanent policies, this type of insurance doesn’t fit every client’s budget. However, it’s important to get your clients thinking about factors other than price. Emphasize the benefits and features associated with these products, such as, Smeenk Pritchard says, the security of having premiums covered by the cash value of the policy in the event that a payment is missed “so that people understand what they’re getting when they pay more.”

Some clients may wish to get a combination of permanent insurance and term insurance to ensure their near-term needs are covered, with an extra safety net for longer-term needs that might emerge.

Once you and your client have settled on the length of coverage, help the client decide on the specific policy and carrier best suited to your client’s needs.

For clients seeking permanent coverage, explore their investment style to get a sense for whether they’d be more comfortable with whole life or UL. Risk-averse clients who prefer taking a hands-off investment approach may like the long-term guarantees associated with whole life, whereas clients who prefer a flexible investment approach are more likely to choose UL.

– Selecting features and add-ons

Consider what other riders and features make sense for your clients. For those who are able to afford higher premiums in the near term, Bendahan recommends selecting a “limited pay” option, which means the permanent policy will be fully paid up after 15 or 20 years.

Your clients also must decide between individual and joint coverage. Joint coverage can be considerably more affordable, especially for clients who want permanent coverage. Given the high rate of divorce, however, Bendahan typically recommends individual coverage.

For clients opting for term insurance, it’s important to assess the conversion options available in case a client decides to switch to permanent coverage down the road, Bendahan says. The more flexible the conversion options, he adds, the better.

Many insurers also offer dozens of other riders and add-ons. It’s a good idea to present only those that might be relevant for a particular client rather than rhyming off a long list of confusing options.

“Keep it very simple,” Bendahan says, “because if you give [clients] too much information, it can confuse them, and it can delay them making a decision.”

Also, remember that the language associated with insurance products is foreign to most clients. Whenever possible, avoid jargon, says Smeenk Pritchard: “Focus on having the kitchen-table conversation. Make it understandable.”

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