What Financial Advisors Don’t Get About Insurance

Need is always predicated on thoroughly understanding the client’s objectives

By Guy Baker

Key Takeaways:

  • Client objections are rarely what they seem. Most of the time, they are either a request for more information or confirmation that the client is not convinced.
  • The cost of funding estate taxes, without insurance, is substantial.
  • Insurance cash values are similar to owning a long-term bond portfolio with no mark-to-market risk.
  • The “invest the difference” argument holds up only if you are young.

I recently sat down with a very successful business owner who acknowledged to me he needed life insurance now, to protect the value of his company for his family. He is under 50 and recently bought some term insurance. He was now willing to discuss funding a larger permanent plan that would pay if he lives to his life expectancy or beyond.

The business owner had the usual dreaded objections you can count on hearing from virtually any HNW prospect. We call them the HNW talking points. His first objection was typical of someone who is contemplating a large policy: “Do I really need it?” The second is: “How should I pay for it?” The third question is: “Why shouldn’t I just stick with term, which is so much less expensive?”

These objections come up frequently, and any top insurance advisor is able to delineate the issues and help the client through the maze of confusion that shrouds this decision. What is the best solution? Many of these HNW prospects are rooted in an RIA database of clients. They are shielded from these discussions because they trust their RIA and they have confidence that their RIA will bring up insurance if it is really that important. So here is the BIG question: “Is this trust warranted when it comes to estate and business succession planning?” In other words, as the RIA, are you holistic or single-focused in your dealings with HNW clients?

Let’s look at the business owner’s issues. The first one is need. Need is always predicated on thoroughly understanding the objectives of the client. Some HNW clients really don’t care about what happens after they die. Others want every nickel to go to their family. Others don’t mind paying some tax, but they want to preserve the best assets, the heirlooms, for their family. So what is the best way to deal with this question of need?

Handling objections

When this objection comes up, the first thing to do is acknowledge that the question is pertinent. If the client is raising it, then they are not certain in their own mind that they have the answer. Assure them that they are raising a good issue that needs to be fully vetted. Hopefully, you have dealt with this issue much earlier in the process, during the fact-finding interview. This is when you “set the stage” for the next discussion. If you have done the fact-finding part of the sales process properly, you will know the answer to the client’s question already. All you have to do, at this point, is go back to what they have already told you. If in your “set the stage” interview you determined that the client’s burning goal in estate planning is to preserve the estate for the benefit of the heirs, then you can gently remind them of what they already told you. Ask simply, “Have you changed your mind?” When they affirm their intent, you can respectfully share with them the consequences of not using insurance. The cost of paying the taxes and fees from cash flow or liquidity is a form of self-insurance. The client not only loses the use of their funds, but they also lose the future earnings.

The cost of funding estate taxes, without insurance, is substantial. Who is going to finance the tax if you don’t have the liquidity? What is it going to cost the family to get liquid? The cost of insurance is a mere percentage of the true cost of the tax. But if they self-insure, they not only pay the full cost of the tax, but they also pay taxes on the tax as well as an interest cost. Self-insurance is not cheap. This is something you have to understand and believe. Do the math. The “invest the difference” argument holds up only if you die young. Tell me when you are going to die, and I will tell you what to do.

You set the rules

Buying term and investing the difference is like trying to compare incomparable asset class returns. This is like saying, “My stock portfolio will beat your bond portfolio.” If we go by historic returns, then this is a true statement most of the time. But there have been a few times when bond returns did beat stocks, even with mark to market risks. But be careful. This is a trap. If you try disproving the “buy term and invest the difference” argument, you will lose unless you control the asset class debate. The only way to control the debate is to set the rules. “I understand your question, but let me ask you a question. When you invest this difference, where will you invest it? Will you invest it in fixed return assets, with little or no downside risk, or will you invest it in risky assets that are illiquid and have the potential for total loss? Are you going to buy growth stocks and hope the long-term bull market never pulls another 2008 nosedive?” To make this discussion academic, we need to compare similar asset classes with similar risks. Insurance cash values are similar to owning a long-term bond portfolio with no mark to market risk. Ask Mr. Smith, “Are all your assets deployed in high-risk, low-liquidity investments, or do you own any liquid, low-return assets?” If it’s the latter, then ask him if he would rather own the bonds in a tax-free wrapper that provides long-term discounted dollars, or in a taxable world where you can lose 10 to 20 percent of the value if interest rates rise?


Objections are rarely what they seem. Most of the time, they are either a request for more information or a clear statement the client is not convinced. You, as the trusted advisor, need to be able to discern the issues and then provide the correct response. Practice your answers and do the math. You will be surprised how much easier the whole process will become.

About the Author

Guy Baker, MBA, MSFS, CFP® is a financial advisor to business owners. He works to help owners find ways to reorganize their planning to achieve tax-efficient solutions to their succession, retirement and estate planning problems. Guy is a 34-year member of Top of the Table and recognized by Worth magazine as one of the top 250 financial advisors. For more information, you can contact him at guy@bmiconsulting.com or through www.bmiconsulting.com.