Why Are Financial Advisors Against Life Insurance
I really find it interesting how financial advisors are so against life insurance. And I can tell you that I’ve heard so many different ways that they’ve described it. They have a fiduciary responsibility to their clients, and they just feel that that’s the wrong place to put people’s money.
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Why Are Financial Advisors Against Life Insurance?
I really find it interesting how financial advisors are so against life insurance. And I can tell you that I’ve heard so many different ways that they’ve described it. They have a fiduciary responsibility to their clients, and they just feel that that’s the wrong place to put people’s money. And from their standpoint, I would agree with that statement because they are actually doing one thing with your money and that’s investing your money.
They’re not protecting your money; they’re investing your money. And their goal is to make you the biggest return they possibly can. To me, it’s kind of interesting that they’re directly financially incentivized, I should say dis-incentivized of you putting your money into a life insurance contract because all financial advisors out there make their money and grow their business off of what’s called AUM assets under management. Every dollar that you put into a life insurance contract is a dollar that they’re not going to manage and make a fee on for the rest of your life that they’re managing your money.
Typically, that fees around 1%. So, to me, when I hear people argue that you have life insurance agents who are just trying to make a commission, and it’s them fiduciary responsibility to avoid that, I think they’re not quite telling the whole story, because if you do the math over time of them managing your money and also potentially leaving your money at risk to taxation rates, they can’t predict that. They can’t control that, leaving it at risk to market risk. They can’t control that either. Educated gambling. Now granted, they’re going to do a good job, the good ones, but it’s still at risk. And even though this fee that they keep referring to is there a fee to share responsibility to avoid, they’re also avoiding a lot of additional protections that are going to come to the table when life does unfold and life does happen to you.
So, by having money into a life insurance contract, you can potentially protect and insulate yourself and your other investments because you can pull money from that life insurance contract, tap into that death benefit. There are many other benefits that go along with putting your money into a life insurance contract. This should never be bought in for an investment purpose solely is the investment portion. They’re absolutely. Because the insurance companies have learned that you don’t want to buy a product just for your beneficiaries to utilize. You don’t want to spend your money with the insurance company and just have them take it. So, there’s been an investment portion built into it. It’s to your benefit. So, I will happily sit down with any financial advisor at any point in time to have a discussion of why they feel that permanent life insurance is not bringing good value to the table, and how I don’t act as a food fishery by recommending this product.
Main Points:
- Financial Advisors’ Stance on Life Insurance:
Norma highlights that financial advisors typically discourage clients from purchasing life insurance. They view it as an inappropriate place to invest money, focusing instead on investments that yield returns. Their fiduciary responsibility drives this position, as they aim to grow clients’ portfolios. - Financial Incentives and Assets Under Management (AUM):
Norma suggests a possible conflict of interest. Financial advisors earn their income from managing assets (AUM) and collecting fees, often around 1% of the assets they manage. Life insurance, on the other hand, takes money out of the advisors’ control, thus reducing their potential earnings. - Life Insurance as a Form of Protection:
Life insurance is framed as a protective tool, as opposed to an investment vehicle. Advisors focus on investment growth but cannot mitigate risks like market volatility and tax uncertainties, which life insurance can help safeguard against. It provides a financial safety net in unpredictable life events. - Comparison of Commissions:
There’s a comparison between life insurance agents earning commissions and financial advisors earning fees. Norma argues that while advisors may criticize life insurance commissions, they themselves earn fees over time, which can add up significantly. - Permanent Life Insurance Benefits:
Permanent life insurance policies offer more than just a death benefit. They can also act as a financial resource during the policyholder’s life. Norma points out that these policies have investment components designed for the policyholder’s benefit, such as cash value accumulation, which can be accessed when needed. - Challenge to Financial Advisors:
Norma expresses willingness to debate the merits of life insurance with any financial advisor. They believe that advisors may not fully appreciate the value life insurance brings, particularly in terms of long-term financial protection and diversification of assets.
Why Are Financial Advisors Against Life Insurance
Additional Insights
- The Conflict Between Growth and Protection:
It touches on a fundamental difference in financial philosophy. Advisors prioritize growing wealth through investments, while life insurance focuses on protecting wealth. This creates a natural tension between these two approaches. Investors often assume that higher returns mean better financial health, while overlooking the need for security and protection in uncertain markets. - Fees vs. Commissions: Transparency Issues:
A deeper look into the financial industry reveals that both fees from AUM and commissions from life insurance sales create biases. While advisors criticize commissions, long-term management fees can sometimes cost clients more over the years. This highlights a potential transparency issue in financial advising, where clients may not fully understand the cumulative impact of fees or the potential biases in advice they receive. - Tax Advantages of Life Insurance:
It only briefly touches on tax implications, but this could be expanded. Life insurance policies, particularly permanent ones, often offer tax-deferred growth on the cash value component and a tax-free death benefit. This can be particularly beneficial for estate planning or managing high-income individuals’ tax liabilities. - Diversification Beyond Investments:
Another point worth exploring is how life insurance provides diversification beyond traditional investment portfolios. Permanent life insurance policies can act as a financial buffer during economic downturns, providing liquidity through the cash value that can be borrowed against. This is a valuable point for anyone seeking financial stability in volatile markets. - The Role of Fiduciary Duty:
Financial advisors are bound by fiduciary duty, which means they must act in their clients’ best interest. However, there’s an interesting conflict here: life insurance products, though protective, may be disregarded due to their impact on advisors’ AUM-driven fees. The question arises whether this bias is fully aligned with the fiduciary standard, a point that could spark further debate in financial planning circles.
- The Conflict Between Growth and Protection:
Summary:
It reveals a debate between financial advisors and life insurance agents, centered on differing incentives and priorities. Advisors, whose income depends on managing assets, may discourage life insurance due to its effect on AUM. Meanwhile, life insurance is presented as a protective financial tool, offering benefits that can complement other investments, providing insulation from risks such as taxation and market volatility.
By exploring the nuances of financial incentives, the conflict between protection and investment growth, and the role of fiduciary duty, it highlights important considerations for individuals seeking to diversify and secure their financial future.
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