Life insurance can help preserve your book, protect a client's business and round out relationships. But pay attention to details like medical information and policy ownership. Here are eight issues to keep in mind.
1 Selling insurance can be simple. "Selling life insurance is easier than you think," says Bob Kerzner, director of the individual life department at Hartford Life in Simsbury, Conn. In fact, selling a life insurance policy today is a lot like dropping a ticket, he says.
For example, the final page of Hartford's marketing brochures consists of a "ticket" that the rep can quickly fill out and fax in. The company handles the paperwork from there, Kerzner says. Many carriers have also put applications online.
"Brokers don't need to learn everything themselves," Kerzner adds. "We're doing life insurance business more the way brokers do their normal business."
2 Selling insurance can be complicated. On the other hand, educating clients about the advantages of life insurance is very time-consuming, says Byron Jordan, a broker with LPL Financial Services in San Antonio.
Jordan still sells the product but warns that simplified paperwork offered by underwriters is sometimes only for policies with coverage under $100,000. And problems that are beyond a rep's control can bring the process to a grinding halt, Jordan says.
"The client may not qualify, or he may get a standard rate instead of a preferred rate, and you'll have to call and tell him," he says. "You might spend four or five months putting a policy together, and at the end, the client says, `I've changed my mind.'"
Even when the client qualifies for the insurance, the underwriter can mess things up by questioning the broker's estate planning valuations. "Be prepared for a major time-consuming event," Jordan says.
3 Insurance can protect your book of business. Life insurance creates a bridge to the next generation. "Younger brokers may still be in business long after their clients have passed on," Kerzner says. "What will tie that next generation to the broker?"
Life insurance can, when used as part of the estate planning process. Retaining assets for beneficiaries through insurance endears you to the next generation. "It also rounds out the relationship with the client as more attorneys and accountants become involved," Kerzner says. "This is one more way the broker can add value."
4 Insurance can fund executive benefit packages. Life insurance is not just for death coverage. It is sometimes used by corporations to fund executive non-qualified deferred compensation plans, says Pat Miller, CEO of Equitable Distributors in New York.
"A variable life policy allows individuals to defer a percentage of their compensation and invest on a tax-deferred basis," Miller says. "Ultimately that income is payable to their estate, income tax free, with no capital gains."
A financial consultant might broach this subject with a corporate human resources person or with an executive client himself, Miller says. "Ultimately, the decision to offer that benefit will be made at the highest level of an organization."
5 Insurance can protect a client's business. Life policies can also fund business succession plans. "In a partnership arrangement, for example, if a key individual dies, the policy can be set up to provide immediate liquidity back to the organization, so the buying or selling of a partnership interest is not the agonizing problem it could be," Miller says. "The key for the broker is simply to ask some questions of their key corporate clients."
6 Disclosure is paramount. Any misleading information on an insurance application can be disastrous, says Ed Graves, associate professor of insurance at American College in Bryn Mawr, Pa.
"I can't overemphasize the importance of straightforward, full disclosure," he says. Under current regulations, insurance carriers have two years to examine a new life insurance policy for untruthful information. If the policyholder dies within two years of purchase and has submitted misleading information (such as a secret smoking habit), the insurance company can deny coverage.
"If the client dies within the first two years, the insurance company will examine that policy with a fine-toothed comb, looking for ways to negate coverage," Graves says. "Understand the importance of full and accurate disclosure, and impress that on your client." After two years, the policy is "incontestable" and the insurer must pay all benefits, he says.
7 Underperformance is a concern. Today's clients are worried more about performance than about their insurance company going belly up, says Ed Zurek, cofounder of InsuranceStudy.com, a Web site offering continuing education courses on state insurance license requirements.
"No life insurance policy has ever gone [unpaid]," he says. "If somebody dies, even if there's a problem with the insurance company, another company will step in and take up that obligation." The client's primary concern these days is return on investment, he says.
"The other day, somebody used the term `insurance capital.' I've been in the business a long time, and I've never heard that term before," says Zurek, a former wirehouse broker. "But I think you're going to hear that language more and more because that's what people are starting to view insurance as - part of the entire portfolio."
8 Your client should not own the policy. If you sell a life insurance policy as part of estate planning and want to avoid taxes, make sure someone other than the insured person owns it, Graves says. You want to keep those policy benefits out of the client's estate when he or she dies, he says.
Policyholders often buy insurance themselves, thinking that they'll transfer ownership to a trust eventually. But if that transfer is made within three years of the person's death, it will be disregarded, he says.
"The [tax] code says that changes made within three years of death will be treated as if they haven't occurred," Graves says. "So, if you die during that three-year window, all your planning will be for naught."
Also, always insist that clients name a charity or nonprofit foundation as the last "contingent beneficiary" in case something tragic happens to all their living heirs. "There should always be a fail-safe final trigger to make sure those assets do not go back into the insured's estate," Graves says.