How to be sure my advisor's insurance recommendations are good for me?

Question

Recently, I've been in contact with my financial advisor who has been talking me through a few risk management strategies, as well as other short- and long-term financial goals for retirement, kid's education, etc.

She believes it's in by best interest to buy a term life insurance policy for both my wife and me (we have 1 child), as well as a long-term disability policy for me. I work, while my wife stays home with our daughter. Additionally, I have a life insurance and long-term disability policy through my work.

My question: how can I be sure my advisor's recommendations of these extra-employment policies are in my best interest and not just in her best interest to sell me stuff? Do financial advisors generally get a kickback from selling these kinds of policies to their clients?

EDIT #1: Thanks for all the feedback already! In the above description, I was wrong to use the phrase "invest in life insurance." What I meant to say was "purchase life insurance." And for reference, I'm 29 and in good health.

Her recommendation for all 3 policies (2 life insurance policies and a long-term disability policy) comes out to be around $100/month.

EDIT #2: The insurance breakdown from my advisor is as follows: 2 term life insurance policies of $46/month and $20/month for me and my wife, respectively. Then long-term disability insurance for me at around $30/month. So $96/month to be exact.

Answer 1

The thing that is a red flag for me is your statement of "investing in life insurance". No. You probably need to fire her. Investments are great, and life insurance is necessary. Mixing the two is bad, and very bad.

The right solution is to buy Level Term Insurance. It is pretty darn cheap. The level part is the number of years the premiums will stay the same. Your bill (assuming you are like 30 and in decent health) should be about $250/year for a $500k 10 year level term policy. I may be a bit off, but something like that. In comparison a whole life policy will cost you more than that per month.

Still not convinced? Search why whole life is a bad investment on the internet. Or just go here. Selling you a whole life policy allows this adviser to be paid for her services, but it is a really bad deal for you and your family.

However, I cannot state this enough, you do need life insurance, and I would error on the side of buying too much. A friend of my wife just lost her 35 year old husband in an auto accident and they had three young children and no life insurance. She cannot even take time off from work to grieve as their budget was tight prior to the accident.

I am okay with adding to the disability insurance. Your greatest asset is your income, and disability ins protects it. However, I would avoid short term disability and only purchase long term. It is best if this can be done through work or some other type of group policy. Individual policies tend to be pretty expensive. However, if no other choices exist then that is okay.

You may consider taking a local Financial Peace University class. Although its main focus is to help people learn how to budget, communicate about money with their spouse, and encourage them to get out of debt there are other aspects that are really good. In your case the insurance lesson will be very valuable.

In my own case, it took me like 18 months to get my insurance stuff squared away and I watched the lesson multiple times during that period.

Answer 2

Besides the dubious advice from your advisor about "investing" in life insurance You should also be concerned about your core question:

how can I be sure my advisor's recommendations of these extra-employment policies are in my best interest and not just in her best interest to sell me stuff? Do financial advisors generally get a kickback from selling these kinds of policies to their clients?

If they are advising specific products that is a problem. In some cases it is easy to see the connection. They work for X and their company sells that product. In other cases it is harder to see the connection. They may work for company X but they get a commission from Company Y and a bigger commission from Company Z so they always recommend company Z.

You want to hire an advisor who will help you determine types of insurance (disability, life, liability, property), how to save for your child's education, your retirement, and how to afford a house. They will help you determine amounts, goals and basic ways to get there. But they should not be recommending specific products.

Getting a commission isn't illegal, but it should be disclosed. What it does do is skew the calculation. They are tempted to recommend a product that maximizes their income not your benefit.

Answer 3

Term life insurance is needed to replace your income if anyone relies on your income. You should probably get 5 to 10 times your annual salary in level term. In your wife's case, you need to calculate what it would cost to replace her duties, especially since you have a child: housekeeper, shopper, cook, nanny, tutor, driver, etc. then 5 to 10 times that for her in level term. Look out for Riders or additions to the policy that cost extra. These sometimes seem like a good idea but rarely are of any value.

The same goes for long term disability for both of you. Your family will need the money if you are disabled and you will need to replace some or all duties if your wife is disabled.

Given your age you should be able to get 20 year level term and long term disability until age 65 very inexpensively.

The problem with policies through work are that they are not portable. If you leave your job or are laid off, then your insurance is terminated as well. If you contract cancer or diabetes then obtaining new insurance will be very expensive or impossible to get.

Answer 4

There are generally two types of financial advisors: ones who get most of their income via commissions and ones who get most of their income from their clients. The ones who get most their income from clients have much more incentive to act in your best interest. They may still get some commissions, but the commissions should be only a very small amount of their income.

I don't know how much you pay for this financial advisor. If the amount is above average for financial advisors (and I'm not sure what that is), they're more likely depending on clients for their income. If their fees are lower than average, they're more likely getting income from commissions.

Also, I suggest asking her if she earns commissions on the products she recommends and how much. Ask her to explain why certain products are better than their competitors. The more detail she's able to offer about the product and why it suites your needs, the better. If she's only able to offer vague statements ("it's trustworthy", "the company has been around for 80 years") without discussing the details for the product, you should be cautious.

I also suggest getting the details of the products she recommends (fees, penalties, and the fine print details) and educating yourself on that category of products. If she's recommending term life insurance, find articles about term life insurance and learn what to avoid. You don't need to educate yourself up to her level (you did hire her for her expertise after all), but do at least have some basic knowledge. People who know a little about cars are less likely to get scammed by unethical mechanics than somebody who knows nothing about cars: the same goes for financial products.

That said, I think that her general advice is sound (I'm including the knowledge from your 2 edits). As the sole provider of income, you want to ensure that your family is taken care of if you die or become disabled. Term life insurance is the best deal for life insurances and I do advise long term disability insurance. The devil is in the details, as they say.

Here's my advice. Calculate an amount that your family could live off of should something happen to you and for how long. Will your wife eventually get a job when the child gets older, decreasing the necessary amount of insurance? What sort of education expenses will the child need? Will there eventually be more children? How long does it need to last? Until the child becomes self-sufficient or even longer? What kind of debts (car loan, mortgage, etc.) would need to be paid off? Term life insurance is cheaper the younger you are, so it tends to make more sense when you are younger and have small children to support. Older people with grown children are less likely to need it, although it does depend on their exact situation.

Once you have an amount, try to get enough life and disability insurance that would cover the amount and still be affordable. If your work provides $100,000 of life insurance but you calculate that you need $500,000, buy $400,000 of extra life insurance. I recommend buying a bit more because you may change jobs or be without a job for a period of time.

Then looks at the products that are offered to you and analyze them. What is covered? What is not covered? When will the insurance pay out and when will it not? You have to pay attention to the details and verify that it makes sense for you. The disability insurances in particular can be tricky. They may only pay out a small amount if you lose a hand, for example. If you cannot do your job one-handed, then that might not be enough. If that's less important to your job, that may be fine. My long term disability insurance, for example, doesn't cover claims made in the first year of having the insurance, but it's cheaper than insurances that do cover first-year claims. It's good to be aware of details like that.

You may not find the perfect insurance that's also affordable, so I recommend finding the one that fits your needs the best. Your financial advisor (if she's good) should be able help you meet your needs to the insurance details. If she doesn't seem interested or glosses over the details, then she's likely doing it for the commission rather than what's best for you.