Financial advisers often recommend life insurance as part of a complete financial plan. But should you always follow their advice? Let’s take a deeper look at why advisers suggest insurance products and when these recommendations might—or might not—align with your best interests.
When you sit down with a financial adviser, they may present life insurance as an essential protection tool. In many cases, this advice makes sense. If you have dependents who rely on your income, life insurance creates a financial safety net. Without it, your family could struggle to pay bills or maintain their lifestyle if something happened to you.
However, not all insurance recommendations are created equal. Some advisers earn commissions when clients purchase certain policies, especially whole life or permanent insurance products. These commissions can range from 50% to 100% of your first year’s premium, according to data from PolicyGenius. This potential conflict of interest deserves your attention when evaluating advice.
“The financial services industry has built-in conflicts that consumers should be aware of,” says Barbara Roper, former Director of Investor Protection at the Consumer Federation of America. “This doesn’t mean advisers are dishonest, but understanding how they’re paid helps you evaluate their recommendations.”
Whole life insurance policies combine death benefits with a cash value component that grows over time. These policies cost significantly more than term life insurance, which provides coverage for a specific period without any investment component. For many families, especially young ones with limited budgets, term life insurance delivers adequate protection at a much lower cost.
Some advisers champion permanent insurance for its tax advantages and forced savings mechanism. The cash value grows tax-deferred, and policyholders can borrow against it without triggering taxes. For high-income earners who’ve maxed out other tax-advantaged accounts, this benefit might prove valuable.
Before signing any insurance paperwork, ask your adviser directly: “How will you be compensated if I purchase this policy?” A trustworthy professional will explain their compensation structure honestly. Fee-only financial planners, who don’t earn commissions from product sales, may provide more objective insurance guidance.
Consider getting a second opinion from an independent insurance broker who can shop multiple companies. Compare premium costs, coverage amounts, and policy features before making your decision. Remember that term life insurance costs about five to fifteen times less than whole life for the same death benefit.
The right amount of life insurance depends on your specific situation. A common recommendation suggests coverage equal to 10-15 times your annual income, but your actual needs may differ. Calculate your family’s expenses, outstanding debts, future education costs, and long-term financial goals to determine appropriate coverage.
“Insurance should address specific risks, not serve as your primary investment vehicle,” explains Ryan Frailich, a Certified Financial Planner in New Orleans. “For most people, investing through retirement accounts will be more efficient than insurance products for long-term wealth building.”
If you already own a permanent life insurance policy and feel unsure about it, resist the urge to surrender it immediately. Canceling these policies in their early years can result in significant financial losses due to surrender charges. Instead, consult with a fee-only financial planner who can analyze whether keeping or replacing the policy makes sense.
Financial advisers can provide valuable insight into protecting your family’s future. The best advisers tailor their recommendations to your specific circumstances rather than offering one-size-fits-all solutions. By understanding both the protection value and the business incentives behind insurance recommendations, you’ll make more informed decisions about this important financial tool.
Trust your instincts when receiving financial advice. If a recommendation feels rushed or pressured, take time to research alternatives. Your financial security is too important to base on decisions you don’t fully understand or feel comfortable with.
Ultimately, insurance serves as protection, not primarily as an investment. Keep this principle in mind when evaluating whether your adviser’s insurance recommendations truly serve your financial best interests or potentially serve theirs.
