Financial Advice Options for Young Professionals – Insurance Agents
Many young professionals are looking for financial advice when it comes to tackling many of the financial challenges they face in today’s increasingly complex world. As life becomes ever more real for millennials and Gen Xers with marriage, new homes, children and career advancement, the financial challenges that come with these various life stages can require expert guidance, if not for the simple reason that many of us simply lack the time—and oftentimes inclination—to effectively manage our own finances.
Whatever the reason for needing expert guidance, the challenge for young professionals remains that it is incredibly difficult to fully understand your options and the various pros and cons associated with each of the ways consumers can receive financial advice on everything from investment planning to insurance and everything in between.
Today we will cover the first of the four primary channels young professionals have for receiving financial advice as part of a blog series outlining the various options and the pros and cons associated with each model. Over the next three weeks we will touch on each of the channels listed below:
- Insurance Agents
- Brokers
- Traditional Financial Advisors (a.k.a. your parents advisor)
- Millennials and Gen X focused advisors
Receiving Advice from an Agent Operating Inside an Insurance Model
Insurance companies have long coveted young consumers as virtually all young professionals who are newly married and/or having kids need some form of basic life insurance. In fact, being adequately insured is arguably the number one priority for young families next to having the appropriate estate planning documents in place to protect loved ones in the event of an unfortunate death.
With that said, however, it’s important to understand that while receiving financial advice from an agent operating inside an insurance organization is certainly not a bad thing, it almost always tends to be fairly product centric. Because of this, it’s important to have a clear understanding of the potential conflicts that can arise when working with agents operating in this model, especially as many will market themselves as “financial advisors.”
Financial Incentives and the Whole Life Insurance Conundrum
Most insurance agents typically have no base salary and are paid largely on a commission basis, meaning there is a major incentive to sell products—agents need to feed their families after all—and while this helps align the agents interest with the organizations (i.e. grow the business by selling more!) it also can create strong incentives to sell individuals as much insurance as possible, using the products that have the highest payout to the agent.
The financial incentives for agents are not insignificant either, as most whole life insurance policies typically pay 80-105% of the first year premium to the agent as a commission. Which, if you simply compare that to the 30-50% commission on less expensive term policies, it’s not hard to see where the conflict can potentially arise—this is despite the fact that term is almost always a better option for individuals looking to simply replace their income or cover debts in the event of a premature death.
To provide some perspective, according to Nerd Wallet, the average $500,000 20-year term policy for a person in his 20s costs approximately $246/year, while the average $500,000 whole life insurance policy costs roughly $5,178/year. Clearly there’s a fairly steep difference in the cost, especially when the benefits of a whole life policy (i.e. cash value, ability to take loans) are oftentimes not even necessary. It’s a bit like buying a souped-up sports car that tops out at 180 MPH when your daily commute is a brisk two miles on backroads—a lot of unused horsepower providing little, if any value.
Captive Agents vs. Independent Agents and What’s Right for You
Another important consideration when working with an insurance agent is to understand if they are a captive or independent agent—a major distinction. A captive agent (i.e. NorthWestern Mutual) works for one specific insurance agency and is beholden to only sell the products and solutions offered by that company.
Think of it like working at the Ford dealership, you only sell Ford, regardless if a Chevy would be better suited for your customer’s budget and needs. Again, not a bad thing, but one that requires the consumer to have a clear understanding of the limitations and any potential conflicts. The positive, however, is that captive insurance agent only has to understand one company’s products and solutions, so they are likely to be intimately familiar with the solutions they can offer.
On the flip side of the coin there are independent agents who essentially operate as their own business and are free to use whatever insurance product or solution is best suited for the client, regardless of who the primary insurance provider behind the product is. This provides the agent considerably more flexibility to find the best solution for the client.
When looking to purchase insurance, it’s important to have a very clear understanding of the type of agent you are working with so you can fully understand the breadth of solutions that they may have access to, as well as any potential conflicts of interest that can arise from the model they operate in.
Understanding When an Insurance Agent Can and Should Be Utilized
It is important to note that while receiving broad based financial guidance from insurance agents on topics such as college and retirement planning can oftentimes be conflicted due in large part to the environment agents operate in, there is very much a need for the value and expertise that agents can provide, especially when it comes to insurance products. Ultimately the important thing is to understand when that knowledge and expertise is necessary.
Insurance agents are incredibly knowledgeable about the various insurance products the market has to offer—especially if they are independent agents—and this specific product and feature expertise can be tremendously helpful, as most financial planners typically do not have the specific product background or training that insurance agents are required to have.
If you, as a young professional, are married, have young children, or sizable debts (i.e. mortgage, student loans), insurance is likely something you should most certainly consider to protect your income and assets. With that said, when diagnosing the need and ultimately the product solution, it oftentimes helps to start by talking with a financial professional that has nothing to gain from helping you diagnose the amount of insurance you need.
From there it may make sense to engage an insurance agent to help find the appropriate product once you’ve objectively identified the appropriate amount and have determined objectively the general insurance product structure that is most appropriate—which is almost always going to be term insurance.
Lastly, it’s important to reiterate that the trouble with receiving advice from insurance agents is not that insurance agents are bad, but rather that the environment that they operate in can create major conflicts of interest when it comes to helping pick the appropriate insurance coverage. The solution simply requires doing your homework and having a clear understanding of the potential conflicts that arise in working with insurance agent.
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