What Is A Fee-Only Insurance Advisor?
Fee-only insurance advisors are rare; there are only a handful across the entire country. The fundamental distinction from a typical insurance advisor is that fee-only insurance advisors, like Scott Witt, don’t sell any products.
Instead, they are compensated for their advice on either an hourly or project fee basis. And because of that, they can serve as true fiduciaries for their clients and prioritize their needs.
People look for fee-only insurance advisors because the insurance decision can be confusing, whether it is life insurance, annuities, long-term care insurance, etc. So, they look for someone who can guide them in the right direction when they need to get insurance, without trying to sell them an insurance plan to make a profit from commissions that aren’t even transparent.
Depending on the commission details, the money you put into insurance as an investment might not even give you a return. So it’s essential to look at the facts and understand the insurance plan.
But insurance contracts are complicated for the everyday person to understand, and there are a lot of agents selling products out there that they don’t necessarily truly understand or only understand what their home offices have trained them. A fee-only insurance advisor would help a client understand their different insurance plan options and choose one that best suits them.
The majority of Scott’s cases involve life insurance, well over 50%. Next in line is annuities, and long-term care is third.
Fee-only insurance advisors like Scott also help people with retirement decisions regarding lump sum vs. various annuitization options for their pensions and sometimes do valuations of insurance policies and more actuarial-type things.
In terms of who hires fee-only insurance advisors, Scott tells us that anyone can hire a fee-only insurance advisor. Many people have experience working with business professionals who are paid on an hourly basis, like accountants and attorneys; hiring a fee-only insurance advisor is no different.
Most often, people with a net worth of at least half a million dollars usually look for fee-only insurance advisors because they have to make decisions on larger dollar amounts and want to make sure they make the one that’s best for them.
Buying Insurance Is Often A One-Time Life-Long Decision
Making decisions about life insurance, long-term care insurance, and annuities is often a one-time occurrence. It’s essential to take the time, effort, and money to get it right the first time. So you don’t end up paying more money down the road by having to hire an insurance advisor again or choosing an insurance plan that has an increased rate than it would have if you bought it years sooner.
Scott says, “about 99% of the time when a policy is being replaced, it’s evidence that there was a mistake.”
Reasons an insurance client might look for a policy to be replaced:
- A mistake was made at the time that the policy was issued
- The client didn’t fully understand the policy at the time that the policy was issued
- The client couldn’t afford the policy and needs to change it
- The policy has the wrong kind of coverage or is with the wrong company
- A mistake was made at the beginning, when the policy was issued
- The original insurance agent is no longer around to possibly reform the existing policy
- Beware: a new agent assigned to the policy is pushing a new policy because that’s the only way they’ll be compensated
Working with a fee-only insurance advisor helps prevent these mistakes from occurring because you’re their priority as their client instead of compensation from selling insurance products, like other insurance advisors.
Building An Insurance Policy Needs To Fit Your Life, Not Just Look Good On Paper
Making changes for clients can be a delicate process because their decisions around choosing an insurance policy aren’t always about finding the cheapest option. It’s about what the client believes, what makes them feel good about the situation, and the underlying financials.
People may buy an insurance policy and expect it to last forever without needing to be changed, but what you put together five to fifty years ago might not meet your insurance needs today.
One way to help avoid buying an insurance plan that won’t suit your needs in the future is by preventing assumptions and, instead, looking at the projections of the policy in the annual statement and current enforcement illustration.
So, regardless of the psychological reasons behind choosing an insurance policy, if you’re looking to change it to a policy that better suits your needs, whether financial or otherwise, seeking help from a fee-only insurance advisor is the best course of action.
Whole-Life Insurance vs. Term Insurance
Choosing whole-life insurance or term insurance depends on how long you need the coverage.
There are some situations where someone needs coverage for their whole life, like a special needs situation where they want to ensure that a child will be taken care of if one or both parents pass away.
And there are other situations where life insurance can essentially be viewed as an investment, a substitute for investing in taxable, conservative investments.
As a substitute for taxable bonds or money sitting in a bank account, there need to be several prerequisites satisfied first:
- Maxed out all other tax-advantaged savings opportunities
- Have an eye on generational wealth
- Be at a level of wealth where you want to avoid taxes from tax rates increasing
Life insurance sounds desirable, but it can vary depending on your own personal needs. Suppose you’re not committed to holding the policy until death for your future generations. In that case, you’re making a mistake because the number one advantage that life insurance has is the tax-free nature of the death benefit.
So, if you go into a life insurance policy with the mindset that you’re going to see how it goes for five or ten years and can always walk away from it, you’re almost certainly making a mistake. You need to have the mindset that you did your due diligence upfront and are making the best decision for your needs when buying or investing in any type of insurance.
Return On Your Money vs. Return Of Your Money
Lifetime withdrawal benefit annuities are very complicated to understand and analyze as they come in a lot of different forms and different types of optional riders can be attached to a policy.
In essence, it provides some form of guaranteed retirement income, which has a lot of appeal to it.
The confusion comes with what type of return you’re getting. When you get a 5% return, it feels like you’re getting a 5% investment return, which sounds great in today’s environment. A significant chunk of that return is of principal so 5% is a bit of a convoluted number and certainly doesn’t equate to a 5% annualized return.
Instead of a 5% return on your money, it’s often just a 5% return of your money.
So, even if you get the 5% of your money, the actual return on your investment may be dramatically lower.
How To Make Better Insurance, Annuity And Retirement Buying Decisions
To improve your decision about insurance, it’s important to take your health and expected longevity into consideration.
If you’re only expected to live until 80 or 85, you might be better off taking your Social Security earlier and you wouldn’t be interested in a lifetime guarantee of retirement income because you’d essentially be subsidizing those who are going to live to 95 or 100.
On the other hand, if you think you’re going to live long, annuities can make a lot of sense for you as a guaranteed source of income.