5 Ways CLU Designees Give Their Clients Peace of Mind

The American College of Financial Services
July 9, 2018

Life insurance planning includes determining how much and what type of insurance is needed. 

Financial planners must understand the client’s goals or objectives and priorities. In order to make recommendations, financial planners require practical knowledge in the field of insurance. In the Chartered Life Underwriter® (CLU®) program, students learn how to fully serve the diverse needs of their individual and business clients through in-depth insurance knowledge. 

This post details five learning takeaways in the Chartered Life Underwriter® program, and how the CLU® designation prepares advisors to give their clients peace of mind through expert assistance.

1. Know the Appropriate Amount of Life Insurance

Many different approaches are used to determine the amount of life insurance appropriate for any given client. In order for a client to select the option that is best for their needs, advisors must know the different approaches. Some of these approaches include: 

Human life value approach – measures a person’s human life value in terms of the present value of that portion of estimated future earnings which, if he or she lives long enough to achieve all the earnings, will be used to support dependents

Multiple of income approach – determines life insurance needs based on the client’s current annual income

Capital needs analysis approach – determines how much life insurance is needed to provide a principal sum adequate to fund survivors’ needs while preserving the principal

Financial needs analysis approach – calculates how much life insurance is needed to provide a principal sum that will be liquidated to meet survivors’ lump-sum and ongoing income needs

2. Unpacking the Financial Needs Analysis

The financial needs analysis approach is used to determine how much life insurance a person should carry. This approach identifies survivors’ immediate cash needs and ongoing income needs and assumes life insurance policy proceeds will be liquidated to meet them. The financial needs approach begins with estimates of the family’s financial needs if the client were to die today. The two main categories of financial needs are lump-sum needs at death and ongoing income needs.

Lump-sum needs at death: the lump-sum tends to needs at the client’s death that require immediate cash

Ongoing income needs: In addition to managing specific, immediate expenses, most clients’ surviving dependent family members have ongoing financial needs that require a flow of income that continues until the dependents can support themselves

3. Grasp How Insurance Works

How can an insurance company assume a large risk for a comparatively small premium and soon thereafter make a large loss payment? For example, life insurance pays some death claims on policies issued and in force for less than a year. The following four concepts help explain how insurance works:

The insurance equation: The equality between the sources of income and the uses of income.

Probability and uncertainty: Insurers try to avoid operating at a loss by applying probability concepts. Within calculable limits, the insurer can foresee the normal losses and can also estimate losses from catastrophes in order to compute the premium necessary to pay all losses, as well as to cover expenses and profits. The ability to use probabilities gives the insurer a different perspective from the policy owner’s. Without this ability, insurance would be nothing more than the accumulation of many small risks and accompanying uncertainties into one enormous risk. By using probabilities, the insurer can estimate a somewhat predictable loss for its entire group of insured persons. 

The law of large numbers: Also known as the law of averages, this principle states that as the number of independent events increases, the likelihood increases that the actual results will be close to the expected results. 

Adequate statistical data: Sound application of the mathematical laws of probability and large numbers requires adequate statistical data. Predictions in the form of probabilities must be based on adequate and accurate statistical information. For each line of insurance, insurers carefully compile statistics to accumulate experience as a basis for rate making. Important life insurance statistical data deal with mortality, defined as the relative incidence of death.

4. Evaluate Insurers With Ease

In order to properly advise clients, a planner should be aware of the various criteria that can be used in evaluating both insurance companies and insurance producers. A financial planner may assist the client in the selection of insurers. Probably the single most important criterion is the insurer’s financial strength. Because an insurer’s basic function is to pay claims, care must be taken to select insurers that are most likely to be able to do so. In light of the number of insolvencies and near insolvencies among insurers in recent decades, and the limitations of state insurance guaranty funds, an insurer’s claims-paying ability cannot simply be taken for granted. The size of an insurer is not always the most relevant factor, as financial strength and size are not necessarily equivalents. Many primary insurers – especially the smaller ones – are financially strong because of reinsurance. 

5. Establish Criteria for Selecting an Insurance Company 

Choosing an agent or a broker is an essential step toward a sound insurance and risk management program for clients. The criteria used to evaluate insurance agents and brokers includes knowledge and ability, willingness, integrity, and representation. As an agent or a broker, you must have the background and experience necessary to identify, analyze, and treat risks properly. Below are the criteria that need to be transparent to prospective clients:

Financial strength 

Attitude concerning claims payment 

Lines of coverage offered 

Service before and after a claim 

Underwriting standards 

Cost of the coverage

Taking the time to see that services, including those of agency staff and insurance companies, are performed as effectively as possible will reassure your clients. Since insurance is purchased to reduce uncertainty, agents or brokers must be able to give their clients both psychological and actual security. Consumers need someone with whom they can identify closely in discussing their financial needs and goals. The values of agent and client, if similar, can help them establish a good rapport. 

Agents who are fully committed to the insurance profession are more likely to do a successful job for their clients by developing their skills and keeping abreast of rapidly changing knowledge requirements. The insurance consumer needs a technically competent agent who performs the wide variety of services essential to proper insurance protection. These services may include understanding needs, analyzing significant possibilities of loss, finding markets, comparing alternative coverages and contracts, arranging for credit or installment payments, checking on the accuracy of classifications and rates charged, providing loss prevention or engineering services, making evaluation appraisals, seeing that claims payments are made promptly, reviewing changing needs frequently, and many other important duties. 

The content of the blog post you just read was adapted from the Chartered Life Underwriter® (CLU®) program curriculum. In CLU®, students learn how to fully serve the diverse needs of their individual and business clients through in-depth insurance knowledge. Upon completion, students have the expertise to provide guidance to clients on types and amounts of life insurance, make recommendations on aspects of risk management, and expert knowledge of various insurance solutions. A CLU® designee understands the legal aspects of life insurance, and assisting clients in making decisions about estate planning, including various wills and trust arrangements.