Looking for post ideas, I asked my Facebook community for suggestions. The first response I received was, “How do I know if a Financial Planner is any good?” Others immediately chimed in that they would also like know.

So I’ve spent some time compiling criteria for selecting a financial planner for a number of sources, including financial planners themselves.

Desire to learn and teach

This habit is straight from the horse’s mouth.

“The desire to learn and teach is the most important. For a planner to be effective, he/she must constantly be studying new laws, products, strategies, and a million other things. But to really do the best thing for the client, a planner should teach each client as much as reasonably possible. Essentially, arm the client with enough information so that he/she can recognize good ideas and learn to avoid the bad ones for his or her individual situation. Teach the client to develop good financial habits, and help them develop the savvy to ask good questions.”

Here are a few questions to ask a potential planner to find out whether or not they are still learning.

1. When was the last financial planning related course you took and what was it?
2. What trade journals do you regularly read?
3. What and when are your most recent certifications?

Strong educational background

Several years ago, when I was still in school and studying financial planning, I was approached by a firm offering a financial planning position while I was still in school. Not really knowing what I was signing up for, I joined and started going after my warm market. After a short time, I realized that this firm, and others like it, use a poor approach to recruiting new planners. Basically, they convince individuals who are looking to switch careers or need money or like planning or whatever reason, teach them a little bit about financial planning (focusing on variable universal life insurance), and set them loose on the population.

There is one huge flaw in this approach – the new recruits don’t know anything about financial planning except for the few, specific things they are taught in a very short time. I understand learning on the job. But sending an army of good intentioned newbies with no real educational background out to sell products to individuals who know even less does not end well.

So verify how much education your planner has in varying areas of financial planning.

Strong experience

I was tempted to combine this attribute with the prior one. However, I believe it merits its own lime light. Ask your planner or potential planner the following questions:

1. What licenses do you have?
2. How long have you been licensed and practicing?
3. Who are three current clients that I can contact?
4. Why did you lose your last two clients? (The manner in which a planner responds to this question is almost as valuable as the answer itself)
5. How much money/assets do you have under management right now?
6. When you are unsure, who do you consult with or call?
7. Do you use partners for estate planning, tax planning, investment planning, and insurance planning? And if so, who are they and can I speak with them?
8. Pose specific situations and ask how the planner would address them.

Understand that you are hiring a planner and that he or she should go through the same rigorous interviewing process that you would implement for a high level CFO. Your planner is your CFO and you will regret not spending enough time hiring the right one.

Fee based versus Transaction based

I hesitate a little to even broach this topic. I do not intend to make a case for one or the other. Rather, I just want to explain some of the issues surrounding how the financial planner is paid.

• Transaction based financial planners are paid by the investment or insurance company every time there is a transaction or sale of a new product. Meaning, you do not pay anything to the planner (big plus). However, the planner may have the incentive to move you from investment to investment in order to generate additional income (called “churn”) or direct you to products with big commissions.
• Fee based financial planners are paid a set amount by you to perform specific tasks or take a percentage of the value of your holdings each year. For example, I may pay a fee based planner $2,500 to evaluate my finances and create an investment strategy. The purpose of the fee is to create an objective plan. If I choose to have the planner open the accounts and make the investments for me, then he or she will receive a commission from the investment or insurance company. Or I can open the accounts myself. With percentage based planning, the planner has an incentive to grow my assets each year since the dollar amount of the fee corresponds to the overall size of my portfolio. In other words, if my portfolio grows, the planner makes more money.

Longevity in the industry

The financial planning industry experiences a very high turnover rate. The first five years are the most difficult and about 90% drop out. You don’t want to sign up with a planner that will be out of the business in six months.

So look for a busy planner with a secretary or assistant that has been in the industry for more than five years. Since assistants are paid for out of the planner’s own pocket, having an assistant usually is an indicator that the planner is both successful and serious about staying. Though anyone can hire an assistant. So also look for planners with at least five years experience.

What other factors do you find to be important when selecting a new financial planner? For more tips and commentary on financial planning, follow Rabbit Funds on Twitter.

I know that the title of this post is somewhat morbid and not many people want to talk about death. However, we are all going to pass on at some point and just like anything else in life, we need to be financially prepared.

Unfortunately, too many people don’t take the necessary steps to financially prepare for death. Often, the result is a mess for your family. To help you know what to do and how to get it done, I’ve created a simple checklist with information and resources.

Step 1: Get Life Insurance

By the age of 25, you should have life insurance. You probably have either debt or other financial responsibilities by this age. And if you don’t, then you soon will and term life insurance at this age is cheap.

• Sufficient to pay all obligations at time of death – This calculation can be a little tricky since you don’t know when you will pass away or under what circumstances. However, you should leave at least enough to cover final expenses (everything related to the funeral and burial), a sum for possible medical expenses, and any debt obligations that you expect to have during the term of the policy. For example, I have 20 year term. So I’ve left enough to pay off our mortgage the day I die, the funeral, and possible medical expenses.
• Cover the long term economic loss to your family – If you are an income earner, then your family is suddenly facing what can be a very large economic challenge. So using a time value of money calculator, figure out how much money your family needs today to be the equivalent of what you would have earned during your life. Also, make sure that you leave instructions on how this money should be invested and distributed in order to last a life time (do this in your will or estate planning).
• Transition period expenses – Your spouse may have the desire or need to go back to school in order to gain skills relevant to today’s job market. So calculate and leave enough money to cover these transition period expenses.
• Long term goals for your children – Do you have any long term goals for your children like a college degree? Hopefully, you are already using a 529b Account to invest money on a set schedule for your children’s education. If you are, then you have probably calculated how much your children will need in that account come college time. Again, use a time value of money calculator to determine how much you would need to put in that account today in order to have it fully funded when they are 18 and ready to go to college.
• Convertible to permanent life insurance – Better known as whole life or universal life insurance, permanent life insurance does not have an expiration as long as you keep paying. You may want to convert part or all of your policy at some time in the future to permanent life insurance. So check to see if your provider offers this capability. It can be a nice option.
• Specify a primary AND contingent beneficiary – A lot of people only specify a primary beneficiary, but if you outlive the primary beneficiary, then you need to have a secondary or contingent beneficiary designated.

Step 2: Create a Will

As Dave Ramsey says, “Not leaving a will when you die is just rude.” And it is. Your family is facing a time of grief and mourning. If they are faced with haggling over your belongings, then fighting is bound to happen. Make sure that your will covers at a minimum the following topics.

• Designate an executor – The executor is responsible for executing your will. Or in other words, the executor resolves any claims against your estate (i.e. your stuff), carries out any special wishes left in your will, and distributes your property.  You will want to select someone who you have great confidence in. Someone that is very trustworthy. This person will gain control of your belongings and can steal them if he or she do desires. So be careful. Also, I recommend not telling anyone, including this person, who the executor is. That way, no one is offended if you later change the executor. Last, specify a second and third executor in case someone does not want the job.
• Who gets what – Generally, you will leave 100% to your spouse. Though make sure to specify a secondary beneficiary after your spouse. If you have children, then this would be your children.
• Custody of your children – Your spouse should be first on the list, then a second option in case you and your spouse are in a common disaster, and then a third option. Again, I recommend that you do not tell the second or third option that you have them in your will. That way, if you later change who is listed, then no one is offended that they were removed.
• How your children are to receive their inheritance – If your children are minors, then you should not simply leave them their inheritance. You want to create a trust or give control to a custodian (ideally the persons who you are leaving your children to) until your children meet a certain criteria. For example, we specified that our children do not receive full control of their inheritance until they are 25 or earn a college degree, whichever comes first.
• Do not create a will when you are mad – Unfortunately, I’ve seen this happen. Recently, I saw great heartache and resentment created due to a will that was written eight years before the person passed away in a moment of great anger. That will has soured many family relationships and the damage is near irreparable. So if you are angry, then wait until you calm down to create your will. And just don’t be vengeful. I promise, you won’t have the last laugh.
• Adhere to the laws of your state – In order for a last will and testament to be valid, then there are certain sections or statements that have to be made. You will want to make sure that they are included. Wikipedia offers a starting point with its list of Requirements for Creation. The best way to ensure that you have complied with the law is to use a lawyer or LegalZoom.com. My wife and I used LegalZoom and highly recommend it. Actually, here’s my review of writing a will using LegalZoom.

*Side Note – Make sure that your will and your spouse’s will match in areas like custody of the children and second/third executor.

Step 3: Create a Living Will and Medical Power of Attorney

A Living Will, or Advance Health Care Directive, gives instructions on what you want to happen if you are left incapable of making decisions for yourself. For example, if you were in an accident that leaves you in a vegetative state, then you can leave directions to pull the plug and cease life sustaining treatment. Your Living Will is important because decisions like ceasing treatment may be too difficult for loved ones to make.

A Medical Power of Attorney goes along with the Living Will in that it gives someone the legal right to make medical decisions on your behalf if you are incapable. Basically, you are making it clear to doctors and anyone else who they should listen to. I know that my mother would be very upset if I were in a terrible accident and in a coma. She may want to make decisions on my behalf. However, my wife is the one who has that responsibility. The Medical Power of Attorney makes that clear.

Step 4: Plan Your Funeral

This is really a last step and may be too awkward for some people. However, think about it for a moment. You’ve just passed away and your family is just trying to deal with the loss. It can be very difficult to have to sit down and plan a funeral program. So ease their burden and do it for them in advance. This also helps ensure that the tone and feeling that you want at your funeral is represented.

Bonus Step: Get Life Insurance for Your Children

No one wants to fathom for a moment that you may outlive your child. I certainly don’t want to think about. However, the unfortunate happens from time to time.  Which is why this Bonus Step is actually very crucial. So when you setup your own policy either add a rider to your policy or get a policy for each child.

Let me give a little bit of advice on the amount. Many insurance policy riders are for about $10,000 for children. I submit that that amount may be insufficient. Let me illustrate an often overlooked “financial cost” with an actual example.

Several years ago, I listened to a man describe the days and weeks after his teenage son passed away. He was a sales rep for a company in Phoenix, AZ. He said that in the weeks subsequent to his son’s passing, he found that there were days when he arrived at work that he simply turned his chair towards the window, looked out over the city, and sat there lost in thought and grief, incapable of working for hours. This man’s family’s income was dependent on him actively selling. Fortunately, they had a life insurance policy for their son and the lost income from those days of grief were paid for or made-up by the life insurance policy.

So, make sure that you have enough coverage on a child to (1) pay for all final expenses and outstanding medical bills and (2) give you time to grieve.

Conclusion

Preparing for your own passing can be one of the most important things you ever do in your life. Make this your responsibility and don’t put it off onto your family.

Any other suggestions for financially preparing for the inevitable? For more information on financial planning topics, sign up for our RSS Feed and receive new posts directly in your favorite RSS reader.

Let me first address everyone who read that titled and thought, “But you just don’t understand it.” You may be right. Though, I studied life insurance in college (my teachers were practicing life insurance sales reps), I trained for a short time with an insurance company, and I have had permanent life insurance pitched more times than I can count.

So you’re right, I don’t fully understand it and all the ways it can be used. But I understand enough to identify my key concerns.

Life insurance should provide for my family if I die

I had the opportunity to chat with a friend who happens to be life insurance rep for awhile last night. One of the arguments that I made was that whole life insurance is often pitched to young people who can’t afford the high premiums at this stage of life. He retorted that I can buy policies for only a few hundred dollars a year. The problem with this argument is that as a young person, the death benefit for my family is first and foremost my concern.

For example, leaving my family only $50,000 in the event of my death is unacceptable. Even leaving $250,000 is unacceptable. Meaning, in order to buy a whole life policy with a large enough benefit will cost $1000s each year. I wish I had that much under the mattress, but I don’t.

I have seen young couples sold on the fringe benefits of a whole life policy while the sales rep neglected the fundamental reason for having life insurance – security for my family. Usually, the sales process goes as follows. First, the rep meets with a family and gathers information about their goals, finances, and money available to invest. The rep will also spend a little time talking about insurance products as a primer for later. During the second meeting, the rep presents an analysis of the family’s finances and goals and begins discussing how life insurance will help them reach those goals. All kinds of printouts showing huge cash values and death benefits are presented. The entire presentation is designed around the dollar amount available to invest, not around whether or not the death benefit is sufficient if the provider dies tomorrow.

So the family signs up, pays in, and prays that tragedy doesn’t strike.

To my friend’s credit though, he mentioned that for young couples, he recommends buying term life with sufficient coverage in combination with a small whole life insurance policy. Over time, the couple can increase the amount of the whole life policy and phase out the term life. I would be much more prone to taking this approach, assuming I wanted whole life.

The costs are higher, but I’m not sure about the value

The reason my friend and I even started our debate last night was because I stated last Saturday while at the golf range that I don’t like how much life insurance companies charge. As a rebuttal, my friend created a spreadsheet outlining how much a life insurance rep makes on a whole life insurance policy as compared to stock based investments. His goal was to show that the commissions are cheaper.

In his financial model, he assumed that a consumer pays 1% annually for investment advice. However, if you assume that a consumer doesn’t hire a financial planner (which many can do with out) and invested in a mix of index funds with low fees like the ones offered by Vanguard and Fidelity, then the consumer pays $1000s less in fees with the investments. If you further add in what the insurance company is making on top of the payout commission to the sales rep, then a consumer saves anywhere from two to three times more than the management fees from mutual funds over 15 years.

So using his model, I demonstrated that buying term and investing the difference, assuming that you know what you’re doing, can save you a lot of money over 10 or 20 years.

Whole life insurance can be a complex financial instrument

Before my friend starts egging my house, let me state that I do believe that whole life insurance can play an important role in some financial plans. The problem is that to properly incorporate it, a consumer needs a competent, experienced advisor. Many so called “financial planners” receive little to no training and are set loose on the population. Several large and popular financial planning firms take average consumers, promise them riches if they start selling permanent life insurance policies, and tell them to go. Rarely are these people trained enough to understand how to use permanent life insurance as part of an overall financial plan.

If you are interested in permanent life insurance, ask for referrals and shop around. Find an advisor who understands how to make life insurance just one part of your plan. Don’t let one well-prepared pitch suck you in.

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In our current hectic and fast-paced lifestyle, technology has caught up with every industry, making businesses work better, faster and safer. The life insurance industry is no different.

Technology has simplified the process of applying for and buying life insurance so greatly that it is now possible to buy life insurance online with just a few clicks. Most new life insurance buyers in the market are therefore left wondering whether to stick to the traditional route of meeting with a local life insurance agent or buying online.

What is a multi-carrier brokerage firm?

A multi-carrier brokerage firm, also called an online life insurance agency, conducts its life insurance business through its website. It deals with hundreds of carriers and uses technology to link in real time to life insurance carriers’ computers. This means the information it offers to the end customer is up to date and accurate. These multi-carrier brokerage firms also offer life insurance-related resources to gain information, unbiased advice, use free tools like life insurance needs calculators, and request for free quotes.

Why is buying through an online multi-carrier brokerage firm better than buying through a local agent?

The traditional way of buying life insurance through a local agent is greatly challenged by the arrival of online life insurance agencies. Let’s see why buying online is better:

• A local agent represents just a handful of life insurance companies and may recommend the wrong product to you
  Life insurance should be bought after shopping around. Since a local agent deals with just a few carriers, you only get the best of what’s in his portfolio. Sometimes, a biased agent will even sell you policies that don’t fit your needs, only because he or she gets a higher commission on it. On the other hand, when you buy online, you are assured that the quotes recommended to you are true, because they are picked up through a database consisting of thousands of life insurance policies. The process is automated and therefore, completely unbiased.
• Online multi-carrier agencies are fast and safe
  When you buy through a local agent, the buying process takes time. The agent will need a few days to get the information he/she needs or will have to meet you several times, and you will likely take a few days to decide. When you buy online, you can make the process as fast as you want it to be, because quotes, as well as complete information about them, is given to you in minutes.
• Buying through an agent can get uncomfortable because you need to divulge complete personal information
  Filling up a life insurance application form manually in the presence of an agent can get uncomfortable because the agent will need to ask you a few personal questions that can embarrass you. He will also need to know the details on your finances. Buying online is more comfortable because you are not face-to-face with the person asking you questions. All you need to do is fill in their form as truthfully as possible, and you are done.
• Multi-carrier websites are a one-stop shop
  Life insurance is a very personal decision and an online agency not only gives you quotes but also gives you access to life insurance-related resources, online tools such as life insurance needs calculators, advice on how to get the best results on your physical exam, and complete financial information and comparison charts on the quotes you shortlist. With a local agent on the contrary, the information is more likely to be subjective because agents are also looking to maximize their incomes, and they earn better on some products than on others. Also, an agent may not have access to all the information you need off the cuff and may need to meet with you several times before you can make a decision.
• Life insurance carriers have niche areas in their underwriting processes
  This means that a particular company may look more favorably on a particular health or lifestyle condition than others. So if you are a cancer survivor, Company X may look more favorably on you than other companies. These niche areas are constantly changing, and a local agent may never be able to be on top of the latest changes, because of his limitations. A multi-carrier online agency however, is directly connected to each carrier’s network, and its database is automatically updated to reveal the latest niche areas of each carrier. You are therefore more likely to get a better life insurance rate with an online multi-carrier life insurance agency.
• Buying online is faster, cheaper and more reliable
  Because of the above points, when you buy online through a multi-carrier life insurance agency website, you will be offered the best rates, your needs are matched to the right policies and you are able to make a well-informed decision because you are provided with complete information on the policies you are considering.
• Afraid of buying online?
  If you are worried about using your credit card online, you can still use the services of an online multi-carrier agency website. Once you are given the quotes, you can opt for someone from the agency to call you, follow up with you, or use an alternative way to pay for your life insurance. In other words, you don’t have to pay online if you receive quotes online.

Online life insurance agency websites provide an indispensable service

The intention of this article is not to discredit the services of local agents, some of who are extremely trustworthy and committed. However, today they just can’t compete with the technological advancements that online multi-carrier agencies have incorporated into their businesses. Accessing an online multi-carrier website is simply the smarter, more economical thing to do.