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  • Writer's pictureDavid H. Kinder, RFC®, ChFC®, CLU®

F.A.Q. #8 - What exactly IS needs based planning?

Updated: Jan 18, 2023

Today's blog post is about my own views of how "needs-based" financial planning came about... because I believe it is an over-used and perhaps misused term to describe financial planning.

Financial Employer Sales Objectives Turned Into "Needs-Based Planning"

I got my start in financial services at a large bank. One part of my job description was to "increase wallet share" with each customer. Today, this bank actually calls their products "solutions". This bank taught me about "profiling" and "searching for needs" that we can sell to. We were held accountable to hold certain "cross-selling" ratios to make sure that we were doing the full job.

A "full banking package" might look like this:

  • Checking Account

  • Savings Account

  • ATM/Debit Card

  • Online Banking Access

  • Bill Pay Service

  • Credit Card

  • Brokerage referral, mortgage referral, or a home equity lending application

When you look at a list like this, it's easy to conclude that we're "meeting our customer's needs" by selling everything we could... that makes sense for their situation.

The other reason to do business this way... was the notion that "the more products they have with us, the harder it would be to leave us". I suppose there's some truth to that.

And the compensation plan with these companies rewards such selling behavior accordingly with additional bonuses.

"Lives" or "New Account Opening" Focus

In the life insurance industry, there has been a focus on "lives sold". One of our prominent associations (NAIFA, formerly known as NALU) had an award called the "National Sales Achievement Award" for those who sold over 100 "lives" in a year. Most other insurance companies also offer similar recognition - often starting at the "100 lives" level.

Well, here's what's different about that: If there was a bonus program associated with such a program, then it may have made more sense to sell additional riders and policies to "get more lives per sale".

For example: If I sell a term policy with a disability income rider, that would actually count as "two lives". If I sell the same policy on the spouse, that's another "two lives". That's "4 lives" in one household.

Is this in their best interest? Or was it in the agent's best interest? It could be both... but the incentivization would probably make it appear that it was more in the agent's best interest. (As though selling more would actually not be in their best interest? Sometimes the most ethical sale... is a large sale! Tying ethics to compensation makes very little sense in many cases.)

There is an investment firm with the tagline "Making Sense of Investing" that rewards their reps with "diversification trips" as they help open new accounts and ensure "proper diversification" according to their internal training. And I'm "meeting my client's 'needs' by focusing on multiple products per household".

Now, let's take that same mentality and apply it to a "Financial Planning" approach:

You meet with an advisor, planner, consultant... whomever. They want to ensure maximum product sales under the notion of "needs-based" planning. They may not be maximizing YOUR situation, but MAXIMIZING THEIR QUANTITY SALES in order to qualify for trips, etc.

So a sample planning package recommendation could look something like this:

  • 20 Year Term Life insurance

  • 2 Year Disability Policy

  • Contribute to your employer's 401(k) up to the match (no additional compensation there in most cases)

  • Contribute to a Traditional IRA or Roth IRA (if eligible)

  • Fund a brokerage account

Former employees of a particular company actually called this the Financial Planning "happy meal" - implying that everyone got the same thing... for the same reasons. (And sometimes advisors and planners wonder why they are sometimes regarded as little more than "used-car salespeople?" If they're not bringing a higher level of thinking, it feels exactly like a high-end product sales presentation.)

Is there anything wrong with the above? Not necessarily.

It's just the "tic-tac-toe" approach to financial planning. You may feel like you're taking care of a lot of things... but there may be little organization, integration, or coordination going on between your various purchases.

Now, back in the late 60's to 70's, there was the beginning of the "Financial Planning Movement" where professionals were beginning to put together written financial plans for a fee. These plans would incorporate some advanced knowledge into them to help support their recommendations... but it was still a way to "cross-sell" various products.

And the more that something is promoted as "the best" (such as "needs-based" planning), the more it becomes "the standard", simply by repetition.

Needs-based thinking in planning actually promotes a huge misconception problem:

One of the problems with needs-based planning is the notion that life insurance is an expense, rather than an asset. Without additional knowledge and expertise in these matters, it can be easy to assume that permanent life insurance is simply a "more expensive" form of life insurance.

Since term life insurance expires without any value and permanent life insurance is "so expensive" with its higher premiums... the notion of "buy term and invest the difference" really seems to take hold. And if your focus is to "cross-sell" as many products, it's easier to do if you don't commit too much money in one particular area or product.

Other advice standards:

Solomon Huebner founded The American College back in 1927 to teach the concept of Human Economic Life Value as the advice standard of life insurance recommendations. However, just because that's what was taught doesn't mean that's what was done.

A simple example of Human Economic Life Value:

Did you know that, to replace $50,000 of income with a lump sum of cash paying out 5% interest... you'd need $1,000,000 in that account? Would $1,000,000 of insurance be cheaper with permanent or term insurance?

A.L. Williams / Primerica Got Their Start

Art Williams promoted "buy term and invest the difference" because most agents were only selling a lower face amount of permanent life insurance coverage. When his father died (I believe it was his father), there wasn't much benefit that was paid out. When he discovered how much more life insurance there could've been if his father had only purchased term life insurance... the family could've been far better off. So, he started his own life insurance company to correct, what he felt, was an injustice to him and his family.... and promote "needs-based" planning.

This began more needs-based insurance coverage standards of advice:

Let's suppose that you need $1,000,000 of life insurance coverage, and you could pay either $1,500 per year... or $25,000 per year. Which would you most likely choose? Probably the $1,500... so you could have the rest of the other amount to do with as you please, right?

With the $1,500 per year policy example above, you can write the check and "check it off" your "needs" list because you took care of the need... with the smallest outlay that you could get away with.

Is there any reason why anyone in their right mind would pay $25,000 for a similar permanent policy? (Check that Ed Slott video above. It might not be so far-fetched as one would believe.)

Needs-based planning works for the financial services companies profitability... not for your financial prosperity.

You may or may not realize this, but there are 4 rules of financial institutions that they all follow - for THEIR benefit, NOT yours. I have copied the following from this link here:


1. They want your money. This simple rule is what starts it all. You want to save for retirement? Here’s an IRA. Oh, you want your employer to help you save for retirement? Here’s a 401(k). When you’re ready to save for your child’s college education, pick from our selection of 529 plans. And the list goes on. The institutions have designed solutions for your biggest needs simply because of rule number one – they want your money.

2. They want your money systematically. Once you give the institutions your money, they want to make sure that you keep giving it to them, on the same day, every moth, year after year. Think about 401(k) contributions – these often come straight out of your paycheck. People often make IRA contributions on a schedule as well. Many times, we operate in ways that are convenient for us, hence paycheck deductions. Yes, the institutions do a good job of tricking us with convenience.

3. They want to hold onto your money for a long time. All of that money you’re putting into your 401(k) is locked away until you’re 59 ½. And just in case you get antsy before that, you’ll find yourself slapped with taxes and penalties galore should you try to pull it out. Isn’t it funny how you have to pay to get your own money back? For all of those responsible people who want to keep saving into their IRA past this same age, don’t worry – they’ll hold onto it for you until your 70 ½ .

4. When the time comes, they want to give back as little as possible. Money that you take out of your 401(k) goes in pre-tax. That means when you go to take it out, you’ll be paying taxes on it. The same goes for an IRA. This is different than a Roth IRA, where you put in post-tax money. Concerning IRAs, they also don’t want you to let those sit and grow for too long. They’ll keep it until you’re 70 ½ , but then you must start taking distributions from it. This lowers the principal, which lowers the return


If we look deeper into the many products or accounts that most needs-based financial planning recommends, you'll find that most conform to these 4 rules... unless your advisor knows how to "beat the institutions (and the government) at their own game"!

Summary: Needs-based planning is the idea of spreading the least amount of dollars across a bunch of products and accounts. On the surface, it FEELS like you're doing a lot, but in reality, you may be "di-worse-ifying" your dollars.

Strangely enough, "needs-based" planning guarantees a higher total amount of commissions and profitability for the company, firm, agency! How? Because needs change! Therefore, more sales are needed to be made because of the 'needs-based' approach made before!

After you go through your "needs-based" approach, there simply ISN'T any "extra money" to set aside for other "wants". That's the problem with the "needs-based" approach. It's also quite common that the money is "locked away" in various kinds of accounts with taxes and penalties for accessing these funds early. Things happen and when they happen, most people need access to capital rather than racking up more debt - which is a more common approach when things happen.

Is there another way to do quality planning? And what if that approach creates more safety, security, guarantees, liquidity, use, and control of your financial picture?

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