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July 07, 2002 at 08:00 PM
Dont Shoot Yourself In The Foot With Policy Illustrations
By
Sometimes, we need to be protected from ourselves.
Take Barney Fife, the jittery deputy sheriff on the old TV series, “Mayberry RFD.” Barney was ordered to carry his revolver unloaded lest he inadvertently shoot someone, most likely himself. He protected the public–as well as himself–by storing a single bullet in his breast pocket.
The life insurance industry has a parallel to Barneys revolver–sales illustrations. Too many financial professionals are shooting themselves in the foot by relying too heavily on illustrations to assist their clients in choosing the right life insurance policies.
Seeking an advantage over the competition, these insurance “deputies” are pulling their illustrations out of their holsters without first understanding what their illustrations are loaded with or if they are even firing accurately.
Used correctly, life insurance sales illustrations can be very valuable tools. They do allow financial professionals and their clients to assess the potential impact of certain changes on the performance of a given life insurance policy. They can help answer questions like:
- What if I earned 1% less on my investment options in the contract?
- What if I paid an extra premium in the first policy year?
- What if I took a policy loan?
However, unless you are comparing contracts where all of the charges are guaranteed (and that is rarely the case), sales illustrations are terrible tools for finding “the best” product. Why? Because policy illustrations do not show what the client will get. Rather, they show what the client would get IF (notice, thats a big if) all of the companys assumptions about the future came true.
These assumptions include several unforeseeable factors such as:
- The insurers expense and mortality levels–today and, even more importantly, 20, 30 and 40 years from now, because these costs increase dramatically as policyholders age;
- How much profit the insurer makes on other life insurance policies;
- The returns the insurer realizes on the premium dollars it invests.
Obviously, none of these factors can be predicted with any certainty. Although a good deal of analysis sometimes goes into setting these assumptions, they are, after all is said and done, only guesses. Some companies guesses are more conservative (to minimize the potential for disappointment on the part of the buyer); some are more aggressive (to make the product look more attractive). And, in some instances, I would argue these guesses are “prayers” rather than reasonable estimates.
So, the company with “the best” illustration may simply be the one with the most optimistic assumptions about the future, not the one that has the fundamentals to give the client the best value (i.e. the lowest costs or the highest investment returns).
Despite the fact that these illustrations are simply non-guaranteed estimates based on a set of assumptions (that may not even be the companys “best guess” assumptions), many financial professionals cling to policy illustrations as they would a lifeboat on the Titanic. They close the sale by simply picking the policy with the best illustrated values. The rest, as they say, is conversation.
