Dont Shoot Yourself In The Foot With Policy Illustrations

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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.

If this scenario sounds even remotely close to your life insurance sales approach, its time to put your revolver back in your holster. Dont touch the trigger on your illustration software again until you rethink your approach to educating clients about making what is a critical financial decision.

You and your clients should look at buying a life insurance policy the same way you would any other major purchase. For instance, lets say you just retired and bought the house of your dreams on a golf course in Florida. You want to enjoy life and you dont want to deal with the hassles of maintaining your lawn, shrubs and the house itself. So, you decide to hire someone to keep your baronial estate beautiful for the next 20 years.

The house is brand new, so you know that the actual cost to maintain it over the next few years will be fairly low but will increase significantly as the house ages. Youre also on a fixed income in retirement, so you decide you want to pay a level annual maintenance fee for the next 20 years.

Because youre a smart shopper, you obtain estimates. Four firms say they can perform all of the maintenance youll ever need for $25,000, $33,000, $34,000 and $35,000 a year respectively. However, all of their quotes point out, in big print, that their estimates are not guaranteed, that they reserve the right to increase their fees in the future, and the ultimate cost to you will be based on many factors, including:

  • The firms actual labor and raw materials costs, not only now, but particularly in the future since thats where the bulk of the costs will be incurred;
  • How much profit they make on the other parts of their business;
  • How well they invest the dollars you give them.

Now, would you simply pick the contractor who gave you the lowest non-guaranteed estimate of $25,000? Well, I hope not. If so, perhaps its time to watch a few reruns of Mayberry RFD and pick up a few pointers from Deputy Fife.

If you are like most people, you would look further. You would want to better understand the assumptions the four firms made to create their estimates. Then, you would want to know if a firm had a history of “lowballing” its estimates.

You would also want to ascertain the financial strength of the firm (i.e., is it going to be around in 15 to 20 years when you really need it?). And thats just for starters. You would probably make your decision only after you received satisfactory answers to all of your questions.

Now, if you would go to this length to evaluate a maintenance contract, why would you recommend that one of your clients buy a certain life insurance policy simply because the insurer gave you the lowest non-guaranteed estimate–also known as a policy illustration?

So how do you pick the best policy? How can you do a better job of getting the best real value vs. the best illustrated value? I would suggest you use a similar Socratic approach. Ask yourself the following questions:

  • Is the lowest estimate a lot lower than the other ones you got? If it sounds too good to be true, it probably is.
  • Since the mortality levels assumed at ages 80 and older have a huge impact on the estimate, what assumption did the insurer make in those years? Is it a lot lower than industry averages?
  • Is the insurer giving any other customers “sweetheart deals” such as liberalized underwriting standards for higher mortality risks? If so, how are they going to be able to meet their mortality assumption?
  • Does the insurer have the critical mass and management discipline to keep its expenses low?
  • How strong is the insurers financial condition?
  • Do the investment options within the insurers variable universal life insurance products have a good investment track record? Especially if you are selling variable life, you should be taking a hard look at how the investment options have performed over the long run, not just the latest month or quarter.

With this kind of information in hand, a “better” illustration seems a lot less important–and it is! After all, an illustration showing a higher premium or a lower cash value may not be more expensive, it may simply be based on more realistic assumptions.

So, if after reading this, you continue to rely heavily on policy illustrations to find “the best” policy, feel free to contact me at the e-mail address below and Ill be happy to send you your honorary Deputy badge.

Tim Fitch is senior vice president and director of individual life product development at Hartford Life Insurance Co., a subsidiary of The Hartford Financial Services Group. Tim can be reached at timothy.fitch@hartfordlife.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, July 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.