I have been a bit surprised at some of the feedback that I have received regarding my May 12 column in National Underwriter. The article, titled “Alphabet Soup and Gobbledygook,” dealt with the proliferation of designations of doubtful value and the spread of misinformation regarding financial products (gobbledygook). From the comments that have been made, both verbal and written, it appears that gobbledygook is a much larger problem than I had realized.
Allegations of misrepresentation are centered around two products in particular: Variable Universal Life (VUL) and Indexed Annuities. The criticism is not so much about the products, but rather their misapplication and the lack of consumer understanding of the risks such products carry. One writer commented that index annuities are “often sold by agents not smart enough to get a securities license.”
One way or another, the problems cited relate back to a lack of education and training. There is more to selling insurance products than simply getting a license. The culprits most often mentioned were employees of banks and wire houses where the occasional sale of a life insurance product is merely a sideline. To be fair, I suspect that there are insurance agents who do not always understand the nuances of their sideline securities products. There is something to be said for specialization when it comes to sophisticated products.
One example given to me by a writer involved a VUL policy owned by 2 brothers on their mother. After paying in $240,000 in premium, when the mother reached age 87 the policy ran out of cash value and required an increase in premium to maintain the policy. They said, “$240,000 down a rat hole.” The policy was sold by a stockbroker in a well-known and respected organization. The product is a good and viable one and the issuing company one of the best; the problem was a gross misapplication, and according to one of the brothers, misrepresentation. (Gobbledygook at work.)
Both VUL and indexed annuities were introduced to the marketplace after I left the field, so I have had no personal experience with them. Most of what I know has been gleaned from the experience of others and reports of their use in various articles. However, I believe that as an observer of the scene today the problems are clear and should not be ignored by the business.
The essential problem, I believe, starts with companies that produce complex products in an effort to cope with today’s uncertainties, and then throw them out into the market to any and all who are willing to sell them. Again, I am not suggesting the products are not worthwhile–but they all have extra features to hedge against risks and they are often hard to understand. These extra bells and whistles all have an added cost that is not always understood either by the buyer or the seller.