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.
The more complicated the product the more intensive agent training should be to insure consumer understanding, a difficult job even under the best of circumstances. Sadly, this comes at a time when the trend is more to a reduction in agent training by companies.
At about the time I was writing the original column on this subject, I received a phone call from a cousin in another state. She wanted my opinion of a set of proposals her 95-year-old mother (my aunt) had received. The proposals were for an immediate annuity costing $300,000. The agent said only 2 companies would issue such a contract, hence the limited number of proposals. One of the companies, according to press reports, is already involved in class action suits over alleged improper sales of deferred annuities. My aunt is a cancer survivor and has a heart condition, which may require a pacemaker. Well, I will let you decide what to recommend if she was your aunt.
As I have thought about this issue and its relationship to proper training, I realize that this is not really a new issue–it has been around a long time–but just exacerbated by so-called modern products. Some years ago when I was involved in the leadership of our local association we received an ethics complaint against a local manager. It seemed that he was training his agents in the belief that a whole life policy produced a 12% rate of return from premiums paid. His reasoning was that at a certain age the policy cash value exceeded the total premiums paid at the end of 20 years by 12%. When told he was misrepresenting the product and that a 12% return would double the premiums paid in about 6 years he was stunned. I will never forget his response. He said, “At least my way sold a hell of a lot of insurance.” Poor training did not start yesterday.
About 40 years ago a noted actuary made this observation, “The industry will pay dearly for the corpses of policies sold to people who should not have bought them by agents who should not have been allowed to sell them.” Not his exact words–but close enough for his meaning.
There is no excuse for such ignorance today. With LUTC, CLU, ChFC and other fine courses readily available and affordable, gobbledygook should never be a factor in our business. People cannot be a CLU the day they enter the business, but some designation should be a requirement for the sale of our complex products. Learn the business selling the basic products.