Stockbrokers often introduce possible investments to a client with three words: “if you believe.”
As in: “If you believe the stock price will go up, you might want to consider this. If you believe it won’t, how about another choice?”
By comparison, insurance professionals talk about “if-this-then-that.” They zoom in on what is guaranteed and protected, not what the customer believes might happen.
As in: “If this (covered event) happens, then your insurance will pay… If you want a guaranteed return, the fixed annuity is a good option. If you want your life insurance to last a lifetime, let’s put a lifetime no-lapse guarantee on your universal life policy. If you don’t want to pay premiums for insurance you never use, you might like guaranteed return-of-premium insurance.”
These are subtle but very important distinctions that not everyone gets or talks about. But given what has happened in the economy in the last half of 2008, those points need to be brought front and center.
Securities and insurance professionals both need to make it clear that believing in a securities investment is not the same thing as knowing that the money is guaranteed to be safe, to grow and to pay out according to the contract terms.
They need to educate clients that a security is not the same thing as insurance, and that belief is not a guarantee.
No doubt, all those deep-pocket customers of the now-defunct Bernard L. Madoff Investment Securities, knew these things intellectually. But, judging by their shock last month upon learning of Madoff’s gigantic Ponzi scheme and their own losses, it’s safe to say they really were operating more on belief than solid facts, guarantees and understanding.
For instance, news reports indicate they believed that investing with Madoff was just ducky. They believed their investments were sound; they believed the firm was trustworthy; and they believed their impressive investment results would just keep on going up–but not up, up and away.
Millions of other people–mid-market investors, people in 401(k) plans, employees of companies that dole out stock options, etc.–are suffering a similar shock. It’s not because of a Ponzi scheme, but rather because of the decimation of their security account values stemming from the credit meltdown.
These other investors also believed everything was ducky, until the facts proved otherwise. They too did not grasp that that securities account values could tank. They believed a rising tide would keep rising.
How on earth did so many people become so bamboozled?
When the securities professional says, if you believe, that is what the professional means. It’s all on the customer, what the person believes will happen. The customer becomes the risk-bearer and must allocate and take other strategic steps accordingly.
When the insurance professional says, if you want guarantees and protection, that is what the professional means. The customer has a contract that spells it out. Even variable insurance contracts offer no-lapse and a variety of other guarantees. Depending on the policy purchased, the customer looks to the insurance carrier to bear all or some of the stated financial risk.
Make no mistake about it, risk is what this is all about. In securities, the risk of loss and hope for gain rests on the shoulders of the customer, no matter what the customer believes. In insurance, the risk of loss due to specified events is borne by the insurer up to stated limits, again no matter what the customer believes. Also, in products like fixed annuities and whole life, the insurer guarantees gain as well, again no matter what the customer believes.
This is not to say there is no risk in insurance policy ownership. There is the risk that certain types of policies may be repriced as a block of business, for instance. Certain variable policies do not offer guarantees. Certain universal life contracts, if sold without no-lapse guarantees, may blow up in later years if not well funded. Some products may be sold, as a block, by one carrier to another carrier not of the policyowner’s choosing.
Still, insurance has far more certainty than non-insurance securities. That’s not belief; it’s the structure of insurance. This will be a strong selling point in 2009.
At least one fixed annuity company is moving on this. When a customer calls for service–to request a form, say–the service rep handles it and then asks, “by the way, do you want to know your annuity value today?” If the caller says yes, he or she gets some welcome news that the account value is up (barring withdrawals or distributions).
In today’s turbulent economy, that oh-by-the-way moment becomes a powerful reminder of the fixed annuity’s value proposition. Belief is not required.