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Life Health > Life Insurance

The Flying Rake's Lesson

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After gardening for several hours in the hot sun, I decided to call it a day. Rather than bending down to pick up my rake, I decided to take a shortcut–by just stepping on the metal prongs so the rake would flip up into my waiting hand.

Well, it didn’t flip up. It flew–right past my hand and onto the side of my head.

Lesson learned: Shortcuts don’t always work. Sometimes they turn into flying rakes that hit you in the head.

That’s apropos to insurance product development, sales–and foibles. One need look no further than the story of universal life insurance for an example, remembering UL sales in the 1980s, and how the contracts blew up later on due to ill-advised shortcuts.

Let’s listen to a review of that story by Mark Armstrong, president of insurance services for ValMark Securities Inc., Akron, Ohio. A panelist at this year’s Million Dollar Round Table annual in Indianapolis, Armstrong summed it up this way:

“Over the past 30 years, our clients have been disappointed by the performance of both whole life and universal life policies they purchased.

“The disappointment arose from the misunderstanding and misuse of illustrations. Unprofessional and inexperienced agents would compete for cases based on attractive illustrated values. Nothing was guaranteed, but the illustrations–both whole life and universal life–looked very convincing to clients.

“As a result, many clients bought from the agent who showed them the most attractive illustration. In effect, the biggest and most convincing liar won the case.

“As interest rates decreased, the most aggressive illustrations crashed hardest and performed miserably. Over time, clients and advisors lost interest in anything that was not guaranteed. So did agents, who felt they had been burned by carriers promising results they would not deliver.

“For this reason, independent agents began to focus on the best guarantees rather than the best currently assumed results.”

In Armstrong’s recap, the key words are “convincing” and “most attractive.” As in, the illustrations “looked very convincing;” and clients bought from agents showing the “most attractive” illustration.

That was the shortcut–using a “convincing” illustration to induce clients to buy. It looked fantastic, but wasn’t guaranteed. However, the sale just sped on by that little, but very important, fact.

The illustration software and those running the illustrations were equally complicit in these sales. So, in a way, were the buyers, in that they bought into the too-good-to-be-true projections.

“Oh, but that was long ago,” you say. True enough. The UL world is on more solid footing now, thanks to many changes including the new secondary guarantees.

Still, in recessionary economies such as today’s, new shortcuts may appear that lead to new turmoil, if not with UL then with other product lines.

Changes are afoot right now that could go that way–or not–depending on how they are handled. For instance, variable annuity insurers are stripping out or cutting back on their very popular guaranteed withdrawal features. Traditional fixed annuity insurers are taking their traditional fixed interest rate guarantees as close to the floor as possible. Fixed indexed annuity companies are re-jiggering products to look more like traditional fixed annuities. Life companies are cutting here and there to create more “affordable” plans, and long term care companies are not far behind. Disability companies are lowering the maximum issue amounts.

Such changes are not bad in and of themselves. In fact, mindful streamlining and cost-management are good business practices. They become shortcuts that work.

But developers and advisors who handle these new leaner products need to guard against turning them into–or letting them be turned into–shortcuts that hurt.

For instance, companies and advisors need to cultivate realistic expectations in the minds of customers about what the new leaner products will and will not do. Setting appropriate expectations will go a long way toward successful outcomes.

As the UL story makes clear, focusing sales on “convincing” price points and “most attractive” projections can make for short-term gain but long-term trouble.

I was lucky. When the flying rake hit me, I was wearing sunglasses that cushioned the blow. But when those old UL contracts blew up in the face of the life insurance industry, there was no barrier to protect the business from the huge public outcry.

That day in the garden, I was also foolish. I should have taken the time to make sure that my shortcut would work. So, too, should the insurance industry.


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