The Wall Street Journal’s tome on personal financial management, Lifetime Guide to Money, begins its life insurance section, “There is a lot of value in life insurance. There are also lots of problems in the way it is sold.” Jim Hunt, an actuary and for 25 years the Consumer Federation of America’s life insurance adviser, has repeatedly stated, “It doesn’t take long in the work I do advising consumers to realize that hardly any understand how a cash value policy works.” Professor Kotlikoff and syndicated financial columnist Scott Burns in their 2008 book, Spend ‘til The End, wrote “Life insurance agents have a well-deserved reputation for being hucksters.” Mission Control to life insurance industry leaders: although no terrible headlines appear currently in the media, the life insurance industry’s pervasive, age-old, and enormously costly problems that arise from its fundamental failure to provide appropriate policy disclosure persist. Ultimately, responsibility for this national disaster rests with the NAIC.
The insurance regulators would be wise to consult with Elizabeth Warren on the importance of appropriate disclosure of financial products. No market works properly without informed consumers. While insurers and agent groups for more than five decades have vehemently fought proper disclosure of cash-value policies, industry regulators are nonetheless suppose to be fulfill their basic public duties. An obvious and imperative part of such duty is providing appropriate product disclosure. Indeed, any self-respecting democracy, especially one with a purportedly competent ‘fourth branch,’ an active and knowledgeable media, would have solved this regulatory failure of inadequate policy disclosure decades ago.
Appropriate disclosure of cash-value policies has always required information regarding its insurance and savings components, and that has always meant information regarding a policy’s annual costs and its compounding rates. Apologists may assert that some of this information is sometimes provided in some circumstances, but sporadic and incomplete provision of this absolutely essential information is hardly acceptable. After all, the absence of essential information is not only problematic in itself, but it creates an environment in which misinformation proliferates, and the irrefutable circumstances that gave rise to the introductory paragraph’s quotes are experienced.
In 1980, an NAIC task force actually recommended rigorous policy disclosure. However, as Professor Belth, in his award-winning newsletter, The Insurance Forum, has reported, “The companies did not just stifle the committee report; the individuals primarily responsible for the preparation of the report lost their jobs.” No insurance regulator, not one single state, in the subsequent 30 years has followed-up and implemented the task force’s recommendation. Furthermore, the profound and inherent problems with sales illustrations, the NAIC’s Life Insurance Buyer’s Guide, and its continued use of the interest-adjusted cost indices that have been repeatedly declared defective are nothing but testimonial monuments to mis-regulation. If Insurance Commissioners could be charged with dereliction of duty, they would all be in jail, having repaid their salaries, and forfeited their pensions.
Not only are insurance regulators culpable for inaction on these problems, the NAIC has actually acted in the mid-1990s to delete policy performance data that previously was disclosed in life insurers’ Annual Statements. Historical performance data on a publicly marketed financial product can hardly be considered either irrelevant or proprietary. Admittedly, given that disclosure of policies’ past performance can be indicative of their future performance, especially of their insurance-related component, there are certainly ramifications of such disclosure, especially once consumers are being appropriately informed. But do the regulators think that their concerns about possible insolvencies sparked by “runs on poorly performing insurers” outweigh policyholders’ and advisers’ need for such information to be readily available? (An aside to NAIFA, The Society of CLUs & ChFCs, and other groups proclaiming their members’ professionalism and intentions to serve their clients’ best interests: Where were your objections to this deletion?) Even though everyone can lip sync the caveat about past investment performance, can anyone imagine the mutual fund industry and its brokers operating without fund performance data being publicly available?
If the NAIC wants to finally begin to fulfill its responsibilities, it ought to do at least three things. First, at the stroke of an executive order, it ought to be able to stand-up for policyholders and mandate that insurers’ next filed Annual Statements contain 20 year historical data on any type of policy that comprised at least 10% of the insurer’s 1991 sales. Second, it should also begin to provide appropriate policy disclosure of cash-value product. Such disclosure, in fact, is currently available online. The NAIC is invited to publicize this disclosure, or if it believes some improvement in necessary in such, to provide such. Clearly, the disclosure of the costs of life insurance policies will enable the praised forces of genuine economic competition to finally be able to work in the life insurance marketplace. Third, it should ask Elizabeth Warren to assume responsibility for regulating life insurance products.
Brian Fechtel is the founder and president of Breadwinners Insurance. He has written several previous articles, including “What Would You Think?” and “The Case for Requiring Life Insurance” for National Underwriter Life & Health.