In her enlightening book, The Optimism Bias, best-selling author and neuroscientist Tali Sharot examines how and why we are all so predisposed to see ourselves, our families, our surroundings and our future in the best possible way. She defines the phenomenon of this look-on-the-bright-side bias as, “the inclination to overestimate the likelihood of encountering positive events in the future and to underestimate the likelihood of experiencing negative events.”
Why do we act in this particularly positive fashion? Well, for one, it helps us simply to survive.
While I certainly understand and appreciate this protective mechanism, when it comes to making decisions about your financial future, I firmly believe that people need to make decisions on realities that may not be particularly rosy.
(Related: Why the Indexes Are Multiplying)
And all too often, when people are engaging with our industry shopping for policies designed to actually help them live their best future life possible, the facts and advice they receive can play right into their optimism bias.
That’s why it is so vitally important for financial advisors to be 100% transparent with clients about the claims they make and the illustrations they use to show the value of various products and policies. It’s quite easy to overpromise and go light on details, but clients deserve to understand what they are buying in the simplest terms, covering both the pros and the cons.
This is especially true with a complex product like indexed universal life (IUL).
New Demands, New Features
Accumulation IULs are popular because more people are searching for tax-savvy ways to prepare for retirement. Many of these individuals have changed jobs several times, didn’t take full advantage of qualified 401ks and are in need tax-advantaged savings. Accumulation IULs are specifically designed to help meet those needs, while maintaining their primary objective of providing a tax-free death benefit.
However, to meet those demands, accumulation IULs are becoming more complex with features like high multipliers, non-guaranteed bonuses, and alternative loans to potentially generate more income. Because clients really need these products to perform, and because they can be so complex, extra care needs to be taken to ensure clients understand all the risks.
That means it is more important than ever to fully understand these products and features yourself – and then explain to your clients the potential risks related to these products. Also, make sure to look at the company behind the IUL. This kind of straight talk with your client now means you won’t have to talk them down from a potentially very bad experience later.
As an advisor, the first thing to keep in mind about a complex product like accumulation IULs is that you can’t assume your clients understand everything about the policy. They need to be completely confident in understanding that the combination of high fees with the potential of less-than-stellar market returns could mean their investment might not pay off the way they hope, or expect. This situation is complicated even further by complex, high-cost multipliers and other buy-up features like high caps or non-guaranteed bonus features.
My suggestion would be to under promise and then over deliver. One way to accomplish that is to illustrate their situation at 70% of the maximum rate. That means giving your clients a truly realistic idea about how their policy might perform – as opposed to using an illustration that focuses on a market that does nothing but grow and grow.
When you use a realistic illustration with your clients, not only does it instill initial confidence in them about what to expect from their investment, but also if and when the numbers take a dip, the conversation you will have to have with them will feel a lot more collaborative and a lot less confrontational.
Many clients who are interested in accumulation IULs will be attracted to the fact that additional options can mean they could earn higher cash values or more income. However, if the market drops, especially in the first several years of the policy – or any time during the life of the policy – the results could be very different. And it doesn’t take a Fed Chairman to know that given the current economic and political climate that a never-ending Bull Market is anything but a smart bet.
In short, presenting illustrations that show maximum growth every year might get you more clients in the door, but it also might mean more upset clients at your door if illustrations don’t pan out over the long run, when downturns are inevitable.
Be very mindful of high multipliers, non-guaranteed bonuses and leveraged loans. They look great and can pay off well in a strong market – but they can erode the income stream down the road. By carefully selecting when to use these features – and illustrating them at 70% of the maximum rate– you help set up your client and yourself for success.
One way to make this situation a reality is to always offer your clients an IUL that offers the choice of whether to include high multipliers or high caps, while keeping the charges low. Also, always make sure you show your clients tangible examples of what their investments will look like when the market grows, as well as when the market drops. Again, showing your clients illustrations run at 70% of the maximum rate will demonstrate how resilient a policy can be in different market conditions.
What you never want to happen is for your clients to be surprised to learn that their policy’s fees are so high that the premium isn’t enough to cover the policy’s expenses. This is especially true for clients who might be heavily dependent on the income from a policy like this during retirement.
To sum up a complex situation, I suggest looking for an IUL with options – not requirements – that include high multipliers, at a low charge. Always carefully explain the risks by running multiple illustrations at least 70% of the maximum rate to show a client what could happen.
IULs can be very complicated, so it’s more than worth the effort to understand them and manage client expectations very carefully.
Holly Snyder is the leader of Nationwide’s life insurance business.