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.
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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.