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Life Health > Life Insurance > Permanent Life Insurance

The Problem Is Not the Life Insurance Products, or the Illustrations

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What You Need to Know

  • Illustrations simply show how a product might work.
  • Sometimes, the world changes in ways beyond the imagination of the product designers.
  • The author maintains that better disclosures would help more than new regulations.

We’ve all seen recent articles about the 90-plus-year-old lady (let’s call her “Emma” for the purpose of this article) who is suing an insurance company because her universal life policy, or UL policy, has run out of cash value.

To her (very negative) surprise, she must pay thousands of dollars in premium to keep it in force.

She had no idea and is feeling ripped off.

This has triggered rounds of raucous arguments.

The Products

First, there are the product war arguments (characterized by the sentiment that the products they offer are always superior)…

“UL is just a horrible product with high loads, high insurance rates, lousy returns, and poor guarantees. You should only sell variable UL (VUL) which offers market returns.”

“No, VUL is terrible too — High loads, more complexity, and even poorer guarantees. You should sell indexed UL (IUL) where the interest rate can’t be less than zero.”

“No, all these flexible UL products are complicated, expensive, evil products. You should only sell traditional par whole life (PWL) with its strong guarantees. Emma would never be in this predicament with PWL.”

“No, PWL premiums are ridiculous. The only life insurance you should sell is competitive term insurance.”

Finally, the pièce de résistance … “Term insurance hardly ever pays out. The whole life insurance industry is a scam. Buy whatever we’re selling instead.”

Sorry, I’m all for improving products, but the products are NOT the problem here.

The Illustrations

The real problem, people say, is that we need to improve sales illustrations.

If only we could better control what a company illustrates.

If only we could tamp down on all those exotic index returns illustrated.

If only we could explain how the illustration is just an educational tool intended to demonstrate how a product works and should not be used to compete.

If only we could add a few more pages of disclosures and disclaimers to the 12 (or so) pages currently being produced.

Or should we just require all companies to show the same exact projected premiums and benefits, regardless of the product?

Or should we just require that only guaranteed benefits are illustrated?

Improving sales illustrations is great too. The Model Illustration Regulation from the early 2000s did a lot to curb extreme illustration abuses. So further improvements might help.

For example, illustrations typically have a guaranteed column that shows when a guaranteed cash value will run out.

However, they don’t show what premiums the policyholder would need to pay to keep the policy in force at that point.

That’s exactly the situation Emma, the hypothetical client, finds herself in.

Or perhaps illustrations should not be allowed to show a policy that lapses under the guarantees.

Instead, always require the illustration to show a pattern of premiums that will keep it in force.

On the other hand, it’s nice to think you could control how illustrations are used or interpreted.

But so long as one illustration has better numbers than another, it is unavoidable that salespeople will use the differences to sell policies.

But regardless, even with all the potential improvements, at-issue illustrations will NOT solve the problem either.

The Real Problem

Getting back to our Emma. When did she purchase the UL policy?

Chances are it was 20, 30, 40 or more years ago.

Even if we had the perfect sales illustration, one that explained all the possibilities, and even if she had the opportunity to adequately review all types of products, and even if she understood it all and made a well-informed decision back then, it would still not be enough.

Insurance contracts of any kind are complicated.

A carrier can’t expect any court to verify that everything was done correctly.

No court would ever expect that Emma should have remembered it all.

Chances are there are lots of these situations out there waiting to emerge, and it’s going to cost carriers a lot of money.

The Real Solution

So, what is the solution?

The main problem is that these products with complicated, nonguaranteed elements are just not “set it and forget it” types of products. They need maintenance.

Here’s an outline of what I think is needed:

1. Emphasize simple, short disclosures, both at issue and on an ongoing basis. Pages and pages aren’t going to cut it. The disclosures really need to be read and understood.

2. Make disclosures verifiable and ongoing. We need a method that, as much as possible, can be verified as having occurred. Require a sign-off by the customer, and, if that’s not possible, solid documentation that disclosures and options are delivered regularly.

3. Provide adequate disclosure at issue. This should be a short, simple paragraph that explains, at a high level, that the product the customer bought has nonguaranteed elements that are, to some degree, subject to the discretion of the carrier.

Note that even the “index formula” in indexed universal life products usually has some elements of carrier discretion that can change the amounts credited.

Let the carriers draft these disclosures (since all the various product types are different), as long as the disclosures are short, and as long as the disclosures make it clear that carriers have the discretion to make future changes.

4. When adverse changes are made, whether discretionary or not, tell the customers. Require that a verified communication is made, with an offer to show the customers what adjustments can be made to premiums, benefits or whatever to ensure that the initially illustrated benefits remain achievable.

If our Emma were treated this way, she would have had to pay small incremental premium increases over the years and avoided the big negative surprise.

If she elected not to pay the higher premiums over the years, the carrier would have documentation that she was warned. And the carrier should follow up regularly in this latter situation.

5. Carriers should take charge. There has been a historical debate as to who’s responsible for communicating with a customer.

Many companies and agents believe that the agent owns the customer, and agents have often been testy about companies talking directly to “their” customers.

But the contract is between the company and the carrier, and, generally, when lawsuits are being considered, the carrier is where the money is.

Also, agents come and go, but, for the most part, carriers stick around.

Perhaps there are ways to share the responsibility, but the buck must stop with the carrier.

6. Provide useful information that encourages market forces to act. I believe that market forces are better regulators of fair treatment than asking regulators to micro-manage illustrations.

For this purpose, I’d like to see answers to these questions:

a. What adverse historical nonguaranteed elements changes has a carrier made to its product? Each entry should be very brief; just a few lines indicating when, why, how much, etc. This list should be accessible with every verified communication.

b. Is the product still being sold? Many companies are more inclined to reduce benefits when the product is no longer for sale. The adverse changes list should include this status. Such documentation could be used to encourage carriers to treat old products fairly.

c. Do carriers ever improve nonguaranteed elements on existing products? This should be included in the list too. Such a list could encourage fair treatment in both directions.

d. Has your policy been sold to another carrier? Often, the new carrier is more inclined to make adverse changes to such policies. The list of adverse changes should include whether the carrier is the original carrier or not.

This is just a first shot at a solution. I’m sure others might have things to add.

Some of these ideas may be difficult to implement. But I strongly believe that simple, ongoing, verified communications is where the best solutions lie.

Chuck RitzkeChuck Ritzke is a fellow of the Society of Actuaries, a member of the American Academy of Actuaries and founder of Problem Solving Enterprises, an actuarial consulting firm.





Credit: Adobe Stock


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