Ethical Use of Illustrations

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Ethical Use of Illustrations

• Everett L. Kent Associates
• Fujimoto Consulting
• September, 2004

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Why Ethics? Why Now?

• Ethics Today
• Ethics and Financial services
• Ethics and Financial Products
• Ethics and Sales Tools
• Ethics and Illustration
• Ethics and Your Illustrations

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Keys to Ethical Illustrations

• Transparency
• Integrity what is it? what does it say? not say?
  How does it say it?
• Who is it for? Advisor or client?

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Ethical Keys (contd)

• Sales versus service
• (the high maintenance challenge)
• Sales person or service person
• Is there a Service checklist?

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The Golden Rule of Ethics

• If this product was the one and only
  investment vehicle for a loved one, what would I
  insist be included in the illustration and in
  other pieces of the sales and service cycle?

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Our Challenge to You!

• How would your illustration and your product
  service and sales cycle stand up to an in-depth
  outside review?

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Canadian Individual Life Insurance Sales
Source LIMRA Canadian Individual Life Insurance
Sales
What do these statistics tell us?
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The Advisors Viewpoint

• What are the responsibilities of the Advisor?
• How does he/she get compensated for providing
  sales/service?

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The Advisors Sales Process

• Determine the need
• Get agreement by the prospect that
  there is a need to be addressed
• Design and present the solution
• Close the sale

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Designing the Solution

• Use Computer Illustrations to design ledger
  statements that will assist in the explanation of
  how a particular universal life policy will
  perform under a specific set of assumptions

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Universal Life and Illustrations

• Can you sell a universal life policy without a
  computer illustration?
• What ethical responsibilities does this put on
  the Advisor and the company?

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The Ethical Dilemmas

• How do I determine which compan(ies) to promote?
• What criteria do I use to determine which
  universal life policy to recommend?
• What interest rate assumption do I use and is it
  reasonable based on the historical returns of the
  Investment Account(s) selected?
• How does the policy illustrate if I use variable
  interest rate returns instead of level interest
  rates?

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The Ethical Dilemmas

• How do I illustrate riders and benefits?
• How do I show withdrawals and loans? (interest
  rates, loan interest rates, timing, disclosures)
• How do I communicate non-illustration issues?
  (i.e.) tax treatment fees and charges, etc.

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The Disconnects

• Advisor Knowledge
• Words !
• High Maintenance product ....
• Low maintenance Commissions
• Who teaches the downsides?

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Advisor Knowledge

• Who is responsible for ensuring that the client
  understands what he/she is buying?
• No one (Client Beware)
• Advisor
• MGA
• Life Insurance company
• Life Insurance industry

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Advisor Knowledge

• How do you determine if the Advisor has the
  knowledge to sell a companys universal life
  product?
• Company product meetings
• Competency testing
• MGA/Supervisor sign-off

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Words!

• How do you know what the Advisor is saying to the
  prospect in order to sell your universal life
  policy?
• Remember the Vanishing Premium fiasco
• Are the current sales practices used by
  Advisors opening the door to future (and
  present) class- action suits?

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High Maintenance product .... Low maintenance
Commissions

• 100 First Year compensation
• ½ to 10 Second, Third, Fourth, Fifth, Sixth,
  etc. compensation
• Wheres the incentive to provide consistent,
  regular service?

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Who teaches the downsides?

• MGA
• Life Insurance company
• Life Insurance industry

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How does the Advisor design the computer
illustration?
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Universal Life

• Play with the illustration software until a
  suitable scenario can be illustrated and
  presented
• Interest Rate Assumption (, Level, Variable)
• Cost of Insurance (YRT, Level)
• Death Benefit Options (Level, Increasing,
  Variable)
• Premium/Deposit (Level, Variable, Limited
  Payment Period)
• Investment Options (DIA, GIA, Variable Interest
  Options)
• Loans and Withdrawals (Timing, )
• Lives Insured (Single, Joint first to die, Joint
  second/last to die, Multiple lives)
• Riders and Benefits (Disability Waivers, ADD,
  term riders, spousal riders, GIB, child riders,
  etc.)

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What the Advisor May Not Know

• A level interest rate is likely to illustrate
  much differently than a variable interest rate
  illustration with the same average interest rate
• A small interest rate differential can make the
  difference between a policy staying in force and
  lapsing

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A 2 Interest Rate Difference
Male, 40 N.S., 250,000, YRT COI, Level DB,
2000/year
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What the Advisor May Not Know/Consider

• A 6 interest rate return illustration using an
  Indexed Investment Account does not equate to the
  index performing at 6
• The maximum premium is not fixed but is
  determined at the end of the policy year. A
  credited interest rate different from the
  illustrated interest rate will affect the actual
  Account Values and Cash Values accumulation

6 3
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What the Advisor May Not Know/Consider

• Bonus interest rates may be affected by the
  amount of cash value or the credited interest
  rate return for the policy year. A level interest
  rate assumption is an unrealistic reflection of
  actual future performance
• Preferred underwriting practices vary from
  company to company
• The crediting of premiums/deposits to the various
  Investment Accounts vary from company to company

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What the Advisor May Not Know/Consider

• The MER for Index Accounts will vary from
  company to company
• A UL policy with a 1 interest bonus and a 3.25
  MER will show values with a higher cash value
  compared to a UL policy with no bonus interest
  and a 2.25 MER

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Some Suggestions for the Companies

• Educate Advisors to ensure that they know what
  they are selling
• Seminars
• On-line reference guides
• Illustration guides
• Product competency tests
• Technical competency tests

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Some Suggestions for the Companies
Disclaimer

• Put in LARGE bold print on every illustration
  It is a certainty that the values illustrated
  will not occur. The flexibility of this product
  guarantees that actual performance will vary or
  a similar disclosure. Ideally, the same wording
  should appear for all companies

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Some Suggestions for the Companies

• All actions illustrated that are non-contractual
  should be prominently noted and the applicant
  required to sign-off (i.e.) YRT to Level COI
  changes removal of riders after x years loans
  and withdrawals

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Some Suggestions for the Companies

• All illustrations should be subject to interest
  rate assumptions consistent with the historical
  returns of Investment Accounts chosen at time of
  application
• Interest rates should have a default of randomly
  generated interest rates
• Interest rates in the first ten policy years
  should be shown at 2 below the selected interest
  rate assumption

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Some Suggestions for the Companies

• A statement on the first page of the
  illustration should state the purpose of the
  computer illustration (show how the policy works
  using certain assumptions)
• Another statement should emphasize that due to
  various product designs, the comparison of values
  from one policy to others may not be accurate or
  fair. A listing of these factors should follow

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Some Suggestions for the Companies

• For every concept that is illustrated, develop
  an education package for both the Advisor and
  Client that outlines the pros and cons and
  requires signatures by both that it has been read
  and understood

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Universal Life Illustrations
A Fantastic Tool...... if used appropriately!