I'm mad as hell about deceptive illustrations of products with weak guarantees

By Jeffrey Reeves MA

EUREKONOMICS[tm]


It’s a sad day for professional life insurance and financial advisers when those who aspire to represent themselves as professionals stoop to deception in order to sell their wares. However, it’s even sadder that insurance companies and marketing organizations allow unrealistic — even impossible — illustrations to be created in the first place.

An agent I am mentoring placed a well-structured participating whole life policy on the life of a small business owner. Another agent slithered through a crack somewhere and misled the client to believe the in-force par whole life policy was of lesser value than the indexed universal life policy the other agent was proposing to sell the client.

My mentee wanted to know how to help his client understand the deception of the other agent and avoid losing the valuable benefits of the client's whole life insurance program.

Here is my response to my mentee with [bracketed descriptions of the players] replacing their actual names.

Hi [Agent,]

I’ve reviewed the “Supplemental Illustration” from [the large foreign-owned stock insurance company] that [another agent] recommended to [your client] as a replacement for [your client's] whole life policy.

I suggest you point out to [your client] that [the other agent]:
  • failed to show the entire illustration, which includes the guaranteed values required by law in all fifty states. Moreover, that requirement is clearly stated on the cover page of the supplemental illustration.
In addition, I suggest you point out to [your client] that [the other agent]:
  • wants [your client] to believe that a contribution of $28,600 in year one and $9,600 for 15 years thereafter — $172,600 total — to [a universal life insurance policy with an indexing feature]:
    • would grow to $233,697 by the year 16 based on the non-guaranteed values in the supplemental illustration — which makes it impossible to determine the formula for the calculation.
    • that [your client] could then expect that $233,697 to produce $25,820 annually — over 11 percent per year excluding the cost of insurance, administration and possible interest charges — and repay the entire amount of [your client's] contributions — $172,600 — in less than seven years.
    • to then deliver $25,820 in income each and every year thereafter through age 121 from policy loans. That’s a payout of $1,092,567 in policy loans, again with no regard for insurance, administration and interest expense. (That payout assumes somewhere in the neighborhood of a 12 percent return forever based on a calculator available on BankRate.com.)
    • would retain, at age 121, a cash value of $657,418 and a death benefit of $816,644.
Incredibly, [the large foreign-owned stock insurance company] illustration [the other agent] produced claims that a contribution of $172,600 would produce a total of $1,749,985 in policy loans.

Common sense tells us that these numbers are unrealistic, but a financial calculator could tell you the precise impossible-to-achieve rate of return that the other agent is using to create these post age 72 income amounts from policy loans.

You may want to create a spreadsheet showing [the mutual company] policy’s actual guaranteed cash values and death benefit and non-guaranteed illustrated dividends and compare them to the hypothetical values being illustrated for [the large foreign-owned stock insurance company] product.

You could either leave the guaranteed column empty on [the large foreign-owned stock insurance company] portion or, better yet, call a brokerage house and have them run [the large foreign-owned stock insurance company] illustration showing the same results and fully disclosing the guarantees — or lack thereof — and the return assumptions. You could then use their hypothetical numbers on your spreadsheet — with emphasis on hypothetical. I hope this helps you demonstrate to [your client] that selling from an incomplete illustration that only shows untested and unrealistic hypothetical results is unethical at best and unworthy of consideration. It's also worth noting that it could be a reportable violation of NAIC rules and state laws by both the agent and the insurer.

Every EUREKONOMICS™ agent is fully committed to adhere to the legal, moral and ethical standards of the insurance and financial advisory vocation without, however, being restricted by the constraints of conventional wisdom that lead to these kinds of abuses and serve more to constrain creativity than to present the truth and protect our clients.