IUL lawsuits: Are lawyers salivating over your E&O?Article added by Rodney Ballance on June 19, 2013
Rodney Ballance

Rodney Ballance

Branson, MO

Joined: September 22, 2011

There is a reason why we have to hold securities licenses to sell securities. It is a whole different world from selling fixed products. If you don’t have a full understanding of contributing factors and their direct and indirect impact on economic issues, you are playing with fire.

I know many of you will think this is an idiotic piece with absolutely no relevance to your business, but for those of you who actually take the time to understand what I’m about to say, take note.

Those of you who were in the insurance business in the 1990s and remember the days of high interest rates that provided us with the perfect sales scenario for universal life will absolutely understand my position.

Back in those days when interest rates dropped from the highs, policies sold at minimum premium that projected growth at the current rate suddenly required more money from the client to keep the contract in place. There were a lot of unhappy people, and some legal battles ensued.

The first thing we must all agree on is that the economy is cyclical in nature. What I mean is that when one area of the economy suffers, another is flourishing. Over a period of time, these economic issues change and actually reverse their impact. For example, when the stock market is up, interest rates are low.

I've never claimed to be an expert in IUL or indexed annuities, but I think I have a pretty good understanding of the basic premise of these products. I know many will comment with corrections, so I’ll just throw this out for consideration.

What happens to an IUL product during a period of little or no gain in the index to which it is tied? Isn’t that product safe because the company guarantees no loss for the period? You get no gain, but there is the secure feeling that you can’t lose your money, right?

What if there is an extended period of no growth? Will a client simply receive no return on their money during that period of time? As an example, what if a client purchases an IUL today while the S&P 500 is at a certain level? If, over the next five years, the index stays flat or loses value, what happens to the account value of the IUL?

If a client purchases this product based on illustrations showing tremendous returns over the past three years and realizes no growth over the next three years, will they be happy with that purchase? If they aren’t happy, won't they get hit with surrender charges if they want to move to something more predictable and profitable?

Please understand that I’m not trying to say, "Don’t sell indexed products," but I do want to raise awareness among my colleagues that we must be careful with these tools right now. It is evident that recent market growth will not last forever. In fact, I believe that before this summer is over, we could easily see a drop in the S&P and Dow of somewhere between 20 percent to 50 percent.
I further predict that, as a direct result of quantitative easing, America will see an inflationary economy that will take interest rates back to highs not seen since the 1980s. What will happen to your indexed products when the cycle reverses, and how will your clients view you and your advice?

There is a reason why we have to hold securities licenses to sell securities. It is a whole different world from selling fixed products. If you don’t have a full understanding of contributing factors and their direct and indirect impact on economic issues, you are playing with fire.

I do hope you will take this article in the way in which it was intended. I just want us to think beyond the sales rhetoric provided by the companies trying to profit from our efforts, and realize that economics, just like physics, is a science. For every action, there is an opposite and equal reaction.

Higher interest rates mean lower stock market values. Lower stock market returns mean little or no growth for your clients. Clients who are unhappy with the products you sold them means no positive referrals. No referrals mean your personal economy suffers.

Just be careful when using these tools, and make sure there is more protection for the client than just “You can’t lose your principle.” I fear the attorneys are already lining up to challenge these contracts, and I don’t want my friends to be caught up in the litigation feeding frenzy.

I look forward to your thoughts.
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