Life Insurance Illustrations Are More Like Estimates Than Quotes

Many people think that the more life insurance products they compare, the better price they will get. Todd S. Healy, MSW?, CLU?, ChFC?, AEP?, CAP? reminded me of an industry presentation I did several years ago that clearly illustrated the difference between estimated and actual costs of life insurance. I began the presentation with an anecdote of a house move that went poorly.

My wife and I had just purchased a house, which stretched us financially at the time. In an effort to “save money” on the moving process, I had diligently contacted three moving companies to price the cost of moving all of our furniture and wares to the new house. Based on their pricing information, I selected the company that provided me with the lowest cost.

Move-in day had arrived and, as I am sure many of you have experienced, it was hectic; countless boxes being shuffled from room to room and furniture piling up around the doorways. The lead man on the team approached me early in the process saying, “Mr. Rybka, I think I need a third man to help move your stuff up and down the stairs. Is that OK?” I said yes. He later asked me if he should double-wrap some of the furniture with additional blankets. I said yes. Finally, late in the day, he came to me explaining that not everything would fit into the truck, which would require the team to make a second trip. To that, of course I said yes.

As the final items were being loaded into the new house, the team’s lead man presented me with a bill that was double what I had expected to pay. Shocked and slightly angered, I quickly pulled out my copy of the contract I signed with the moving company; I was determined I would not let my three years of law school go to waste. At the very top of the contract, in large, red letters, read the words: NON-BINDING ESTIMATE OF COST. I didn't need a law degree to know that this was no mistake, and I was obligated to pay double what I had expected. The quote was only an estimation of cost, based on the number of man hours and materials required to complete the job. In my case, both man hours and materials were higher than what was initially expected.

The truth is this is how most life insurance products work. Illustrations are estimates of the premium paid and the benefits produced. There are a couple of key variables, including projected interest rates and mortality, that are projected to drive “price.” Mel Todd was once quoted as saying, “Illustrations show a client what might happen if certain undisclosed assumptions prove to be true.”

Some of my more technical posts on LinkedIn that focus on life insurance products, especially premium financing, have led some to claim that “Larry Rybka hates IUL.” I don’t hate the product; I hate how it is sold. That is why several industry colleagues and I have participated in three rounds of rulemaking with the National Association of Insurance Commissioners (NAIC) , attempting to rein in IUL illustrations. Despite these efforts, the core problem remains; this product continues to illustrate in a way that is most likely to disappoint consumers. This is because the core assumption is wildly optimistic. Under AG-49, the credited rate allowed for IUL contracts provides that the insurance company can make 45% annual profits on options. Unlike the moving contract, which boldly states in 36-point red letters that what you are receiving is only an estimate, the wildly optimistic assumptions for life products are buried in the contract or illustration, inconspicuous, but powerful just the same.

The real difference between a true life insurance professional and a life insurance salesperson is that professionals take the time to understand the assumptions, to help clients and other advisors make informed decisions about those assumptions and how the contracts operate, including elements that might be guaranteed. Often, salespeople will boast to their clients about how they have compared dozens of illustrations and are getting the client “the best price,” misrepresenting estimates as actual costs.

Jim Benson, a former CEO of several industry companies and someone well-respected in the insurance industry, once remarked that there are no professional insurance buyers, which underscores the need for competent, ethical, and astute life insurance professionals. Having a true life insurance professional who can explain these aspects to the client is crucial to the success of any life insurance purchase because clients are not professional insurance buyers; they are consumers looking to make an informed decision. True professionals should act as the large, red font at the top of the contract as clients contemplate their decision.

I am anticipating that this post will create some meaningful dialogue and I would love to hear your thoughts!?

Bobby Samuelson Barry Flagg, CFP?, CLU, ChFC, GFS?, AEP? Richard Weber Tom Love James Benson #premiumfinancedIUL #AG49

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