The Society of Financial Service Professional’s Life Insurance Illustration Questionnaire has made a big difference in the life of the insurance professional. It has stripped away the quaint notion that '... if the marketing department says it’s good, it must be good.' In this first of a three-part series, Richard Weber explains why an illustration isn’t the best resource on which to sell a policy.
Life insurance salespeople are taking control of their business lives by understanding the difference between a Life insurance policy and a Life insurance illustration. Some of us are embarking on the difficult process of retraining our clients and ourselves to the reality that an illustration is a particularly poor resource on which to make the decision of which policy to sell or buy. Consumers can’t use the 'best price' test in buying Life insurance as they would in purchasing a computer or refrigerator.
One particularly egregious instance of illustration misuse is in the recommendation to replace an existing policy with a new one. After all, it’s an easier sale to the prospect who has already purchased a policy and gone through both the psychology and the math of accepting the need to provide proceeds at death for a loved one or an owed one. Some agents either naively or maliciously tell these prospects '... it’s time to trade in that old policy for a new one.'
Let’s examine the leading rationales for replacement.
'THE SKY IS FALLING’
In the Great Ratings Reduction Era of the late `80's through the present, virtually every Life insurance company has experienced one or more downgrades. Northwestern Mutual, New York Life, Guardian Life, and State Farm are among the handful of companies who have not suffered the indignity and agent outrage of reduced ratings. Ratings reductions often resulted from poor investment choices or other negative changes in the carriers’ financial or operational processes. In some cases, a ratings reduction preceded a carrier failure (Mutual Benefit); in other cases the company’s financial deterioration outpaced the rating service’s ability to keep up (Confederation Life). In yet other instances, ratings reductions appeared to result from a changing macroeconomic climate in which all carriers operated without much individual control.
Whatever the rationale for the rating changes, well-publicized downgrades motivated many clients to seek a better carrier. As the company’s rating fell, these policyowners switched policies strictly to get out while the getting was good — often without considering how a replacement policy might perform. The increase in policy surrenders and cash value loans with Executive Life from late 1989 into its crash in April 1991 offers a good example of concerned policyowners protecting themselves.
'NEW AND IMPROVED’
Although genuinely new policy features don’t come along as rapidly as the incredible improvements in computer technology, today’s policies offer innovative bells and whistles, such as the Accelerated Death Benefit introduced by Prudential. The good news for Prudential policyholders was that they could generally add this feature to existing policies. What about other features that aren’t readily added after the fact? The tremendous popularity of Variable Life products comes to mind.
'I CAN GET IT FOR YOU WHOLESALE’
Although fear of losing cash value triggers many policy replacements, far more replacements result from the desire to get a better deal. In many cases, this is a legitimate motivation. It was understandable that most of the guaranteed, non-par policies of the pre-1980 variety were exchanged for current assumption policies during a period when current interest rates were as much as five times that of the guarantees of the older policies. On the other hand, I wonder how many of those exchange policyholders would wish they could have that guaranteed policy back again?
Most performance-based decisions to replace an existing policy are based on an illustration. After all, what better way to evaluate the 'performance' of an existing policy than to compare it to a new one? Clients are saying, 'My policy was supposed to vanish’ in nine years; now they tell me it’s going to be 14. This policy is obviously no good.' Or, 'You’re telling me I could’ve gotten the same coverage for $2,000 a year less?'
Let’s examine the reality.
CARRIER RATINGS
Although a client’s concern about their policy 'investment' is understandable after a carrier’s recent rating drop, most clients would do better to 'wait and see.' If the client — or agent — is concerned about the company’s survival, borrow the available cash value and keep these funds until it becomes clear whether to stay or leave. If insurability is an issue, buy Term insurance from a strong carrier and convert the coverage later, if necessary. This option offers the policyholder some control over the situation rather than merely being a victim.
The action of last resort is to replace the existing policy; this guarantees the payment of a second set of sales charges and the likely imposition of surrender costs from the first policy. Unknowing or unscrupulous agents prey on client concerns about ratings without offering them an expanded list of options that don’t have to cost them money, which they’ll probably never recover. Although some replacements are valid in the face of an obvious failure, I suspect most replacement activity is motivated by a concern for compensation rather than for the client’s best interest.
NEW GOODIES
Nothing aggravates me more than buying a new gadget and then finding two weeks later that an improved version is on the market. I hate obsolescence. I hate over-paying for something. But Life insurance is different; there’s a definite cost to the consumer for switching.
Because our need for Life insurance tends to increase over time (with the need to protect growing earnings and assets), buyers will generally have the opportunity to add policy features that might not be intrinsically valuable. It annoys me that my computer manufacturer came out with a 90MZ Pentium a week after I bought my 75MZ, but it’s hardly worth throwing away my $7,500 investment to start over! The dealer might try to convince me that the end cost of the more expensive computer would be a more cost-effective investment, but that’s objectively doubtful. Likewise, when a Life agent uses an illustration incorporating non-guaranteed values to convince a client that it’s worth the change because the immediate loss will be made up later on, there’s no assurance that this will occur.
Buyers are drawn to the attractive impossibility rather than the less attractive probability. The only thing more annoying than finding out that the computer you just bought has been made obsolete by a newer model is to learn that the system is being advertised for less than you paid for it!
Consumers generally believe that they must do everything possible to get the lowest price. Because a policy illustration provides the flexibility to create the appearance of a good price, it’s easy to prey on the consumer’s desire to get the best deal. So when a client learns that their nine-year 'vanish' will take 14 years under the diminished dividends of today’s economy, they’re receptive to an unscrupulous agent who confirms their worst fears that they bought a lousy policy to begin with. The agent is quick to point out that there is a path to salvation: a new policy (which, by the way, just happens to include a new commission).
If you show me a Universal Life illustration with a calculated premium, I can beat it. If you show me a Whole Life illustration with a seven-year 'vanish,' I can beat it. I can always beat 'your' illustration — at least on paper — by comparing two 'new' policies or comparing an old policy to my proposal for a replacement. Although the reality will be vastly different, the illustration does not give the client the information or the skills to understand the issues. It’s time to sing a different hymn!