Imagine this. A (prospective) client has a significant investment in a particular asset. You receive notice that the costs being charged inside this product are being increased. In addition, this notice includes forward guidance downgrading future interest earnings expectations by 50 basis points and cautioning that interest earnings expectations could be further reduced by as much as another 100 basis points.
Now imagine the client's reaction to such news. What would they want to know? For most assets, clients would want to know how increased costs measure up against alternatives, right? And how reduced performance expectations relate to asset class benchmarks, right?
Instead of measuring increased costs against peer-group alternatives and reduced performance expectations against benchmarks, clients are too often being presented with comparisons of hypothetical values for the in-force policy versus some sales proposal/illustration.
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Never mind that neither the in-force illustrations nor sales proposals disclose the costs charged inside policies. Never mind that interest earnings expectations are often different in each policy, that features and benefits often materially differ, or that such comparisons are now considered misleading, fundamentally inappropriate and unreliable by financial, insurance and banking industry authorities.
Without the information necessary to understand internal costs, the reasonableness of performance expectations and differences in features and benefits, clients too often blindly choose the illustration that looks better. If such an analysis were presented for any other client asset, the financial adviser likely would be laughed out of the room. Such analyses are also increasingly the source of complaints, arbitration and litigation.
How would advisers who follow a prudent process answer these questions? The West Point Draft of the Best Practices Standard for Life Insurance Stewardship, vetted by leaders of nearly every profession with clients who own life insurance, provides a checklist for the prudent selection and proper management of life insurance.
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The best practices standard says questions about cost increases can be answered by reviewing internal policy costs relative to both the original proposal and representative benchmarks. If costs in the original proposal were among best available rates and terms, and the cost increase is nominal, then the opportunity to reverse the cost increase is modest or nonexistent after considering transaction costs involved in an exchange to an otherwise lower-cost product.
On the other hand, if a client doesn't know whether costs in the original proposal were competitive or excessive, the increasingly frequent announcements about cost increases present an opening to talk to clients about what they are being charged in their policies and whether such costs are acceptable, and to answer their questions in ways they can understand.
The standard also says questions about reduced interest earnings expectations can be answered using RATE: the risk tolerance of the client, the corresponding asset class preferences, the planning time horizon, and the performance that's reasonable to expect. As such, if reduced interest expectations are consistent with historical performance for the asset classes into which cash values are invested, then reduced interest earnings expectations are likely reasonable.
Conversely, policy earnings expectations set by hypothetical illustrations are too often unreasonable. For instance, the expected rate of return reflected in hypothetical illustrations can vary from as little as 2% to as much as 8%, even though invested assets underlying policy cash values are required by regulation to invest in the same asset classes, and even for different products from the same insurer where assets underlying cash values are actually invested in the same assets.
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No wonder clients are more comfortable talking about most every other asset on their balance sheet than life insurance. Use the best-practices standards to talk about life insurance in the same way clients talk about every other asset on their balance sheet.
Barry D. Flagg is the founder of Veralytic Inc., an online publisher of life insurance pricing and performance research, and product suitability ratings. Follow him on Twitter @BarryDFlagg.
