Under current state-based standards in insurance laws, it is the policyholder who has to determine if the recommendation and the contract are in their best interest. Under current state-based insurance regulation, the consumer may have no idea how important elements of what they were shown in an illustration could change over time or that the company can increase charges. This has always been the case with life insurance products, but it is especially true for some of today’s more complex and opaque products.
This problem of the wide difference between the illustration and the actual contract has been magnified by a new type of very complex life insurance product that passes even more risk to the consumer. Index Universal Life or IUL often promises equity-like returns in the illustration but is actually a bond-based general account product regulated only by state insurance law. In some of the IUL products we have reviewed, more than 90 percent of the projected benefits are based on contractual elements that the company can change at its discretion. These nonguaranteed elements can control how and even if the policy will work at a projected level of premium payments. Our experience over the years in placing tens of thousands of policies of many types with dozens of companies leaves us confident that less than 1 percent of clients and prospects have the expertise, let alone the patience to go through sixty to one hundred pages of policy contract language and then assess how probable the promised benefit is based on the contract language. In fact, many of today’s products have become so complex that the vast majority of agents selling them don’t really understand the key levers that companies have in this contract language or the risks that may pose for policyholders.
The Challenge for Current State-Based Standards
This “caveat emptor” regulatory model made more sense when life insurance products were very simple and standardized and when almost all policies were sold by agents associated with a single career company. States adapted model insurance regulation laws that required standardized policy language that differed little from carrier to carrier. Whole life and term were the only policy types that all companies sold and had very comparable features, across companies. The language in policies’ contracts that was required by states was based on models created by the National Association of Insurance Commissioners or NAIC. In fact, the whole concept of cash value was driven by standardized nonforfeiture language that states required in contracts for the purpose of preventing policyholders from getting nothing if they surrendered policies.
While this language was updated for variable life products and universal life in the 1970s and 1980s, it is still largely based on a whole life product from seventy years ago, before the invention of computerized illustrations, modern product types, increasingly complex contractual terms and independent agents who can represent multiple companies. Today’s products are not at all standardized and vary greatly between companies. Not only are the products different, but individualized funding levels and riders that can be added to the policies can create widely different outcomes even from the same product. Contract language also varies widely between companies and in some cases gives companies wider discretion in what to credit policyholders or how policy charges are deducted. Agents who represent multiple companies’ products are not nearly as well informed on how the products operate as they were when they sold a few simple products for a single carrier. Educational and licensing requirements have not kept pace with these more complex products or the much broader set of product solutions that can be offered to clients. In many cases, these new opaque and increasingly complex products pass on significantly more risk to the client and contract law is antiquated as a sole standard of protection or suitability.
Understanding current state-based standards will help consumers, and their advisors, make wiser policy decisions.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM