Thought Leadership

Universal Life created a significant paradigm shift in an industry otherwise known for a lack of techno-savvy. When combined with the growing technology behind the computer screen, companies and agents had a powerful tool to attract new customers – and often old customers – with the appearance of a much better “deal” than old fashioned whole life.

As is often the case with new technology, rules and regulations lagged the (let’s just call it “creative”) use of policy illustrations, and reform wasn’t even considered until the Society of Financial Service Professional’s illustration Questionnaire (IQ) efforts in the early 1990s – combined with the 1992 pronouncement by the Society of Actuaries” … Most illustration problems arise because the illustrations create the illusion that the insurance company knows what will happen in the future and that this knowledge has been used to create the illustration.”

In spite of model policy illustration regulations created by the National Association of Insurance Commissioners (NAIC), illustrations for policies designed for current rather than guaranteed assumptions have become even more problematic, and have inspired numerous individual and class action litigation for the customer’s inability to understand – and depend on – even the basic rudiments of performance volatility.

The NAIC’s dual regulation objective was to allow the customer to 1) understand how the policy works, and 2) be able to differentiate between that which is guaranteed and that which is not. The most obvious consideration for the failure of illustrations to meet this objective is when an illustration is used as a calculator to answer the understandable question: “what’s it gonna cost?” A UL policy illustration in 1995 might have shown a 7% current crediting rate and a resulting level annual lifetime “premium” of $6,900 for a 45-year old healthy female. If not remediated, that “premium” (illustrated to be sufficient to age 100) would in all likelihood carry the policy only to age 87 – noting that such an individual had an average life expectancy of age 90.

It has been even worse for Variable UL: a $4,500 “premium” calculated at 12% in 1999 in fact had less than a 10% probability of carrying the policy to age 100; the first lapse in a 1000-trial Monte Carlo assessment occurred within the first year, and the majority of hypothetical lapses occurred between the ages of 78 and 82 (again, average life expectancy is age 90). Yet the policy illustration indicated that the $4,500 premium would “endow” the policy at age 100!

The information underlying the technology for this ability to dig beneath the surface of variable UL has been conceptually approved by the SEC and FINRA since 2003, but we are not aware of any broker-dealers that have approved the use of this information by their registered representatives on behalf of consumer understanding and decision making.

Technology has been a contributing force in the confusion and misunderstanding of how modern life insurance policies work, but it’s possible that Ethical Edge’s Historic Volatility Calculator technology may hold the key to not only providing clients with more meaningful information, but may allow a new era of accessing useful and actionable information on behalf of a growing number of consumers who will not merely follow a “trust me” approach by insurance companies and their agents – they need to beshown!

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