Over the years, we at ITM TwentyFirst have been leaders in peer education. The TOLI Handbook, a free download available here as a PDF, provides industry peers with a single source guide for managing trust-owned life insurance (TOLI) trusts and policies. We have, over the years, provided hundreds of hours of professional CE for several professional designations. Our staff is encouraged and incentivized to seek professional credentials, and our internal training and education programs are robust and ongoing.
We believe this ongoing education is one of the keys to our excellent customer service. Now, several studies are showing that education and professional designations are not only good for customer service but also for team members and for maintaining a compliant work environment.
A past survey by a nonprofit professional association found that 62% of clients of financial professionals believed it critical that the advisor they work with maintain voluntary certifications, and the percentage went up among millennials, with 84% citing the importance of accreditations. (1)
A survey of studies on the subject by the American College of Financial Services (2) found that clients do want their advisors to have credentials. According to the survey, clients are willing to pay more for someone they trust who has achieved the right level of documented qualifications to be deemed an expert. Designations lead to a “perceived higher level of knowledge and professionalism.” Because attainment of a designation is voluntary and not a requirement to do business, “attaining additional credentials shows that the advisor has taken the initiative on their own to pursue their knowledge and professionalism.”
The American College also published another study (3) that examined the effect of holding one of the designations that can be obtained through the college, including a designation held by members of the ITM TwentyFirst team, the Chartered Life Underwriter (CLU), as well as the Certified Financial Planner (CFP) credential and others. They found that having one of these designations raised the average earnings of designees over non-designees by 51%. The study of over 100,000 financial professionals also found that those with two designations earned over 69% more.
More than 80% of all respondents said obtaining their designation “improved their ability to meet customer needs, and also improved both “client conversations” and “customer satisfaction.”
But that is not all. Compliance officers will love the fact that those with designations were found to be much less likely to have a compliance violation. An employee with no designation was found to be more than 6 times more likely to have a compliance violation than one who does.
Education increases customer service and satisfaction, as well as employee earning power, and it reduces compliance violations. In the financial services world, this is a huge deal. Knowledge is power, and we are glad to be a leader in providing that power to our peers.
1. Press Release, IMCA Investor Research: High Expectations for Advisors
2. The Value of Designations: The Client’s Perspective, The American College of Financial Services, https://www.theamericancollege.edu/
3. Designation Outcomes Study, the American College of Financial Services, https://www.theamericancollege.edu/
In my opinion, you can not say your a leader in life insurance education unless you act on the following:The following provides the rational and recommendations for how the narrative summary required by Section 7B of the Life Insurance Illustrations Model Regulation (#582) and the policy summary required by Section 5A(2) of Model #580 can be enhanced to promote consumer readability and understandability of life insurance policy , including how they are designed,
In September of 2015 the National Association of Insurance Commissioners (NAIC) implemented Actuarial Guideline 49 (AG 49) with the intention of providing a more uniform and limiting way of calculating maximum illustrated rates for indexed insurance products, indexed annuities (IA), and indexed universal life insurance product (IUL). More plainly said, to reign in the “Wild West” of exaggerated product promotion in the “my paper insurance product illustration looks better than your paper insurance product illustration war!”
Well NAIC, how did that work out for you? The insurance companies, not the agents, went right to work on AG 49 rules that limited their linear paper illustrations and found ways to juice up those illustration so that not you, and not even the agents, could tell where and how the illustrations were showing cash value growth that blew away their less crafty insurance company competitors.
The NAIC finds itself back at the drawing board to try and find a more secure method to limit outlandish illustrations. At the upcoming November 2019 meeting of the NAIC, it plans to reopen AG 49 to find a way to stop the insurance companies from outsmarting the NAIC and to put a lid on what the NAIC Actuarial Task Force refers to as “index performance multipliers” or IPMs. These IPMs did not exist when AG 49 was adopted in 2015.
Up to now, it has been the agent who was accused of manipulating the paper illustrations, using excessive return assumptions to lower the apparent required premium to support a stated amount of life insurance, that was causing contract owner disappointment. The less than illustrated actual returns combined with insurance company increasing the insurance costs (COIs) showed the consumers that they were misled by rosy illustrations . . . and they got angry at the agents and the insurance companies. They brought lawsuits that have cost the industry plenty of money and marred its reputation.
Now, we have industry destroying despicable act two. It is the Insurance Companies that are inserting Index performance multiplies (IPMs) into their illustration systems, such as bonuses, extra credits and leveraging, all in an effort to juice up their illustrations so they illustrate better than the competition. NAIC, you do have a problem! For those of you who would like to dive deeper into the IPM activity of various life insurance companies see the following web-site; https://lifeproductreview.com/
Visiting this industry expert’s web-site and scrolling down to the PUBLIC CONTENT section would be valuable for any advisor, insurance agent or prospective purchaser of index products charged with using the required paper illustrations in an attempt to make a prudent indexed policy purchase decision. In fact, such routine consultation would be valuable in proving a prudent process in formulating recommendations. It also should be visited by the members of the NAIC Life Actuarial A Task Force as it prepares for its September 2019 meeting.
The question the NAIC will have to consider is that no matter what you accomplish in your November 2019 meeting to address the techniques insurance companies have developed in order to skirt the limitations imposed by AG 49, what makes you think you will not be back three years from now addressing their new regulation skirting techniques creating even juicer illustrations?
The systemic problem the insurance industry, advisors, intermediaries, and the NAIC faces is that the required linear paper illustrations, which purport to show, projecting to the nearest one dollar over the lifetime of the contract each year, what will happen over that long period of time linearly, when the world in which contract owners live is anything but linear. They defy logic!
NAIC addressing the illustration issue is essential. You must eliminate the need for the mind-numbing rows of numbers of many pages of paper illustrations, that do not promote understanding and have failed miserably to do what the NAIC said they would do.
The participation of the insurance companies taking the lead in illustration manipulation is angering, non-participating companies, all ethical insurance agents, and all who value the integrity of the life insurance industry. Why? Because they are ruining the reputation and salability of what is basically a simple product. These indexed products are just an iteration of universal life (UL) in which the insurance company determined interest rates. Instead of the insurance company arbitrarily dictating interest rates, the index iteration determines product earnings based upon the constrained performance of an index. Index Universal Life (IUL) appeals because the contract provides life insurance, the potential for earnings above what the deterministic method might provide, income tax-free account value growth and downside protection. Insurance companies manipulating the paper illustrations of these index products could kill what can be a valuable consumer product and bring about the same consumer disappointment and resulting fallout. Selling, using a manipulated illustration, in spite of it being regulator required, exposes an advisor or agent to unacceptable liability, embarrassment and continued life insurance industry distain. We all cheer the NAIC efforts to put an end to illustration manipulation but doubt their ability to succeed if they insist on continuing the paper illustration requirements.
It is time to make use of technology to build a better tool to educate consumers and agents and to manage life insurance expectations, in addition to facilitating future policy management so that contract owners and prospective customers can see the impact on policy performance as a result of changes in premiums, costs, death benefits, etc.
A Recommended Solution – A Tool to Replace and/or Supplement the Paper
Provide consumers and agents with a tablet device having the ability to vary the assumptions used in the visual illustration, projecting the results of those changes on the tablet screen, and showing the trajectory of increasing or decreasing capital in investment-related insurance products visually. Both agent and consumer need to see the effect on policy capital as the inputs are changed.
Such a tool has existed. It was provided by Financial Profiles, Inc. of California and was called the Dynamic Illustrations System. I say has existed, because Financial Profiles has put the software on the shelf and has stopped supporting it. While it was available, I used it in my practice, not only with individual clients, but in educational sessions I ran for agents and their compliance officers.
The agents often gasped as they watched me make minuscule changes of inputs for death benefit, assumed rate of return, COIs and expenses, and saw the incredible effect it had on the capital on the screen. Observing visually the substantial up and down impact on capital over time was startling but created understanding. They realized they were watching what it would otherwise take multiple paper illustrations to try and understand. It was educational. They would never again be sucked into the paper illustration war of highest death benefit, lowest premium wins!
For individual clients, it enabled a conversation about their choices among investment-related life insurance and a substantive conversation about which life insurance contracts and which contract design was right for them and enhanced their family security. Observing the impact of their choice of contract, varying the inputs and observing the consequent changes enabled them to determine their own risk tolerance as to contract type, financing strategy and ability, both financially and emotionally, to make the long-term commitment. Good data provided the individual with education and understanding of life insurance and self-confidence better than the average agent, and light years beyond what the NAIC paper illustrations ever could provide.
Critics of offering such a tool will say might say that agents will just manipulate the inputs to build pretty tablet pictures. Not so for a number of reasons. First, the customer dictates the inputs and, as a result of their curiosity, will wish to see the changes in inputs. They will ask if the inputs are reasonable. Second, I have talked about my brain trust of insurance experts on these pages before and I am sure we could work together to provide guidelines and base lines of credible policy designs and prudently achievable cash value RORs. And, as you will see below industry expert Barry Flagg has a way to establish baselines and norms and common sense to inputs. Organizations, such as the Consumer Federation of America, could help educate consumers on how to take charge and be the controller of their chosen tablet inputs.
Ongoing Lifetime Management of Life Insurance
Contract owners would see the impact of their behavior on the trajectory of policy capital, up and down before they exercise their rights to increase or decrease premium or face amount. Consumers would be able to re-determine what they feel is a prudent return on capital expectations with coaching from industry experts.
Such a tool will provide for prudent purchase decisions and prudent ongoing policy management decisions and be the most important, most frequently used element of the Securities and Exchange Commission’s Proposed Rule 498A. In a speech on November 8, 2018, Dalia Blass, the Director of the SEC Division of Investment Management talked about allowing users to efficiently analyze and compare information about variable contracts, including, most importantly, their costs. Let us hope this is one of the tools the SEC will encourage the NAIC and the life insurance industry to build and make available on their new multiple-level disclosure web-site.
Coming Soon – New Regulation – The States Step in Where the Feds Fear to Tread (Apparently)
Taking effect August 1, 2019 is the First Amendment to Part 224 of Title 11 of the Official Compilation of Codes, Rules and Regulations of the State of New York (Insurance Regulation 187) (IR187).
It states in part: Emphasis by this author
The best interest standard set forth in this Part requires a producer, or insurer where no producer is involved, to adhere to a standard of conduct to be enforced by the superintendent but, does not guarantee or warrant an outcome. Suitable means in furtherance of a consumer’s needs and objectives under the circumstances then prevailing, based upon the suitability information provided by the consumer and all products, services, and transactions available to the producer.
This Part shall apply to any transaction or recommendation [to purchase or replace an annuity contract made to a consumer by an insurance producer or an insurer, where no insurance producer is involved, that results in the purchase or replacement recommended] with respect to a proposed or in-force policy
Producer is defined in the Glossary as follows:
Insurance producer or producer means an insurance agent or insurance broker.
Apparently, IR 187 does not apply to the other members of the consumers Estate and Financial Planning team who do not fit that description . . . but I would not depend upon it.
For a due diligence proven process discussion see Barry Flagg’s comprehensive discussion of the New York State Regulation 187 in the LISI Financial Products Planning Newsletter # 6 (March 28, 2019) available at http://www.leimbergerservices.com
Barry discusses baselining and bench marking. He gives the life insurance formula as:
• Cost of insurance charges (COI) for death benefit claims. 85 percent of total cost.
• Policy Expenses (E) for policy design, underwriting, distribution and administration.
15 percent of total cost
• Investment gains and/or interest income (i%) credited to policy cash values in excess of COIs and E
So, what would be the benchmark. As he says, benchmarking is the norm for investment returns. All investment managers use benchmarks to measure their returns based upon asset classes since each asset class has a long history of returns and, to assume performance outside of the investment’s norms, is not prudent. Thus, insurance company general account products can be assumed to perform in the five percent range since most general accounts of insurance companies are invested predominantly in bonds and mortgages, as shown in the ACLI 2017 Fact Book available at ACLI.org
Asset Distribution of Life Insurers, 2017 GENERAL ACCOUNT
• Stocks 3 percent
• Mortgages and Real Estate 11percent
• Policy Loans 3 percent
• Miscellaneous Assets 14 percent
• Bonds 69 percent
Most people would agree with Barry that to assume that the performance of such a portfolio would exceed five percent probably is not prudent.
Next, he needs a baseline or norm for the cost of life insurance (COIs). For this he goes to industry standard mortality tables (e.g., Society of Actuaries 75-80 Basic Select & Ultimate Gender Distinct Mortality Tables at http://www.soa.org) and industry aggregate expense ratios (see Society of Actuaries Generally Recognized Expense Table for 2001 also at http://www.soa.org), to reveal actual cost competitiveness. Applying his extensive mathematical talents using these tables, he is able to establish norms for COI.
Finally, he seeks to establish norms for expenses which he does by examining all of various costs and where they can appear in a life insurance contract.
Using common-sense and un-common analytical abilities, Barry’s company, Veralytic, is able to examine baseline insurance contracts and tell if they are a reasonable presentation or trying-to-leap-tall-buildings-in-a single-bound or ignoring economic gravity.
We are at the best time ever for the NAIC to eliminate the paper fiction, to build a tool that will really help educate consumers about the inner workings of life insurance and how to buy and adapt products to build their family and personal lifetime security. Don’t let us down NAIC. Don’t let the insurance companies embarrass us all. Agents and all intermediaries helping consumers use insurance products are angry this time. Insurance companies embedding deceptive tools into their paper illustration will pay this time, not only in litigation, but in excommunication from the financial advisory communities.