Illustrations & Supporting Materials

An illustration can be thought of as the product segment of the life insurance presentation interview.  Unfortunately, it has considerable potential for ethical lapses.  The illustration may be intended to show the possible growth of cash values, dividends and death benefits of a life insurance policy, or it may show the historic growth of a security.  Regardless of its intent, the important ethical principle is the same: the information provided must be such as to enable the prospect to make an informed decision.  The illustration should be:

balanced, and
presented so the prospect can properly assess the product and its suitability for meeting his or her need  

Life insurance illustrations are nothing more than hypothetical constructs that show how the policy would perform under a given set of financial assumptions.  While any product illustrations shown to a prospect should be provided to him for his or her file, it should be made completely clear that the assumptions upon which the illustration is based may not prove to be correct.  Life insurance dividends, costs and interest rates will almost certainly not be as illustrated and may be higher or lower than shown.  

Life insurance product illustrations, because the product is more complicated than a mutual fund, require special care to ensure that the prospect is properly informed.  As an example of the greater care required, consider the illustration of a life insurance policy in which policy dividends are shown paying all of the premium at some point in the future.  If the life insurance agent proposes such a life insurance policy, he or she should illustrate how the policy would perform if the policy dividends actually credited were lower than illustrated.  To do that, the agent would be required to re-run the illustration and use a dividend scale that is lower than the current scale.    

It should be clear that the agent would be ethically required to explain that the premiums do not really stop -- nor is the policy paid-up.  Instead, premiums continue but are simply paid by policy-generated dividends, whose use in that way will reduce the policy's total cash value.  Furthermore, the agent would need to explain that a resumption of out-of pocket premium payments might be required if the declared dividends were lower than the dividends illustrated.  

Remaining true to the ethical principle of complete disclosure also requires that any mention of a life insurance product's being tax-advantaged have a disclaimer.  Such a statement must be accompanied by a full explanation of the conditions required to be met to qualify for those tax advantages.  The explanation would need to include information about the tax advantages of the illustrated policy if it were to become a modified endowment contract.  The statement that a life insurance policy has income and estate tax advantages could easily mislead the prospect.

Insurer-provided product illustrations normally present few ethical problems principally because they are insurer-provided.  The significant ethical issues generally arise when the illustration is not insurer-provided but is created by an outside vendor or by the agent.  Insurers often prohibit the use of illustrations created by their agents unless the illustrations have been approved by the sponsoring company.  The obvious reason for the prohibition is that company-created illustrations contain important information that helps provide a balanced and complete presentation of the product to the prospect.  

The product illustrations used by the practitioner should only be those provided by the sponsoring companies.  However, a practitioner may sometimes find it desirable to present information of a supporting or ancillary nature to the prospect.  These supporting illustrations present a large area of ethical concern.  In order to comply with ethical requirements, these supporting illustrations should be:

balanced and complete, and
such as to present the information in a manner that enables the client to understand the situation as it truly is.   

An example of an illustration that is unbalanced is one that presents only the benefits of an offering without consideration of the attendant costs.  It would be unethical to present that kind of illustration to a prospect.  

Any sales literature used by the practitioner -- including agent-created supporting illustrations -- should be submitted to the companies whose products are illustrated for their input and approval.  While many companies require submission of sales literature, the practitioner should submit the point-of-sale supporting information used to all of the companies represented, whether or not they require such submission.  Insurers are generally better equipped to assess the ethical and legal pitfalls inherent in the literature.  And, we shouldn't forget that the agent has an ethical and legal duty to those companies that could be held liable for his acts by virtue of the law of agency.  Florida's advertising rules.