Illustrations & Exhibits
One of the best ways to explain policies clearly and completely is to use policy illustrations. In the past, fixed-value policies could be explained with one or two pages showing guaranteed valued. With the development of interest-sensitive and variable policies, however, that is no longer possible. As a result, computer-generated policy illustrations, detailing policy performance under a handful of scenarios, were developed. Many agents use these illustrations as the center of their sales presentation. Unfortunately, the use of illustrations provide opportunities 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. Agents should be sure that the illustrations used in their presentations are complete and balanced, so the prospect can properly assess the product and its suitability for meeting his or her need.
Policy illustrations simply show how the policy would perform under a given set of hypothetical financial assumptions. A copy of any product illustrations shown to a prospect should be provided to the prospect for his or her file -- and 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 require special care to ensure that the prospect is properly informed. Consider, for example, the illustration of a life insurance policy in which shows policy dividends paying all of the premium at some point in the future. It is possible that future dividend payments will not meet the hypothetical assumptions of the illustration, and be insufficient to fully offset future premium payments. If a 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.
While the possibility of "vanishing premiums", that is dividends or rising cash values will offset future premium payments, exists -- 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. For all of these reasons, the term "vanishing premiums" has fallen into disuse -- the term simply generates more misconceptions than it explains -- and is avoided by ethical agents.
The tax-advantaged nature of insurance and annuities also raises ethical concerns. Most clients would prefer to pay less in taxes. Insurance and annuities do offer significant tax benefits -- but any discussion the tax-advantages of insurance products should come with a disclaimer. Agents should disclose how those tax advantages will benefit the particular client's situation and 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 general 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.
While an agent should only present illustrations provided by the sponsoring companies, sometimes it may be desirable to present supporting or ancillary information to the prospect. These supporting illustrations present a large area of ethical concern. In order to comply with ethical requirements, and agent should be sure these supporting illustrations are accurate, balanced and complete, and presented in a manner that enables the client to understand the situation as it truly is. For example, an illustration that presents only the benefits of an offering without consideration of the attendant costs would be unbalanced, misleading and unethical.
Any sales literature used by the agent -- 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 agent 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. For more on Florida's advertising rules, including use of statistics, disparaging comments about insurers, introductory or special offers.