A critical step in the sales process is the presentation. The purpose of this step is to present to the prospect a solution to a need that he or she has admitted having. It is the matching of an insurance or investment product to the prospect's requirements. The principal ethical issues in this step involve the selection of the product to recommend and the practitioner's communication with the prospect about it.
The overriding ethical issue with respect to product selection is that it must be suitable to the prospect's circumstances and meet the acknowledged need. The NASD's "Rules of Fair Practice" require that any recommended securities transaction be suitable in light of the prospect's financial situation and needs. This same suitability criterion should also be applied to the life insurance agent's recommendations. Indeed, it should apply to all financial transactions involving the practitioner and prospect whether or not the recommendation involves a financial product considered a security or one that is not a security.
In addition to product selection, a significant ethical issue in the presentation step concerns how the product being presented is communicated to the prospect. Although it should be unnecessary to state this obvious ethical requirement, the product must be properly identified. Regardless of the nature of the recommended product, it needs to be referred to in terms that offer understanding. So, if the product being recommended is a stock or bond, you need to call it such; if it is a mutual fund or a life insurance policy, the prospect must be so informed.
Calling the product by a name that is unfamiliar to the prospect may result in its true nature being disguised. To do so intentionally is unethical.
It is no secret that selling often involves educating the prospect. Furthermore, educating is frequently done by explaining the unknown in terms of what the student already knows. In the recommending of financial products, this method involves a high probability of misleading the prospect and should be avoided. For that reason, it is important to eschew the use of analogies to explain how a particular product works. The ethical concern with using analogies is that the analogy often leaves out more important information than it imparts. As a result, the prospect may have an incomplete and erroneous understanding of the product.
An ethical concern similar to the one just cited occurs when product functions are explained in reference to other concepts. To cite an example: a practitioner may want to describe policy dividends received by a policyholder as investment return. This characterization would be highly inappropriate, even though the principal component in many companies' dividend declaration is its return on invested assets.
There are two ethical concerns in such a description of participating policy dividends: in the first place it misleads the prospect by being superficial and, secondly, it erroneously positions the life insurance product as a security. For the same reasons, the use of the term "investment" when referring to a life insurance premium would be unethical.
In addition, the comparison of alternative investment or savings vehicles, if done, needs to be approached carefully. It should be clear that the simple comparison of historical returns on certificates of deposit and growth stocks would be misleading unless the many differences between the two products were also detailed. In fact, any comparison of financial products that are dissimilar must also compare any differences between the products in the areas of:
tax features, and
any other important feature.
The need to provide this information is implicit in the objective of a product comparison. The reason to provide a comparison between products is to make the prospect better informed and therefore better able to make a fully-informed decision. A fair and balanced comparison that details the pros and cons of each product along with a detailed examination of their similarities and differences is the only ethical way to do that.
A practitioner may be interested in presenting the relative merits of competing products or sponsoring companies. The ethical imperative in such a comparison is that it must be balanced and complete. A "balanced" comparison is one that compares all of the important features of the products and examines the advantages and disadvantages of both products. It is obvious that the intentional misstatement of fact concerning a competing company or product would be unethical; it may be less obvious that the intentional omission
of material information would also be unethical. The guiding ethical principal is that a comparison must include a comparison of all of the important features.
Statistics are often necessary and helpful when comparing products or companies; they must be substantiated and referenced whenever they are used.
Prospects will vary substantially from one to the other in their risk-comfort levels. That level of comfort with risk applies to the products they prefer to the strategies they will implement. While many will avoid risky planning strategies, others will try to push the envelope as much as they can. When discussing the possible use of strategies or products that involve risk, the key ethical consideration for the practitioner is appropriate risk disclosure. The competent practitioner will understand the risk being taken by the prospect that implements a proposed strategy; often, however, the prospect's awareness level is far below that of the practitioner. The practitioner's failure to advise the prospect of the risks inherent in the adoption of any recommended strategy is unethical and likely to expose the practitioner to the risk of a malpractice claim.
SPECIFIC FLORIDA LAWS AND RULES
To minimize the opportunities for misrepresentation of life insurance policies, the legislature passed the General Life Insurance Solicitation Law. Florida Statute 626.99
This act requires insurance companies to provide prospective purchasers with information regarding coverage, rates, and suitability to the purchaser's needs. Insurance companies, and their agents, must deliver disclosure documents to clients when soliciting ordinary (individual) life insurance or fixed annuities. This law does not apply to variable annuities, variable life insurance, group life, credit life or policies issued to qualified retirement plans such as pensions, Keoghs, etc.
Insurance companies must provide life insurance applicants with a "Buyer's Guide" and a "Policy Summary" either:
(1) before accepting an initial premium deposit, or
(2) upon delivery of the policy, if the policy can be unconditionally canceled by the applicant within 10 days, with full refund of premium.
Purchasers of fixed annuities receive a "Buyer's Guide" and a "Contract Summary". Fixed annuities must contain a provision for an unconditional refund for at least 10 days.
The Policy Summary titled "Statement of Policy Cost and Benefit Information" must contain, at a minimum:
name and address of the agent soliciting the application (or if no agent is involved, a means for the applicant to contact the company),
full name and address of insurer (or administrative office),
a short descriptive title of the premium and benefits of the policy, e.g., "single premium whole life", "five-year renewable term", etc.,
annual premium payable for the basic policy and each rider (listed separately) for at least the first 5 years,
guaranteed death benefits,
cash surrender values and other policy benefits,
effective interest rate on policy loans,
projected dividend payments (and a statement that dividends are not guaranteed), and
insurance cost index comparisons.
"Buyer's Guides" must be presented in a format similar to the model guide adopted by the National Association of Insurance Commissioners.