Annuity Illustrations: Liability Your Agents Don’t Need
September 11, 2019 by Sheryl J. Moore
When it comes to life insurance sales, you cannot close the deal without an illustration. Thanks to the National Association of Insurance Commissioner’s (NAIC’s) Life Insurance Illustration Model Regulation, there are very few instances where one need not collect an illustration to get a life policy issued. However, when it comes to the annuity side of the house, illustrations are optional.
The Annuity Disclosure Model Reg. indicates that “An insurer or producer may elect to provide a consumer an illustration at any time, provided…” One may decide to provide an illustration, but they may not.
When I started in the insurance business 20 years ago, salespeople didn’t use illustrations for annuity sales- even indexed annuity cases. When selling a fixed annuity, the client received the expectation that their money would grow at a fixed rate. When selling an indexed annuity, the client understood that they may receive as little as 0.00%, but as high as the cap. On the variable side, purchasers knew that if the market went-up, they would get the upside (less fees), and if the market declined, they would experience losses (plus fees).
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So, how did we get to where we are at?
There were a great many vendors offering “annuity illustrations” when I started my business 14 years ago. One vendor, was frequently cited for having inaccurate product information feeding their software. Another graded annuities, based on their projected performance, with grades of ‘A,’ ‘B,’ ‘C,’ ‘D,’ or ‘F.’ I learned from some of my carrier clients that they were paying to have better ratings in the software! There weren’t actuaries on staff with any of the vendors, to ensure the accuracy of the projected values, much less were they working with the carriers. It scared the death out of me- and consumers were basing their purchase decisions on this garbage! So, I began rallying the NAIC to enact regulation that would reel-in the bad characters, ensure that the carriers had control over their illustrations, and provide something consistent to salespeople to use as a tool.
Looking back, I’d say that my son’s suicide got in the middle of that all happening, and what we have today isn’t optimal. Ultimately, it has fueled an arms race not unlike what has been happening on the life side for decades:
Whomever has the highest illustrated values wins the case!
It’s sad. Many of these illustrations are unrealistic (income rider payouts upwards of 40%?!? Come on.). Such illustrations do nothing but put salespeople in a position of liability, and set the insurance carriers up for future litigation. Where does it end?
Epiphany! I was speaking with a wholesaler that works with structured annuities (a middle-ground between variable and indexed annuities, in terms of risk) recently. I asked him about the illustrations on these new annuities. He replied, “Oh! You don’t need an illustration with this product. The most you can earn is [10.00%] and the most you can lose is [10.00%]. You don’t need an illustration for that.” Two days later, I asked the same thing of another structured annuity wholesaler, and received the same response.
Let’s go back to the basics. I would suggest that we don’t need an illustration to close the annuity sale- especially on products where the performance is contingent on an outside fund or index.
Less work. Less liability. Less unrealistic expectations.
Sheryl Moore is President and CEO of the life and annuity market research firm of Wink, Inc. Her company provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at sjm@indexedrockstar.com.
