Life and Annuity Illustrations Confuse Clients, Advisor Tells Regulators

State insurance regulators should put bad years into the performance illustration charts that show how life insurance policies and annuities might work.

Richard Weber, the principal at The Ethical Edge, a life insurance advisory firm in Pleasant Hill, California, is making that case to the National Association of Insurance Commissioners this week.

Weber is giving the group’s Consumer Liaison Committee a primer on how bad illustrations can lead clients to doom.

Marketers already include warnings stating that the illustrations are not performance promises, but “with all illustrations — no matter the warning — customers will focus on the most favorable illustrated (‘current’) outcomes,” Weber says in a slide deck included in an NAIC/Consumer Liaison Committee meeting packet.

What it means: Weber’s talk could increase the odds that regulators will update illustration rules.

For now, his primer may give advisors tools they can use to keep illustration confusion from trapping their clients.

The history: Regulators, marketers and consumer advocates have been clashing over product illustration rules for decades.

Some of the advocates for tougher rules have been Larry Rybka, the CEO of Valmark Financial Group; Birny Birnbaum, the executive director of the Center for Economic Justice; and Elan Moas, the author of a book about universal life strategy failures.

Defenders contend that the products have worked as promised and that the sellers can’t be blamed for economic changes that threw off predictions or for buyers’ tendency to ignore the many warnings already included with product illustrations.

Weber’s primer: In the presentation, Weber focuses on examples of clients who used premium financing to buy indexed universal life.

Many illustrations fail to show years with zero income, and they often show steady or steadily increasing income, rather than the ups and downs that occur in the real world, Weber says.

If a bad year hits, a policy owner may need to come up with hundreds of thousands of dollars of collateral to keep the policy. Owners who cannot post extra collateral may lose everything, including a planned source of retirement income, not just a modest amount of retirement assets, Weber says.

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