Please Don’t Feed The Lawyers

Fixed Indexed Annuities — Sell Guarantees, Not High Interest Rates

In 1982 interest rates were sky high and some Universal Life products were paying 12% interest. Computers were new back then and agents started to use them to create product illustrations. Few agents talked about the guaranteed interest rate back then – 4% was too ridiculously low to take seriously. Today, most of the policies remaining in force that were issued back then are earning that “ridiculously low” 4% guaranteed interest rate.

In the eighties, many agents back then wanted to sell the highest face amount for the lowest premium so they did a “minimum premium” search on their computer and found that a 35-year-old could buy a $100,000 “permanent” policy for less than $400 per year. In 1984 interest rates dropped to 9%, by 1988 they were down to 7%, and by the end of the decade 6% was the norm. Interest rates dropped even lower for another 15 years and there was a time where 3% was competitive.

What happened to most of the Universal Life products sold in the early 80’s? Most of them “blew up.” $400 per year may support a $100,000 life insurance policy for a 35-year-old at 10 or 12% interest, but this policy will quickly run out of money at 6%. At this low, unsupportable premium, instead of being a “permanent” product, Universal Life becames a “term” product. These sales practices left millions of unhappy customers in its wake.

Is Universal Life a bad product? No, the products under-performed because of poor selling practices – selling high interest rates. When agents emphasize the “high cash value” of insurance and annuity products disaster soon follows. Agents who had their customers pay the Guideline Maximum Level Premium of $1,500 at age 35 still have these products in force, and at 4% interest, these products are guaranteed to last through the insured’s age 95.

History tells us that the life insurance industry is good at providing safety and guarantees. When agents deviate from these themes, and emphasizes high interest rates, customer’s unrealistic expectations are unrealized, and trouble soon follows.

Are Fixed Indexed Annuities bad products? Of course not — when the customer understands what he is buying. Customers should have a clear understanding of the Minimum Guaranteed Surrender Value, because there is a reasonable chance that the customer will achieve only the Guaranteed Minimum Surrender Value. No, you say! History proves that the Guaranteed Minimum Surrender Value is just as possible today as 4% interest was in the 1980’s. It became a reality back then, and it is a real future possibility for your clients who buy Fixed Indexed Annuities today.

Before selling a Fixed Indexed Annuity product, agents should disclose those guaranteed values and tell their clients, “If you would be completely unhappy if you were to earn only these guaranteed values, then don’t buy this product. I have other products that have much higher guarantees.”

If you are an agent, your emphasis should be on selling a product that provides

  • Safety
  • Guarantees
  • Lifetime Income
Stick with these themes. Be conservative when talking about the accumulation component. If you must use an illustrated interest rate, use 5% or lower. Put policy guarantees and historical examples in writing, then keep a copy of these disclosures in your files. If you show a historical example that greatly outperforms the guarantees, remind your client that the company is likely to change the cap, participation rate, and spread in the future, and that past performance is not an indicator of how the product may perform in the future. Also show a similar historical example — with equal enthusiasm and emphasis — where the product performed at or near the guaranteed level. For most products, a starting date of January 1, 1973 will produce an illustration with five or six years of zero interest in a this 10 year period.

This entry was posted on Tuesday, June 3rd, 2008 at 10:50 am and is filed under Fixed Indexed Annuities. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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