Many practitioners are still comparing illustrations of hypothetical policy values for some limited number of products as the means of determining product suitability. This practice has been deemed "misleading" by securities regulators.
Securities regulations “strictly prohibit” comparing illustrations of hypothetical life insurance policy values for the purpose of determining policy suitability or competitiveness because such comparisons omit material facts and are “misleading” as follows:
- 2210 Communications with the Public, Section (d)(1)(A) states communications “must be based on principles of fair dealing and good faith, must be fair and balanced, … and may [not] omit any material fact … if the omission, in the light of the context of the material presented, would cause the communications to be misleading.” Section (d) defines that material facts in “comparison[s] … between investments or services must disclose material differences between them, including … costs and expenses …”. However, comparisons of hypothetical policy cash values and death benefits do not disclose any differences in cost of insurance charges (COIs), fixed administration expenses (FAEs), cash‑value‑based “wrap fees” (e.g., VUL M&Es) and/or premium loads. Because comparisons of hypothetical policy values omit material facts explicitly specified by the Rules, how can you demonstrate they are fair and balanced, and support activities of fair dealing and good faith? Registered representatives should take note that even their communications regarding fixed insurance may be subject to regulatory review.
- Rule 2210(1)(D) goes on to clarify the regulation by explaining that “statements are not misleading within the context in which they are made” and instead must provide “balanced treatment of risks and potential benefits”. The context of the comparative analysis found in many policy review reports is (supposedly) to establish the suitability or competitiveness (or lack thereof) of a particular policy. However, it is our stance that implicit in any comparative analysis based on illustrations of hypothetical policy values is the presumption that both products possess identical likelihood of achieving projected cash values and/or death benefits. In that different products involve different risks that projected cash values and/or death benefits may or may not be achieved, such policy comparisons can fail to provide a “balanced treatment of risks and potential benefits”, and could be deemed “misleading” within the context of policy suitability or (lack of) competitiveness.
- For these reasons, IM-2210-2 Communications with the Public About Variable Life Insurance concludes in Section (b)(5)(C) that “it is inappropriate [emphasis added] to compare a variable life insurance policy with another product based on hypothetical performance as this type of presentation goes beyond the singular purpose of illustrating how the performance of the underlying investment accounts could affect the policy cash value and death benefit.” In support of this conclusion, Section (b)(5)(A)(i) clearly states that “illustrations may not [emphasis added] be used to project or predict [future] results as such forecasts are strictly prohibited by the Rules”. Because any comparison of projected cash values and/or death benefits for the purpose of determining which product is more suitable inherently presumes that such cash values and/or death benefits are accurate predictions of their future results, we contend that such comparisons are prohibited by the Rules.
- Final Report of the Task Force for the Research on Life Insurance Sales Illustrations: “Sales illustrations should not be used for comparative policy performance purposes” because doing so is “fundamentally inappropriate”. “Life insurance policies are complex financial instruments, which generally contain both guaranteed and nonguaranteed elements. A sales illustration may be helpful in understanding how a particular policy performs under specified circumstances. It is generally not feasible, however, to use sales illustrations to determine whether one policy is a better buy than another.”
Policy Review services offered by manufacturers, distributors, agents and/or brokers that generally involve “apples-to-apples” comparisons of illustrations of hypothetical policy values for some limited number of products are, in our opinion, exactly the comparisons that may be deemed “misleading” and “fundamentally inappropriate”. Hypothetical illustrations are a comingling of undisclosed policy charges and unsubstantiated performance assumptions, and do not separately measure policy expenses (as required under Section 7 of the Prudent Investor Act) separate from the reasonableness of performance expectations (as required under Section 2 of the Prudent Investor Act), they are clearly not comprised of all required or customary characteristics, and are thus not complete. These systems/services also lack completeness that results from the comingling of data that generally-accepted prudent practices require to be measured separately, lack reference to independent 3rd-party measures for average price and performance, and lack objectivity due to the artificial limitations on the number of insurers included in their sample population.
The good news is that Veralytic can help you show your clients that you are taking care of them in ways that even most insurance agents or brokers cannot. Veralytic is the only patented, objective and rules-based research tool that goes beyond the overly-simplistic comparisons of illustrations of hypothetical policy values that can be considered “misleading” and “inappropriate” by both financial and insurance industry authorities. Veralytic is simply the fastest, easiest, and most comprehensive and cost-effective way to independently verify to clients and their advisors whether or not the pricing and performance of existing or proposed life insurance is in their best interest. Only Veralytic is accepted for independent client representation, endorsed by the New York Bankers Association (NYBA) and compliant with industry regulations and established case law.
Veralytic provides the empirical pricing and performance research essential to any complete investigation of life insurance policy suitability (as defined by the chief regulatory body of the financial services industry or the Prudent Investor Act) and which can then lead to independent and objective suitability determinations. While due care is an emerging field, and while there is room for a difference of opinion in some areas, Veralytic goes well beyond overly-simplified comparisons of comingled and hypothetical policy values to better protect and/or compete against misleading Policy Review services.
Use the Veralytic Reports to determine the appropriateness of pricing, the reasonableness of performance expectations for invested assets underlying policy cash values, and overall suitability for you(r clients) policies based on the 5 factors of suitability. Click here and get up to 3 Veralytic Reports under our NO-RISK trial subscription.