#23 | Guarantees, Trust & Transparency

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Life insurance companies have a long history of overpromising and underdelivering for both just and dishonorable reasons. Carriers justly reduced crediting rates on UL policies while interest rates dropped for 30 years straight. Carriers dishonorably condoned practices like vanishing premium whole life, illustration wars hinged on unsustainable assumptions and pricing structures that conferred undue benefit to the carrier at the expense of the policyholder in the event of underperformance. For these reasons and many others, agents don’t trust the companies they theoretically represent. And consumers don’t either.

Trust is the grease in the gears. If you don’t trust someone, you won’t do business with them. So in lieu of trust, carriers started forking out guarantees. Guarantees are a cheap, cold, contractual version of trust. You don’t need trust when you have guarantees and you don’t need guarantees when you have trust. Guarantees did the job. They have completely dominated the market for the last twelve years and life insurance professionals have practically forgotten how to discuss products without them. It’s scary, frankly, to put clients in products without strong guarantees. I know because I feel that tension every time I run a product without them.

But we can’t even rely on the guarantees we have. We’re finding out that almost every life insurance company used highly complex shadow account mechanics in their Guaranteed UL offerings that allowed for pricing competitiveness and reserve relief but dumped heaps of administrative risk onto policyholders and trustees. We’re finding out that paying early could diminish the guarantee period, paying late could jeopardize it and skipping a premium could trigger a bill six times the size of the annual premium. And we’re also finding out that guarantees are only as good as the paper on which they’re written and that writing lots of guarantees may make the paper worthless. Guarantees in financial products aren’t even a substitute for trust. They pit one party against the other with the contract standing between. They create zero sum games where the client wins when the carrier loses and vice versa.

Life insurance products where the guarantee is the central feature are not sustainable. I don’t mean financially sustainable because it may very well be that carriers continue to write guarantees and that those products end up being profitable if rates rise and lapses increase. I mean that they’re not sustainable culturally. The insurance industry won’t thrive on a revolving door of vendor/carriers who only make sales when their prices are the lowest.

I think the blame for this mess rests primarily on the carriers and secondarily on producers.

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