James Christie | Don’t “Default” On Your Obligations
Input premium. Input pay duration. Solve for minimum non-MEC death benefit. Solve for most efficient year for the switch from Option 2 to Option 1 death benefit. Solve for loans (usually participating) from age 66-84. Take that number and sell it.
It seems so easy – but it’s not. That number is all your client is going to remember and, by using it as the crux of the sales process, you just backed yourself into a corner. An IUL product is a defined contribution plan, but we tend to sell them like defined benefit plans. By focusing on a final number, a single metric of illustrated income, we leave clients in the dark about how the product really works. They think they bought an income stream, but what they actually bought was a dynamic financial tool.
Where’s the problem? We left out one key piece of the puzzle in how that illustrated income stream was created – the illustrated rate. When you ran that illustration, did you stop to look at the default illustrated rate? For virtually every carrier in the market, the default is the AG49 maximum illustrated rate. We think about that rate as if it’s a regulator-approved number that is above question. But it’s not. By using that rate as the default, you’re actually defaulting to some degree of failure. And the life insurance company is setting you up for it. They’re not being malicious; they’re merely playing by the rules defined by the market. But are those rules the right thing to show your client for setting expectations about future performance and for understanding product mechanics?
I bought my first house in the heat of the run-up to the Crisis. I was young and just getting started in my career, but already had a wife and two children. When I applied for my mortgage, I was approved for an astronomical and practically irresponsible amount of money. I could have easily drowned myself and my family in debt to buy the house of our dreams, which the bankers mysteriously thought that I could afford. But I didn’t take the default. I realized that just because I could buy my dream house didn’t mean that I should. Instead, we reset our expectations. We bought something easily within our means, something we could actually afford while still putting clothes on our backs and food on the table.
The moral of the story is that we didn’t take the defaults. We didn’t let our mortgage lender tell us what was right for our family. But even more importantly, we realized after buying our modest home that we didn’t need the big house. We were plenty happy with what we could actually afford, expectations met.
Expectations are key – which is why I often feel like what’s going on in Indexed UL is a bubble waiting to burst. Not based on how the products are built, but because of how they are sold. By using the defaults, we’re setting extremely high expectations for future performance. We’re giving up on our responsibility to set correct expectations when we just choose the default rate. And that’s a risk for our clients, ourselves and the industry as a whole.
For the remainder of the series, I’m going to cover the following:
- alternative ways to think about setting expectations for income sales in IUL
- how to create your own default rates
- how to gauge the risks and benefits of other default settings in IUL
- how to build a story for clients around expectations that makes sense for them, not for the companies manufacturing the products
- Finally, how to build an easy and repeatable process to set proper expectations and set yourself apart from your competition
At the end of the day, our job as advisors is to create success for our clients. What’s the definition of success? Meeting or exceeding expectations.
So, either set the bar high and run a very high risk of failure, or set the bar more conservatively and blow through it. The choice is yours – don’t default on your obligation to set right expectations for your clients.