How to Find Misleading Information In a Life Insurance Policy -

How to Find Misleading Information In a Life Insurance Policy

With some help from the National Association of Insurance Commissioners (NAIC), policy illustrations have been changing with the intent to better assist consumers by providing guidelines for life insurance advisers and companies.

Prior to the new regulations by the NAIC, there was a series of poor communications between insurance companies to agents and agents to consumers. Also, agents were allowed to provide their own “custom” illustrations, which were misleading to consumers.

When the NAIC adopted the model regulation, it was up to each State Department of Insurance whether or not to adopt it. Up until this time, there was no oversight for ensuring that the presentation of illustrations was fair and appropriate.

NAIC adopted the model regulation to help ensure that policy illustrations do not present misleading information.

Various states have adopted this regulation with certain state-by-state modifications.

The Model Regulation’s stated purpose is to provide rules for life insurance policy illustrations, which will protect consumers and foster consumer education. The goals are to “ensure that illustrations do not mislead purchasers of life insurance and to make illustrations more understandable.”

This regulation created standardized procedures, which must be followed during the sales of all “life insurance policies except variable life insurance, individual and group annuity contracts, credit life insurance, and life insurance with no illustrated death benefit on any individual exceeding $10,000.”

It also sets forth, in conjunctions with the Actuarial Standards Practice Number 24, rules for acceptable assumptions that underlie an illustration.

According to this regulation, an illustration is any presentation or depiction that includes non-guaranteed elements of a policy of life insurance over a period of years.

In other words, if it assumes an interest rate higher than the guaranteed rate and projects accumulated values based on the higher rate, it contains “non-guaranteed elements”, which is, therefore, an illustration subject to the Model Regulation.

Basic Illustration

A ledger or proposal used in the sale of a life insurance policy that shows both guaranteed and non-guaranteed elements. It must always accompany or precede any Supplemental Illustration.

· Narrative Summary – Describes any policy features, riders, or options and the impact they have on the policy. Also, defines the column heading and key terms used in the illustration.

· Numeric Summary – Summarizes death benefit, values, and premiums for three or four particular policy years. Also, includes signed statements by both the applicant and agent.

· Tabular Detail – Shows death benefits, values, and premiums for all policy years until age 100, policy maturity, or final expiration.

Revised Basic Illustration

An updated version of the Basic illustration, which illustrates the policy as issued.

Supplemental Illustration

An illustration that presents and depicts the same information found in a basic illustration, but in a different format. The illustration gives the company more flexibility in explaining to the applicant or prospective applicant as to how the product works.

By Tony Steuer, CLU, LA

Steuer, author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, has more than 25 years of experience and holds the Department of Insurance Analyst License (LA) as well as the Charted Life Underwriter (CLU) designation. Tony holds various leadership positions and has authored three books on the topic of life insurance.

Steuer’s work has been awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy for his The Questions and Answers on Disability Insurance Workbook and The Questions and Answers on Insurance Planner. Forbes named Questions and Answers on Life Insurance: The Life Insurance Toolbook as one of their top nine great investment books.

He’s also the founder of the Insurance Literacy Institute and creator of The Insurance Bill of Rights designed to empower consumers and to identify members of the Insurance Industry dedicated to strong professional standards.

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