In a January 4, 2012 press release, the NAIC released results of a recent survey the organization conducted. The release reports the finding that 63% of the consumers polled had life insurance. The release further quotes North Dakota Insurance Commissioner Adam Hamm, chair of the NAIC Life Insurance and Annuities Committee as saying: “According to our survey, more than two-thirds of consumers don’t know some types of life insurance include a cash value, and nearly half don’t think of life insurance as an investment option.” Hmmm. A major reason why consumers don’t think of insurance as an investment option is that insurers and insurance producers are generally concerned about using the term “investment” to describe insurance – particularly when making comparisons to other possible ways to allocate personal financial resources. Because of concerns over licensing and source of funds, producers are often prohibited from selling most life insurance as an investment option because it raises the possibility that the consumer will confuse “investment” with “security.”
The NAIC Advertisements of Life Insurance and Annuities Model Regulation (Model 570) states in section 4.B that:
No advertisement shall use the terms “investment,” investment plan,” “founder’s plan,” “charter plan,” “deposit,” “expansion plan,” “profit,” “profits,” “profit sharing,” “interest plan,” “savings,” “savings plan,” “private pension plan,” “retirement plan” or similar terms in connection with a policy in a context or under such circumstances or conditions as to have the capacity or tendency to mislead a purchaser or prospective purchaser of such policy to believe that he will receive, or that it is possible that he will receive, something other than a policy or some benefit not available to other persons of the same class and equal expectation of life.
Time and experience have shown that when discussing the “investment” aspects of insurance policies, insurers and producers become vulnerable to disciplinary and legal action. Consumers and consumer advocates often say that when the investment elements of life insurance and annuities are discussed in the sale that consumers don’t understand they are buying insurance. Suitability and Compliance Officers have been saying that the accumulation features of insurance and annuities cannot be described as an investment to be sure that consumers understand they are buying insurance protection.
In addition to consumer understanding that the product is insurance first and foremost, there are problems that arise for producers when discussing insurance as an “investment.” Those relate to licensing. The state of Iowa has addressed the issue most comprehensively in a Bulletin dated June 24, 2011. In the introduction, Commissioner Voss states: “For purposes of this Bulletin, “Insurance-Only Person” means an individual who holds an Iowa insurance license that authorizes the sale of annuities or life insurance products and who is not Iowa-licensed as an investment adviser, securities agent or investment adviser representative under Iowa securities law.” Commissioner Voss says that a “Securities-Only Person” means “an individual who is licensed as an investment adviser, securities agent or investment adviser representative under Iowa securities law, and who is not Iowa-licensed as an insurance producer under Iowa insurance law.” The dichotomy is established between insurance and investment by the license held. To avoid confusion on this issue, producers are taught to avoid calling insurance an investment so as to be clear that they hold the appropriate license.
Insurance-only persons are specifically prohibited from holding themselves out as licensed to provide “investment advice.” If insurance producers are not able to provide investment advice, they are walking a dangerous line to discuss the investment side of insurance products. As a compliance consultant, I regularly tell my clients that they should not use the word investment to describe the accumulation or cash value features of insurance products because, in my opinion, there is a regulatory risk in doing so. My advice is to use the insurance terms or a generic term like “financial product” rather than investment. The Iowa Bulletin concludes: “Persons who solely provide insurance advice as discussed in Section I of this Bulletin, and who disclose that fact to the consumer, should not be concerned with investment adviser or investment adviser representative requirements.”
While the NAIC release discusses whole life and universal life, in addition to variable life and variable universal life, it concludes with the statement that: “Purchasers should consult a licensed investment or tax advisor for guidance on which permanent life policy best fits their risk tolerance and investment objectives.” While that seems to be generally consistent with the Iowa Bulletin’s statements with regard to investment advice and investment advisors, it does seem to leave insurance-only producers out of the equation.
If the NAIC really believes that “permanent life insurance policies that build cash value may be a way to add stability to a financial portfolio and accumulate funds over the long-term,” we need to continue the discussion about what insurance-only producers can say about these features of permanent life insurance policies. If “65% of survey respondents did not know that some types of life insurance include a dollar amount that is guaranteed to increase in value and may provide tax benefits” and there is a public policy benefit to that discussion, then we need to figure out how to balance the interests of making sure that consumers know that the product they are buying is a life insurance policy or an annuity with the need to discuss the investment elements of the insurance products. People can’t know about the investment features of some life insurance policies if those that sell the policies can’t discuss those features as investments without running the risk of disciplinary action against them and the companies they represent.