Commentary: The Case For Transparency In Life Insurance

By Darwin Bayston

The life insurance industry has made notable efforts in recent years to increase transparency in the way its products are created, priced and sold to consumers. This is important for the health of the industry, as a LIMRA/Life Happens study last year found that 67 percent of consumers are interested in more transparent life insurance buying options.

But what about when that same consumer has raised their children, retired on a modest fixed income and is now at a point in their life journey when they no longer need or can afford the premiums on the policy they were sold? Don’t we owe them the same commitment to transparency in their senior years that we owed them when they were a younger prospective customer targeted for a product sale?

Unfortunately, life insurance companies have been unwilling to embrace this responsibility on their own. Most of the time, when a senior or one of their family members contacts a life insurer about an old policy they no longer need or can afford, they are given three options: pay the premiums, let the policy lapse or surrender the policy for its cash value. Faced with such limited and disconcerting options, seniors surrender tens of billions of dollars in life insurance each year.

As an industry, we know better. We know these consumers could explore an accelerated death benefit, the assignment of the policy as a gift, a life settlement, policy replacement or several other options — any one of which would almost certainly represent better value to a senior than a lapse or surrender. And yet in the absence of legislation that mandates the disclosure of those options, life insurance companies have been unwilling to act in the interest of transparency to share this information with consumers.

A growing chorus of insurance legislators and regulators is waking up to this secret and trying to force insurers into action to protect vulnerable seniors. In 2010, the National Conference of Insurance Legislators passed the Life Insurance Consumer Disclosure Model Act, requiring life insurance companies to inform policyholders above the age of 60 (or with a terminal or chronic illness) that there are eight specific options available to consumers as alternatives to the lapse or surrender of a life insurance policy. Since that time, Kentucky, Maine, New Hampshire, Oregon, Washington and Wisconsin have all enacted the consumer disclosure requirement, and California and Florida have implemented limited disclosure requirements in their states as well.

The most recent battleground in this effort took place this year in Rhode Island. In June, Rhode Island became the latest state to pass a form of consumer disclosure requirement, but not before the life insurance industry lobbied hard — and successfully — to water down provisions in the bill.

It is disappointing, but at this point unsurprising, that the life insurance industry continues to oppose consumer disclosure legislation. The carriers object to the NCOIL legislation on a variety of grounds. For example, they claim the costs of sending notices to policyholders is burdensome, yet they’re already sending lapse notices or premium calls to those same customers. The bottom line is that insurers do not want their lapse rate projections thrown off by seniors who learn they have other options available.

Is this really the image that the life insurance industry wants, especially at a time when they are striving to increase consumer confidence and improve transparency in the products sold to consumers?

The fact is that the NCOIL consumer disclosure act makes no attempt to direct consumers into any particular direction — let alone to even discourage them from a lapse or surrender — but simply to “empower consumers through education about their options,” as Insurance News Net reported back in 2011. And yet, as recently as this summer, there are insurance carriers arguing against the simple idea that consumers are better off with more information and not less.

We’ve studied this issue at great length at the Life Insurance Settlement Association and we are supporting a variety of legislative initiatives to promote consumer disclosure requirements. To be clear, this is not an academic exercise for us: 90 percent of seniors who lapse policies without knowing about a life settlement indicated they would have considered that option had they known about it and 79 percent believe their advisors should have informed them of the option.

But this issue is bigger than any one association, company or professional. Every participant in the life insurance industry must decide whether they want to be on the right side of history when future generations look back at how we addressed the issue of whether seniors have “a right to know” about their available options prior to lapsing a policy they may have paid into for years or even decades. Financial advisors and professional agents have a special opportunity to let their voices be heard and join the call for greater transparency in the way life insurance companies disclose information to seniors when they no longer need their policies, not just when they are prospective new customers hearing a sales pitch.

Darwin Bayston, CFA, is president and CEO of the Life Insurance Settlement Association. Darwin may be contacted at [email protected].