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Insurance Presented as a Savings or Retirement Plan

While cash value life insurance does have an accumulation element, producers should not give the impression that life insurance is anything other than life insurance, even when it has cash value features.

In fact, producers must make sure that the cash value is identified and described as just that—cash value.

Guaranteed versus Potential Cash Value Accumulations

When the cash value growth is guaranteed by the insurance company, as it is in fixed-return policies, it can be stated as such. In all other cash value policies, however, including Universal Life (which has a fluctuating declared [current] rate of return) and variable universal life (which features competitive returns based on market performance), clients should be made aware how cash values are credited.

Dividend Misrepresentation

When dividends are possible in participating policies, it is common for clients to believe that the dividends are earnings similar to those associated with stocks. Producers must explain that dividends are a return of premium, which is why they are not taxed. Most of all, producers must make sure they never give clients the impression that dividends are guaranteed. Producers should make this especially clear when giving cash value projections. Also, a company’s past dividend performance must be presented as just that—a history of past performance, which in no way can be interpreted as a projection of future dividends.

Insurance Described as Investments

If the product is life insurance (even if the cash value depends on securities), producers must not imply that the product is an investment or describe it as such.

The emphasis should be on life insurance as a means of protection, with accumulation features that receive favorable tax treatment. Producers should also not describe cash values as investments, investment returns, equity, savings or emergency accounts.

Premiums Referred to as Other Than Premiums

Producers always should refer to premiums as just that—premiums. They should not be described as payments, contributions or some other similar term.

Failure to Distinguish between Tax-Free and Tax-Deferred Accumulations

While it is recommended that producers tell clients that the cash value increases in their policies are tax-deferred, producers should not imply or state that cash value growth is tax-free because this is not always the case. It is acceptable to remind clients however, that beneficiaries receive proceeds tax-free in most situations.

Failure to Divulge Risks

In addition to the positive aspects, producers have an obligation to divulge the risks associated with insurance policies, especially when discussing variable-rate products.

Clients must understand that they—not the insurance companies—bear the full risk of loss with the cash values in variable products.

Failure to Explain Product Differences

Producers should help clients understand the differences between policies under discussion. For instance, it would be grossly unfair to compare premiums and cash values between a traditional Whole Life policy and a Variable Universal Life policy without also pointing out the other differences. This information would be critical in helping the client make an informed buying decision.