NEW REGULATIONS: (LIC) Insurance companies and agents are coming under greater scrutiny on the sale of life insurance products- primarily because of the ineptness of agents in identifying what they should be doing and the lack of supervision by the firms. Pennsylvania proposed somenew rules in 1994. Other states will follow (Life Insurance Selling, June 1994)

1. What I do for a Living: Anyone who earns a living substantially from the sale of insurance or annuity products cannot hold themselves out to be a financial planner, investment adviser or consultant.

2. Signed Policy Receipt form: Upon delivery of a insurance or annuity policy, the agent must use a delivery receipt. The date on this receipt starts the free look period. Both the agent and client must sign the receipt and copies are to be given to the client and to the insurer.

3. Significant Compensation Limits:

a. First year commissions cannot exceed 50% of the first year premium. Commissions are defined to include ".... pecuniary and nonpecuniary remuneration of any kind relating to the sale or renewal of the policy including, but not limited to, bonuses, gifts, prizes, awards and finder's fees". (Current commissions can be 100%+.)

b. Renewal commissions beyond the second year must be the same as the second year and "... must be provided for a minimum of five renewal years. The annual commission or other commission for such renewal period for the second and subsequent years shall not exceed 10% of premium".

c. Every agent and broker must disclose in writing the commission level in writing to the applicant at the point of sale

4. Replacement tracking: Each carrier is required to maintain records of agent replacements as a percentage of sales and lapses as a percentage of sales. The carrier must report this activities to the Department of Insurance for the 10% of each carrier's sales force that have the greatest percentage of lapses and replacements.

5. Complaints records: Carriers must maintain a record of all complaints registered- and the disposition thereof- against brokers and agents for four years. They are to be made available to the department upon demand.

6. Limited use of Illustrations:

a. Illustrations cannot be generated by agents or brokers, but only by the insurer

b. All illustrations must follow a standardized format.

c. "All illustrations shall provide clear disclosure of any kind and all applicable expense loads and charges including withdrawal, surrender, and mortality charges, and clearly identify the contract represented by type and from number."

d. No agent shall withhold, change, or in any way modify a life insurance or annuity illustration provided by the carrier

e. Projected values are limited to the average rate or return actually paid during the most recent three year period for the contract type and policy form illustrated. The carrier must explain in bold type that these values are only projections, based upon the three year history, and are not guaranteed to occur.

f. All illustrations must be dated and signed by the agent and the insurer

g. The customer must be provided a copy of ALL illustrations used, and the carrier must also be provided with all illustrations used at the time the applications is submitted to the carrier. The carrier must retain those illustrations in the underwriting file

h. The illustration cannot be attached to or in any manner made any part of the insurance or annuity contract.

Course of Action: The state may 1. suspend or revoke the license of the offending party; 2. impose a civil penalty of not more than $5,000 per violation and 3. issue and order requiring appropriate restitution.

These are serious rules and regulations. If implemented other states would be very apt to institute similar rules. You actually could be seeing a national structural change in the sale of insurance products. It will force many consumers- as well as agents- to be more involved in the process of designing someone's financial life. By the same token, we will see many agents- and even some companies- drop out of the business. Not a problem. Many should not have been there in the first place.

INSURANCE: (LIS 1996) The NAIC (National Association of Insurance Commissioners) is requiring wholesale changes in policy illustrations since so many agents misrepresented interest rates, mortality expenses, etc. A proposed model regulation includes 13 points. Skip this if you like- it's a little involved. However, your agent shouldn't skip it.

1. Only illustrations after the act is enacted will be covered by the new proposals

2. If a carrier determines that an illustration will be presented, it MUST be delivered to the prospect and the prospect AND agent must sign the illustration indicating they have discussed and understand the non guaranteed elements and that the final results could be different than projected.

3. The products are not directly regulated, but the illustrations however, are.

4. Any illustration must be clearly labeled as such. They must contain the name of the insurer, name and address of agent, name, age and gender of insured, underwriting class, initial death benefit and dividend option of the non guaranteed elements

5. Illustration cannot refer to anything but life insurance. This probably emanated from the illegal practices of presenting them as retirement vehicles. Non guaranteed elements must not be misrepresented; provide an incomplete illustrations, represent that premiums are not required unless that is a fact, use the term vanish or vanishing premium, be lapse supported or represent values that are not self supporting.

6. A new term called the Disciplined Current Scale that the scale of non guaranteed elements must be based on a reasonable recent historical experience and must be certified by an actuary.

7. Projections of elements that have not happened cannot be illustrated. For example, one way to make illustration look better is to adjust mortality rates to be more favorable to rates- i.e. lengthen the actuarial period. True, mortality has lengthened over the last 50 years, but it is NOT correct to use anything that does not reflect the most recent history.

8. Any element used must be supportable. Supportability is measured by a self supported test which requires that only the company's current and recent experience be incorporated into a dividend scale or non guaranteed elements to be employed in a sales illustration

10. A basic illustration must include a tabular value which are calculated using the currently payable scale of experience driven pricing factors. In other words, there can't be tables of values that are falsely illustrated by any means.

11.The clients must sign the illustration page that contains the numeric summary and the carrier MUST retain the illustration for as long as the policy is in force PLUS three years.

12. The carrier must provide an annual report on the status of the policy. If any lapse is imminent, the carrier must notify the client.

13. The carrier must notify the policyholder if there is a negative change on the policy

There's more but the gist of the commentary is that the major organizations and states are requiring wholesale changes for any presentation of insurance. You, as the consumer, should be better protected. Fewer agents will be able to stay in the business simply because they will be unable or to comprehend the implications or unwilling to make the changes.

INSURANCE: (1997) The model commentary below is from an insurance company that will use the NAIC- National Model Illustration Regulation and is designed to promote professionalism. The NAIC does not have the teeth to enforce these "suggestions", but sooner or later, many states will undoubtedly enact similar regulations.

1. A Basic Illustration as defined by the Model Regulation or an Illustrated Disclosure Statement must be provided during the sales presentation

2. A basic Illustration or Disclosure Statement signed by the proposed insured must accompany the application. The illustration must match exactly the insurance applied for

3. If the policy is applied for other than as illustrated, the Disclosure Statement signed by the proposed insured will need to be submitted with the application. The home office will mail you a revised illustration along with the policy to deliver to the applicant for their signature. The signed Revised Illustration must be the returned to the home office.

4. If a singed Basic Illustration or Disclosure Statement does not accompany the application, processing of the application will begin. No application however will be approved by the Underwriting Department until an illustration or disclosure has been received. Because a Basic Illustration is required at the point of sale, we will closely monitor agent activity regarding applications submitted without a signed illustration or disclosure.

5. If a policy is issued other than as applied for, the home office will mail you a Revised Illustration along with the policy for you to deliver to the proposed insured for his or her signature.

To comply with the NAIC regulation, any time the home office provides you a Revised Illustration, as described in three through five above, a second copy will be mailed directly to the proposed insured.

BASIC INSURANCE ILLUSTRATION: The NAIC Model Illustrations has three sections

1. Narrative Summary- a detailed summary of the policy, riders and an explanation of terms

2. Numeric Summary- a summary of the values for certain mandated years using an average guaranteed and current interest rates and charges called "midpoint assumptions".

3. Policy detail- a ledger of the guaranteed and projected values for all years.

Concept selling or any yellow pad representation of values does NOT quality as a Basic Illustration under the Regulation.

So what will happen? Well, it will make it a lot harder to sell insurance by the seat of your pants. However, very few consumers will ever really get involved with this since death and dying are issues they do nor wish to deal with. But this will definitely help the industry provide more knowledgeable and professional reps.

COMMISSIONERS (NAIC): (1997) While I have previously discussed the changes the NAIC is making to policy illustrations, here is the most recent summary. An insurer or its producers shall not

Represent a policy as anything other than a life insurance policy. (Too bad Met, New York Life, Prudential couldn't have figured that out previously)

Use or described non guaranteed elements in a manner that is misleading or has the capacity or tendency to mislead.

State or imply that the payment or amount of non guaranteed elements are guaranteed

Use an illustration that does not comply with the requirements of this regulation

Use an illustration that at any policy duration depicts policy performance more favorable to the policy owner than that produced by the illustrated scale of the insurer whose policy is being illustrated.

Provide an applicant with a incomplete illustration

Represent in any way that premium payments will not be required for each year of the policy in order to maintain the illustrated death benefits, unless that is a fact

Use the term vanish or vanishing premium or a similar term that implies the policy becomes paid up, to describe a plan for using non guaranteed elements to pay a portion of future premiums

Except for policies that can never develop non-forfeiture values, use an illustration that is lapse supported

Use an illustration that is not self supporting

An agent that does not comply is subject to fines, loss of license and termination by carriers. The only problem is that the regulations are NOT mandatory- the NAIC is a voluntary organization and the states must decide whether to stipulate the rules within their state.

I repeat this comment- life insurance is unquestionably the most difficult area of finances to understand- particularly since the companies do not explain how they developed the products. And when you put investments along with the insurance, it becomes even more difficult. After doing the research, I have concluded that when you need insurance- just buy insurance. Any investment angle should be purchased SEPARATELY and that includes cash value.

Never buy insurance from (just) an insurance agent! There are far more astute people to use.