1990-1A, NAIC Proceedings - NAIC / LIMRA - Universal Life Disclosure Form Focus Group Summary - 10p

  • 1990-1A, NAIC Proceedings - NAIC / LIMRA - Universal Life Disclosure Form Test Market Results - Focus Group - CIDWG - Consumer Issues Disclosure Working Group  ---  [BonkNote]  ---  10p
    • 1993 - NAIC - Policy Information for Applicant - Universal Life Policy - 3p
      • Life Insurance Disclosure Model Regulation - Appendix D
      • Located in: 1993 0525 - GOV (Senate) - When Will Policyholders Be Given The Truth About Life Insurance?, Howard Metzenbaum (D-OH)  ---  [BonkNote]
  • (466)  5..........
    • If appropriate, the paragraph might add something like "The amount of premium you have elected to pay, $300 per year, is however insufficient to keep the policy in force to age 95 at the guaranteed minimum interest rate of 4%; the policy would terminate at age 66.
    • To be sure that the policy continues to age 95, even at the minimum interest rate of 4%, you would have to pay  $644.30 per year for the entire life of the policy."

(466) Objective of the Study

The objective of this study was to test a universal life policy disclosure form to see if the average consumer could understand it and to see if the layman found the information provided to be useful.

(467) FINDINGS

Overall

  • On an overall basis, many people found the disclosure form to be quite confusing, especially the second page.
    • For example, the first section of the form indicates that the policy applied for is a flexible premium policy, but the charts illustrate what appears to the layman to be a "fixed" premium (i.e., a fixed premium was interpreted as being synonymous with a level premium).
    • ....The lack of understanding of cash value products was evidenced by the fact that the majority of people could not understand why, in Chart A, if you continue to pay your premium, the benefit would run out before age 95 and....
  • As far as usefulness is concerned, when they understood what the information was supposed to be telling them, they generally felt that it was useful information to have.
    • However, it should be noted that there was a high correlation between the ratings for usefulness and understandability.
    • What they did not understand, they did not find useful.
  • Another significant factor regarding usefulness is the fact that there seem to be two distinct groups of people.
    • Some people want the form to be kept as simple as  possible. -- They only want the basic facts ("Keep it simple, stupid").
    • Another significant group of people are more analytical in nature and do like getting all the detailed breakdowns.
    • Perhaps the best way to accommodate both groups is to have the basic information up front and the more detailed information, clearly labeled as such, in a separate section at the end of the disclosure form.
  • One further general comment is in order.
    • Many consumers have a generally negative attitude toward insurance companies and think that insurance companies are making excessive profits at their expense.
    • Thus, many people viewed Chart A as disclosing that the insurance company was ripping off the consumer; that is, if he paid his premium every year, his cash values would nonetheless decline after a certain point and he would be without protection after a certain point.
    • (Indeed, one person noted that the policy values go down in the later years, just when you need them most!) Furthermore, they saw the explanation of charges on the second page as being "add-ons" in many cases, rather than as already being included in the premium.
    • Once again, some people saw this as just another opportunity for the insurance company to rip them off.
  • Section I
    • Finally, almost nobody understood the difference between a flexible premium and fixed premium policy.
    • As indicated previously, this confusion was enhanced by the fact that the charts showed a level premium which they interpreted as being a fixed premium.
  • Section III/IV
    • A second major problem concerning Chart A stems from the fact that people do not understand how cash value life insurance
      works.

      • Thus, focus group participants were clearly thrown by the fact that the surrender value declined after year 20 and by the fact that there was no death benefit at age 95, despite the fact that the annual premium was paid continuously.
      • Furthermore, about half of the people assumed that the policy values shown at age 65 remained constant through age 94
    • Just how to clarify Charts A and B was somewhat more problematic.
      • Another suggestion that was made was to illustrate the two charts in graphical form, but this suggestion did not meet with universal acceptance when it was suggested.
      • Basically, what people seemed to want was simply a clearer explanation, in bold print, that one chart was showing the "worst case scenario" while the other chart was based on what the company was currently paying in today's environment and assumed that the environment did not significantly change.
      • Furthermore, since few people related the information in Section V (top of page 2) to the charts, a statement should be included to the effect that, in the worst case scenario (i.e., a 4% interest rate being credited), a $300 premium is only sufficient to keep the policy in force until age 66.
      • If the policyholder would like to be guaranteed that the policy would remain in force until age 95, then a premium of $644.30 would need to be paid every year from the date of purchase.
  • Most people found Charts A and B to be quite useful.
    • The more cynical of the focus group members rated Chart B slightly less useful, only because they felt the assumption that the current interest rate would not change to be an unrealistic assumption.
    • Finally, a few people did not notice the statement underneath the charts and, if they were not at a focus group specifically to read the disclosure form, undoubtedly several more would not have noticed that statement.
    • For those who did read it, it raised a natural question in their minds: What other variables might affect the performance of the policy and the illustrations
      shown in Chart B? Are they talking about your health? Investments? Or what?
  • Section V
    • The biggest thorn in this section was the $644.30.
    • Most people had no idea what this figure signified or, if they did think they understood it, they thought that this was the amount that had to be paid after age 65 on the guaranteed basis to keep the policy in force.
    • They did not recognize that this amount would have had to have been paid from the very first year (which is the way I interpret that statement-there is nothing in the instructions to indicate one way or the other).
    • Also, because most people presume that if you pay your premium continuously, your policy will remain in effect, quite a few people had a hard time understanding how or why the policy would terminate in policy year 31.
    • This was simply foreign to their way of thinking.
    • Also, they would prefer that the statement said age 66 rather than policy year 31.
    • People also did not understand what an endowment benefit was and several wanted to know what the endowment benefit would in fact be (i.e., the amount of the benefit).
    • One person was so confused that he said that the maturity age and endowment benefit were moot points, since the policy was going to end at year 31 anyway.
    • While this section was not viewed as important initially, some people felt that it was very important once they understood what it meant.