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Fungible present-value analysis is a useful tool for educating consumers about life insurance policy because it illustrates costs and compounding rates more clearly. Fungible analysis is based on the premise that the premium dollars invested in a life insurance policy will realize a higher cash value through an investment vehicle. The cash difference between the two will be insurance costs, expressed as a present value by using the compounding rate as a discount rate.
Because of a compelling need to improve information about life insurance, a new policy-disclosure and cost-measurement approach recently was submitted to the National Association of Insurance Commissioners and the Society of Actuaries. Although we live in the age of information, we remain mired in the Stone Age when it comes to providing Warn about insurers-practices and performance so that consumers may understand and compare policies.
To correct this situation, life insurance policies should be separated into two operational components--compounding rates and costs. This can be achieved by using an approach called fungible present-value analysis. Implementing this approach will benefit the industry in many ways, including helping it to achieve its primary purpose: to appropriately insure all who need coverage.
Last spring, a Society of Actuaries' task force investigating illustrations confirmed the need for improved information about policies and insurers. It reported that more than 95% of the companies responding to a survey perceive a problem with current industry sales illustration practices in terms of communicating with the potential buyer in good faith. In addition, in the past year articles in many publications, citing significant consumer dissatisfaction, have issued warnings about life insurance policies.
Recently, for example, a jury in Texas awarded a plaintiff $55 million after an insurer was ruled to have affirmed an agent's fraudulent misrepresentations of a life insurance policy by issuing the policy. More compelling than instances of unfavorable publicity, perhaps, are the industries own replacement regulations, which attest to the product's current ignominious unintelligibility for ordinary individuals. However, on the positive side, the American College recently completed a questionnaire on company and policy practices.
These and other developments demonstrate that the most important goals of 20 years of regulation--informed buyers, intelligible policies and genuine economic competition-have not been achieved. Such a finding is hardly surprising, considering that the industry's primary tool for policy information--interest-adjusted indexes-- is not only inadequate, but also both regularly misused and misunderstood. For instance, comparisons of interest-adjusted indexes of dissimilar insurance plans are invalid; hence, the index is a limited tool in times of tremendous policy diversity. Equally as remarkable, though, is the incomplete explanation-indeed, often times inexplicable omission in the industries and regulator's consumer literature--that the disclosed indexes are merely derived from illustrated scenarios that are not required to be reasonable or reliable.
The effort to make the policies tangible through illustrations has made them unfathomable because their operating components have been obscured. Currently, consumers, as well as agents, are neither informed of insurers' assumptions about these components nor provided relevant information to facilitate an evaluation in life insurance policy. However, the separation of policies into cost and compounding components is easy: The challenge, however, is to present the results accurately and intelligibly.
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