The Leaders Group is a leader in the sales and distribution of variable life insurance, so it only makes sense for us to talk about some of the compliance issues related to variable life.
First, to discuss variable life the agent must be securities registered with FINRA and the state in which the customer lives, and insurance licensed and appointed (with variable authority) in the state the paperwork will be signed. Should a representative need to add a state to their registrations, it can be requested through email@example.com. Should an appointment be needed, it can be requested through firstname.lastname@example.org.
Next, knowledge of the basic product is needed. The Leaders Weekly has numerous articles on variable life and carrier information. Past editions of Word on the Street are available here (password WOS-2021). Wholesalers are great sources as well, but several carriers should be contacted to get a balanced viewpoint. Product considerations include death benefit, premium options, strength of carrier (A- or above AM Best rating), cost of insurance, riders available, sub-accounts offered, fees, and guarantees.
Some of the pitfalls of variable life we have seen customers complain about include:
- Market losses during declines affect sub-accounts and customers complain they didn’t understand they could lose value
- Market increases and customers complain they didn’t make enough
- Customers take policy loans and then 1035 the policy without properly transferring the loan, causing tax consequences
- Customers don’t understand the holding period requirements of indexed and fixed sub-accounts and complain they can’t reallocate the money when they want to
- Customers don’t understand that it is not just an investment vehicle, and not just an insurance vehicle, but a combination of both
The way to avoid these pitfalls is making sure the customer fully understands the product. This includes the prospectus, the illustration, and the rationale for the recommendation. The prospectus is required to be delivered either electronically or hard copy. These are seldom read by the customer but must be delivered. The illustrations have to meet NAIC requirements and should not exceed 8% on the high side. The recommendation must be suitable which considers the need for insurance, if the customer can afford it and their risk tolerance is moderate or above, but the recommendation also must be in the best interest of the client.
Once a recommendation is made, the application, illustration, investment account profile and variable life disclosure should be submitted to The Leaders Group through LEADERSlink. The file should include these as well as the delivery receipt and be kept for at least six years after the account is closed.
This is just a brief overview of some of the compliance aspects of variable life. Much more about variable life and the individual products can be learned by reaching out to our marketing team or carrier wholesalers.
Jane Riley, Chief Compliance Officer