Subject: File No. S7-23-18
From: Benjamin G Baldwin , Jr.
Affiliation: BFA, LLC. CLU, ChFC, CFP, MSFS, MSM, AEP (Distinguished)

February 13, 2019

Five Recommendations in Response to the SEC Inquiries:

1. The 698-page Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts should be a Searchable Document so that respondents can find the topics they are best able to respond to.
2. Due to the many questions the SEC asks within that document the response period should be extended beyond February 19th, 2019.
3. An example of the need for a searchable document is that in the hours I have spent examining it I have not found any reference to The National Association of Insurance Commissioners Model Regulation and its requirements. The Model Regulation states:
The purpose of this regulation is to provide rules for life insurance policy illustrations that will protect consumers and foster consumer education. The regulation provides illustration formats, prescribes standards to be followed when illustrations are used, and specifies the disclosures that are required in connection with illustrations. The goals of this regulation are to ensure that illustrations do not mislead purchasers of life insurance and to make illustrations more understandable. If a policy form is identified by the insurer as one to be marketed with an illustration, a basic illustration prepared and delivered in accordance with this regulation is required . . .

Virtually every insurance contract contemplated in 498A is a policy form marketed with an illustration and it will be necessary for 498A to address this issue.

4. I/We think SEC coordination with the NAIC is essential to the success of the final version of 498A.

Also, it is important to note that the regulator required paper linear illustrations have been used for years without positive impact on consumer education or understanding of life insurance or annuities. On the contrary, they have misled and influenced many consumers to give up perfectly fine existing contracts because they are influenced by an agent who does not get compensated for the existing contract but will get compensated for the sale of a replacement contract.

It goes something like this.

In the beginning and for 250 years thereafter, there was Whole Life, and it was good. As inflation pushed interest rates to unfathomable levels, the illustrations of whole life were boring while the illustrations of Universal Life (UL) were exciting. Universal Life held the promise (but rarely the reality) that its initial high interest crediting rates would sustain such policies well past the typical persons life expectancy with premiums far less than those for whole life, while simultaneously building substantial cash values for possible withdrawal at retirement. Many consumers bought the most attractive linier paper illustration using a single set of inputs giving annual values to the nearest $1.00 from policy inception to age 100 or even 120. The poor customer believed it and learned another term that I could not find in the 698 pages, Non-Guaranteed Elements. The Cost-of-Life Insurance (COI) litigation going on today is prima-facie evidence that consumers and their lawyers did not understand those policies or illustrations. When interest rates tumbled down UL was no longer exciting, but the stock market was booming. UL illustrations at 6 percent became boring but Variable Universal Life (VUL) could be illustrated at 12 percent. That 50-year VUL illustration raised the greed tendency of both agents and consumers which called for another replacement. That was just in time for a Stock Market Crash and fear set in one again. Safety called for another change. This time to the attractive illustrations of today, Indexed Universal Life. With the use of illustration gimmicks called bonuses, factors etc. to juice the illustration, the poor uneducated new agent and the consumer are getting slammed by the new kid on the block (IUL).
So, what will it be? Business as usual? Agents and consumers chasing the policy de jour, or will the SEC assist the life insurance industry and the NAIC in building a tool that will help educate consumers and agents?

The sought-after objective of life insurance that can accumulate capital is to provide a death benefit at death and/or retirement capital when needed. Paper, regulator-required linear illustrations show the amount of capital, from contract inception out to and beyond age 100, as growing dollar amounts based upon inputs of death benefit, premium input and assumed, static, linear ROR on capital. The illustration always indicates success at issue otherwise compliance officers would not allow it to be sold.
No matter how many times or how many footnotes and experts tell consumers and agents that the illustration is not the contract, both consumers and agents focus on the paper illustration and believe the upward trajectory of capital. The NAIC requirements for the structure and use of illustrations has caused much of this dependence.

5. Provide consumers and agents with an I-Pad like device having the ability to vary the assumptions used in a visual illustration enabling the agent and client to see the effect on policy capital as the inputs are changed.

Such a tool would eliminate the need for the mind-numbing rows of numbers of paper illustrations, that do not promote understanding although the NAIC would probably still require them.
Agent and consumer education would come from allowing them to instantly create a visual change in the capital trajectory by adjusting the inputs. They would quickly see on an initial and ongoing basis the effect on policy when the insurance company changed any of the non-guaranteed elements within contractual parameters, as is their right.

Consumers would also see the impact of their behavior on the trajectory of policy capital, up and down, as they exercise their rights to increase or decrease premium or face amount. Consumers would be able to re-determine what they feel is a prudent return on capital expectations.

Such a tool will provide for prudent purchase decisions and prudent ongoing policy management decisions and be the most important, most frequently used element of Rule 498A.

In her speech on November 8, 2018, Dalia Blass, the Director of the SEC Division of Investment Management talked about allowing users to efficiently analyze and compare information about variable contracts, including, most importantly, their costs. Let us hope this is one of the tools the SEC will encourage the life insurance industry to build.
I/We recommend the SEC address the misleading NAIC required Illustration issue and seek replacement or a supplemental educational tool such as that recommended above.