In troubled times, we’ll take our happy news where we find it: the Securities and Exchange Commission has issued fresh rules dictating the formulation of summary prospectuses for variable life insurance and annuity contracts.
They will now take the familiar form of those issued with mutual funds, a big step forward in clarity in simplicity of presentation, in our view.
Variable life policies are a form of permanent life insurance. They are composed of discrete investment accounts, each holding securities, bond funds, money market funds and other potentially volatile assets. Due to the inherent risk of these products, variable life policies are regulated under federal securities law. In line with these laws, agents must provide a prospectus to customers detailing the various products offered for the policy.
Variable life products can be complex and hard for prospective clients to grasp. Insurers and agents have long petitioned the regulator to change the rules governing the prospectus to make it more accessible and understandable for clients, in line with the familiar and customer-friendly variant used when selling mutual funds.
Helping clients to understand variable life policies should help increase their sales appeal. Moreover, advisors and agents who sell them could improve their own understanding of the products, which is regrettably not always up to snuff. You can’t entirely blame these laggards, as the old-regime disclosures are indeed daunting, even for well-trained and experienced professionals. Regulators are often faulted for muddying already opaque waters, but in this case, agents and customers appear to be well served by the new disclosure standards.
Insurance industry associations have spoken in favor of the SEC’s new regs. An official at the Insured Retirement Institute (ICI) commented, “This is a major leap forward in the ability to provide consumers with information they need to make educated investment decisions about financial products,” a factor vital to effective retirement planning. An American Council of Life Insurers spokesman said the change is a “win, win, win”: for customers, who can make better-informed decisions when purchasing variable products; for insurers, who can improve disclosure and reduce administrative costs; and for “the environment because it will significantly lower the carbon footprint through electronic delivery and less paper waste.”
The SEC’s new variable product summary rules will come into force on July 20, 2020. A list of contact people was provided in the release (Daniel Chang, Pamela Ellis, Bradley Gude, James Maclean, Amy Miller, Michael Pawluk, Harry Eisenstein and Michael Kosoff), who hopefully can answer all queries on the 713-page regulatory package. Simplification can certainly be complex in the regulatory world, but at least we know who to call.
The new-style prospectus must contain information about related fees and expenses, the risk inherent in the offered products, any restrictions or limitations, tax information and a conflict of interest statement.
The latter section must contain disclosures on what the SEC calls “Investment professional compensation” for selling the underlying investment products to customers. The compensation item was controversial, says the SEC: some readers wanted to expand this requirement, while other commentators sought to limit it. The regulator chose to accept the original draft of the rule, noting that it is based on “the parallel requirement for mutual fund summary prospectuses,” a well-tested formula accepted as sufficient to protect customer interests.
We should note that the ICI is still conducting a thorough review of the proposal. While their first reaction was positive, they are closely eying the details to assure no anomalies or unpleasantries were missed in their initial assessment.
For more information, please read:
7 Facts About the New Variable Product Summary Prospectus Regs | ThinkAdvisor