Equity Indexed Universal Life Insurance – Is it good for us?

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PostPosted: Mon Jul 12, 2010 4:09 am   Post subject:   

Quote:
EIUL is a long term investment




If you had a securities license, DIMG786, you would know that NO LIFE INSURANCE POLICY is ever to be described as an INVESTMENT! Period!!



There are life insurance products that have investment options related to the cash accumulation account, but that does not make the product an investment, merely a registered contract due to the nature of the management investment companies behind the subaccount options in the separate account.



Further, EIUL can't even begin to be compared to an "investment" since it is a GENERAL ACCOUNT product that does not invest any money in any security. EIUL merely uses an associated stock index as the benchmark for crediting the cash accumulation with a certain rate of interest outside the insurance company's direct control.



As for "buy term and invest the difference," there are many of us who would subscribe to that proposition, but no one life insurance policy type is a blanket recommendation for all situations. Term has its place alongside whole life, universal life, EIUL, VLI and VUL (and all the assorted variations in between).



To make the proper product choice, a person is best advised to consult a knowledgeable agent who will analyze the needs and make the most appropriate recommendation. That's what our licenses demand of us.


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PostPosted: Fri Jul 16, 2010 2:26 pm   Post subject:   

Sorry Max, but a Variable life product can be legally described as an investment. One must be investment licensed to sell it and like other investment products, a prospectus is needed. It is an insurance product, but it is an investment and can legally be described as such as long as the fact that it is insurance is disclosed.



In fact, the investment risks must be disclosed. It seems that it would be a huge problem if the product wasn't described both as an investment product and an insurance product. (The same should hold true for variable annuities.)



EIUL is not an investment product and can't be described as one.


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PostPosted: Fri Jul 16, 2010 3:32 pm   Post subject:   

Quote:
One must be investment licensed to sell it




ABSOLUTELY TRUE! Series 6 (or 7) and, in most states, a Series 63 (or 66).



Quote:
a Variable life product can be legally described as an investment.




ABSOLUTELY WRONG! Securities laws PROHIBIT describing ANY insurance product as an INVESTMENT. It is a life insurance (annuity) policy with an INVESTMENT COMPONENT -- the insurance company's separate account -- which is (part of, but) DIFFERENT than the contract of insurance insurance itself. There is no question that the product design integrates the cash accumulation with the death benefit (but all cash value policies do that), and it has a direct effect on the annual death benefit reset in a VLI contract.



It's easy to fall into the trap. Insurance agents have been describing all forms of cash value insurance as "an investment" for 150+ years!



Quote:
but it is an investment and can legally be described as such as long as the fact that it is insurance is disclosed.




Actually, it is the other way around. It is life insurance, and the disclosure is that the CASH VALUE component is an investment in the insurance company's separate account, a "management investment company" -- the insurance company is NOT a management investment company, therefore it's "products" are NOT investments.



What the contract permits is the policyowner's direction of cash accumulation into the insurer's separate account instead of its general fund, thereby relieving the insurer of all risk for the contract's performance or collapse.



I know, this may a difficult concept to fully appreciate. But when you put the cart before the horse, it's easy to get things confused. (I don't think I've ever seen a FINRA action against a RR specifically for describing a variable contract as an investment, which is sort of like watching the recent World Cup games and the officials ignoring flagrant fouls that occurred right in front of them. Doesn't make it "not unlawful", but there are, admittedly, for more serious things to enforce when it comes to the things RRs are doing to people these days, many of which are Ponzi schemes far removed from insurance company separate accounts. Simply put, the less you enforce, the more you encourage.)



Quote:
In fact, the investment risks must be disclosed. It seems that it would be a huge problem if the product wasn't described both as an investment product and an insurance product. (The same should hold true for variable annuities.)




Here, we are precisely on the same page, and it does hold true for VAs. VUL/VLI/VA are all insurance products (first) with an investment component (second) that must be disclosed as such. That's what the prospectus describes.



Quote:
EIUL is not an investment product and can't be described as one.




No argument from me on this, except to say that all those WFG agents (and others) who go around talking about how their EIUL offers "All the upside of the market with none of the downside" are treading on very thin ice, because that dialogue makes the product SOUND like a security. If Rule 151A is ultimately implemented, it should apply equally to EIUL as it will EIAs. (Hopefully, the Rule will be scrapped, because the products truly are not securities -- they are "general account" insurance products.)


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PostPosted: Sun Jul 18, 2010 4:21 pm   Post subject:   

Quote:
ABSOLUTELY WRONG! Securities laws PROHIBIT describing ANY insurance product as an INVESTMENT. It is a life insurance (annuity) policy with an INVESTMENT COMPONENT




Max, Can you back this up? One can't describe a policy in which the money is in the general account as an investment. I've never seen a law that says what you are saying. Look at all of the literature, for example of TIAA-CREF for their 403(b) plans using variable annuities. These aren't described as insurance products. They are described as investment products because they are. Heck, look at any variable annuity. Are you saying that they are all breaking the law?



If you are correct, I'd really like you to point to some securities law that points to this because I've never seen it. There are plenty of insurance regulations prohibiting products that are purely insurance products from being referred to as investments.

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PostPosted: Sun Jul 18, 2010 9:48 pm   Post subject:   

Quote:
There are plenty of insurance regulations prohibiting products that are purely insurance products from being referred to as investments.




Haven't you answered the question for yourself? It hinges on your understanding of the product. Is a variable insurance product (VLI, VUL, VA) an insurance product with an investment component, or an investment with an insurance component?



You have to admit that all of the products are LIFE INSURANCE/ANNUITIES FIRST. Once you come to that realization, it should not be difficult to understand that it's not the product that is an investment, it is the option in the contract to invest the cash value component in the insurer's separate account instead of its general account. The subaccounts are registered investments, and the integration of the two is what requires the contract to be registered as a security. That doesn't make the insurance an investment.



Because the products are INSURANCE PRODUCTS FIRST, they qualify for specific and special treatment under the Internal Revenue Code. Because they are unlike other "investments", they are not subject to the same taxation as "investments" -- gains in insurance contracts are subject to ordinary income tax, compared to true investment gains which are subject only to capital gains tax. Life insurance distributions due to death are made, generally, income tax free, true investment gains are not. Gains in a surrendered or lapsed variable insurance policy are subject to ordinary income tax. That should be a clue.



Would you call an IRA or Roth IRA, a Keogh, SEP, SIMPLE, or 401(k), a 403(b) account (to which you refer) an "investment"? I'm guessing that you probably would, and if you did, you'd be wrong.



You cannot call the "account" an investment, because it is a RETIREMENT ACCOUNT FIRST, and the "account" itself is not an investment -- but the assets held by the account can be invested in a variety of things (and there are some prohibitions, such as life insurance in certain circumstances). People commonly ask, "What interest rate does your Roth IRA pay?" And I tell them, "ZERO." My response is intended to create some confusion, and then I get to educate them by explaining that the account is a "current income tax shelter" for retirement assets. The interest rate depends on what is done with those assets. Many people have their IRA assets in CDs paying 2% or less today. I would not call than an investment.



And like the insurance products, distributions from all retirement accounts are taxed as ordinary income, not subject to capital gains. Which should help you understand the difference between the "retirement product" and the "investment component" more clearly.



I'm going to refer you and other readers to a FINRA document and an SEC document (sorry, they're somewhat lengthy, but at least they are understandable):



http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/no tices/p120756.pdf



and



http://www.sec.gov/news/studies/secnasdvip.pdf



that lay out the general understanding of the products and, among other things, describe "weak" and "sound" practices in the marketing of variable insurance products.



Pay particular attention to the suitability standards for Variable Life Insurance, which state that the purchaser must have "a need or desire for life insurance". It is not the other way around, where the investor is looking to invest and hopes they can get some tax deferral through an insurance product as a fringe benefit [but this is a common marketing ploy]. The document specifically identifies as a sound practice proper disclosure that "there must be a good reason (other than tax deferral) for the purchase."



And also notice the discussion of money as it passes from the customer to the product.



Normally, money for "investments" is paid to the Broker/Dealer to settle a trade. But money paid for insurance products, variable or otherwise, is normally paid to the name of the INSURANCE COMPANY, not their separate account or the individual subaccounts. That, too, should be another clue.



But if you want the FINRA Rule that governs, it is Rule 2330. The relevant section is (c) Receipt of Payment, which begins by stating:



Quote:
No member shall participate in the offering or in the sale of a variable contract on any basis other than at a value to be determined following receipt of payment therefor in accordance with the provisions of the contract,




and concludes with:



Quote:
and, if applicable, the prospectus, the Investment Company Act and applicable rules thereunder. Payments need not be considered as received until the contract application has been accepted by the insurance company, except that by mutual agreement it may be considered to have been received for the risk of the purchaser when actually received.




The contract is different than the separate account. One pays money to the insurer for an insurance product. This particular product allows the cash accumulation to be "invested" in a "management investment company" (subaccount) owned by the insurance company's separate account. There is nothing in securities law which prohibits investing the cash accumulation in a single security, it's just that insurers generally don't make that an option.



So, the understanding (and the answer to the question on the Series 6 exam) is that a Variable Insurance Product shall be described as life insurance (or, annuity) with its cash accumulation based on the investment component which is subject to market risk and other expenses.



When you really read the two documents I link to above, you'll see that much of the regulatory emphasis has to do with marketing the products, especially VAs to seniors. And when you understand it more thoroughly, that results from placing the overwhelming emphasis on the investment side of the contract, sometimes even to the exclusion of the insurance side.



Hope this helps to clear the air. Your understanding of the products may be influenced by the way you've been trained to market them, or by the words you've heard others, like the internal "wholesalers", use to describe them. Although you cannot be held accountable for their words, you are held accountable for your own, and you must understand the product properly to be able to market it properly.


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PostPosted: Tue Jul 20, 2010 9:53 am   Post subject:   

I don't care what they are first. You are making a statement that is factually false. You are saying that these products can't be referred to as investments. I've asked you to back it up. Your posts while interesting have nothing indicating that it is illegal to refer to these products as investments. In fact, the SEC constantly refers to these products as investments. This is directly from the executive summary in your link (emphasis mine):



Quote:
While variable insurance products may be appropriate investments for some investors, concerns have been raised about the sale of these products.



Variable insurance products are hybrid investments containing both securities and insurance features.

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PostPosted: Tue Jul 20, 2010 9:57 am   Post subject:   

Max, To be clear, I'm not arguing that these products aren't insurance products. They are. I'm just letting you know that you are wrong when you say that it is illegal to say that these products are investments.


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PostPosted: Tue Jul 20, 2010 4:07 pm   Post subject:   

Quote:
Variable insurance products are hybrid investments containing both securities and insurance features.




In a positive we can say that this category can be termed as hybrid Investment products.



Whether fjakruak want to promote it as an investment product ,he is right on his stance and



even if



MaxHerr want to name it as insurance product,he is also right on this issue.



But both have to admit that they can not claim that VA is a pure insurance/pure investment product.

My 2 cents to this discussion.........



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PostPosted: Tue Jul 20, 2010 5:58 pm   Post subject:   

They should be promoted in a way that accurately describes the product. However, that is not what this conversation is about. We are talking about what is legal and illegal. Max has made the claim that it is illegal to describe these as investment products. I'm pointing out that I have yet to see that statement ever made and if Max is correct, the SEC is guilty.


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PostPosted: Wed Jul 21, 2010 4:39 am   Post subject:   

Alright. The issue is my claim that it is unlawful to describe variable insurance products as investments. I stand by that statement. To demonstrate it in precisely that terminology may not be possible, because the lawyers who write securities laws themselves use convoluted language to describe their intent.



I'm sure that's not going to make you happy. And neither is having to follow the link



http://finra.complinet.com/en/display/display_main.html?rbid=2403&elem ent_id=2278



to the link to the complete PDF document "NASD Notice to Members 00-44" (July, 2000) [it's not possible to post PDFs on this site, unfortunately] , and your subsequent reading of that document. Because of the combination of NASD and NYSE Regulation that resulted in FINRA a few years ago now, the "rules" of the two organizations are still in the process of being combined and, as far as I know, a final version has not yet been released, so I am having difficulty finding the exact FINRA regulations that apply.



Basically NASD Rule 2310 (which is NOT FINRA Rule 2310) speaks to the issue of "suitability" of a registered representative's recommendation of any "security" (that's the legal term, we all tend to call them "investments" -- but securities do not have to be "investments" in the broadest sense) to a public customer. When you read Notice 00-44, you will see, explicitly, that Variable Life Insurance Products are described as "life insurance" and



Quote:
Similar to traditional life insurance, variable life insurance offers a death benefit that represents the amount the life insurance company is obligated to pay upon the death of the insured. In addition to the death benefit, variable life insurance generates an investment element usually termed the “cash value.” However, the insurance company that issues the variable life insurance policy does not guarantee the cash value. The cash value and in some cases, the death benefit, can fluctuate based on the performance of investment portfolios maintained by the insurance company in a segregated or separate account, and the interest earned on balances in general account options, if any. Generally, the insurance company guarantees the original face amount of the policy as a death benefit as long as the policy holder’s premiums are paid on schedule or the cash value is sufficient to meet each fee deduction.




The Notice goes on to describe a then-recent "Pruco Securities Corp. Letter of Acceptance, Waiver, and Consent", stating in part:



Quote:
. . . engaging in material misrepresentations and omissions, NASD Rule 2210 (Communications with the Public) for the use of misleading sales literature, and NASD Rule 2310 (Suitability Rule) for unsuitable recommendations and sales. (See Pruco Securities Corp. Letter of Acceptance Waiver and Consent (1).) The violations included:



Various misrepresentations, including statements that:



Variable life policies were not insurance but were an investment, savings, or retirement plan.



[and other violations which included]



Unsuitable sales to customers, including retirees and persons who did not know that they were purchasing insurance or did not want life insurance.




Now, you probably still won't believe me when I say it, but as a person responsible for compliance matters, when that notice came out, our office of general counsel informed us that we had to instruct our RRs that variable insurance products WERE NEVER TO BE DESCRIBED as an investment . . . they are life insurance (or annuities) with an investment component. That's what the Notice to Members above clearly indicates.



Part of the "problem" here is semantics. The Rules talk about "suitability of a security" for a customer. The Rules rarely, if ever, use the word "investments" because, as I mentioned above, a "security" does not have to be an "investment", and an "investment" is not necessarily a "security" if it falls outside the SEC Rules which require registration as a security.



But Variable Insurance Products are "securities" and have to be registered. That does not make them "investments" -- they are, simply, securities.



When you understand the "Rules" (as I and others who have been on the compliance side of things understand them), you would have, I hope, a different perspective than your current one.



Now that I have quoted as close to chapter and verse as I can seem to get, it's your turn to find and quote the SEC Rules (not their explanatory materials nor their commentary, but the actual rule that says they "are an investment") that describe Variable Insurance Products as "investments" as you laid claim to above.



Quote:
In fact, the SEC constantly refers to these products as investments.




And, personally, I'd like to see you post a link to the discussion of TIAA-CREF 403(b) annuities that you claim [mis]represent themselves:



Quote:
for example of TIAA-CREF for their 403(b) plans using variable annuities. These aren't described as insurance products. They are described as investment products because they are.




Why? Because, as you should clearly see from the NASD Notice to Members, failure to describe a variable product as an insurance product is a marketing violation (i.e., unlawful). And there are plenty of other NASD "Notices to Members" regarding variable annuities specifically.


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PostPosted: Wed Jul 21, 2010 10:06 am   Post subject:   

Wait a second, Max. You are the one who is saying that they CAN'T be described as investments. Your quote doesn't say that. Look it closely. It is talking about misrepresentations and ommissions. The problem with NASD 2210 and 2310 wasn't in the describing of the products as investments. The problem was in saying that they were not insurance products. They clearly are insurance products and this must be mentioned. That is not the same as saying that they can't be called investments.



The bottom line here is that despite your claim there is nothing that says that they can't be described as investment products, but, of course, the insurance component must be disclosed. This is legal:



"Let's take your 401(k) and roll it over and invest it in a variable annuity with XYZ Insurance company. The way it works is..."



Again, I agree that it needs to be described as an insurance product, but that is very different than saying that it can't be described as an investment product.


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PostPosted: Wed Jul 21, 2010 11:19 am   Post subject:   

With lots of jargon and discussion can somebody (either Maxx or fjakruak) come to some common conclusion?



Both have to agree on one single issue that legally they can market VA as an insurance product as well as an investment product.



But the fine line is no insurance agent (with few exception) bothers to explain in detail to their customer about the exact purpose of VA.

(Even customers are also not in mood to hear a big lecture just to purchase a policy from insurance company.They prefer it to handled by their representative.) and Most of the time their representative is their insurance agent only.

and thus all it becomes more difficult to educate a customer on the subject matter.

Although This may be a diversion from the topic of legal /illegal insurance/investment topic.But i think that was well needed.



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PostPosted: Wed Jul 21, 2010 2:24 pm   Post subject:   

DIM, I believe that Max and I have a common conclusion that all material facts of these products should ALWAYS be disclosed and the agent/rep has a responsibility to make sure the client understands what they are buying and the agent/rep has to make sure that the product is in the client's best interest.



Our disagreement is a legal one. I agree that a VA and variable life can be marketed as both an insurance and an investment product. Max is saying that it is illegal to call it an investment product.


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PostPosted: Wed Jul 21, 2010 2:29 pm   Post subject:   

Quote:
Both have to agree on one single issue that legally they can market VA as an insurance product as well as an investment product.




The primary MISUNDERSTANDING is that variable contracts are not an "investment product", they are "insurance contracts with an investment component." The SEC of late, has chosen to use the term HYBRID INVESTMENT which seems to contradict FINRA's discussion of the product, but the SEC's Rules are clear: the products are a "security" -- mutual funds are a "security", stocks and bonds and options are "securities". And all "securities" are regulated products.



That's fine with me, SEC regulates "paper", FINRA regulates "people" -- and it's the people who push the paper that need to push the paper properly.



So what does FINRA say about pushing the paper? If you have no need for life insurance, FINRA's "suitability rules" prohibit the recommendation of such products to you because they are far more costly than mutual funds.



If you have little or no prior "real" experience as an investor (far more than merely a contributor to a 401(k) plan), variable insurance products are probably unsuitable for you as an investor. So how do you end up involved in one? An insurance agent who is also a Registered Representative tells you about a way "to invest your money on a tax-deferred (or, worse, tax-free) basis, borrow money tax-free, and leave money to your heirs tax-free." Sounds great! See any mention of insurance in that bit of dialogue? That's what's wrong.



Now, if the RR says it just a bit differently, then I have no problem with the rest of the discussion as long as it is accurate: "Mr. Prospect, our company has an insurance product called Variable [insert your choice of Annuity or Life Insurance]. Like our other insurance products it provides the ability to grow money on a tax-deferred basis, except that this product also includes a feature that allows your cash accumulation to be invested in our company's separate account. Your money will be invested in the stock market where it can rise or fall, and you could lose value over time, but it is also possible to achieve growth that exceeds the rate of inflation, which is often referred to as "a hedge against inflation."



Any problem with that? Not in the least, except that most agents are not trained to talk about the products as clearly as that. And it usually leads to big problems with the regulators when discovered. Just isn't discovered frequently enough.



Quote:
no insurance agent (with few exception) bothers to explain in detail to their customer about the exact purpose of VA.




I'm not entirely sure that is an accurate statement, but sometimes people think they're getting a "trust" when they're only getting an annuity, which is clearly a different problem -- and it mostly involves fixed/indexed annuities.



But if it is accurate, then I don't know how a person could possibly make a PROPER decision to purchase one. And neither does FINRA when it files an enforcement action against the RR following its investigation of a complaint from a public customer. Just have to look at the long list of enforcement actions FINRA takes on a regular basis, resulting in suspension of or revocation and bar of RRs who make "unsuitable recommendations", which can include marketing a variable insurance product as an investment rather than as insurance.



The words of the "Notice" referred to previously (which are akin to a state's Insurance Regulations that enforce the state's Insurance Code) are not unimportant. They are GUIDANCE in how the firm and the RR are supposed to perform their duties properly and responsibly.



So here's the definition of ANY annuity, fixed or variable:



The purpose of any annuity is to provide lifetime income to the annuitant. Can an annuity do something in addition to than that? Yes, there can be annuity provisions that allow limited access to money in the contract without a surrender penalty, or guaranteed withdrawals without having to annuitize, even a guarantee of income perhaps without annuitizing, but the FUNDAMENTAL purpose is to create a contract between the insurer and the owner that, if annuitiized, will provide lifetime income to the annuitant, no matter how long that is. No other product in the financial services arena can make that same promise.



And the agent/RR should also add, for the informed benefit of the client, that, "Once you put money into an annuity, there is NO WAY to take money out without an income tax liability. Not you and not your beneficiary."



Having said that, the RR can properly say that, "A variable annuity MAY provide an advantage over a fixed annuity because the owner has the ability to directly affect the cash value during the accumulation phase of the contract. By directing the cash assets into a WELL-DIVERSIFIED mix of the available subaccount options in our company's separate account, it may be possible to achieve a rate of return that exceeds the rate of inflation, which can more than preserve the purchasing power of the future value of the contract. That can be an advantage of the contract."



[[ There are certainly ways to economize on the words one chooses to use, but all of the points above must be covered. ]]



"On the other hand, Mr. Client, failure to monitor one's subaccount performance can result in a loss of principal, thus negatively impacting the future value/purchasing power of the contract."



To discuss it in those explicit terms should provoke one of these two responses: (1) That's exactly what I'm interested in, or (2) I don't want anything like that. But could also invite, (3) Can you explain how it works? That's a good thing, and it's up to the RR to do a good job of explaining in order to "close the sale".



But even when interested, if a person is unable or unwilling to manage their contract appropriately, it is inappropriate for the RR to recommend the sale of that product to the customer (applies to either VAs or variable life insurance products). A fixed product could be the suitable recommendation.



Quote:
Even customers are also not in mood to hear a big lecture just to purchase a policy from insurance company.They prefer it to handled by their representative . . . and thus all it becomes more difficult to educate a customer on the subject matter.




Really? If that's true, then a VA/VLI/VUL transaction with that customer is UNSUITABLE and could cause the Registered Rep to lose his/her securities licenses, and the member firm to be sanctioned for failure to supervise.



An ethical agent/RR will turn that business away. Unfortunately, there will always be an unethical one willing to take it. Both the customer and the agent will get what they want, and it could also be wrong for both.



Quote:
the topic of legal /illegal insurance/investment




Perhaps this is where the misunderstanding lies. No one, least of all me, has said that the SALE of variable insurance products is UNLAWFUL . . . but they are NOT, according to securities law, to be MARKETED as "an investment."



[[ You sometimes see FINRA actions against a RR for recommending the "sale of unregistered securities" but not the "sale of unregistered investments" because there is no such thing. ]]



Does it happen frequently? Absolutely! Should it happen? Absolutely not! There are no Securities Policemen looking over the shoulder of every RR during their sales presentation. Other FINRA rules place the burden for that on the "Principal" responsible for approving the trade. It's one of the reasons that more and more insurance companies are creating "suitability" forms that must accompany the applications.



Can any of this stop the RR from misrepresenting the product to the customer? NO. Only the RR's ethics can do that. But, if the RR also deceives the Principal by falsifying the suitability paperwork, guess what? The FIRM is subject to sanction as well for its FAILURE TO SUPERVISE its RRs. And there are plenty of enforcement actions against FINRA member firms on that basis, too.



One last time: According to a proper understanding of securities laws, any variable insurance products must be described as an insurance product with AN INVESTMENT COMPONENT.



I'm not here to convince you, but I am here to educate you. You have to convince yourself. As the proverb states, "You can lead a horse to water . . . "


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PostPosted: Wed Jul 21, 2010 2:34 pm   Post subject:   

Quote:
I believe that Max and I have a common conclusion that all material facts of these products should ALWAYS be disclosed and the agent/rep has a responsibility to make sure the client understands what they are buying and the agent/rep has to make sure that the product is in the client's best interest.




100% CORRECT!!


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