The great importance of life insurance protection to millions of consumers is widely recognized by the general public. This value has long been recognized by the Congress of the United States. As a result, the ownership of life insurance is encouraged by the U.S. federal tax system, which grants certain tax advantages to life insurance products. The two most important advantages are that the death proceeds of a life insurance policy are usually free from income tax and the growth of the cash value inside an insurance policy is not normally subject to income taxation. In addition, most states grant special protection for life insurance cash values and proceeds from the claims of creditors. Many states also provide special statutory protection for life insurance in the event of a policy-owner�s bankruptcy.

Despite this encouragement and the general recognition of the importance of life insurance, many people do not clearly understand how life insurance works. A 1975 report issued by the Life Insurance Marketing and Research Association (LIMRA) noted that 73 percent of the respondents claimed that they had trouble understanding their life insurance policies. For example, 54 percent did not know the difference between the cost of the policy and the premium they paid for it. Since the life insurance product line has gotten far more complicated in the years since that survey was conducted, it is not likely that the public would do any better today than in 1975.

The basic concept of life insurance as a method to spread the risk and cost of premature death is fairly easy to explain and understand. After this point, all simplicity is lost and the more one learns about life insurance contracts, the more complicated the subject becomes.

Giving advice about life insurance products is a particularly dangerous area for advisers (such as lawyers and accountants) who have not acquired specific expertise or education about insurance. While these advisers may be able to read and interpret the life insurance contract or analyze the numbers on an insurance illustration, these activities will not reveal the peculiarities of life insurance law or the nonguaranteed assumptions that created the illustration. The contract and illustration do not reveal the extent of the discretion the insurer retains to raise or lower the policyowner�s costs with respect to the policy�s nonguaranteed elements (mortality costs, interest crediting or dividend rates, expenses, and so forth). Consequently any advice given without access to and an understanding of these elements is inadequate.

For variable and variable universal contracts, which are subject to the disclosure rules relating to securities, this information can be discovered by a careful reading of the prospectus. For policies that are not subject to the securities disclosure rules, this information can be discovered if the insurer has published its answers to the insurance Illustration Questionnaire (IQ), which is produced by the American Society of CLU & ChFC. A company�s responses to the IQ must be obtained from the insurer.

Since a life insurance policy is such a complex contract, accurate and fair communication of information about how particular types of life insurance work has long been a subject of regulatory concern. For this reason, the life underwriter must be familiar with a wide variety of state and federal laws that govern advertising life insurance products. These laws are applicable to life insurance marketing in general but, as we will see in the first part of this chapter, certain types of life insurance advertisements are subject to even more rigorous regulation.