Ledger selling offers a prospective buyer a financial product or investment based on a view of the prior performance history. The intent of displaying the ledger is to entice the buyer based on previous earnings for the investment. Ledger selling rests on the speculation that the investment will continue to earn interest or dividends at the same rate for the new investor, but use of the ledger adds an element of legitimacy to investments with higher risk and uncertain future earnings.
Legal Practices
Due to the volatility of many financial markets, including investments and insurance policies used for long-term investment, federal law mandates people working in sales and marketing fields using ledger selling follow general ethical sales guidelines. Materials used in the sales presentation must include specific dates, and profit ranges must clearly demonstrate past performance. Sales personnel making claims for future profits must put any such promises in writing as part of the legal sales contract. Some product sellers and professional business organizations, including the American Academy of Actuaries, hold sales agents and members to additional ethical standards for accuracy when representing past performance of a financial product using the ledger sales approach.
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Industries Using Ledger Selling
Although annuities and some financial accounts use ledger selling to motivate potential buyers to invest, firms selling life insurance are a key industry using the ledger approach to illustrate the strength of companies and the potential payouts for policy holders. Life insurance sales use ledger tables to show the interest accumulated by a variety of life insurance investment products.
Risks
The business portfolio used by company personnel in industries using ledger sales typically shows the interest or dividend earned on the product over the past year, or a longer period of investment, in the case of investments requiring a long-term financial commitment. Life insurance and long-term annuities are two such products. The ledger information offers no guarantee or warranty for the investor; it simply shows trends for prior years. Insurance firms offering life policies typically use reinsurance firms and various sorts of bond sales to cover the company's own risks. Failure of the insurance corporation to secure reinsurance or categorical bond funding to cover policy obligations means the potential failure to meet the life insurance contract obligations for groups of policy holders.
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Disclosures
Leger selling involves the use of a sophisticated and detailed disclosure that the buyer must sign as part of the contract. This disclosure protects the seller and the corporation offering the financial product from future lawsuits. The disclosure warns the buyer that the ledger represents past market trends and in no way guarantees any profit or performance in the future. Some annuity and investment products offer buyers the option to accept less profit by incorporating a contract clause guaranteeing a set amount of profit from the product each year, and others provide a guarantee that the buyer won't lose the initial investment during times when interest isn't paid to the investor and the financial product loses worth.
References
- AHI Insurance Services Inc.: Approved Insurance Continuing Education Course
- Transactions of Society of Actuaries: Final Report of the Task Force for Research on Life Insurance Sales Illustrations Under the Auspices of the Committee for Research on Social Concerns
- American Academy of Actuaries: Insurance Risk 101
- The Washington Post: The Risks of Life Insurance
- Lloyd's: Lloyd's Acts and Byelaws
- NYLEX Benefits: Banked-Owned Life Insurance (BOLI)
- Office of the Comptroller of the Currency: Description -- Interagency Statement on the Purchase and Risk Management of Life Insurance
- Office of the Comptroller of the Currency: Interagency Statement on the Purchase and Risk Management of Life Insurance
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