24 minute read
Today’s selling and buying environment requires new standards
By Richard M. Weber
Our country and its life insurance industry have experienced phenomenal growth since the turn of the last century. During the 20th century, we saw such interruptions as a 10-plusyear economic depression, two world wars and numerous foreign conflicts. From the 1905 Armstrong investigations to the era of “Father Knows Best” to the time just prior to the COVID-19 pandemic, life expectancies in the U.S. have risen from an average of 49 years in 1905 to 79 years in 2020 — a 68% increase.
In 1905, $5 billion in life insurance death benefits were in force. By 2020, that number grew to $20.4 trillion (a 4,080fold increase). By almost any measure, that’s progress.
Not so progressive are sales practice issues that seemingly move the industry three paces forward and then two paces (or four) back, reflecting the awkward and tenuous move away from “caveat emptor” and toward fiduciary standards of care. This is the ebb and flow of the issues reviewed in last month’s InsuranceNewsNet article “The Game of Life.”
There has been a growing concern for providing enhanced consumer protection in the purchase of increasingly complex annuities and life insurance products. This concern was prompted by the 2010 DoddFrank Wall Street Reform and Consumer Protection Act’s attempt to harmonize agent and broker sales behavior with that of fiduciaries. Concerns further increase with the existence of extremely high and upfront sales compensation. After all, doesn’t compensation drive sales behavior? But compensation won’t change anytime soon, notwithstanding attempts in the specialty area of “no-load” products.
Major regulations and rules impacting certain groups of advisors
1. Following the passage of the 1974 Employee Retirement Income Security Act, the Department of Labor attempted to broaden the extent to which advisors selling products or services to retirement plans would be deemed to fall under strict fiduciary standards. Implemented in 2015, the DOL’s updated fiduciary regulation was vacated by the U.S. Court of Appeals for the 5th Circuit in March 2018.
“DOL 2” was instituted in 2021. Both efforts were an attempt to impose fiduciary duties on those receiving fees and/or commissions when rendering financial advice and/or making product sales to retirement plans, expanded to include individual retirement accounts and Roth plans.
2. In 1979, the Society of Financial Service Professionals began requiring applicants to agree to abide by its Code of Professional Responsibility as a condition of membership.
3. In 2019, the CFP Board of Standards upgraded its fiduciary standards to require that all client discussions and planning performed by a CFP certificant be performed at a fiduciary level. Unstated, though implied, is that if something should have been discussed in the planning process but wasn’t, the CFP may be in jeopardy of a complaint or lawsuit in the event that a client claimed the CFP’s failure to provide advice created financial loss for the client.
This is probably most important in the area of personal risk planning, something many non-insurance advisors do not provide.
4. New York’s Regulation 187 went into effect for life insurance sales in New York state in early 2020, imposing “client best interest” and suitability requirements on agents and brokers in the sale of cashvalue and term life products as well as annuities. The regulation was suspended by the Appellate Division of the New York State Supreme Court in April 2021 and is now under appeal to New York’s Supreme Court. Most life insurance companies selling in New York continue to require agents and brokers to follow the broad requirements of the suspended regulation.
5. Also in 2020, the Securities and Exchange Commission and the Financial Industry Regulatory Authority introduced Reg BI to address client best-interest issues. While some commentators suggested Reg BI didn’t go as far as the requirements of the DOL or the CFP Board of Standards, it was at least an important first step. FINRA has already audited and assessed some fines for failure to meet the new standard.
All of these reflect current regulatory imperatives, addressing producer behavior by those who fall under various regulatory purviews. However, the broader question must be asked: What is the advisor’s responsibility to the client when it is merely a matter of ethical and professional imperatives?
Clerks are largely regulated by rules, generally with clear do’s and don’ts. Professionals are regulated by principles-based processes and procedures. These make it inherently more difficult to judge deficiencies in individual situations that may change the objective viewpoint.
Organizations weigh in
Finseca occasionally coauthors position papers with trade groups such as the American Council on Life Insurance. Finseca has a broad mission to protect the interests of agents and advisors, and as a result, it generally provides pushback as the counter to the pull for more regulatory sales practice solutions.
The Life Insurance Consumers Advocacy Center is a California state-focused notfor-profit entity with the mission to create greater transparency in life and annuity sales practices, especially in the area of “investment-focused” product sales. The need for LICAC and similar financial watchdogs is one of the more recent reflections of the broader issues first raised by Dodd-Frank and ending with New York’s Regulation 187.
Low/no load policies
So-called low/no load life insurance policies suppress or eliminate agent compensation yet represent an extremely small niche within the overall sales of life insurance products. Only a handful of insurers make such products available. The leading no/low load life insurer in 2020 placed only 189 policies, less than 1% of its total business, in this category. For context, all life insurers combined placed 5.6 million policies in 2020.
The appeal of low/no load comes from the erroneous belief that commissions are paid out of the customer’s account and, if eliminated, would enhance the value of the product. This is partly true but mostly wrong.
Commissions are not a charge against product account values but are paid out of the carrier’s general account. To avoid immediate terminations after paying commissions as high as the initial premium itself, the carrier will impose a “surrender” charge on immediate terminations, gradually reducing it to no charge after as few as five or as many as 20 years.
Because so few low/no load policies are sold as a percentage of the total, distribution costs are disproportionately high. Compared to commercial, commission-paying policies from quality carriers, the numbers do not justify the expectation.
Today’s issues — front and center
1. Premium financing (using borrowed money to pay life insurance premiums) has existed for a number of years, but the volume and breadth have increased markedly in the past five to 10 years. The concept works under the premise that policy values will increase at a greater rate than loan interest, along with the expectation that such loans will ultimately be extinguished by policy values.
At the same time, it is assumed the client has the means to pay premiums but has more profitable opportunities, especially in times of low borrowing rates.
In reality, however, there isn’t a good probability the policy sales illustration will deliver the expected benefits after an objective analysis using appropriate statistical measurements of the stock market’s financial ups and downs. Along with the maxim first stated by Aristotle, loosely stating, “We are drawn to the attractive impossibility rather than the less attractive probability,” we are currently in a market downturn in which indices and current segments are generally at 0% guarantees, while loan interest rates are rapidly rising. Adding to the concerns about these plans are the instances of loan commitments that are greater than the borrower’s net worth.
2. Life insurance enjoys federal and state income tax advantages not accorded most asset classes. These tax benefits were created with widows and orphans assumed to be the primary beneficiaries of life insurance. But these tax benefits are now being sold to wealthier clients for whom tax benefits are the primary — not secondary — feature.
Rising income tax rates, or at least the possibility of higher rates, prompted agents to promote the tax advantages of tax-deferred policy cash-value buildup and the subsequent absorption of those deferrals into tax forgiveness upon payment of the death benefit.
What’s your ‘best’ premium?
3. We recently saw a prominent financial newsletter pitch for the many benefits of a Tax-Free Retirement Account — a description free of any allusion to insurance, yet the underlying product is a life insurance policy. The idea is to suppress the death benefit component of cash-value life insurance to the greatest degree possible in favor of maximizing tax-deferred accumulation of cash-value and “retirement income” policy loans.
The typical illustration can show more than 4-to-1 tax-free cash flow — ostensibly
for retirement — compared to the “premiums” paid in the earlier years. However, because these products are so complex, it is highly unlikely illustrated expectations will be met. Carrier control over many of the switches and levers of policy credits and debits, and policy sales illustrations with constant rate assumptions make it inherently both volatility and the carrier’s control over key factors affecting the actual outcome of the proposed benefits and costs. 4. The newest twist on a “tax-free retirement account” occurs when the benefits are proposed through premium financing.
The bottom line in most cases is “It ain’t gonna happen,” potentially leaving the client with previously deferred policy gains subject to ordinary income taxes in the year the policy lapses.
5. In most of these new trends, policy illustrations — primarily for indexed universal life — are becoming the main thrust of the sale, with almost total dependence on the sales proposal rather than understanding how the policies work in the face of volatile stock market returns. The most likely result is it’s unlikely the illustrated expectations will be realized. It is not that the IUL is “bad.” But in a number of cases, the client is not given the full picture of the possibility the scheme will not work out as “illustrated.”
6. Remember all those wonderful tax benefits accorded to life insurance policies? There is a contingency rarely mentioned: The insured must die with the policy still in effect and paying a death benefit. If the policy is surrendered or lapses before it becomes a death benefit, there is immediate ordinary income taxation on any gains in the policy in excess of the policyowner’s basis.
According to a 2016 academic paper by Daniel Gottlieb and Kent Smetters, “nearly 88% of universal life policies ultimately do not terminate with a death benefit claim,” hence, taxes accelerate on all those previously untaxed policy gains.
7. Since the introduction of current assumption/universal life products, the typical buyer’s almost universal objective is to pay only the lowest possible premium. In many cases, this causes the client to sort through different policy illustrations to seek the lowest price.
But many of the factors resulting in a calculation of a planned (not guaranteed) premium are in the control of the agent running the illustration software. A planned premium is not the premium. The correct premium is the one that will sustain the policy until the insured person’s death, whether that’s in five years or in 50 years.
The policy must be assessed periodically to make sure that the correct premium is being paid for all the inevitable changes that will occur in various policy debits and credits that occur as time goes on.
Chasing the initial appearance of “best price” does not and cannot assure the buyer their policy will have a high probability
Weber’s ‘10 Commandments’ for PREMIUM FINANCING
THOU SHALT NOT,
I. Propose premium financing except for those prospective clients in need of large amounts of insurance who have the cash flow and/or assets to pay premiums directly — yet have the sophistication, savvy and resources to capitalize on the potential arbitrage inherent in premium financing proposals.
II. Use the phrase “free life insurance” in conjunction with premium financing.
III. Recommend a plan of premium financing when it is the only way to pay the premium.
IV. Assume that the client’s death is the only way to end the arrangement.
V. Exclude the client’s other advisors from the discovery and decisionmaking process. VI. Proceed with a recommendation unless all the advisors in No. V are in agreement that it makes sense for the client to proceed.
VII. Proceed without an exit strategy that can be implemented immediately (say, the day after Lehman Brothers defaults and all premium financing lenders call their loans/letters of credit).
VIII. Recommend recapitalization of interest.
IX. Provide only one scenario of the interaction of policy credits, policy expenses and loan interest rates.
X. Project insurance credits high and loan rates low without the opposite scenario prominently portrayed and discussed.
of being in force whenever death occurs. We need a new paradigm for “Goldilocks premium funding”: not too much, not too little — but just right.
8. Rather than seeking the lowest price, the better paradigm is for the buyer to consider the minimum probability of success they are willing to accept for the insurance policy and its duration. Does a 50-50 flip of a coin represent a sufficient probability? Hardly. Most clients — including those of great wealth — typically want a probability of success of at least 80%, 90% — even 100%.
With that vital insight, the calculation of a universal life premium then can be made by determining the current payment that will meet that probability threshold. After two or three years, the policy should be reevaluated based on current account values and other changes that may have occurred. This periodic reassessment process should be deployed throughout the insured person’s life.
A new paradigm and a new management strategy
As readers can see, the originally solved best premium in this example has less than a 10% chance of sustaining to age 100. This client’s average life expectancy is age 91. In this case, the best premium produces unacceptable odds of success.
Alternatively, armed with this information, few clients (and their agents) would be willing to take a chance that the best premium will sustain the policy to whenever death occurs. A client wishing to ensure the availability of the policy’s death benefit regardless of the many ups and downs likely to occur in a lifetime will need to use the probability of success paradigm for effective lifetime management of their policy.
Richard M. Weber, MBA, CLU, AEP (Distinguished) is a 56-year veteran of the life insurance industry, having been a successful agent, a home office executive, a software designer, author of four books and more than 400 published articles, and an educator. He is the co-creator of Certified Insurance Fiduciary, an online program for advisors wanting to enhance the scope of their advisory services. He may be contacted at dick.weber@innfeedback.com.
Overcome client discomfort about discussing DI and LTC
A lifetime of relief and security is well worth a few uncomfortable conversations.
By Scott Fligel
Disability and long-term care can be unpleasant topics to discuss with clients. Most people do not enjoy considering the possibility of becoming disabled or needing assistance with daily life. Discussing the idea that their families may not be financially prepared to support them in those scenarios can be difficult as well. These discomforts lead many clients to avoid the discussion altogether.
The worst possible outcome of being financially unprepared for disability or long-term care needs, however, is far
more unpleasant. This is especially true if the client assumed their loved ones were equipped to handle those needs. Financial advisors must make sure they discuss these important protections with clients — because a lifetime of relief and security is well worth a few uncomfortable conversations.
Why planning is crucial
A person’s earning potential is one of their most important assets. This is likely old news to financial advisors, but it may be a different story for clients. We now live in a world that pulls our attention toward an ever-increasing number of flashy investment options and strategies, such as cryptocurrency, real estate and the FIRE (financial independence, retire early) movement. Because they’re inundated by an incessant stream of news articles and social media posts, it’s not surprising that some clients will forget they are their most valuable asset.
The prospect of losing that earning potential is so scary that most people prefer not to think about it, or they think about it only in the context of others. But this avoidance hides the reality that it’s statistically common for someone to lose their earning potential through acquiring a disability or need for long-term care. One in four Americans will experience at least temporary disability before retirement age, and 7 in 10 seniors will require some form of long-term care. This means advisors may need to start a discussion that clients may not want to have.
Making the conversation easier
Before approaching this topic, or any other that can set off emotional alarms for your clients, advisors should make sure they have a solid relationship with the client.
This relationship must be built on trust and a mutual conviction to act in the client’s best interests. Most people want advisors who ask thoughtful questions, actively listen and offer feedback or recommendations when truly appropriate. Taking this approach makes it far more likely that advisors will be taken seriously when they bring clients into unpleasant territory.
Once it’s time for the conversation, begin by asking questions about a client’s family and friends — have any of them needed assistance with day-to-day life? Most people will say yes. Ask them if they understand the true financial impact of lost income, from needing assistance themselves or from taking time off from work to care for a loved one, and most people will say no. At this point, you can outline the potential costs of care in their location and the One in four Americans will experience at least stress families often face when they are without coverage. The final point of discussion should be an explanation of how much temporary disability disability or long-term care insurance can before retirement age, save your client. This is especially true for and 7 in 10 seniors will disability insurance, which typically has a require some form of long-term care. low annual premium. Conversations with clients about disability and long-term care can be incredibly daunting. Not only will some clients initially not want to engage with the topics, but the details can be emotionally difficult for almost anyone to digest. But tackling the problem head-on, as uncomfortable as it can be, is far superior to losing a lifetime of built-up assets in just a few years because of an unplanned-for need for care.
Scott Fligel, CFP, is a wealth management advisor with Northwestern Mutual and Fligel Financial Services. Scott is a 24-year and lifetime MDRT member and a Top of the Table qualifier. He may be contacted at scott. fligel@innfeedback.com.
Keeping up with the LTC market
The long-term care market continues to change, and several factors make it even more complex.
By Carroll S. Golden
As we begin Long-Term Care Awareness Month, it’s important to recognize a few basic issues shaping today’s long-term care landscape.
Advisors are likely to face several challenges when working with clients on comprehensive plans. First off, few people have planned for potential extended or LTC needs, and many consumers and professionals lack in-depth education about the scope of planning options. This includes a large cohort of maturing baby boomers, many of whom will require some level of care as they age.
Complicating the outlook is that COVID-19 highlighted and exacerbated the shortage of skilled and unskilled care providers. The rising costs of health care and prescription drugs show no sign of abating.
Consumers consistently fail to plan for LTC, so crisis planning is becoming more common. The results are negative consequences felt by family members and friends as well as federal and state budgets.
Many consumers do not understand current programs or are misinformed about who qualifies for long-term services and support. The oldest of the baby boomer generation are in their late 70s, and many mistakenly believe government Medicare and Medicaid programs are equipped to handle their LTC needs. In reality, longevity is impacting programs not designed to handle the growing volume or required length of care. These are some factors influencing state and federal governments to consider legislative options.
Government LTC proposals
NAIFA’s Limited and Extended Care Planning Center — supported by sponsors specializing in all aspects of limited, extended and long-term care — formed a legislative working group that follows, discusses and influences legislation relating to federal and state LTC proposals. The LWG consists of participants from carriers, broker general agencies, work site specialists, advisors, agents and NAIFA staff. The group stays up to date about both federal and state initiatives.
Developments in the federal space the group is engaged on include:
WISH ACT, the Well-Being Insurance for Seniors to be at Home Act:
» Would charge 0.6% payroll tax (50/50 cost share by employee and employer). » Elimination period is one to five years — means-tested by income.
Social Security Caregivers Credit Act:
» Would provide retirement compensation in the form of Social Security credits to individuals forced to leave the workforce to care for loved ones.
Better Care Better Jobs Act:
» Would expand Medicaid to home and community-based services. » Increased wages and benefits for paid caregivers. » Funded by Medicaid in the federal budget to cover home and community-based services.
Credit for Caring Act:
» Would create a nonrefundable tax credit of up to $5,000 for caregivers.
The Long-Term Care Affordability Act:
» Would allow use of qualified money to purchase LTC insurance. » Excludes from gross income retirement plan distributions up to $2,500 a year to pay premium. » No income tax or pre-age 59 ½ penalty on distribution used.
At present, none of these proposals is moving forward.
States move in
State budgets are becoming increasingly stressed as demands for services and support for LTC increase. Washington is the first state to pass legislation establishing a publicly funded LTC program. » Funding will come from a mandatory payroll tax: 0.58% of all W-2 income, with no cap or limitation. It will be assessed via payroll deductions. » Employees had until Nov. 1 to apply for an exemption if they had qualifying private traditional LTC insurance, group LTC coverage, linked and hybrid life, or annuity hybrid policies in place. » The maximum lifetime benefits are $36,500 (adjusted annually with Consumer Price Index). » Gov. Jay Inslee and Washington Democratic legislative leaders announced an agreement to delay the new WA Cares payroll tax on employees as they address issues with the new LTC program.
Acknowledging the importance of planning for LTC needs is an important first step. However, the program is undergoing further clarification. Other states — including California, Michigan, Minnesota, South Dakota and Vermont — may soon follow suit with public-option LTC plans of their own.
California established the Long-Term Care Insurance Task Force, which will present a feasibility report to the state’s insurance commissioner, governor and legislature early next year. Significantly, the program is not expected to give state residents notice of a period to purchase qualifying insurance to opt out of the tax once the legislation is adopted. Hawaii has proposed a plan (Kapuna) focused on supporting working caregivers.
The long-term care industry is responding to these initiatives by working toward developing supplemental products that will enhance public-private programs. Additionally, carriers are creating new innovative products to expand options for consumers to plan for funding care. Cooperation between states and carriers concerning efficient product approval and consumer education will be essential to the success of any program. It is important that advisors stay well informed during LongTerm Care Awareness Month and throughout the year to understand how these developments might impact clients.
Carroll S. Golden, CLU, ChFC, LTCP, CASL, FLMI, CLTC, is the executive director of NAIFA’s Limited and Extended Care Planning Center. She is the author of How Not to Tear Your Family Apart. She may be contacted at carroll. golden@innfeedback.com.
It’s becoming harder to become — or stay — financially literate.
By Keith Golembiewski
Annuities, guarantees, term life, surrender charges, health supplemental plans, voluntary benefits, critical illness, Roth 401(k), target date funds, living benefits, riders — and the list goes on. The financial services lexicon is complex and continues to grow. Things get further complicated when you bring up major financial themes such as savings, budgets, insurance coverage needs, debt, taxes and personal longevity. It’s hard for anyone to have the skills to make confident financial decisions.
Although the COVID-19 pandemic has increased awareness of life insurance and health, knowledge on financial topics is still abysmal. According to the TIAA Institute-GFLEC Personal Finance Index survey, U.S. adults could correctly answer only about half of the financial literacy questions. Eighteen percent correctly answered more than 75% of the index questions, while 23% correctly answered 25% or fewer of the questions. As bad as these results were, the grades were even worse for Generation X and millennial respondents.
In fact, data from the FINRA Investor Education Foundation’s National Financial Capability Study shows a strong correlation between respondents with higher financial literacy (scoring above the median on a seven-question financial literacy quiz) and those who feel financially secure. That finding is exacerbated when, according to LIMRA’s 2022 Insurance Barometer Study, 2 in 5 parents say they are barely or not at all financially secure.
The strength coach analogy
As a 46-year-old coming out of the pandemic, I made my physical fitness a priority. Although I can’t control every aspect of my health, I do want to increase my odds of having a long and active retirement. If the respondents indicating the use of social media sites for financial purposes more than doubled in the past three years, to 53%. Your online presence should not be about pushing product. Connect the dots for your clients.
2. Be human. Bring expertise and empathy to topics like end-of-life, adult care and holistic advice. According to LIMRA’s 2022 Insurance Barometer Study, 40% of respondents felt discomfort during end-of-life discussions. Advisors and agents can build trust with clients by starting with basic topics like emergency savings, budgeting and longevity.
Use of Social Media for Financial Topics by Generation*
* Among respondents using sites for financial information and/or communications. Source: LIMRA
I weren’t staying active, it would become harder and harder to exercise and more likely that I would have health issues later in life. I stay active by running every other day, and I use fitness apps that provide on-demand coaching, gamification and ways to track my performance. While I’m using technology to support my fitness, many of my friends use personal trainers and strength coaches. Improving your physical fitness doesn’t have to be a one-size-fitsall approach.
The same logic can apply to finances. By investing time and effort in reading books, listening to podcasts, or using budget tools and programs, some might be able to build financial literacy on their own. Others will need a financial professional, friend, coach, trainer or advisor to increase their financial knowledge, ultimately leading to financial success.
From inertia to action
Why don’t more individuals invest time and effort in improving their financial acumen? Research shows that time, topic discomfort and being overwhelmed are three of the key areas of inertia. So what can you do? Here are three things to consider.
1. Have a social media presence. In LIMRA’s 2022 Insurance Barometer Study, 3. Connect at a deeper level. People love stories. They want to feel emotions. Storytelling is powerful because it can create an emotional connection between you, your personal brand and the client. You can share 1,000 facts with a client with little success, but a powerful story will have a greater chance of moving a client closer to action.
Keith Golembiewski is senior director of LIMRA’s strategic research program. He may be contacted at keith.golembiewski@ innfeedback.com.
