InsuranceNewsNet Magazine - January 2015

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MAGAZINE

January 2015

2015 ANNUITY FORECAST COULD THIS BE THE BRIGHTEST YEAR EVER?

PLUS

HOW TO TURN A NO INTO A YES An interview with Tom Hopkins

THE BROOKSTONE DIFFERENCE

YOUR PATH TO ATTRACTING AND RETAINING

MORE CLIENTS

SUPPORT

TOOLS

PLATFORM

STATE-OF-THE-ART TECHNOLOGY

MARKET REPORTS & COMMENTARY

ALL-INCLUSIVE INFRASTRUCTURE

DYNAMIC TRAINING & EDUCATION

STRATEGIC PARTNERSHIPS

PROVEN INVESTMENT MANAGERS

EFFECTIVE MARKETING PROGRAMS

PORTFOLIO MANAGER THOUGHT LEADERSHIP

FULL-SPECTRUM INVESTMENT SOLUTIONS

PERFORMANCEBASED INCENTIVES

INVESTMENT PLANNING TOOLS

STRATEGY DIVERSIFICATION

360° OPERATIONAL SUPPORT

MORNINGSTAR INSIGHTS

OPEN COMMUNICATION

Our Brookstone advisor program supplies you with an all-inclusive platform for long-term support, learning and growth. We’ll provide all the tools, training, marketing resources and incentives you’ll need to successfully build your business.

ADVISORS

LEARN MORE ABOUT HOW BROOKSTONE CAN HELP YOU BUILD YOUR BUSINESS

Visit www.WhyBrookstone.com to get your Why Brookstone Information Kit, for free.

GUIDED SOLUTIONS BROOKSTONE

BRIDGES ADVANTAGE

SERVICES. for longyou with a platform program supplies training, marketing Bridges advisor Our Brookstone provide all the tools, and growth. We’ll your business. term support, learning, you’ll need to build resources, and incentives

WIDE-RANG ING

BROAD INVESTMENT TURN-KEY ADVISORY

with investment solutions We offer risk-management and support to help an all-inclusive infrastructure businesses smartly and grow financial start, build, and leverage our userprofessionals can efficiently. Financial events, investment year- round training marketing friendly platform, support, and full-range gain solutions, operational allow them to flexible resources services. These and economies proven methodologies servicing their access to all our more time to spend of scale – while finding clients. strategies, and new technologies, the most We actively pursue to offer BCM advisors to help investment managers solutions and platforms so current advisory ongoing training business. We provide technologies streamline your on these innovative you can stay up-to-date and developments.

EXTENSIVE TRAINING

/ EDUCATION

training, process for advisor We offer a streamlined expansion so advisors can business clients education, and decisions for their make the most informed an established onboarding From outreach, we and their business. online and in-person universe of process to ongoing and leverage our help advisors understand their practice, conduct sales market long-lasting investment vehicles, the close, and build appointments, make relationships.

OPTIONS

Founder and CEO and direction of Under the vision methodology delivers a proven Dean Zayed, BCM based on a riskinvestment solutions and powerful and high-quality We supply a flexible separately managed approach. options – BCM strategies, Portfolios range of investment Managed and Morningstar managed accounts, from conservative needs of clients, INVESTMENT APPROACH – to meet the diverse to moderate to growth.

LATEST SOLUTIONS

BALANCED PERSPECTIV E.

We focus on managing TECHNOLOGY

investment risk to preserve and wealth in any market.

f STATE-OF-THE-ART grow

f ALL-STAGE OPERATIONAL

STRATEGIC DIVERSIFICATION

We believe that diversification across STRATEGIC PARTERSHIPS fcontrolled multiple riskstrategies helps manage wealth performance and for both protection. While each of our model strategies has its own methodology and diversification, all incorporate some form of risk management against large-scale to guard losses. conservative, moderate, Our strategies encompass and growth-oriented performance goals to offer a full spectrum options to meet each investor’s tolerance of investment for risk.

CAPITAL MANAGEMENT

INVESTMENT OPTIONS

We provide a robust money comprised of well-diversified,management platform risk-adjusted portfolios.

We offer both customized solutions and strategies BCM wealth management from specialized managers (sub-advisors) money risk-managed philosophy.who pursue a complementary This broad selection for effective long-term allows strategies customized investor’s specific to each risk/reward profile.

BROOKSTONE

INVESTING

STRATEGIC DIVERSIFICATION

SUPPORT

FULL SPECTRUM

INFRASTRUCTURE RISK-MANAGED f COMPREHENSIVE METHODOLOGY Our approach is directed toward defending against significant TRAINING & EDUCATION the f CONTINUOUSimpact large drawdowns can have on the longterm growth of an investment portfolio. develop and implement We SOLUTIONS therefore strategies INVESTMENT focused risk. Specifically, f FULL-SPECTRUM our strategies emphasize on minimizing to broader volatile low correlation market activity, whether through hedged equity with SERVICES the use MARKETING of protective options, f COMPLETE strategies to tactical dynamically other risk management adjust to market conditions, or practices.

POLICY f OPEN COMMUNICATION

COMPREHENSIVE

BROOKSTONE

RISK-MANAGED

ROBUST RESOURCES

CAPITAL MANAGEMENT

OUR COMPREHENSIVE

OF OPTIONS

PLATFORM

PROVEN INVESTMENT MANAGERS BCM has partnered with additional independent investment firms that each strategy to our platform. bring an exceptional As sub-advisors, offer a diverse range they of investment strategies are managed by that firms with proven excellence in managing money.

PARTNERING WITH MORNINGSTAR BCM has partnered with Morningstar to harness multiple strategies from their Managed Portfolios Series, allowing us to offer investors a broad range of investment options — whether conservative, or growth-oriented. moderate BCM STRATEGIES

We also provide customized BCM wealth management solutions to help advisors develop and implement an intelligent long-term investment strategy geared toward unique client goals, resources and tolerance for risk.

OUR WRAP FEE

PROGRAM

BCM’s Wrap Fee Program “wraps” both the advisory services fee and the transaction fees into a single fee charged to the client.

This means a client’s the same regardless costs are of the number of transactions in an account (as opposed to a non-wrap program client pays these where a fees for extremely cost effective each transaction). This could be if your clients plan frequent trading to experience or rebalancing.

LETTER FROM THE CEO

OPPORTUNITY STARTS HERE In an industry that has grown increasingly complex and unpredictable, Brookstone Capital Management has been able to excel with investment strategies that take an intelligent, analytical approach to risk and reward.

It’s the same approach we take to our relationship with our Investment Advisor Representatives (IARs).

We know that open communication, comprehensive support and a broad range of innovative investment strategies are integral to helping our IARs serve their clients and grow their business.

That’s why it’s our goal to create an interactive environment with our IARs that gauges the up-to-the minute attitude of the marketplace and illuminates how and why certain strategies work in the current economy.

With Brookstone, you’ll gain the advantage of having your finger on the pulse of market behavior, and you’ll learn how to react. We’ll give you total access to our investment intelligence and highlight the strength of our proprietary strategies accordingly.

Ultimately, we’ll keep you one step ahead on successfully managing your clients’ wealth.

We’re excited about the opportunities in front of us, and I would look forward to adding more talented advisors like you to our fast-growing team.

Sincerely,

BROOKSTONE AT A GLANCE Founded: 2006 Services: investment management through a select network of independent advisor representatives Portfolios: conservative, moderate, growth Investment strategy: analytical approach to risk and reward Founder and CEO: Dean Zayed, JD, LLM, CFP® Ranked: #27 on Financial Advisor magazine’s 2013 List of Fastest-Growing RIA Firms Ranked: Financial Times Top 300 RIA List for 2014 Assets under management: over $1.4BL

Dean Zayed CEO, Brookstone Capital Management

www.WhyBrookstone.com

THE PATH TO A BETTER ADVISORY BUSINESS

STARTS HERE

www.WhyBrookstone.com

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How to Attract and Convert High-Paying “Whale” Clients...

Without Cold Calling, Begging for Referrals, or Ever Doing Another Dinner Seminar Again.

From the Desk of Frank Kern La Jolla, CA. December 2014 If you’re like most advisors you have at least one of these three problems: 1. You don’t have enough leads.

2. The leads you DO have don’t become clients.

3: The few who DO become clients don’t pay as much as you’d want to.

If any of these problems sound familiar, keep reading ... because I have been where you are, and there’s a solution.

First, out of respect for your time, let me tell you what the solution is NOT: The solution is NOT about working harder and getting more leads.

And it’s NOT about trying to turn yourself into a “famous” advisor by blowing a fortune on your own radio show or TV ads.

It’s NOT about trying to convince a bunch of CPAs to refer you, and it’s definitely not in doing more dinner seminars or sending out even more invitation mailers.

The REAL solution is in making the decision to ONLY work with high-paying, high-value clients, and then creating a super-simple system that attracts them and has them calling YOU. Here’s how you do it...

STEP 1: FISH IN THE WHALE POND ONLY. The first step is to really get clear on who your ideal client is and fish in the right pond, because once you do, you bypass all the people you don’t want to work with and you ONLY end up talking to ideal clients who can and will net you the money you want.

When you focus 100% of your marketing efforts on identifying and marketing to only the ideal high-net-worth clients, you’re doing what’s called “fishing in the whale pond” as opposed to spending money to market to people who have no value to your practice whatsoever. Case in point: If you’re like most advisors, right now, you’re sending out 10,000 postcards every month inviting people to a dinner seminar. And, if you’re like most advisors, only 1,000 or so of those people are the

type of “ideal client” you’re looking for.

The other 9,000 either have no money, aren’t ready for your service or simply aren’t right for you.

Imagine if you could isolate the high net worth “whales” from that group and only market to those people? That’s why fishing in the right pond—getting clear on your ideal client and only marketing to them — is crucial.

STEP 2: USE “WHALE BAIT.” Let’s face it. High-net-worth clients are different than “typical” clients. They have different needs, they respond to different things, and they’re discerning.

If your main way of getting clients is to offer dinner seminars, chances are you are rarely (if ever) attracting whales.

Why? Because you’re using what’s known as “minnow bait.”

A free dinner in a hotel ballroom (or somewhere similar) isn’t really appealing to a whale. He can buy 100 dinners just like it without batting an eye.

Let’s assume that you’ve followed step 1 and you’ve identified your ideal client. And for the sake of illustration, let’s assume that client is someone who recently sold a business.

Now that we’ve identified that “whale,” what is our next step?

It’s to identify the proper “whale bait” to attract him.

In this case, that “whale bait” would be a customized plan that’s specifically designed to help people just like him who have recently sold a business.

(Notice how this is dramatically different from generic “minnow bait” like a free dinner seminar about “retirement.”)

Now, the way we present that “whale bait” is through the Irresistible Intrigue Process.

The “Irresistible Intrigue Process” has six steps and it’s designed to cause whales to pursue you … fully knowing that your main objective is to get them as clients.

The offer is usually presented as a simple letter sent to the ideal prospect and it has six steps.

So what do you need to use instead?

THE IRRESISTIBLE INTRIGUE PROCESS:

“Whale bait.”

1. Offer your help for free.

Here’s what that means.

On your letter, you might use a pre-headline that says, “If You Have Recently Sold Your Business, Please Read Every Word of This Important Letter Because it Directly Affects You.”

High-net-worth “whales” believe they are special.

They believe they are different. And they want to be treated accordingly.

Now, if we know they believe they are special and different, what does that tell us? It tells us they want something that’s created just for them.

Something custom.

Something exclusive.

How do you give them what they want? You offer them the best “whale bait” there is: A customized plan to meet their needs, free.

And the way you do that is really, really simple. You just use an exclusive process known as the Irresistible Intrigue Offer.

And under that, you might have a headline that says, “Would you like me to customize an asset protection, tax reduction, wealth preservation and growth strategy specifically for you …for free?”

You don’t have to use hype. You don’t have to sound unprofessional.

You sound like a solid person genuinely offering to help them get the result they want.

2. Explain the benefits of your free help.

STEP 3: USE THE “IRRESISTIBLE INTRIGUE” PROCESS TO HAVE THEM CHASING YOU

In three or four sentences, you may say, “When we talk, I will help you come up with a customized plan to reduce your capital gains tax exposure, show you how to get guaranteed income from your assets to replace the cash flow you’re used to, and how to reduce your exposure to downturns in the stock market.”

Before I show you how to do this, let’s take two steps back.

That’s it. You simply write out the three or four most important benefits you can help them with.

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You don’t talk about how great you are, how long you’ve been in business, or any of the usual hyperbole that other advisors resort to.

3. Explain the reason you’re doing this.

This dramatically sets you apart from everyone else because you’re going to be very up front about the fact that you’re an advisor who wants them as a client. This is, of course, the polar opposite of what other advisers do.

Here, you can say, “The reason I’m offering this to you is because I genuinely enjoy helping people protect and manage the wealth they’ve created from recently selling a business. I’ve been doing it for 20 years, and it’s a passion of mine. The other reason is, I’m a financial advisor specializing in helping clients who recently sold a business and some of the people I speak with ask to become clients after our conversation.”

Now — I know what you’re thinking. You’re thinking that as soon as they see you’re going to want them to become a client, they’ll head for the hills thinking you’re just another salesman.

And at this stage in the process, you’re right.

That’s why we’ve got the following steps in place: 4. Eliminate sales fear.

At this point, the client reading your letter may feel like you’re going to sell them on your firm once they are on the phone with you.

But that’s not the case, because you now say, “I want you to understand that this is not going to be a sales pitch in disguise. In fact, you’re going to find our conversation to be extremely valuable because....” and you list two or three things you will do for them on the call. This is all about serving them.

Again, you don’t tell them how great you are, or how long you’ve been in business, or any of the “usual stuff” that everybody else does.

Instead, you simple let them know specifically what you’ll be helping them with, for free, when you talk to them.

“I’m so certain you will find our conversation to be of great value, that in the event you don’t find it valuable, and you tell me I’ve wasted your time, I will immediately write you a check for $1,500.00 on the spot to compensate you for the 45 minutes we have spent together.”

This creates Irresistible Intrigue. They HAVE to know what is so good about this conversation that you would put it all on the line like this.

So now they’re interested but we’re not done. We need to do two things.

First, we need to make sure we protect ourselves from having to talk to someone who isn’t an ideal client.

And second, we want to use some powerful psychology to turn the tables and have them pursuing you… instead of the other way around.

Here’s how to do both in one fell swoop: 6. Take it away.

By now, they are curious. They are intrigued.

They’re considering talking to you.

So, we start taking away the opportunity for them to talk with us as a means of making them want it even more.

You could do it by saying, “However, there’s a catch. I can only be of benefit to people who meet certain criteria. Here they are.....” And you list four or five criteria you would want your ideal client to have.

Your criteria is completely up to you … simply take the “whale criteria” you came up with in step one and use it here at this phase in your irresistible intrigue process.

Now, once you’ve listed your criteria, it’s time for step seven.

7. Tell them what to do next.

At this point you simply direct them to fill out a brief questionnaire online.

At this stage, they’re slightly less skeptical and wary because you’re being so up-front and transparent with them, but they’re still not committed to talking to you.

You could say, “If this sounds like you, please go to my website and fill out my brief questionnaire so I can best be prepared to help you when we talk…” and you state the website.

That’s why we have step five.

You can explain in the letter that, “After I receive your information, I’ll review it. Assuming I’m confident I can help you, I’ll have my assistant contact you to schedule an appointment.”

5. Create Irresistible Intrigue.

Even though you have said there will be no sales pitch, they still may not believe you. Now, the way I solve this issue could be a bit different than how you will solve this issue, and when me and you talk, we can discuss how to ensure you use what I’m about to share with you in a way that is complaint.

Let me tell you how I do it, and then we can brainstorm together later how to do it in a way that is compliant for you.

The way I create Irresistible Intrigue is by saying,

THE NET RESULT The net result of what I just showed you is an ideal prospect who knows who you are, knows what you do, knows you want him as a client, and has jumped through a few hoops just to get to talk to you.

This ensures you are only dealing with ideal clients to whom you can provide massive value in your initial conversation with them, and this is what causes

those clients to want to work long term with you.

You provide incredible value up front, and as a byproduct, they chase you.

Now, you won’t get a million people responding to you, but you ARE going to get people who are perfect for you and they have jumped through hoops to get to you.

Thus, the Irresistible Intrigue Process eliminates leads who are not a right fit and ensures the people you get on the phone or in your office will more easily become high-paying clients.

Now, knowing all this, it’s easy to see how you are very close to transforming your business.

You don’t need more leads. You need better leads who are predisposed to want to have you as their advisor and coming to you, asking you for the privilege of your time.

If all of this is intriguing to you, I’ve set aside some time to show you how to take this process I just gave you, and make it ten times more powerful by deploying a very simple marketing sequence.

Free Online Workshop: How to Create and Deploy a Complete A-Z WhaleGetting System In this free online workshop, you’ll discover: • Exactly how to identify and locate whales in your area.

• Exactly what to send them BEFORE you use the Irresistible Intrigue Process.

• The specific steps for making them want to become your client … before you ever speak to them.

• The exact words to use when scheduling their appointments.

Plus, you’ll get complete handouts and bonus material including a detailed process map that lays everything out for you so you can deploy it as easy as doing a paint-by-numbers painting.

WARNING: Space is very limited.

To claim your seat for free, simply visit WHALECLIENTS.COM

IN THIS ISSUE

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JANUARY 2015 » VOLUME 8, NUMBER 1

24

ANNUITY

46 R egulatory Moves Crumble Walls Between Fixed and Variables

By Linda Koco A discussion on contingent deferred annuities leads to speculation on whether the “walls” between fixed and variable annuities could be coming down.

50

INFRONT

10 More Women In Leadership Positions: Are We There Yet?

50 T he Case for Annuities in Qualified Retirement Plans

FEATURE

24 2015 Annuity Forecast

By Steven A. Morelli Annuities have experienced a warming trend recently, but some forecasters warn that the trend could turn stormy and cold. A look at the various predictions and what they mean for advisors and their clients.

By Linda Koco A look at the challenges and opportunities for women who aspire to leadership in the industry.

By Jim Pedigo An option that allows for ongoing guaranteed growth with principal protection, including access to principal at any time, even in retirement.

HEALTH

54 V oluntary Can Ease Clients’ Growing Health Care Worries

By Tye Elliott A look at key trends that the workplace benefits sector can expect to see this year.

FINANCIAL

58 Variable Annuities Get Back to Basics With Investment Focus

12 INTERVIEW

12 How to Turn No Into Yes

An interview with Tom Hopkins Sales professionals hear the word “no” many times in their careers. Tom Hopkins, co-author of When Buyers Say No, wants to help you turn “no” into “cha-ching!” In an interview with InsuranceNewsNet Publisher Paul Feldman, Hopkins says that “no” is not a rejection, but permission to begin the next phase of the sales process.

4

36 LIFE

By Al Dal Porto The makeover of variable annuities in recent years is changing their value proposition for advisors and clients.

60

36 Private Loan Strategy Protects Estates Now Without Gifting

By Russell E. Towers A loan and trust strategy can help “wait and see” prospects make a decision.

40 Leveraging Low Interest Rates to Avoid an Escalating Estate Tax

InsuranceNewsNet Magazine » January 2015

By J. Leland “Lee” Davis Moving bank savings into large life insurance policies with high early values could be the right solution for today’s wealthy client.

BUSINESS

60 Stories That Will Inspire Action

By Thomas Cooper When your clients understand that you face the same personal issues they do, it builds trust.

Life Insurance | BenefitAccess Rider

I’m planning on being around for a while.

That’s my reason.

LIVING LONGER IS A GOOD REASON FOR WOMEN TO PLAN FOR CHRONIC ILLNESS CARE. NOW YOU CAN HELP THEM USING LIFE INSURANCE. By adding the BenefitAccess Rider to permanent life insurance, your clients can have guaranteed death benefit protection plus the ability to accelerate up to 100% of the death benefit if they become chronically or terminally ill.* To explore tools and resources about life insurance with BenefitAccess, visit prudential.com/reasons or call 844-606-7873.

*Terms and conditions apply.

Life insurance is issued by The Prudential Insurance Company of America, Pruco Life Insurance Company (except in NY and/or NJ) and Pruco Life Insurance Company of New Jersey (in NY and/or NJ). All are Prudential Financial companies located in Newark, NJ. All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. Policy guarantees and benefits are not backed by the broker/dealer and/or insurance agency selling the policy, nor by any of their affiliates, and none of them makes any representations or guarantees regarding the claims-paying ability of the issuing insurance company.

Each is solely responsible for its own financial condition and contractual obligations.

The BenefitAccess Rider is available for an extra premium. Additional underwriting requirements and limits may also apply. Obtaining benefits under the terms of the rider will reduce and may eliminate the death benefit.

Benefits paid under the BenefitAccess Rider are intended to be treated for federal tax purposes as accelerated life insurance death benefits under IRC §101(g)(1)(b).

Tax laws related to the receipt of accelerated death benefits are complex and benefits may be taxable in certain circumstances. Receipt of benefits may affect eligibility for public assistance programs such as Medicaid. Accelerated benefits paid under the terms of the Terminal Illness portion of the rider are subject to a $150 processing fee ($100 in Florida). Clients should consult tax and legal advisors prior to initiating any claim.

A licensed health care practitioner must certify that the insured is chronically or terminally ill to qualify for benefits. Chronic illness claims will require recertification by a licensed health care practitioner. Other terms and conditions may apply. This rider is not Long-Term Care (LTC) insurance and it is not intended to replace LTC. The rider may not cover all of the costs associated with chronic or terminal illness. The rider is a life insurance accelerated death benefit product, is generally not subject to health insurance requirements, and may not be available in all states.

Accelerating the death benefit will reduce the death benefit on a dollar-for-dollar basis. Full acceleration will eliminate the death benefit and the policy will terminate. © 2014 Prudential Financial, Inc. and its related entities.

FOR THE EDUCATION OF PRODUCERS/BROKERS ONLY. NOT FOR USE WITH THE PUBLIC. 0266198-00001-00

ALSO IN THIS ISSUE JANUARY 2015 » VOLUME 8, NUMBER 1

INSIGHTS

62 SOCIETY OF FSP: Illustrations May Be Misleading

By Richard M. Weber Illustrations for policies such as indexed universal life (IUL) run the risk of heightened expectations for unrealizable results.

64 MDRT: Lifestyle Is an Integral Part of Retirement Planning

By Nick Cassis If your clients don’t figure out their retirement lifestyle destination, they may never get to where they want to be.

65 NAIFA: Policymakers Don’t Understand How Advisors Serve Clients

By Juli McNeely The more policymakers know about insurance and financial advisors, the better they will understand how proposed regulations can impact client relationships.

66 THE AMERICAN COLLEGE: Women of Color Seek a Seat at the Leadership Table

By Jocelyn Wright Increased diversity among industry leadership will lead to greater visibility among a growing population segment in need of advice.

68 L IMRA: The Disconnect in What Insurers Say vs. What Consumers Hear

By Scott R. Kallenbach The language barrier that keeps our message from reaching those who need to hear it.

EVERY ISSUE 8 Editor’s Letter 22 NewsWires

34 LifeWires 44 AnnuityWires

52 HealthWires 56 FinancialWires

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15 INN 01.15 FOR AGENT USE ONLY. NOT FOR USE IN SOLICITATION OR ADVERTISING TO THE PUBLIC. January 2015 » InsuranceNewsNet Magazine 7

WELCOME LETTER FROM THE EDITOR

When Security Beats Sexy

S

ome things or people don’t need to be sexy. Like your grandma. You don’t want to think of her being sexy.

There’s just no need for that.

Same thing with annuities. They are meant to be nice, dependable and boring.

Boring is exciting when the stock market burns down. It’s reassuring when other retirement options destabilize. It’s the thing people can hang on to as their own while their employer or the government rolls back promises.

In this month’s feature article focusing on the annuity forecast for this year, I found some promising trends as well as a couple of trends that have some people concerned.

Among the promising ones were the strong fixed index annuity (FIA) sales and the greater recognition of the importance of annuities in retirement planning.

In many ways, the time has arrived for the products. Baby boomers are hitting 65 at a rate of 10,000 a day, with trillions of dollars in retirement funds at risk for mishandling. And these folks have one shot to get their retirement income right. One false move, and it’s back to the job market for them, assuming they can work.

The door keeps widening for annuities to be the preserver of retirement security. One of the latest developments was the qualified longevity annuity contracts (QLACs) that the federal government released last summer. They are deferred income annuities (DIAs) for much later in life, after age 80, and would be funded with qualified money. QLACs also would be shielded from required minimum distributions.

At the moment, QLACs are open only to DIAs, which are not typically products sold in the independent insurance channel. Kim O’Brien, CEO of the National Association for Fixed Annuities, said her organization is asking federal officials to allow FIAs as QLACs also. That would certainly open up an opportunity but also would be a strong endorsement of the product.

I was not able to cover it in the feature, but another encouraging development is the growth of long-term care riders on annuities. As I have often written in our blog, long-term care costs are looming as perhaps the biggest threat to retirement 8

security. Not only that, but the costs are draining inheritances for the next generation. Millennials are already struggling in the new economy. They don’t need yet another setback. So, annuities with LTC or similar riders will go a long way toward helping families with their real risk.

So, what were the troubling aspects?

They had to do with a couple of growing trends: exotic indexes and uncapped potential. Almost everybody I spoke with for this article was worried about one or both of these. The new indexes are ones other than the Standard & Poor’s 500. They change things up, which is usually a good thing. Some of the indexes are interesting and a good alternative. Others are clearly gimmicky.

The gimmicks are of concern to David Callanan, a co-founder of Advisors Excel.

Overseeing the nation’s largest independent marketing organization, he knows a thing or two about selling. He said the focus on accumulation in FIAs has overshadowed

InsuranceNewsNet Magazine » January 2015

the essential function of providing income.

“Increased income is going to be extremely important,” Callanan said. “If you’re going to sell a 55-year-old an index annuity and you’re going to talk about doing an income plan at the age of 60, it’s important that they can get an increasing income.”

That would be a product that allows a client to increase the income every certain number of years of annuitization, which is a way of countering the effect of today’s low interest rates.

Low rates are the reason the exotic indexes and uncapped potential are being marketed. And LIMRA says that message is gaining popularity.

But people who know a lot more about these features than I do say the new indexes and uncapped promises don’t yield better results than the typical FIA. That is an unfulfilled promise. And that is contrary to the basic premise of insurance, which is built on the integrity behind the contract.

Tricky marketing, smoke and mirrors, have been partly to blame for the annuities’ bad rap. Why give detractors more ammo?

These should be the times when people turn to the insurance community for security, not for sexy come-ons.

Callanan and his partners visit insurance departments and legislators to advise them about the important function served by insurance. And he hears concerns about marketing that threaten to draw attention away from the good things the industry does.

“As we’ve spent time visiting regulators, I do think the way these products are illustrated, back-cased and communicated to consumers for their performance has got to change,” Callanan said.

He and others would like to see the focus return to careful, predictable planning that sets clients on a road to a dependable retirement. Safe and secure. Isn’t that just like what you expect from grandma?

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January 2015 » InsuranceNewsNet Magazine

9

INFRONT TIMELY ISSUES THAT MATTER TO YOU

More Women in Industry Leadership: Are We There Yet? Women are moving into the top spots in many industry organizations, but more work needs to be done to attract greater numbers of them to leadership.

By Linda Koco

4%

W

hen the National Association of Insurance and Financial Advisors (NAIFA) elected Juli McNeely as its new president last fall, some insurance observers saw it as a turning point.

The owner of McNeely Financial Services is more than just the first woman to hold this post in the organization’s 125-year history. She also joins a circle of women who hold, or who very recently held, top leadership posts at national insurance and financial industry associations all at the same time.

It is hard to think of any such time before – not even during World War II when many women worked at all kinds of occupations, including insurance and financial services.

As of December 2014, for example, Caroline A. Banks was president and Michelle L. Hoesly was immediate past president of the Million Dollar Round Table (MDRT). Barbara Crowley was 2013-14 chairman at the National Association of Independent Life Brokerage Agencies (NAILBA). Daralee S. Barbera was 2014-15 president of the board of GAMA International, and Nancy A. Kistner, immediate past chair of the board at the Certified Financial Planner Board of Standards.

Several women also hold executive leadership positions at industry trade groups. These include Bonnie L. Godsman at GAMA, Kim O’Brien at the National Association for Fixed Annuities (NAFA), Janet Trautwein at the National Association of Health Underwriters (NAHU), Dr. Susan B. Waters at NAIFA and Cathy Weatherford at the Insured Retirement Institute (IRI).

Several observers add that at least four women are CEOs at leading life insurance carriers; a good number of women lead the state and regional insurance associations; many women hold key managerial posts throughout the industry; and a growing 10

of CEOs are women

number of women own their own advisory practices.

A woman at the helm was more the exception than the rule until more recent years.

Today, it’s a frequent topic of conversation: “Hey, did you notice?” “Could it be that women leaders aren’t tokens anymore?” “Is parity with male leadership close at hand?”

Status

The industry is still perceived as maledominated, according to a 2012 survey on women in the financial services industry conducted by Women in Insurance & Financial Services (WIFS). Not incidentally, this group is also headed by a woman president – Susan L. Combs – and run by a woman executive director – Deb Duffy.

That is a global trend in fact as well as perception. Men still make up more than onethird of leading financial institution “ExCos” (executive committee members), according to a December report from the global management consultant Oliver Wyman. This is based on a study of senior staff at insurance companies in addition to investment banks, retail banks and money managers.

As for women at the top, they account for only 4 percent of CEOs and 13 percent of ExCos, Oliver Wyman said.

Although women are just beginning to make inroads into leadership roles in the insurance and financial industry, they told InsuranceNewsNet that they feel encour-

InsuranceNewsNet Magazine » January 2015

13% of execs are women

aged by seeing more women leaders at the top today.

What’s Behind it?

Demographics are one factor that may be helping fuel the shift. For example, there are simply a lot of women employed in the insurance business – an estimated 1.6 million in 2013, according to an Insurance Information Institute analysis of Bureau of Labor Statistics (BLS) data. This represents 59.4 percent of the 2.4 million workers industrywide (property/casualty and life/health, all occupations), according to BLS. Some commenters believe that this rising tide has helped, and will continue to help, more women get to the top.

As indicated, some women have made it to the executive level. But on a percentage basis, the sobering reality is that the numbers at the top still remain relatively small. For instance, a 2012 study by St. Joseph’s University found that just 6 percent of top executive positions at 100 companies across the insurance industry were then held by women, and that 85 percent reported having no women holding top executive positions at all. Women did hold a larger portion of director slots (12.6 percent) and “inside officer” positions (8 percent), however.

In the financial planner field, a 2013 Women’s Initiative study by the CFP Board found that only 23 percent of financial planners are women. That’s higher than 6

MORE WOMEN IN INDUSTRY LEADERSHIP: ARE WE THERE YET? INFRONT percent, but the 23 percent doesn’t necessarily represent women at the helm.

However, in earlier eras, the percentages were even smaller, as evidenced by the very few women holding top association positions two or more decades ago. That is a key reason why the presence of so many women in visible leadership roles in recent times is getting so much attention. Onlookers believe today’s women leaders may help open doors for more female opportunity going forward.

Industry Trends

Trends inside the industry are playing a role as well. This came through loud and clear in an informal email poll that InsuranceNewsNet recently sent to a few of the industry’s top women leaders.

The leaders were asked to rank, on a scale of 1 to 10, with 10 the highest, the opportunity they see for more women to reach top leadership posts in the industry in the next three years. The average score on answers to that question was an impressive 9.95.

The reasons the leaders gave for such optimism provide a telling glimpse into trends these leaders are seeing. Several of the women pointed to greater allowance for flexible, family-friendly work environments; the arrival of more women to top positions, which triggers greater acceptance of women in leadership roles; and the increasing efforts by a number of carriers to create more inclusive, diverse cultures and to bring more women on board.

In addition, one woman pointed to deliberate, outside-the-industry “empowerment campaigns” (such as Lean In and Fight Like a Girl). Another noted that more carriers are adopting “gender balancing” initiatives. And one commented on a changing dynamic she is seeing, with more women selling and more women buying, and with more women managers who now have vast experience as well as an empty nest.

There is something else too: This is a changing attitude among consumers. McNeely put her finger on it during an interview.

Today’s consumers don’t want the “hard sell,” she said. They may be accessing information on their own, but they prefer to use the services of a financial advisor with whom they can “build a relationship.” They want to be an active part of the decision-making. In addition, women customers are demanding that the advisor build a relationship with them as well as with their husbands, she said.

Those preferences align well with deepseated traits and skill sets, such as relationship-

building, that McNeely said many women have. This suggests an increased need for women in leadership positions. The insurance and financial services industry needs to “adjust its ways” to attract today’s more relationship-oriented consumers, she explained.

No Pollyanna Here

Women executives are far from Pollyannaish about their optimism. Take Combs, who is president of Combs & Company brokerage in New York City and the youngest-ever president of WIFS. Combs told InsuranceNewsNet that although she believes opportunity for more women at the top is a 10 (high), she has not lost sight of the fact that today’s women leaders still represent a very small percentage of all industry leaders and of all women in the industry.

She is concerned that the recent arrival of women to top association positions may be a perfect storm. “I’ve been looking at the succession behind the current women association leaders, and there is not a single woman coming up,” she said.

In addition, not everyone wants to be at the top. Many women feel overtaxed between family life, business life and volunteer life, Combs said. So some who do rise to, say, executive vice president, decide they don’t want to go any higher. “Or they say to offers for advancement, ‘not right now’ or ‘this is not the time.’”

“We need to start with basics,” she said. “We need to attract women at the lower levels – not sell them, but attract them – so they get interested, involved and excited” enough to stay and grow into national leadership.

A number of executives whom we polled mentioned other challenges as well: » “Men remain more aggressive than women and more willing to self-promote,” and “Our society accepts this self-promotion more when it comes from men than women,” NAIFA’s Waters said. » Unconscious bias against promoting women still exists, some said. » “Slow advancements in opportunities for women to grow, but getting much better,” GAMA’s Godsman commented. That is a point picked up in the Oliver Wyman study. Women in the U.S. financial services industry are only 45 percent as likely to progress from middle to senior levels of management relative to their male counterparts, the researchers found.

» Taking time out to raise a family can be a challenge, NAFA’s O’Brien said. When a woman returns to the workforce, “you are perceived as a ‘new entrant,’” she explained. » The oft-cited wage gap can be a hurdle too. In 2011, for example, women in the financial sector were earning about 70.5 percent of what men earned, according to Catalyst, a nonprofit that works to expand opportunities for women in business. The lower pay scale makes it more difficult for women to pay for support services that would help them meet family needs while they take the reins, say some leaders. Lower comparative pay also can weaken incentive.

Bottom Line

The future for aspiring women leaders appears to be not only challenge, but opportunity – and openness to opportunity.

“The opportunity is there, and there is a tremendous focus on growing women in this field,” MDRT’s Hoesly wrote in an email.

“If there is a challenge, it is that some women don’t recognize how valuable their input and leadership are.”

Also, she said, “as many more women have become active in top positions, their talent has been recognized and appreciated.”

Eileen McDonnell, president and CEO of Penn Mutual, wrote that “I’ve seen more women reaching top leadership levels in this industry in the last five years than I have during my entire career.”

From a corporate perspective, she added, “there are women who have worked their way through the ranks and are wellpositioned to assume leadership roles now and into the future.” What’s more, she said, “there is evidence that women have arrived and are continuing to arrive in the C-suite.”

As for the glass ceiling getting in the way, McDonnell said that “if women buy into the idea that there is a glass ceiling, they are setting themselves up for failure. There is no reason why women can’t succeed in our industry today.

“I am an advocate for people taking control of their own destiny. If a woman is in an environment that doesn’t advance women, she has the power to change her situation and take her career and success into her own hands.”

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning.

Linda can be reached at linda.koco@ innfeedback.com.

January 2015 » InsuranceNewsNet Magazine

11

NO YES HOW TO TURN INTO

T

he sweetest word in the sales process might be “no.” In fact, top salespeople know “no” means “eureka!”

That’s because it is next to impossible to get a “yes” without a “no,” according to renowned sales coach Tom Hopkins’ latest book, When Buyers Say No. When people buy something of consequence, they must start with an objection to help them justify the expenditure.

Tom has written or co-written 18 books on selling, including How to Master the Art of Selling and Selling for Dummies, and has spoken to more than 4 million people worldwide on the topic of sales. He learned the art of selling the hard way, working up from construction to a successful real estate career. His is an unlikely story showing that anyone with drive can get anywhere.

He noticed that although the word “no” exasperated even good salespeople, sales stars seemed to thrive on hearing rejection. That’s because they did not see “no” as a rejection, but as permission to begin the next phase of the process.

In the first installment of a two-part series with InsuranceNewsNet Publisher Paul Feldman, Tom explains how sales experts turn “no” into “yes.”

12

InsuranceNewsNet Magazine » January 2015

O

Tom Hopkins shows why ‘no’ means

‘cha-ching!’

January 2015 » InsuranceNewsNet Magazine

13

INTERVIEW HOW TO TURN NO INTO YES FELDMAN: What does it really mean when a buyer says no?

The Circle of Persuasion

HOPKINS: It means lots of things. The more people like and trust you as a representative, the tougher it is to say no and the nicer they are when they say it. This is why it is better to get the gentle “I want to think it over,” “We’ll get back to you,” or “We don’t jump into things like this.” All of those are nice, warm nos, instead of the blunt “We’re not interested.”

This is really when selling starts. In a way, if there weren’t nos, the world wouldn’t need salespeople. Companies could just send out the applications and all the insurance information, have the customers sign their names on it, and send the check. Well, we all know that’s not going to happen. And even though the Internet has taken a tremendous toll on some industries, I don’t think there will ever be a lack of people who want to do business with a human being in financial services or in insurance transaction, because it’s so critical and so important that it’s done right.

Preparation

Referrals

(Negotiate)

Closing Questions

FELDMAN: How do you become a master questioner?

HOPKINS: Years ago, I started to understand that too many people sell what they want to sell instead of what the client needs. I decided to take the word “needs” and make it an acronym. But I changed it to N-E-A-D-S, with each of those letters 14

Re-establishing Rapport

Ultimate Question

Closing Questions

Identifying Questions Presenting Answers

Identifying Needs

Presenting Solutions

FELDMAN: You’re dealing with really big dollar amounts and it’s a bit more complex than simply clicking on a few buttons, ordering it, and getting free shipping on it. Isn’t selling essentially more than just a transaction?

HOPKINS: I really believe that people in the insurance industry have a tremendous responsibility to make sure that clients do the right thing based on their needs.

A financial doctor would diagnose and prescribe what is best for that individual, just like a medical doctor would.

But it’s something that many people in this field don’t do. They have what they believe the person should have, but because they aren’t master questioners, they don’t get to the bottom line of what that person needs.

Establishing Rapport

Yes

Key Points •F our steps to memorize: 1) Establishing Rapport. 2) Identifying Needs. 3) Presenting Solutions. 4) Closing Questions.

• The first step in responding to a question or concern is to re-establish rapport with the buyer.

•T hree potential actions: 1) Ask a question.

2) Make a statement. 3) Remain silent.

• You do not have to respond immediately to a question! You can choose to ask questions that clarify the buyer’s concerns.

• The presentation is where you give the buyer real reasons to own your product or service.

•A lways remember: You are not paid to give presentations. You are paid to close sales.

meaning what type of questions you have to ask.

The first thing to do is spend more time on the “now,” meaning that you ask what your prospects have now, and then you must explore deeper into their past. That will give you a tremendous understanding of what they’re going to do in the future – unless they had a drastic change, such as winning the lottery. But for average Americans, show me their past and I can predict a great deal about their future. In the insurance field, that lets me know a lot

InsuranceNewsNet Magazine » January 2015

•Y our final step is to ask your buyer to take immediate action.

Tom Hopkins and Ben Katt, When Buyers Say No. 2014, Business Plus

about what products or services that person would need.

FELDMAN: What are some questions you must ask to get prospects into the “now”?

HOPKINS: You can ask this: “I found over the years that I can decide what’s best for the folks that we serve by exploring what they have done in the past. And because of that, I’d like to ask you a little bit about your experience in the insurance field –

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January 2015 » InsuranceNewsNet Magazine

15

INTERVIEW HOW TO TURN NO INTO YES

The average person hears a “no” and does not ask enough questions to find out what “no” really is.

what type and how much you’ve had in the past. When I add up all these little things I’m going to ask you, it will give me a formula that will help you and your family reach financial independence. That is what you want, isn’t it?”

FELDMAN: Would you also ask them why they didn’t buy insurance in the past?

HOPKINS: Yes. The dialogue would go something like this. I would say, “I’m curious, John – based on your whole financial situation, what has prevented you from taking care of the health and life insurance needs of you and your family?”

John might reply, “I’ve never believed in insurance. My parents told me that it was a waste of money and I shouldn’t even do it.”

I would say in return, “Have they been brought up to the latest ways that we’re using insurance as a financial hedge against inflation and how we can build financial independence?”

He would say no, and then you could explore that. You could add, “And, by the way, we are an education company. So if you do not mind, I will share with you some examples of what we have done for others and what we can do for you. Would that be OK?” Then I would get to the exploring questions to find out the best program for him.

FELDMAN: Let’s get back to your “NEADS” formula.

What does the E stand for?

HOPKINS: The E stands for “enjoy.” When you chose a company in the past, obviously you enjoyed them or what they offered. What were those things that made you say yes to that?

They might say they liked the salesperson, who was a friend of a friend. And I get all their hot buttons as to what they enjoyed.

The A stands for “alter.”

A better word might be change or improve, but alter fits into the acronym of NEADS. And alter means:

16

InsuranceNewsNet Magazine » January 2015

What would you like to have different?

What would you like to change? What would you like to improve about what you have had in the past?

The D is “decision-maker.” Many people have a third party whom they rely on for information in making investment decisions. I want to know that. That’s why I had this one little question: “John, Mary, if we’re fortunate to design a program to satisfy not only your insurance needs, but your financial independence needs, who other than yourself would be involved in the final decision?”

I want to know if they have a father who used to be in insurance, and he is going to look at everything we do first. I want to know if the person can write the check to say yes to what we’re offering.

Then, of course, the S in NEADS stands for “solution,” which means if you take Now, Enjoy, Alter and Decision-maker and add up all the information, you should be able to design a Solution.

FELDMAN: Most people think of a sales process as linear, and that’s not necessarily how it goes. Tell us about the Circle of Persuasion you described in your book.

HOPKINS: The average person hears a no and they don’t ask enough questions to find out what “no” really is. Is it lingering hesitation? Is it a defense mechanism to avoid coming up with a decision? Is it because of fear? Most of the first nos start from a fear, and that’s one of the biggest enemies that anyone in sales must overcome. The average American cannot say yes to spending money on almost anything until they have some type of “no” that they must come up with first. I learned this during my eight years in real estate. I found that the people who have no nos have made the decision not to purchase, but because they think you’re a nice person, they just gently get rid of you.

The people who are sincere and really are interested have to come up with an objection, which is a “no” that we must turn into a “yes” before they will purchase. The average salesperson is afraid of nos, but the top producers don’t mind getting them at all.

Is it because of fear? Is it only a stall?

Is it a need for more information? Most of the time, that’s what it is. So the key

GOOGLE YOUR WAY TO SALES INTERVIEW

January 2015 » InsuranceNewsNet Magazine

17

INTERVIEW HOW TO TURN NO INTO YES is to do your best to soften any fear that they have. I used to love it when they’d say, “Tom, I think we have to say no.” And of course, I would always smile and say, “I can appreciate that. Our company asked me to always find out why a person would see the benefits that we have to offer and then say no. So would you help me with that and elaborate on why you feel you have to say no?”

Then I would get them talking. The next part of the circle is to get them to elaborate, to open up and to give me a hook, something I can convert into a “maybe.”

It always goes from a “no” to a “maybe” to a “yes.” Most salespeople don’t get them to the “maybe.” You can’t get to the “yes” until you get to the “maybe,” and that’s what you do with the questioning. I try to teach salespeople more of the art of questioning than anything else. That’s because the great listener and asker, a master asker, will isolate the true reason the prospect is saying no. Then you’ll know your strategy to overcome it. With the right phraseology, the right presentation of skill, you will lead them to agree that the yes is a better opportunity than the no.

rationalize spending the money.

So if a buyer says, “You know, Tom, I think it costs too much,” I then start with a sentence of agreement: “You know, John, today most things do. Can you tell me about” – always use the word “about” – “how much ‘too much’ you feel it is?”

Now I get an amount of money, which I can handle. I can’t handle “I want to think it over.” Once I get it to the money, I use different strategies to help them rationalize making the financial investment.

If they said, for example, “I think I should shop around and maybe I can get it for less,” I’d say, “You know, that may well be true, John, and we all want the

FELDMAN: What are some key ideas that you think every insurance agent should know?

HOPKINS: Realize that you cannot let people feel you are selling. People love to own but they don’t want to feel they’ve been sold. So, it is critical that you don’t use sales jargon. Don’t use the words “sell” or “sold.” I never sold a home. I just kept getting people involved. I would never sell you insurance; I’d get your family involved in an opportunity for protection.

Another word is “buy.” For most people, when you come in as an insurance agent, they know what you’re there for and the couple has made a commitment. We call it a no-purchase pact, where a couple says to each other, “Bob is bringing this guy over who has helped him with his financial needs, but I’m a little nervous, so honey, we’re not going to buy.”

If you as a salesperson say the word “buy,” up go defenses.

So the professional never says “buy.” They constantly say “own.” It’s not “when you buy our policy.” It’s “when you own the long-term benefits of our protection,” because people love to own. They just don’t want to buy.

Too many people say the word “contract.” You know: “why don’t we just look at the contract?” Well, people are terrified of contracts. I would never call an insurance proposal a “contract.” It’s “the paperwork” or “the agreement”: “Why don’t we look at the agreement that our companies come up with for you and your family?”

People love agreements. They don’t want to get near a contract.

These are called fear-producing words.

Another is asking them to “sign” something. I never ask them to sign. Mom and Dad said, “Don’t you sign anything.” I ask them to OK it, approve it, authorize it or endorse the paperwork.

The reason you need all four is because you’ll have to make at least four or five attempts at closing the transaction. The average person doesn’t say yes on the first attempt. So I might ask them to OK the paperwork the first time, then I’ll maybe get a stall: “You know, Tom, we’re not sure about this right now.” “Well, I can appreciate that, John. What might be holding you back from doing the right thing tonight?”

I’ve found over the years that the top income earners eventually have almost everything scripted.

FELDMAN: How important is scripting to a sales presentation?

HOPKINS: This has been a battle that I’ve had throughout my training career. Most people in sales would rather wing it instead of really knowing what they’re going to say. And I’ve found over the years that the top income earners eventually have almost everything scripted.

I have a script for when prospects say they want to think it over. I have a script if they say it costs too much. And if I deliver them, they will never know that it’s something I said 1,000 times.

FELDMAN: What is your script when someone says, “It costs too much” or “I need to shop around before making any decisions”?

HOPKINS: You just say: “You know, John, today most things do cost too much. Can you tell me about how much ‘too much’ you feel it is?” The reason for that is if a buyer is fighting the expense, they really want to go ahead but need your help to 18

most for our money. A truth I’ve learned over the years is that the cheapest price is not always what we really want. Most people look for three things when making an investment: the finest quality, the best service and the lowest price. And I’ve never yet found a company that could offer the finest quality, the best service and the lowest price. And I’m curious, John, for the long-term security for you and Mary, which of the three would you be most willing to give up? The finest quality, excellent service or a few pennies a day?”

FELDMAN: That’s a good line to get into the conversation using microcommitments, because as you go through the process you can refer back to their statements and address the real objection.

HOPKINS: Yes, right. I’ll say, “Give me an amount that is monthly too much, and I’ll get it to a daily amount. That will help you and your wife understand why, if a tragedy happens where the husband becomes an angel, this will be the amount of money to let the wife enjoy the lifestyle that she is accustomed to until she joins her husband as an angel.” By the way, I always teach insurance people to say “becomes an angel.” You never say “death.”

InsuranceNewsNet Magazine » January 2015

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19

INTERVIEW HOW TO TURN NO INTO YES And there again, I’m getting them into the agreement, the questions.

So all these little things added up make a person able to close lots of transactions.

I’m a believer in insurance. I don’t want to even tell you how much I have, because I would have more than almost all of your readers. I have always felt it’s a necessary part of a good financial plan to protect your loved ones, to have your wife and children live the lifestyle, the dignity that you’ve created with your net worth.

FELDMAN: Do you think being passionate about the product or service is essential to being a great salesperson?

HOPKINS: I have said for years, people will say yes based more on your belief and conviction than on all your technical skills.

I think I did so well in real estate for eight years because I believed everybody should own a home. And back in those days, people would come in and want to rent a home. Two hours later, I’m getting a check from them to purchase a property. The reason was they felt my total sincerity. They felt my belief that you cannot rent and let a landlord take advantage of the equity in your property. You have to own it.

Many times on a talk show, I will get a question like this: “Tom, I’m thinking of going into sales. Where can I make the most money?” And I always say, “Do not look at what you’re going to do as a vocation in that way. Don’t look at the money.

Look at what you love to do. Look at what you believe in. And if you aren’t burning with a huge amount of belief, then you ought to find something else.”

it might go something like this: “Paul, as we get started tonight, let me just thank you for the time that we’re going to share, and I hope you’ll relax, because I’d like to consider tonight somewhat exploratory.

That means my job is to tell you about our dynamic company, what we’ve done for other families and hopefully what we can do for you. I want you to relax, because it’s OK for you to say no, and if this is not right for you, please let me know.

Is that OK?” I did what most salespeople would never do. I let the buyer know it’s OK to say no. But these are the things that bring down people’s defenses, where they start to get comfortable. Because they’re thinking, “OK, if I don’t like this, I’ll say no.”

And, by the way, that also gets them to

don’t know why we’re saying no.” And you sit back and never interrupt the husband and wife bantering. You’d be amazed how the wife – who wants the death benefit, wants the financial independence, wants to have that monthly investment going toward her future financial security – will jump in and close the sale for you.

FELDMAN: What are some of your favorite closes?

HOPKINS: The “I want to think it over” is always one of my favorites. And the reason is because the average salesperson doesn’t know what to do with “I want to think it over.”

I am sitting with John and he has said, “Tom, we don’t jump into things like this.

I think we’ll think it over.” You always start nicely with, “Well, that’s fine, John, and obviously you wouldn’t take your time thinking this over unless you were seriously interested, would you?” And what’s amazing about that first sentence is if you come across with sincerity, they don’t want to reject you, so they say, “No, no, we are very interested.”

Then you continue. “So may I assume that you’ll give it very careful consideration?” “Oh, yes, Tom, this is too important. This insurance is necessary.”

“Well, just to clarify my thinking, what phase of this opportunity is it that you want to think over? Is it the quality of the service I’ll render?” “No, Tom, we’re impressed with you.” “Is it maybe something I’ve forgotten to cover?” “No, I think your presentation has been impressive.”

“Seriously, John, level with me. Could it be the money?” And with this, you’ll be amazed by how many people will say, “Yes, I think it is the money,” and many of them will say, “I think it’s more than we can afford.”

Well, then you say, “John, I can appreciate that. About how much more is it than you think you can afford?” And now I get them to an amount of money, which I can handle, instead of “I want to think it over,” which I can’t do anything with.

Whenever I have a seminar, I try my best to get every person in the room to say they are going to master that close.

People will say yes based more on your belief and conviction than on all your technical skills.

FELDMAN: Let’s talk about the presentation part a little bit more. What are some common strategies to increase your own persuasiveness when you’re doing a presentation?

HOPKINS: The first thing you have to do is find a way to make people comfortable.

Most people do not spend money on anything if they’re not relaxed and comfortable. That’s why I always teach people to start off with a nice introductory statement to relieve pressure.

If I’m beginning an insurance proposal, 20

open their minds to what you’re presenting at the table.

FELDMAN: It also gives them a comfort level to tell you the reasons why they’re saying no.

HOPKINS: Exactly. They feel good about you. What is the real secret of being great in sales? I’d simply say develop a personality and a temperament whereby people rapidly like you, trust you and want to listen to you.

People will look at you as an expert advisor, not a salesperson. They will relax and say, “Man, this person has done well for other families. Let’s open our minds.”

And once you get the mind opened, you can really implant the message properly.

FELDMAN: How do you handle a couple’s dynamics?

HOPKINS: One of the keys in sales is to get the couple talking. I’ve often had the wife sitting there quietly, and suddenly I get to that point where I ask why they’re saying no, and the wife jumps in: “Honey, I like what Tom has presented here. I

InsuranceNewsNet Magazine » January 2015

Next month: Learn the seven steps for every sale.

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January 2015 » InsuranceNewsNet Magazine

21

NEWSWIRES

NAIC Creates Cybersecurity Task Force bitly.com/qrcyber

High Court to Hear ACA Challenge

other round of It’s time for an

The Supreme Court has agreed to give the Affordable Care Act (ACA) another day in court. The high court agreed to hear arguments on the biggest challenge launched at the health care law in two years – the issue of whether the subsidies given to eligible consumers who buy coverage on the federal exchange are legal.

Observers say that if the court knocks down the subsidies on the federally facilitated exchange, the decision could end up being “the big one” that sends the ACA off to its death. The legal question centers on four words in the language of the law: “established by the state.” Those who filed the challenge contend that those four words mean that only those who purchased coverage in state-run exchanges are eligible for the subsidies.

Only 13 states and the District of Columbia created their own exchanges.

More than 4 million people receive subsidies to help make the coverage more affordable for them. For those who purchase insurance on the exchanges, the subsidies cover on average 76 percent of their premiums. Without the subsidies, most low- and moderate-income purchasers would choose to forego the coverage, rendering the health care law helpless.

The court is expected to hear arguments on the case in March, with a decision expected to be handed down in June.

HAS HEALTH CARE SPENDING BOTTOMED OUT?

There’s some good news/ bad news where health care spending is concerned. The health care good news is that health care spending spending grew at the lowest rate on record last year. The bad news is that per capita health care spending in the U.S. was the highest in the world, at $2.9 trillion for 2013, or $9,255 per person.

The growth rate was 3.6 percent, the actuaries at the Centers for Medicare and Medicaid Services reported. It’s a continuation of a five-year trend and in line with the general slow economic recovery, they reported in the journal Health Affairs – a continuation of a five-year trend and in line with the general slow economic recovery.

Spending grew just slightly in all areas of health care, but growth was slow for private health insurance, where premiums went up by just 2.8 percent; the Medicare federal health program, where spending

APPROX.

? 43M

DID YOU

KNOW

grew by 3.4 percent; and hospital spending, at 4.3 percent. American consumers also spent only a little more, with out-ofpocket spending up just 3.2 percent. The White House Council of Economic Advisers said there’s growing evidence that costs are being driven downward by the number of Americans covered by health insurance.

MANAGED VOLATILITY IS KEY FOCUS FOR SEC

Adding managed volatility overlays to funds that underlie variable annuities “may raise important disclosure, suitability and other concerns,” according to Norm Champ, director of the Security and Exchange Commission (SEC) Division of Investment Management.

Champ made his remarks at the 32nd annual ALI CLE 2014 Conference on Life Insurance Company Products in Washington. He noted that “if an underlying equity fund is changed to add a managed volatility component after a contract owner has allocated contract value to that

TAXPAYERS had individual

retirement accounts with a total reported fair market value of

Source: Government Accountability Office

22

InsuranceNewsNet Magazine » January 2015

$5.2

TRILLION in the 2011 tax year.

QUOTABLE By simulating what it’s like to get old, people start thinking about their futures, start thinking about the upcoming decades and make logical choices.

— Dr. Edward Schneider of the University of Southern California’s Leonard Davis School of Gerontology, who helped Genworth develop a suit to simulate what it’s like to suffer the physical travails of old age.

fund, the [SEC] staff generally believes that insurers should consider whether adding downside protection is redundant with the living benefits contract owners may have already purchased and/or suppresses the potential for gains that may have motivated the original equity investments.”

Champ stated that the use of managed volatility strategies at the fund level in connection with contracts that provide living benefits may, in some cases, “result in limited benefits to contract owners who have already paid for protections against market loss, particularly to the extent that these strategies limit upside earning potential.”

AND THE MOST IMPORTANT PERSON IN D.C. IS …

Federal Reserve Chair Janet Yellen will be the most important person in Washington in 2015, according to Ben White, Politico’s chief economic correspondent.

“Yellen has a daunting set of tasks before her,” White writes. “She must manage the continued shift away from extraordinary assistance to a more normal policy footing without stomping on the brakes too fast and sending the U.S. economy crashing back into recession.

“And she must do it while Europe, Japan and even emerging economies including China suffer and the world grows increasingly dependent on U.S. growth.”

Compounding Yellen’s challenge is that she must lead the Fed through a complex policy shift just as Republicans take full control on Capitol Hill and push hard for

[NEWSWIRES]

FEDS FIGHT OVER GAO SIFI REPORT

Treasury and Federal Reserve officials are challenging a Government Accountability Office (GAO) report calling for changes in the process that the Financial Stability Oversight Council (FSOC) uses in designating non-banks as systemically important financial institutions (SIFI). American International Group and Prudential are two insurance company SIFIs. The FSOC designated MetLife as a potential SIFI, but the insurer has appealed the designation.

The report points out ways FSOC could improve the accountability and transparency of the process it uses to designate nonbanks such as insurers as SIFIs. The GAO report cited three areas of concern.

Tracking and monitoring. The GAO said that federal internal control standards call for clear documentation of transactions and monitoring to assess the quality of performance over time. FSOC has not centrally recorded key processing dates, tracked the duration of evaluation stages, or collected information on staff conducting evaluations, such as the number or type of staff contributed by member agencies. Without such data, FSOC’s ability to effectively monitor the progress and evaluate the quality and efficiency of determination evaluations is limited.

Disclosure and transparency. The GAO said that FSOC’s transparency policy states its commitment to operating transparently, but its documentation has not always included certain details. For example, FSOC’s public documents have not always fully disclosed the rationales for its determination decisions. The lack of full transparency has resulted in questions about the process and may hinder accountability and public and market confidence in the process.

Scope of evaluation procedures. The GAO said that FSOC has evaluated how

Insurance Captives Threaten Financial Stability The use of captives by life insurance companies is a key reason that risks to the financial stability of the U.S. have increased since last year, according to a new report by the Office of Financial Research (OFR).

A captive is an insurance company created and wholly owned by one or more non-insurance companies to insure the risks of its owner (or owners). Captives are essentially a form of self-insurance whereby the insurer is owned wholly by the insured.

They are typically established to meet the risk-management needs of the owners or members. Over the past 30 years, there has been significant growth in the captive market. Today, there are over 5,000 captives globally compared with roughly 1,000 in 1980, according to AM Best Captive Center. Captives can be domiciled and licensed in a wide number of jurisdictions, both in the U.S. and offshore.

The OFR, a unit of the Treasury Department, was created by the Dodd-Frank Financial Services Reform Law to help the U.S. pinpoint risks to financial stability in the wake of the 2007-2010 financial crisis.

The OFR report cites three key reasons the U.S. economy is less stable now than it was a year ago. These reasons include the “excessive” risk-taking during the current extended period of low interest rates and low volatility, the increasing vulnerability due to declining market liquidity, and the migration of financial activities toward opaque and less resilient areas of the financial system. companies might pose a threat to financial stability using only one of two statutory determination standards (a company’s financial distress, not its activities).

By not using both standards when appropriate, FSOC may not be able to comprehensively ensure that it has identified and designated all companies that may pose a threat to U.S. financial stability.

FALCONE’S SURPRISE SPLIT FROM HARBINGER

Philip Falcone surprised industry observers when he announced he would step down as chairman and CEO of Harbinger Group Inc. (HGI) on Philip Falcone Dec. 1.

The news is of interest to insurance professionals because HGI is owner of annuity carrier Fidelity & Guaranty Life (FGL), among other holdings. The carrier has DID YOU

KNOW

?

some relatively recent corporate history that keeps insurance minds wondering where the business is heading. Falcone is part of that history because he has been running HGI since its acquisition of FGL in 2011. HGI acquired the carrier after Falcone’s hedge fund, Harbinger Capital Partners, bought OM Financial Life from Old Mutual in 2011. Following the purchase, Harbinger Capital had quickly transferred the insurance company to HGI and then renamed the carrier Fidelity & Guaranty Life, the insurer’s original name.

The news of Falcone’s resignation came four days after HGI released its fourth-quarter fiscal results. A Bloomberg news report on the development said that some Harbinger investors felt that replacing Falcone may lift the stock. Falcone is departing with a lot of money. He gets a one-time payment of $20.5 million, $16.5 million in a 2014 bonus, and $3.3 million in bonus for fiscal 2015, HGI said.

300,000

APPROX.

an “Audit the Fed” bill that could subject the decision-making process of the central bank’s policymaking committee to unprecedented scrutiny. She also will be challenged to communicate to the markets on when and how rates will start to rise now that U.S. joblessness is falling back to normal levels and wage growth could follow.

Americans will buy long-term care coverage in 2015.

Source: American Association for Long-Term Care Insurance

January 2015 » InsuranceNewsNet Magazine

23

2015 ANNUITY FORECAST COULD THIS BE THE BRIGHTEST YEAR EVER?

By Steven A. Morelli

A

t the dawn of 2015, forecasters predict a warming trend for annuities, but warn of a chance of a sudden and deep freeze.

The sun has been shining on annuities for the past few years, in fact. Not all products, of course. But consumers are going for some, such as fixed index annuities (FIAs), like Italian ice on a blistering afternoon.

FIAs have been breaking records most quarters since the Great Recession, enticing with their alluring upside potential/downside protection message. Will that trend 24

continue? Or will a front of faux FIAs from the financial realm darken the sky?

Or will the whole system of FIAs become so complex that it bogs down and blows away? Will FIAs then be replaced by a current of hybrid systems that steal their thunder?

Oppressively humid weather metaphors aside, these are some pretty darn good days for annuities. More Americans are accepting them, particularly as consumers see their retirement prospects wither. People have only a few dependable ways to take control of their financial destiny. Stocks might be meteoric, but meteors occasionally crash. Just about

InsuranceNewsNet Magazine Âť January 2015

anything established by an employer, such as a pension, can be taken away. The same thing can be said of a government program subject to the whims of politicians.

And who knows when bonds will become a substantially better deal than stashing cash in a coffee can?

The federal government is recognizing the value of annuities. The latest evidence of that would be the qualified longevity annuity contracts (QLACs) that were approved last summer. They would allow people to postpone taking required minimum distributions past age 70½ by putting an annuity into a retirement plan, such as a 401(k).

2015 ANNUITY FORECAST FEATURE

Persistently low interest rates will continue to drag down sales of fixed traditional and multiyear guaranteed annuities, said Sheryl Moore, CEO and president of Moore Market Intelligence, an annuity analyst. But the low rates haven’t slowed FIAs any.

“Because people say, ‘Look, I do want safety. I don’t feel comfortable losing money. But I still want to be able to beat out the one-quarter of 1 percent I can get at the bank,’” she said, adding that accumulation is getting more attention. “I think that we’re going to continue to see a focus on accumulation sales, and not just income sales, because for a long time caps were so low that everybody had to sell index annuities based on the income story. No one was out there pitching 2 percent caps. But we have seen more and more of a focus on accumulation over the past few years.”

In fact, that pursuit of accumulation has pushed innovation with features such as uncapped potential and exotic indexes.

Insurers are operating in a narrow lane of opportunity between low interest rates and tighter regulation.

“We’re going to continue to see product innovation on supplemental benefits like riders because there’s not a lot of innovation left for us to do within the annuity products because we’re limited to a 10year cap and often limited to a 10 percent penalty in the first year,” Moore said. “That has the unintended effect of limiting premium bonuses and commissions and caps and all sorts of things.”

That means more innovation through riders, such as guaranteed lifetime withdrawal benefit (GLWB) and death benefit. “And even types of riders that people wouldn’t imagine, such as ‘We’ll give you a higher bonus if you buy this rider or we’ll give you a greater annuitization value if

$59.5

Dollars in Billions

The Fixed Index Rise

Variable & Fixed Annuity Sales – Quarterly

39.5

$61.9

40.6

$60.1

39.8

$56.9

Variable

Fixed

$57.3

$56.8

$55.0

$54.7

$59.6

36.9

38.7

$61.5

$58.2

$61.4

$58.2

$52.7 $51.9

35.7 38.0

36.8

35.0

35.3

21.3

20.3

18.9

18.1

18.6

17.9

17.7

16.6

18.8

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

2012

36.4

38.0

20.0

2011

34.2

23.9

25.1

24.0

Q3

Q4

Q1

2013

36.2

35.5

25.2

22.7

Q2

Q3

2014

Source: LIMRA Secure ReCrement InsCtute, U.S. Individual Annui.es survey.

you buy that rider,’” Moore said. “That’s really where the focus of product innovation is going to be, because it is still a challenging pricing environment.”

Moore expects that guaranteed minimum accumulation benefits (GMABs) will be among the next wave of features.

“Because rates are so poor on index annuities, people are saying, ‘If I can guarantee to my client that no matter what, they’ll earn at least X percent on the annuity over the life of the contract, that would be really helpful to me,’” Moore said, putting it in the context of another growing distri-

bution trend. “That’s a feature that’s especially popular in bank and broker/dealer distributions. We’ll see more features that cater to the bank and broker/dealer distributions, like return of premium features, bail-out provisions and things that typically have not been very popular with index annuities because there is a cost to providing those benefits.”

Moore described a scenario where a bailout provision would be used: “Let’s say the index annuity has a cap of 5 percent when it’s sold. The bailout provision might say that if the insurance company ever re-

Market Value Adjusted

Book Value

Market Value Adjusted

Book Value

Fixed-Rate Deferred Annuity Sales $10.1

$9.9

$10.1

$9.9

$9.7 $8.1

$8.1 8.7

8.5 6.9

8.7

Dollars in Dollars Billions in Billions

Even financial services folks, who have long curled a lip toward fixed annuities, are fashioning FIA-looking variable annuities.

Heck, some are dropping all pretense and are actually selling fixed index annuities!

What’s next? Will we see Ken Fisher running through the hills, flinging daisies and yelling, “I love annuities! LOVE THEM! And you should too!”

Maybe not. But it is true that annuities are a more accepted member of the financial family, and not just sitting at the kids’ table anymore.

$7.5

$7.5 6.3

8.5 6.9

6.3

$6.9

$6.5 $5.7

$6.9 5.6

5.6

$5.5

$5.4

$5.7

$8.4

$8.5

$8.4

6.4

5.7

$5.7

5.3

4.7

5.3

$5.5 4.5

6.4

5.7

7.2

4.5 1.0

4.1 1.3

4.1 1.6

2.5

2.1

Q1 1.3

Q2 Q3 2.5 1.6 2013

Q4 2.1

1.4

1.4

1.2

1.2

1.3

1.2

Q1 1.4

Q2 Q3 1.4 2011 1.2

Q4

Q1 1.3

Q2

Q3

Q4

1.2

1.2 2012 1.0

1.0

Q1

Q2

Q4

Q1

Q2

Q4

Q3

$5.4 4.1

$5.7 4.1

$7.4

7.2

$6.5

4.7 1.0

Q3

$8.5 $9.7

Source: LIMRA Secure ReDrement InsDtute, U.S. Individual Annui.es survey.

2011 2012 Fixed rate deferred = Market value adjusted + Book value

Source: LIMRA Secure ReDrement InsDtute, U.S. Individual Annui.es survey.

$6.6 $7.4 5.5

5.5 2.7 Q1 2.7

4.7

4.7

1.9

1.9

Q2 1.9 2014

Q3 1.9

Q1 Fixed Q2 rate deferred Q3 = MQ4 Q1 Q2 Q3 arket value adjusted + Book value 2013 2014

January 2015 » InsuranceNewsNet Magazine

Fixed rate deferred = Market value adjusted + Book value

$6.6

25

FEATURE 2015 ANNUITY FORECAST

Quarterly Index Annuity Sales: Q1 2010 – Q3 2014 Dollars in Billions

$11.9

$8.7

$8.7

$8.7

$8.1

$7.9

$7.1

$7.0

vice president, LIMRA Secure Retirement Institute Annuity Research.

“We’re seeing eight out of 10 index sales have a GLB available, and when it’s available, seven out of 10 times it’s accepted,” $11.7 Montminy said. “They’re helping to resonate with consumers who say, ‘I do want the ability to control my money but get that income at a later point in time.’ And with that money, we’re seeing a shift. Ten years ago, probably six out of 10 index annuities came from nonqualified money.

Fast-forward to this year, six out of 10 index sales now use IRA or qualified money to fund that purchase.”

$13.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2010

2011

2012

2013

2014

Source: LIMRA Secure Re.rement Ins.tute, U.S. Individual Annui.es survey.

duces the cap once you own the annuity to less than – let’s say 4 percent – then you can cash-surrender the annuity without paying any penalties. It’s kind of a ‘trust me’ factor.”

The bailout option would prevent carriers from doing a bait-and-switch on terms – especially important for banks and wire houses. “Those distributors don’t want to do business with carriers that don’t have integrity when it comes to the renewal rate on those contracts,” Moore said. “Because they pay less commission to the salesperson, they can get

some of those features where the banker broker/dealer says, ‘This really helps me to feel comfortable doing business with this carrier and also gives me a marketing message to the client to say, “We’re not your typical indexed annuity. We have something that you can count on in terms of your rates going forward on this annuity once you’ve purchased it.”’”

LIMRA also noted that benefit riders have become a bigger deal among independent insurance distributors. Guaranteed living benefit (GLB) riders are now expected, said Joseph Montminy, assistant

Percent of Deferred Index Annuity Retail Sales IRA

Nonqualified 62% 57%

IRAs continue to be the dominant source of money to purchase indexed annuities

51%

49% 43%

38%

'06

'08

'10

Source: U.S. Individual Annuities survey, LIMRA Retail = IRA + Nonqualified annuity sales.

Fixed-rate deferred annuities = book value + market value adjusted annuities.

26

InsuranceNewsNet Magazine » January 2015

'12

Q3 YTD '14

New Channels Tune In

LIMRA also noticed that the bank and broker/dealer channels are taking an interest in the index world.

“Folks who may not have historically offered them are now starting to look at some of these index products,” Montminy said. “Wells Fargo went as far as to demand simpler features, shorter surrender charges, lower surrender charge amounts and lower comp.”

Banks have grabbed greater market share since the recession. In 2008, banks had 4 percent of the market. In 2013, they sold 13 percent. As of the third quarter of 2014, banks’ share had risen to 15 percent. But broker/dealers had an even more rapid ascent, growing from 5 percent of the market in 2013 to 14 percent as of the third quarter of last year. Career agents have hovered around 5 percent of the market since 2007.

Independent agents dropped from 86 percent of the market in 2011 to 65 percent as of the third quarter of 2014. Montminy is quick to point out that although the new channels grew, sales increased overall.

“Those independent agents are not losing dollar value sales,” Montminy said.

“They’re still seeing their dollar value sales grow in the independent agent channel.

It just happens that the banks and the independent broker/dealers are seeing their dollar value grow faster, which is why they’re capturing market share.”

In fact, Montminy said even though 2013 was a breakout year for FIAs, sales look to leap 25 percent higher in 2014 to about $48 billion. LIMRA is projecting another 10 to 15 percent gain this year.

But Kim O’Brien, CEO and president of National Association for Fixed Annuities (NAFA), sees a far bigger number.

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27

FEATURE 2015 ANNUITY FORECAST “I think we’re not too far away, maybe three or four years, from a $100 billion year,” O’Brien said. (Montminy said that although he was impressed with O’Brien’s attitude and agreed with the upward direction, he didn’t foresee that large a leap in the next few years.)

O’Brien is basing her projection on decades in the financial world and a dozen years at NAFA. “Twelve years ago, it was 10 percent of the marketplace,” O’Brien said of FIA market share. “Now one out of every two fixed annuities is an index.”

She has also noted the market share increase in other channels, but she said independent marketing organizations (IMOs) are probably not too nervous about the incursion. In fact, IMOs might be a key reason for that trend.

“It’s amazing how many of the independent marketing organizations have relationships with B/Ds and banks,” said O’Brien, who counts about 80 IMOs as NAFA members. “We think that’s because the banks and the B/Ds don’t really have the product or the back-office knowledge, so that growth is being driven by that relationship.”

NAFA board member and past chairman Bob Phillips sees it as even bigger than a convenient relationship. It’s a change he has seen first-hand from his perspective as the president of Alternative Brokerage.

Index Annuity Sales ($) by Distribution Channel (Dollars in Billions) Full Service Nat'l BD

Career

IBD

Banks

Independent Agents

$29.6

$25.0 $22.2

$27.5

$27.7

$23.5

$27.7

$23.4 $5.4 $5.3 $2.1

2007

$1.6

$1.8

$2.1 $1.9

2008

2009

2010

$2.0 $1.6

2011

$3.1 $1.9

$1.9 $2.1

2012

2013

$4.9 $1.8

YTD Q3 2014

Source: LIMRA Secure Re.rement Ins.tute, U.S. Individual Annui.es survey.

see wire houses have their own products, which will blast open the broker/dealer market for index. Whenever one of the wire houses has their own, then most of the national broker/dealers and regional broker/dealers are going to compete for those dollars.”

David Callanan, a co-founder of Advisors Excel, the nation’s largest IMO, is not exactly talking about a partnership with broker/dealers, but he is not too worried about their presence in the marketplace either.

“I have had the question from a lot of our advisors: Average first-year premium for ‘What happens if Morgan fixed index annuities. – LIMRA Stanley, or whoever, creates a fee-based product?

“We’re a wholesaler, mostly life and That’s going to be terrible!’” Callanan said. annuities on the fixed side,” said Phillips, “And I say a fee-based product is probawhose career has included stints at Legg bly going to have a three-year surrender Mason and Principal. “We’re like many of charge. Maybe two, one. Maybe even the traditional insurance agents. But there’s none. I don’t understand how they’re gobeen talk about a sea change just in the past ing to do that effectively. It’s not a variable five years. There’s a big evolution of IMOs, annuity. The power of this thing is the fact or there needs to be, toward the registered that the insurance company can invest rep market and the bank markets.” a little longer and does have protections He is keeping an eye on wire houses: based on surrender charges, so they can “The rumor was, back in 2009, that one get a little more yield and that yield goes of the major wire houses was developing back and benefits the client.” their own index product. Then the rates But that does not mean Callanan wants continued to shrink and they didn’t launch financial folks to fail in the indexed space. it. I think if rates come back, we’re going to In fact, he hopes they do well.

$76,000

28

Independent agent index annuity sales continue to grow, despite losing market share

InsuranceNewsNet Magazine » January 2015

“It just adds more validity to the product,” Callanan said of fixed index annuities.

“It’s been around now for 20 years, but the more penetration you get in banks and wire houses, the better. That’s because I’m convinced that an advisor can provide a better service-based platform for a lot of consumers than those places can. But, for goodness’ sake, if we get to the point where Morgan Stanley and Goldman Sachs are presenting these things every day, it becomes more commonplace.”

Callanan welcomes the wider recognition of FIAs, which he sees as part of an overall plan for client financial health. He likes them as simple as possible and dedicated to some gain but a lot of preservation.

So, he is not a big fan of one of the newest trends in FIAs.

Exotic Indexes and Uncapped Potential Debut

For the past few years, carriers have been offering annuities that link to indexes other than the typical Standard & Poor’s 500. Now, some companies are combining indexes to create new ones.

Moore, of Moore Market Intelligence, expects to see more hybrid indexes, partly because this helps companies offer another new feature.

“Hybrid indexes on these products are the way that people get to an uncapped crediting method,” Moore said. “So, instead

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FEATURE 2015 ANNUITY FORECAST of the S&P 500, it might be an index that includes the S&P 500 as well as other indexes, and they make up an index out of several others. And often it’ll have a cash component and do rebalancing and what have you.”

The new feature is being promoted pretty heavily, mostly in response to low interest rates, Moore said. The 10-year Treasury note has been hanging around above 2 percent for much of last year and does not look like it will rise anytime soon.

That is a problem because it’s the primary measure for pricing fixed annuities.

“It makes it very challenging to offer attractive caps and participation rates,” Moore said of the bond’s low rates.

“When caps and participation rates are so low, insurance companies and marketing groups are looking for better ways to make their product look more attractive.

And, in reality, using different indexes or different crediting methods doesn’t necessarily make the product better – it just makes it more marketable.”

The marketing message is that rather than the 3½ percent cap you would typically have on an S&P index, you can have a new index without a cap.

But how can a company offer an index without a cap?

“What they might do is take the S&P 500 but blend it with some nonperformers in terms of indexes,” Moore said. “So, bond indexes tend to be much more conservative in performance. Cash also. And then there are some indexes that are very new and have no history that you can add too. It essentially waters it down in terms of performance.”

A cap is the most typical of the three ways to limit interest in an FIA. The other two, participation rates and spreads, are sometimes perceived as an improvement over caps because a cap is a hard limit. No matter what the index does, you’ll never get more than the cap.

But a participation rate and a spread would actually allow a client to get more than the cap if the options seller didn’t price his options correctly, Moore said.

Options are typically what a carrier buys to cover the index portion of the FIA. Generally, though, the options seller will make sure his risk is relative regardless of the index or the crediting method.

“He might say, ‘Well, you know, if you really want the ability to say your product 30

Index Annuity Sales Expanding Outside of Independent Agents Full Service Nat'l B-­‐D

89%

88%

Career

84%

Independent B-­‐D

85%

86%

Banks

82%

Independent Agents

76%

65%

15% 7%

7%

6%

9%

5%

6%

6%

6%

5%

5%

5% 5%

2007

2008

2009

2010

2011

2012

2013

Source: LIMRA Secure Re@rement Ins@tute, U.S. Individual Annui.es survey.

doesn’t have a hard limit on the maximum potential for gains, you could use a participation rate because if the S&P 500 goes up 20 percent and if you’re using a cap at 3 percent, you’re never going to get more than 3 percent,’” Moore said. “‘But let’s say your participation rate is 50 percent and the S&P 500 goes up 20 percent.

Well, then you’d actually get 10 percent index interest.’ But he’s been selling options way longer than indexed annuities have ever existed. So he’s pretty good in his pricing since he’s the one who’s on the line for it.”

In the end, Moore said, regardless of the index or the credit method, they are going to perform about the same over a long period of time.

“Index annuities are a really great product,” she said, “but in an effort to make one company’s product look better than another’s, it seems like we get a lot of this ‘innovation’ for the sake of marketing, which really complicates the sale.”

Moore also gets worried about some of the new indexes and how they are marketed. She described what she thought was a head-scratcher in a company’s marketing piece describing a new index.

“When you turn to the third or fourth page, it has this chart where it lists some different years and some different values.

And it says, ‘Hypothetical Historical Performance.’ And it has an asterisk next to

InsuranceNewsNet Magazine » January 2015

13%

14% 5% YTD Q3 2014

it, and it leads to a footnote that says, ‘Although this index was just created July 24, 2014, had it existed in the past, here is an example of how it may have performed.’ ” She called the carrier and said, “You are releasing this piece that is going to tell your distributors it’s OK to be communicating to a client that they can get 24 percent, 36 percent gains, because here is this marketing piece that makes it look like that’s what people in the past have earned with it, even though this index was just created three weeks ago. And they said, ‘Well, you think that’s a problem?’”

The communication, not necessarily the index, is a problem at NAFA, said O’Brien, the association’s CEO, and Phillips, a board member.

“It’s dangerous unless we self-police,” Phillips said, casting an eye toward federal officials considering an expansion of fiduciary responsibility. “Everybody realizes that the regulatory environment is only going to increase. It has; it will. We don’t know what the Department of Labor is going to do or the Securities and Exchange Commission on fiduciary responsibility.”

Callanan said he would prefer that companies focus more on the income rather than on creative indexes.

“You could talk about inflationadjusted income or any kind of enhancement to start your income at one level and have the ability every couple of years to increase that based on something,” Calla-

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FEATURE 2015 ANNUITY FORECAST

Income Annuity Sales on Pace for Record-Setting Year in 2014 Immediate Income

Deferred Income $0.71

Dollars in Billions

$0.10 $0.21

$0.10

$0.16

$1.9

$1.8

$1.9

Q4

Q1

Q2

$2.2

Q3 2011

Number of Companies selling DIAs

3

$0.27

4

4

$0.71 $0.67

$0.56

$0.39

$0.54 $0.40

$2.0

$2.0

Q3

Q4

$1.7

Q1

$2.6

$2.5

Q4

Q1

$2.1

$1.9

Q2

2012

3

$0.62

Q3 2013

5

5

7

8

$2.6

Q2 2014

8

11

13

13

Source: LIMRA Secure Re.rement Ins.tute, U.S. Individual Annui.es survey.

nan said. “I think you’re going to see more and more of that in this space, and I really believe it’s what is important because it’s what the consumer needs.”

But Callanan conceded that there will probably be at least another year of exotic indexes and capping strategies: “Maybe I’m predicting more what might happen in ’16 and ’17, but typically when everybody starts talking about something, that’s when the ride’s over.”

In Comes the Income: QLACs, DIAs and SPIAs

The Qualified Longevity Annuity Contracts (QLACs) that the federal government created last summer allow people to buy a deferred income annuity (DIA) with qualified money inside a retirement plan. The DIA would pay later in life, when that contract holder reaches age 80, most likely. A key benefit is that it would reduce the required minimum distribution (RMD) that people would otherwise have to start taking at 70½. In November 2014, AIG’s American General was the first large company to offer a QLAC. Montminy of LIMRA said he’s heard quite a bit of excitement about QLACs. “It’s exciting because it does provide you the opportunity to have money that can go beyond the RMDs, but I think it’s going to be more of a niche kind of market,” Montminy said. “We’ve heard some people say it’s going to be a game changer. Actually I 32

don’t think it’s going to be a game changer, but I do see it helping to grow sales.”

Moore of Moore Market Intelligence said QLACs are probably going to be of most interest to career agents. She suspects the first purveyors of the products will be companies like MetLife, Guardian, New York Life and Northwestern Mutual.

One of the encouraging aspects is that it would promote the idea of DIAs at a time when low interest rates have dampened enthusiasm for those products and single premium immediate annuities (SPIAs).

“We’re very optimistic about SPIAs and DIAs overall,” Montminy said. “We see those as being something that will grow as more consumers need to create their own pension plan. Once rates start to increase, I think those sales will grow. Our forecasts right now are we see those sales almost doubling by 2018, and that can be conservative.”

The average contract size for SPIAs in 2013 was $124,000. And it was $137,000 for DIAs, Montminy said.

O’Brien of NAFA said she is optimistic about DIAs, which at $2 billion a year are where FIAs were when they first started in 1995.

“The biggest growth area for the DIA is probably more in the public sector and the institutional market, because of the decisions the Treasury has made on the 401(k) target funds and also the recent

InsuranceNewsNet Magazine » January 2015

$2.3

Q3

QLAC decision,” O’Brien said in describing ways that the DIA is being allowed in qualified plans. “I think those are going to be very strong propellers of growth for the DIA.” NAFA is also trying to get the Treasury to allow FIAs with GLWBs as QLACs along with DIAs. “The main difference between the two is the access to cash value,” O’Brien said. “There are good reasons for both.”

A Clearing Sky

O’Brien said she sees a sunny future for DIAs with the government’s interest. She also 15 expects FIAs will thrive as even more broker/dealers open the door to sales. O’Brien suspects that the Treasury’s exiting of quantitative easing will help lead to improvements in non-indexed fixed products.

Callanan of Advisors Excel also sees vast opportunity in the baby boomer generation, famously crossing the 65-year line at 10,000 a day. He thinks those retirees are looking not looking for bells and whistles, but for solid, trustworthy planning.

“I know there are advisors out there who are dying for the next, juicier thing that gives a better return so they can go pitch it,” Callanan said. “But I don’t believe that’s what the successful guys need. If you’re a great financial planner and offer your clients great benefits, I’m convinced that the struggle of competition won’t be the problem.

“We function in the world of abundance,” Callanan said. “There are so many consumers out there who have a need. And I think that’s why the industry has been growing the past few years.

I just think the opportunity is very, very large, and we’re just starting to tap into what it can really be.”

Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as an award-winning reporter and editor for newspapers, magazines and insurance periodicals. He also was vice president of communications for an insurance agents’ association. Steve can be reached at smorelli@insurancenewsnet.com.

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LIFEWIRES

Life Insurers Invest In Big Data Analytics bitly.com/qrbigdata

Workplace Customers Tend to Be Younger Who’s buying life insurance at work? Generations X and Y, that’s who.

A recent LIMRA study finds that 75 percent of workplace life insurance customers are members of Gen X or Gen Y. These workplace buyers also tend to be single and have annual household incomes of less than $50,000. They also don’t shop around after being presented with an option at work. In fact, 62 percent consider only one offer, and only one in six explores a third option.

The top reasons workplace customers purchase life insurance is to provide for family living expenses and cover burial expenses.

“Workplace life insurance buyers are more likely to be first-time customers of individual life insurance, and about a quarter have never had a general discussion with someone who represents the industry,” said Ron Neyer, assistant research director, LIMRA Distribution Research.

PRODUCT UPDATES

Carriers are updating their offerings faster than the snowflakes are tumbling from the skies. Here’s a sampling: Lincoln Financial Group enhanced its life insurance portfolio with updates to its term and survivorship indexed universal life (SIUL) offerings. The enhancements provide added flexibility in planning for income replacement needs, tax-efficient wealth transfer or health-related expenses.

Now available with Lincoln WealthPreserve SIUL policies, which insure two individuals in a single policy, is the Lincoln LifeEnhance Accelerated Benefits Rider (ABR) for clients who have a primary need for life insurance protection, but are also concerned about the impact a permanent chronic or terminal illness may have on their financial well-being. The LifeEnhance ABR provides access to tax-advantaged funds through acceleration of the policy death benefit when both insureds or the surviving insured develops a qualifying permanent chronic or terminal illness.

The Phoenix Companies added a pair of term life products aimed at the middle market.

Safe Harbor Term Life offers benefit DID YOU

KNOW

?

34

53%

riders that advance the death benefit in case of chronic illness, critical illness or terminal illness. The policy also offers an unemployment rider and an accidental death benefit rider. Face amounts range from $50,000 to $1 million.

Safe Harbor Term Life Express offers the same benefits as its fully underwritten cousin, but face amounts range from $25,000 to $400,000, the company said.

Fidelity & Guaranty Life announced it has added some flexibility to its fixed index universal life product by offering another interest crediting option that guarantees an interest rate of at least 3 percent. The option was made available to advisors and producers beginning Oct. 31. F&G’s Life-Choice policyholders and advisors now have four crediting options from which to choose, each tied to the benchmark Standard & Poor’s 500 index.

The crediting options are capped.

WIDOWS WISH FOR MORE INSURANCE

Widows find out too late that the emotional burden of losing a spouse is compounded by the financial burden that accompanies their husband’s death. Life insurance

of Gen Y consumers said they plan to buy life insurance within the next year.

Source: LIMRA

InsuranceNewsNet Magazine » January 2015

would help cushion the financial injuries, but many widows wish they had some or more coverage on their husbands.

Those are among the findings of New York Life’s “Loss of a Spouse Study” of nearly 900 widows and widowers. In addition to wishing they had more life insurance, 42 percent of widows surveyed said they wished they had saved more money during their marriages.

The survey also revealed that 30 percent of widows said they wished they had conducted detailed discussions about the financial consequences of the loss of their spouse, 28 percent wished they had a better financial plan in place and 18 percent said they regretted not having all of their important documents in one place.

Among women whose spouses had life insurance when they died, the policy proceeds lasted nearly two and a half years, but these women said they wished the policy proceeds had lasted them 14 years, the survey found.

Two in five women whose husbands did not have life insurance struggled to meet basic needs within the first year of their husband’s death, the survey found.

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Two industry associations have agreed to share services. The Association for Advanced Life Underwriting (AALU) and the National Association of Independent Life Brokerage Agencies (NAILBA) have entered into an agreement to join forces in specific areas.

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Both organizations will jointly promote membership and professional development opportunities.

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This material may contain a general analysis of federal tax issues. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.

Securian Financial Group, Inc. www.securian.com Insurance products are issued by Minnesota Life Insurance Company in all states except New York. In New York, products are issued by Securian Life Insurance Company, a New York authorized insurer. Both companies are headquartered in Saint Paul, MN. Product availability and features may vary by state.

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F81291-18 12-2014 DOFU 9-2014 A04618-0914

For financial professional use only. Not for use with the public. This material may not be reproduced in any form where it would be accessible to the general public.

January 2015 » InsuranceNewsNet Magazine 35

Read how life insurance can solve estate planning challenges in a low interest rate environment. Page 40

LIFE

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uch has been written about making lifetime gifts to use some or all of the $5 million federal gift tax exemption. This exemption has indexed up to $5.43 million in 2015 based on the permanent estate and gift tax rules of the American Taxpayer Relief Act of 2012. Some estate owners have already made lifetime exemption gifts of cash, 36

rental real estate, securities portfolios, and shares of limited liability corporations or S corporations to remove future asset appreciation from their taxable estates.

How can wealthy estate owners be persuaded to take action now while still preserving lifetime gifting flexibility for the future? The continuing historically low interest rate environment gives you an opportunity to use the “arbitrage” between the applicable federal rate (AFR) interest that must be charged on a “private loan” transaction and the assumed rate of return on invested assets in an irrevocable trust. This assumed “arbitrage” differential can be placed into an annual

InsuranceNewsNet Magazine » January 2015

premium for a limited-pay no-lapse survivorship universal life (SUL) policy owned by that same irrevocable trust. It’s this leveraged arbitrage of a short-term private loan plan that could cause your “wait and see” clients to take action now.

Let’s look at a simple fact pattern where $5.43 million is loaned (not gifted) from the estate owners to their irrevocable trust at the current short-term AFR rate.

Facts of the “Wait and See” Case

Mr. and Mrs. Citizen are each 60 years old and are rated preferred nonsmoking for underwriting purposes. They have a sizable estate and have the ability to make

CASH VALUE CAN BUILD A BRIDGE TO RETIREMENT LIFE

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➤ 10% penalty-free annual withdrawal 5after year -Yearfirst MYGA ProductAnalysis Analysis 1 5-Year MYGA Product Based on a Deposit Amount of $20,000 A.M. Best Secure Rated Companies Only ➤ Guaranteed Tax-Deferred Growth

5 Year – 2.55%

1

Based on a Deposit Amount of $20,000 A.M. Best Secure Rated Companies Only2

Easy access to current carrier multi-year guaranteed annuity rate comparison ▼ Name

1 Rate based on $20,000 or more in premium for the initial guaranteed period. Interest rates effective 12-12014 and are subject to change. Call for current rates.

The Oxford Life Multi-SelectTM annuity is issued by Oxford Life Insurance Company. A comprehensive description of the policy benefits, costs, exclusions, limitations and terms is available to you upon request. An investment in this contract is subject to possible loss of principal and earnings, since a surrender charge and market value adjustment may apply to withdrawals or upon surrender of the contract. Not available in all states. For more information, please refer to policy form ICC14-MYGA0814, DA520 and state-specific variations where applicable.

Company

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Royal Neighbors Guggenheim Athene Sentinel

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Liquidity Features

Product

Income Protector Preserve MYGA 5 Certainty Select 5

10% Free Withdrawals

Included Included Included3

Included Included Included4

Included Included Included

Not Available

Included4

Included

Choice 5 ProOption MYGA 5 MaxRate 5 Personal Choice 5

Not Available Included 0.15% 0.08%

Guarantee 5

Not Available

Guarantee Ultimate 5

Penalty Free RMD Death Benefit Withdrawals Waiver

Included4 Included 0.15% 0.16% Included4

Not Available Included 0.15% 0.15%

Included Not Available Not Available 0.08%

2.70% 2.45% 2.50% 3.00%

0.00% 0.00% 0.15% 0.66%6

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Not Available

2.25%

0.00%

Included Included Included

Included Included Not Available

Included

Not Available

Not Available Included 0.15% 0.15%

Included

Not Available

1. All data per AnnuityRateWatch.com as of April 15th, 2014 based on Yeild to Surrender. State availability and features may vary.

Value

Current Yield to Surrender (Effective Rate)

Terminal Illness Waiver5

Included Included Included 0.35%

2

Penalty Free Withdrawal of Interest in Year 1

Nursing Home Waiver5

▲

LIFE

Included Included Included

2.85% 2.80% 2.70%

Included4

2.30%

2. Secure rated companies include ratings of B+ or better, as defined by A.M. Best 1. All data per AnnuityRateWatch.com as of April 15th, 2014 based on Yield to Surrender. State availability and features may vary.

3. Elected through optional rider which modifies the death benefit to equal the surrender value or the accumulation value applied to a payment option of at least 5 years 2. Secure rated companies include ratings of B+ or better, as defined by A.M. Best.

6 Year – 2.65% 7 Year – 2.75%

Liquidity Rate Less Features Liqudity Cost Total Cost

0.00% 0.00% 0.00%

2.85% 2.80% 2.70%

0.00%

2.30%

Liquidity Features Included

6/6 6/6 5/6

8 Year – 2.85%

2.70% 2.45% 2.35% 2.34%

3/6 5/6 1/6 0/6 4/6

9 Year – 2.95%

2.25%

2/6

10 Year – 3.05%

4. Benefit not contractually guaranteed 3. Elected through optional rider which modifies the death benefit to equal the surrender value or the accumulation value applied to a payment option of at least 5 years.

5. For event. guaranteed.

4.eligible Benefitqualifying not contractually

6. RMD withdrawal costevent. is not included because RMDs are penalty free when 10% free withdrawal waiver is elected.

5. For eligible waiver qualifying

6. RMD withdrawal waiver cost is not included because RMDs are penalty free when 10% free withdrawal waiver is elected.

Policy Theforms…

Oxford Lifeetc Income Protector ® annuity is issued by Oxford Life Insurance Company. A comprehensive description of the policy benefits, costs, exclusions, limitations and terms is available to you upon request.

Not available in all states. more information, please ForFor producer use only etc.refer to policy form ICC12- IP200, and state-specific variations where applicable.

IP559P1

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— FOR PRODUCER USE ONLY — Not intended for soliciting or advertising to the public.

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37

LIFE PRIVATE LOAN STRATEGY PROTECTS ESTATES NOW WITHOUT GIFTING large gifts up to $5.43 million should they decide to do so. Fully informed that all future appreciation above date of gift value will be removed from their taxable estate, Mr. and Mrs. Citizen nevertheless have decided to “wait and see” what happens with the 2016 election and how the result might affect any tax law changes in the future. They ask you for any ideas that might cause them to take action now rather than wait.

You consult with your own advanced planning experts and are informed that the short-term AFR rate is at a relatively low 0.40 percent. This AFR rate is for private loans with a term of up to three years. Here is a summary of the suggested “private loan” transaction that could break the ice with your clients and cause them to take action now: » The clients loan $5.43 million to a newly created grantor irrevocable trust. They execute a short-term loan agreement between themselves and the trust with an interest-bearing note at only 0.40 percent interest for three years. Their law firm drafts the “private loan” agreement and note payable. » The trustee invests the $5.43 million in a portfolio of financial assets that are expected to produce a nonguaranteed hypothetical rate of return of 4.40 percent ($5,430,000 x 4.40 percent = $238,920).

Interest, dividends and capital gains on the trust portfolio are taxed to the grantors personally because the trust is a grantor trust for income tax purposes during their lifetime. » The trustee pays the annual interest on the note ($5,430,000 x 0.40 percent = $21,720) back to the grantors each year. » The trustee allocates the “arbitrage” amount ($5,430,000 x 4 percent = $217,200) to an annual premium for a three-pay nolapse SUL policy owned by the trust. » At the end of the three-year term in 2018, the trustee plans to repay the loan principal of $5.43 million back to the grantor. » As an alternative, in 2018 the grantor could “forgive” the repayment of the note.

This loan forgiveness would be treated as 38

The leveraged arbitrage of a short-term private loan plan could help your clients avoid the “wait and see” trap.

a completed gift of $5.43 million at that time. » As another flexible alternative, in 2018, part of the loan principal could be paid back to the grantor and the grantor could forgive the rest of the loan principal as a completed gift. Remember, the actual nonguaranteed rate of return on the loaned assets could be either greater or less than 4.40 percent over the threeyear term. The actual performance of the portfolio principal at the end of the threeyear term may determine the mix of how much loan principal is paid back to the grantor and how much is forgiven as a gift by the grantor. » The only risk of this private loan arbitrage plan is the investment performance over the three-year period from 2015 to 2018. Your clients should consult with their investment professional to determine the mix of financial assets that could potentially achieve the desired 4.40 percent or greater target rate of return.

What have we accomplished by this short-term three-year private loan plan between the estate owners and their irrevocable trust? » Using the net “arbitrage” between the assumed rate of return (4.40 percent) and the low AFR interest rate (0.40 percent), the trustee places this assumed net “arbitrage” of $217,200 (4 percent) into a three-pay no-lapse SUL policy from a

InsuranceNewsNet Magazine » January 2015

competitive carrier with a face amount of $3.7 million. This death benefit is free from income and estate taxes. » At joint life expectancy (assume age 90), the internal rate of return (IRR) on the competitive no-lapse three-pay SUL policy is 5.96 percent. Assuming a 30 percent average income tax bracket, the pretax equivalent IRR is 8.51 percent.

This pretax equivalent IRR is well in excess of what other nonleveraged fixed financial assets are currently yielding in this historically low interest rate environment. » The estate owners have preserved their full lifetime gift exemption for future gifts in 2018 and beyond. This allows them the flexibility to “wait and see” how the 2016 election will affect estate, gift and income tax planning in the future. » In the meantime, while waiting to see what will happen, they have created an additional $3.7 million death benefit for their heirs – free of income and estate taxes. This was accomplished with no additional premium outlay for the rest of the estate owners’ lives.

Russell E. Towers, JD, CLU, ChFC, is vice president, business and estate planning, of Brokers’ Service Marketing Group. Russ may be contacted at russell.towers@ innfeedback.com.

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Enjoy additional benefits by reaching new goals of Court and Top of the Table membership.

learn more v isit J O I N M D R T.O R G January 2015 » InsuranceNewsNet Magazine

39

Read how life insurance can fund a “loan and trust” estate-protection strategy. Page 36

LIFE

Leveraging Low Interest Rates to Avoid an Escalating Estate Tax L ife insurance can provide wealthy clients with a number of options to solve their estate planning challenges in today’s low interest rate environment.

By J. Leland “Lee” Davis

W

ealthy clients today face serious issues. At the top of the list is how to keep their families wealthy for generations to come while enduring the simultaneous problems of low interest rates on deposits and the generational erosion of assets due to the federal estate tax. Ouch.

By way of background, the federal estate tax was changed significantly in 2009.

Today’s wealthy clients understand that they have a $5 million exemption per person. For married couples, that’s $10 million that can be passed on to the next generation net of tax with proper planning.

At least for now.

But in a revenue-hungry, governmentcentric environment where Congress is searching for every tax dollar, how long will such an exemption last? One year? The next election cycle? Ten years? No one knows for sure. What we do know for sure is that the federal estate tax has been changed time and time again.

In regard to interest rates, the prevailing wisdom is that they will increase in the future from today’s minuscule savings rates.

According to Bankrate.com as of this writing, the average money market bank fund in America pays a paltry 0.48 percent. A one-year certificate of deposit pays 0.71 percent, and a five-year CD pays a whopping 1.5 percent. None of these rates comes close to keeping up with inflation as measured by the U.S. Consumer Price Index.

Many wealthy clients who have significant liquid assets are considering using a high early value life insurance policy as an alternative to such low savings rates – especially if they have a potential future drain on their assets caused by estate taxes.

40

The chart on the next page (pg. 42) shows the impact for Bob, 50, and his wife, Betty, 48, when they reposition $500,000 from their bank money market account (in equal installments of about $166,667) over a scant three years into such a plan.

If a bank would pay a 1 percent interest rate on a savings account, the interest “loss” to Bob and Betty on that $500,000 after the deposits is $5,000 yearly. Or is it?

In a commercially available second-to-die indexed universal life insurance policy

InsuranceNewsNet Magazine » January 2015

from a strongly rated carrier, the fifth-year cash value based on a midpoint interest rate of 6.5 percent (below the actual history of the carrier as of 2013) is $564,988, more than the same stream of payments compounded at 1 percent interest over the same time frame. By the way, if Bob and Betty are high-tax-bracket folks, and they probably are, their bank interest is taxable – making the difference in favor of the life insurance policy even more substantial.

Perhaps more important, the second-to-die

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Power Select Plus Income Index Annuity is issued by American General Life Insurance Company (AGL), a member of American International Group, Inc. (AIG).

All contract and optional guarantees are backed by the claims-paying ability of AGL and are not the responsibility of AIG.

Important notes: Index annuities are not a direct investment in the stock market.

They are long-term insurance products with guarantees backed by the claimspaying ability of the issuing insurance company. They provide the potential for interest to be credited based in part on the performance of the specified index, without the risk of loss of premium due to market downturns or fluctuations. Index annuities may not be suitable or appropriated for all clients.

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January 2015 » InsuranceNewsNet Magazine

41

LIFE LEVERAGING LOW INTEREST RATES TO AVOID AN ESCALATING ESTATE TAX

estate (death) benefit in that policy

Premium Policy Net Net Accumulated Net Cash Death Outlay Loan Outlay Value Surrender Value Benefit is some $4,502,015 in Year 5. That’s Year Age 1 50/48 166,667 0 166,667 164,455 164,445 7,518,365 nine times their deposits.

51/49 166,667 0 166,667 334,654 334,645 7,518,365 If the policy is personally 2 3 52/50

166,666

0

166,666

513,438

513,430

7,518,365 owned, Bob and Betty have access 53/51 0 0 0 538,408 538,402 7,518,365 to their cash value at any time, 4 5 54/52 0 0 0 564,993 564,988 4,502,015 via withdrawal or through a low6 55/53 0 0 0 593,294 593,290 4,502,015 interest policy loan. At any point, 7 56/54 0 0 0 623,420 623,417 4,502,015 the policy could be used as collat- 8 57/55 0 0 0 655,486 655,483 4,502,015 eral for a business loan should Bob 9 58/56 0 0 0 689,611 689,610 4,502,015 and Betty decide on a potential 10 59/57 0 0 0 725,923 725,923 4,502,015 venture. All cash values accumu- Total 500,000 500,000 60/58 0 0 0 772,112 772,112 4,502,015 late free of tax until withdrawal, 11 61/59 0 0 0 821,247 821,247 4,502,015 and withdrawals may be tax-free, 12 62160 0 0 0 873,502 873,502 4,502,015 if properly structured, under cur- 13 14

63/61

0 0

0

929,048

929,048

4,502,015 rent tax rules.

15 64/62 0 0 0 988,076 988,076 4,502,015 Here may be the best part.

16 65/63 0 65,000 -65,000 983,467 983,467 4,436,223 When Bob reaches age 65, the 17 66/64 0 65,000 -65,000 978,379 978,379 4,368,950 life insurance policy can begin 18 67/65 0 65,000 -65,000 972,740 972,740 4,300,164 distributions on a tax-free basis 19 68/66 0 65,000 -65,000 966,467 966,467 4,229,830 under current law. In this exam- 20 69/67 0 65,000 -65,000 959,459 959,459 4,157,914 ple, a $65,000 annual withdrawal Total 500,000 325,000 175,000 70/68 0 65,000 -65,000 951,616 951,616 4,084,380 occurs each year over the next 12 21 71/69 0 65,000 -65,000 942,817 942,817 4,009,191 years (assuming that midpoint in- 22 23

72/70

0

65,000

-65,000

932,923

932,923

3,932,310 terest rate and current insurance/ 73/71 0 65,000 -65,000 921,727 921,727 3,853,699 administrative charges). That’s 24 25 74/72 0 65,000 -65,000 909,017 909,017 3,773,320 $780,000 of tax-free withdrawals 26 7/73 0 65,000 -65,000 894,546 894,546 3,691,132 from their initial $500,000 de27 76/74 0 65,000 -65,000 877,989 877,989 3,607,095 posit – some $280,000 more than 28 77/75 0 0 0 926,266 926,266 3,586,959 they put in, potentially income 29 78/76 0 0 0 976,009 976,009 3,566,371 tax-free.

30 79/77 0 0 0 1,027,027 1,027,027 3,545,319 Now, when they reach ages Total 500,000 780,000 100/98 0 0 0 1,618,644 1,618,644 2,975,491 77 and 75, respectively, Bob and 51 101/99 0 0 0 1,596,283 1,596,283 2,941,144 Betty can maintain the life insur- 52 102/100 0 0 0 1,571,896 1,571,896 2,906,024 ance policy with its death benefit 53 54

103/101

0

0

0

1,545,522

1,545,522

2,870, 114 in excess of $3 million without 55 104/102 0 0 0 1,517,163 1,517,163 2,833,397 any further deposits under those 56 105/103 0 0 0 1,486,785 1,486,785 2,795,853 same assumptions for the remain57 106/104 0 0 0 1,454,316 1,454,316 2,757,464 der of their lives.

58 107/105 0 0 0 1,419,648 1,419,648 2,718,212 If Bob and Betty should change 59 103/106 0 0 0 1,382,635 1,382,635 2,678,076 their minds a few years down the 60 109/107 0 0 0 1,343,090 1,343,090 2,637,037 road, it seems unlikely they would Total 500,000 780,000 lose any return whatsoever in comparison to a bank account. Looking Net accumulated values take into account deductions from the contract value for all fees, commissions, and expenses and the cost of insurance. at the market history of the various All values on the chart are taken from a commercially available life insurance policy illustration from a major U.S. carrier. They contain nonguaranteed values based on current costs of insurance and an illustrative interest rate, which can and will vary. Actual results are likely to be indexes even in recent tumultu- different from those illustrated, and proper tax and legal consultation is always suggested in these matters. ous years, Bob and Betty would likely still be ahead of where they Or Bob and Betty could choose to donate J. Leland “Lee” Davis, would’ve been at today’s paltry money market rates, especially because they can never the policy to a charity. They would receive a LUTCF, is a Top of the Table earn a negative return in today’s policies of significant income tax deduction while the member with multiple Court of the Table qualifications charity receives a significant windfall. this type. over his 25 years of Million And in some states, life insurance has Dollar Round Table memIf the estate tax laws are changed to rebership. He and Jeremy duce the $5 million exemption to, say, $1 significant insulation from creditors.

Leveraging low-interest and, in many cas- L. Davis, CFP, ChFC (a Court of the Table million or some other number, this policy qualifying MDRT member), are partners in could be placed into an irrevocable trust es, dormant bank savings into large life insur- the Colorado-based wealth advisory firm ance policies with high early values could be using part of Bob and Betty’s lifetime uniJ.L. Davis Financial Corp. Lee may be the right solution for today’s wealthy client. fied credit at some point in the future. contacted at lee.davis@innfeedback.com.

42

InsuranceNewsNet Magazine » January 2015

Life insurance for

Life...

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Our whole life products, with their high, early, guaranteed cash value, give people what they want—liquidity, access and control of their money.

Our policyowners enjoy: • • • •

Early access to the cash value in their policies through the Infinite Banking ConceptTM Late stage college planning Opportunities for business planning, including buy/sell agreements, executive bonus, key person Plus, guaranteed level premiums and guaranteed death benefits.

As a mutual company, providing value to our policyowners is our primary mission. Offering products with high, early guaranteed cash value that can be accessed throughout life is our goal.

Do you have clients who want the living benefits whole life insurance provides?

To learn how MTL and its products can help you satisfy your clients’ needs as well as maximize your sales, contact: G. Edward Hughes, CLU, Senior Vice President Chief Sales and Marketing Officer 800-323-7320, Ext. 5594 • hughese@mutualtrust.com Or online at: www.mutualtrust.com/opportunity

Follow us on January 2015 » InsuranceNewsNet Magazine

For producer use only

43

Brought to you by:

ANNUITYWIRES

Interest Rates Drag Down Annuity Sales in 3Q

2%

Lower interest rates dragged down fixed annuity sales in the third quarter as annuity sales fell 2 percent from the prior year. Total third-quarter annuity sales reached $58.2 billion, according to LIMRA. In the first nine months of 2014, total annuity sales increased 6 percent, compared with 2013, to reach $177.7 billion.

“Throughout the year, fixed annuities have been the primary driver of overall annuity growth,” said Todd Giesing, senior analyst, LIMRA Secure Retirement Institute Annuity Research. “The 50 basis-point drop in interest rates since the start of the year has dampened interest in fixed products, pulling down third-quarter sales.”

Total fixed annuity sales were $22.7 billion in the third quarter, down 5 percent versus the prior year. Fixed index annuity sales grew 15 percent in the third quarter, to $11.7 billion.

Deferred income annuity sales reached $670 million in the third quarter, 21 percent higher than the prior year. In the first nine months of 2014, DIAs jumped 35 percent, totaling $2.0 billion. Single premium immediate annuity sales were up 10 percent in the third quarter to reach $2.3 billion. Variable annuity sales fell 1 percent in the third quarter, totaling $35.5 billion.

ANNUITY OWNERS MORE CONFIDENT ABOUT RETIREMENT

Making the leap from the working world into retirement can be scary. But owning an annuity can inject a boost of confidence into retirement.

That’s the word from a recent LIMRA Secure Retirement Institute (LIMRA SRI) study, which found that nearly nine out of 10 annuity owners are confident about their lifestyle in retirement.

High confidence is most notable among households with investible assets of $100,000 to $999,000. Those two categories account for 79 percent of the households in the survey. One-third of households with assets of $500,000 to $999,000 own an annuity, as do 38 percent of households with assets of $100,000 to $499,999.

“These two groups have limited assets at their disposal that they will need to use in their retirement,” said Jafor Iqbal, LIMRA SRI associate managing director.

“These consumers tell us that owning an annuity gives them confidence about their financial security in retirement.”

The positive trend is also reflected among households with more than $1 million in assets, as 44 percent of annuity owners in that 44

category say they are “very confident” of a secure retirement compared with 35 percent of non-annuity owners.

NEW PRODUCTS ARRIVE ON THE SCENE

Genworth has introduced a new fixed index annuity (FIA) with a lifetime income rider for consumers as young as 45 who want to start building retirement income that has the potential to grow before and after withdrawals begin. SecureLiving Growth+ with IncomeChoice rider also offers the potential for contract owners to double their income for up to five consecutive years when they are confined to a medical care facility.

Symetra introduced an enhanced death benefit rider to its suite of FIA products.

The optional feature is available on select Symetra fixed indexed annuities, including Symetra Edge Pro Fixed Indexed Annuity, and is designed to provide beneficiaries with a potentially larger death benefit than they would otherwise receive from an annuity contract.

MILLENNIALS ARE OVERWHELMED

BY RETIREMENT SAVING

Millennials have a lot on their minds as they launch their careers and families. For

InsuranceNewsNet Magazine » January 2015

them, retirement can seem like a distant place they’ll never reach.

A Nationwide Retirement Institute survey showed that 28 percent of millennials who don’t have a retirement saving plan believe that creating one is overwhelming. Forty percent said they haven’t begun to create a plan.

On a slightly more positive note, 64 percent of millennials ages 18 to 35 said they had a financial plan, although 68 percent of them also said they were not investing enough to pay for the retirement they envisioned for themselves.

Although 58 percent of the millennials surveyed said they conducted their own financial research and made their own financial decisions, only 50 percent said they were confident they knew how much to save for retirement.

JACKSON STAYS IN FIRST PLACE IN 3Q

Jackson National retained the top spot among individual annuity writers in the third quarter of 2014, according to LIMRA SRI. Jackson remained the largest variable annuity (VA) writer, with Allianz Life leading fixed annuity sales.

AIG companies ranked second in total annuity sales, with Lincoln National third, Allianz fourth and TIAA-CREF fifth. In the VA category, Jackson was followed

by Lincoln, AIG companies, TIAA-CREF and Prudential. New York Life was second in fixed annuity sales, followed by AIG, Security Benefit and American Equity Investment Life. The only change in ranking among the top five companies in any category was AIG, which edged TIAA-CREF for third place in VA sales.

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In the S&P 500 point-to-point with participation rate indexed strategy, the participation rate limits the indexed interest rate to a percentage of the change in the S&P 500 index, but the indexed interest rate is not capped at a maximum percentage. For funds allocated to an indexed strategy, interest is credited on the last day of the term. The account value, which includes any credited indexed interest, will not go down unless, during the early withdrawal charge period, a withdrawal is taken or the contract is surrendered. In the Stacked Income Option, the benefit base amount, on which rider income payments are based, is increased by interest credited to the account value, which may include indexed interest determined in part by changes in a market index or a fund unit value. Because account value interest is added to the benefit base amount after income payments begin, income payments may increase. Optional riders are available for an annual charge.

Products issued by Great American Life Insurance Company , a member of Great American Insurance Group. (Cincinnati, Ohio) under contract form numbers P1104314NW and P11044NW, and rider form numbers R6046814NW, January2784-SP 2015 » InsuranceNewsNet Magazine 45 R6046914NW and R6047014NW. Form numbers and features may vary by state. Not available in all states. For producer use only. Not for use in sales solicitation. ®

ANNUITY

Regulatory Moves Crumble Walls Between Fixed and Variables A discussion on contingent deferred annuities leads to speculation on whether the “walls” between fixed and variable annuities could be coming down.

By Linda Koco

C

ould the walls between fixed annuities and variable annuities be vanishing? Well, yes. And, well, no.

During a recent conference call of state insurance commissioners, a few commenters alluded to how the walls between those types of annuities “don’t really exist.”

This was in the context of a discussion 46

about a third type of annuity, the contingent deferred annuity (CDA) – essentially an income guarantee attached to securities not owned by the insurer.

The conversation centered on regulating CDAs like any other annuity in key regulatory areas (such as producer licensing and suitability), as opposed to regulating them separately from fixed and variable annuities.

Might this thinking affect the annuity future for advisors? It could, depending on the direction it takes.

A Puzzle

The “walls” part of the discussion might puzzle annuity producers, because their

InsuranceNewsNet Magazine » January 2015

business licenses allow them to sell specific products.

A fixed annuity producer needs a life insurance license. Those who sell variable annuities need both a life insurance license and a securities license (because the products are annuities that are registered with the Securities and Exchange Commission [SEC]).

In view of the distinct licensing requirements, how can the walls between annuity types be nonexistent? The answer has to do with how state regulators are approaching regulations regarding annuities, said Jim Mumford, deputy insurance commissioner in the Iowa Insurance Division and securities administrator in the Iowa Department of Commerce.

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ANNUITY REGULATORY MOVES CRUMBLE WALLS BETWEEN FIXED AND VARIABLES State and federal regulators are sharing knowledge and arriving at meetings of the minds in ways that are becoming increasingly important as annuity product development evolves, he indicated in an interview. Mumford alluded not only to CDAs but also to “collared variable annuities” as examples of new forms of annuities that regulators are seeing.

This regulatory sharing is removing certain barriers in annuity regulation, he said. Or at least it is putting doors in the walls that have kept certain parts of annuity regulation separate and distinct.

It Started With the CDAs

The trend started with the arrival of the CDAs, the regulator said. (The earliest versions popped up in the latter part of the last decade.) The first-blush view was that these products were essentially a wrap on a portfolio of stocks, he recalled.

As such, they should be regulated as a security and registered with the SEC. But insurance regulators looked at the reserve issues related to the annuity guarantees, the market conduct issues, sales and many other factors, Mumford recalled. From an insurance standpoint, they wondered, were these fixed or variable annuities? How should they be regulated at the state level?

As it has turned out, state insurance regulators have decided “that CDAs are neither fixed nor variable annuities, but they are annuities,” he said. “They are in their own category.”

But do CDAs need their own set of regulations? Because the products are annuities, can existing regulations apply to them? These questions no doubt still sit on some regulatory tables. But they have also opened up awareness of regulatory walls that complicate things for annuities, and for the business that depends on consistent and effective regulation.

For example, state insurance regulators initially considered adding language related to CDAs in certain model insurance regulations that affect annuities.

But the thinking has now turned toward approaching the products as annuities (i.e., with no separate distinction) and treating them as such from a regulatory standpoint in certain insurance regulations. This approach focuses on the commonality between the products, keeps existing model regulations largely intact, 48

and builds on what is already known and understood.

As for CDA specifics, the regulators are developing guidelines for state insurance regulators to consult, complete with references to existing model laws. The guidelines raise regulatory points about CDAs without unraveling the existing annuity regulation order.

“CDAs (contingent deferred annuities) are neither fixed nor variable annuities, but they are annuities. They are in their own category.”

— Jim Mumford, Iowa Deputy Insurance Commissioner

Backstory

Mumford traces some of this more unified way of thinking back to the early 2000s, when annuity carriers started adding guaranteed living benefits to their variable annuity policies.

Up to that time, state insurance regulators had been reviewing variable annuity forms for compliance with state laws, Mumford recalled. The SEC handled oversight via review of the prospectus, and the state securities departments looked at compliance with state investment laws, licensing of the salespeople, and protection against fraud and scams in mind.

Those were the walls for variable annuities back then. But with the arrival of guaranteed living benefits in variable annuities, state insurance regulators saw that they needed to start looking at more than the product forms. They needed to look at the reserves that carriers had available to support the guarantees, he said.

As approaches for this developed, the National Association of Insurance Commissioners (NAIC) began having meetings with the SEC and later with the Financial Industry Regulatory Authority (FINRA), he said. These connections led to a more clear understanding of what areas the various regulators were looking at. That led to

InsuranceNewsNet Magazine » January 2015

sharing, and that led to some coordination and/or common ground.

Suitability Example

One example has to do with suitability.

The states had their own suitability regulations for life and annuity sales, and FINRA had its own set for sales in the broker/dealer channel including annuity sales, even fixed annuity sales.

Those were the walls. However, it’s different today. For example, in many states, if a fixed annuity is sold through a broker/dealer, the suitability process of the B/D (as provided for under FINRA) “is OK by the states,” Mumford said. That’s even though the fixed annuity is not a security. The NAIC model says this is acceptable suitability review, he said.

What about suitability reviews of fixed annuity sales that go through insurance channels rather than B/Ds? The suitability is regulated by the insurance department of the state where the annuity is sold.

The shared approach to oversight is spreading into other areas. Right now, Mumford noted, NAIC and FINRA are working on developing common social media rules.

Developing common approaches to annuities, or other regulatory areas, is a process, he cautioned. It requires “both sides to develop an understanding about what the other regulators are looking at.

That takes time.”

But it could have positive outcomes for the industry. “For both carriers and producers, it is generally preferable to have one uniform set of regulatory requirements than different and possibly inconsistent federal and state standards that apply,” Stephen E. Roth said in an email.

Roth is a partner at the Washington law firm of Sutherland Asbill & Brennan and has deep annuity expertise.

“To the extent there is a trend toward one regulator deferring to or recognizing the regulatory framework of another regulator,” Roth said, “that trend generally should operate to create more effective and efficient compliance.” In turn, that should benefit all concerned, including consumers, Roth said.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning.

Linda may be reached at linda.koco@ innfeedback.com.

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January 2015 » InsuranceNewsNet Magazine

49

ANNUITY

The Case for Annuities in Qualified Retirement Plans E ighty-four percent of plan participants have no kind of guaranteed future income funding option from which to choose.

By Jim Pedigo

C

ould your client’s 401(k) or 457 plan be missing the mark? Probably, because most of those plans do.

Why? Most plan administrators do not allow 401(k) and 457 plan participants the option to purchase a fixed annuity to fund for future income guarantees.

What can you do? Let’s look at some background information and then answer the question.

Here are four common income options that 401(k) and 457 plan participants may select in order to generate retirement income. The fourth option combines the features of the first three options.

This fourth option allows anyone from age 20 to age 60 and beyond to continuously accumulate a portion of their plan account or use a lump sum to guarantee many thousands of dollars in future income. This option also allows for ongoing guaranteed growth with principal protection, including access to principal at any time, even in retirement. Plus, participants can turn on their guaranteed lifetime income whenever they are ready to retire after the annuity contract has been in force for one year. An income start date of age 59½ or later is recommended to avoid the Internal Revenue Service’s 10 percent penalty for early withdrawals.

The 401(k) and 457 plan income options are: Option 1: The client invests in mutual funds and, upon retirement, spends only the investment earnings, which typically consist of mutual fund interest and dividends. The client doesn’t touch 50

the principal. Income will fluctuate and may not be sufficient. Principal is subject to investment risk.

Option 2: The client invests in mutual funds and, upon retirement, draws down the principal cautiously using systematic withdrawals so they don’t outlive their assets. The client could run out of money if they live past their assumed age of death.

Principal is subject to investment risk.

Option 3: The client buys an immediate income annuity from an insurance

plan participant account, there is a fourth option. A fixed index annuity with a guaranteed lifetime income rider may be just what your client is looking for. Income payments can be guaranteed years in advance for deposits directed by the plan participant, whether they are in their 40s, 50s or 60s, or older.

These income payments will continue until the annuity owner’s death, while the underlying equity index contract continues to accrue interest credits. Principal and income payments are guaranteed, with access to principal at all times. If the owner dies before the policy’s accumulation value is depleted, there are two options: » The spouse may continue to receive the guaranteed withdrawal payments until the policy’s accumulation value is depleted. » The spouse or beneficiary may receive any remaining accumulation value in a lump sum or in a series of payments.

company after retirement and lives off the monthly benefit the insurance company pays them. This option provides the client with steady income but no access to principal. The client’s account growth before retirement is uncertain because of mutual fund market fluctuation.

If your client’s plan does not offer this guaranteed income option, they must ask their employer for it.

Option 4: If your client wants guaranteed future lifetime income with access to principal with part of their

InsuranceNewsNet Magazine » January 2015

On July 1, 2014, the Treasury Department added another income option to the mix described previously. It is the deferred income longevity annuity, which will reduce your client’s required minimum distribution requirements. With Option 4, as described previously, your client cannot outlive the payments. The Treasury deferred income longevity annuity will soon be available to your client, if their employer’s retirement plan adopts it.

Sounds great, right? But wait: Option 4 and the Treasury deferred income longevity annuity will not be that easy for your client to obtain. A Hewitt Associates survey found only 16 percent of 401(k) plan participants have some form of future income option. However, many of the participants in those plans have to choose

THE CASE FOR ANNUITIES IN QUALIFIED RETIREMENT PLANS ANNUITY from the income riders of nonguaranteed variable annuities, and they elect not to do so. That leaves 84 percent of plan participants representing billions of dollars in plan assets with no kind of guaranteed future income funding option from which to choose.

The problem arises because the guaranteed future income options mentioned in Option 4 and the Treasury deferred income longevity annuity, are funded by a fixed annuity, which is considered a guaranteed savings and income contract. This fixed annuity contract requires the plan administrator to manually report and keep records as required by the Employee Retirement Income Security Act (ERISA).

Many 401(k) and 457 plan administrators refuse to approve the use of any savings products like the fixed annuity in Option 4 because they require manual record keeping and reporting. There are several reasons for the plan administrator’s refusal to administer these products; mainly they do not want to change their current method of electronic record keeping and reporting. For clarification, there are generally two reporting companies

for 401(k) and 457 plans: the plan custodian and the plan administrator. These may be the same or different companies.

The plan custodian holds the plan mutual funds and provides daily values for the plan participants. The plan administrator provides the plan record keeping and reporting for the IRS and the Department of Labor.

What can you do to help your plan participant clients get this option added to their plan?

If your clients want a guaranteed future income option added as one of their saving selections, even if they already have a variable annuity option in the plan, ask them to introduce you to their employer so you can explain what is needed to get the fixed annuity added as one of the plan savings options. It would be helpful to let the employer know their current administrator may not want to administer this new savings option because they may not want to do the manual record keeping and reporting, or if they do, they may want to charge a higher-than-normal cost for this manual service. These administrators may need to be replaced

with a “fixed (guaranteed) annuity-friendly” administrator, who normally charges the same administrative cost as (or a lower cost than) your client’s plan is already paying.

Finally, advise your clients that you are knowledgeable about which insurance companies to use for their plan and its participants and about how the fixed annuity product will work inside their plan, and, if necessary, help their employer select an annuity-friendly 401(k) or 457 plan administrator. To help you become more comfortable with the retirement plan language, there are continuing education courses available in your state for 401(k) and other defined contribution plans. Your goal is to become recognized as the agent that prospects, clients and employers look to for guidance in this relatively new area of guaranteed future lifetime income.

Jim Pedigo, CLU, ChFC, CASL, is a retirement planning advisor with Financial Rate Watcher$ Inc. in Lake Mary, Fla. Jim may be contacted at jim.pedigo@ innfeedback.com.

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January 2015 » InsuranceNewsNet Magazine

51

HEALTHWIRES

Small-business owners brace for 2016 rate shock. bitly.com/qrshock

Americans Would Rather See the Dentist Than …

Let’s take a moment to feel sorry for dentists. All they want to do is help us keep those pearly whites gleaming. And what do we do in return? We describe certain tasks as being so repulsive that we would rather face the dentist’s dreaded drill than perform them.

Two recent surveys bring home this point. One has to do with shopping for health insurance and the other is about having the long-term care discussion with family members.

Bankrate.com surveyed those who recently shopped for a health plan and found that 23 percent said it was worse than having a cavity filled and 45 percent ranked the experience as just as bad as a dentist’s visit.

Meanwhile, a Genworth survey revealed that one out of every four adults would rather go to the dentist than talk about their long-term care or aging needs. Genworth’s president, Tom McInerney, didn’t think the findings were anything to smile about. “While the data stating people would rather sit in a dentist chair than talk about long-term care might seem amusing, the severity of the issue is very real,” he said.

ACA ENROLLMENT PERIOD NEARING HALFWAY MARK

We’re about halfway into the second open enrollment period for coverage under the Affordable Care Act (ACA), and from most reports it seems to be an easier experience than the initial sign-up period.

Nearly half a million Americans chose plans on HealthCare.gov during the first week of open enrollment for 2015. The U.S. Department of Health and Human Services (HHS) said that more than a million Americans submitted applications for coverage in that first week. Those figures include numbers only from the 37 states that offer coverage through the federal site rather than state-based exchanges That’s a big change from the initial enrollment period, when only 27,000 people were able to sign up for coverage on HealthCare.gov during the entire first month.

The Obama administration has predicted that at least 9 million will enroll in coverage by the time the current open enrollment period ends Feb. 15.

DID YOU

KNOW

?

52

62%

HOW MUCH ARE THOSE DEDUCTIBLES?

It’s not enough to compare the premiums on health care plans. Those deductibles are lurking out there, ready to rip a hole in your client’s wallet. HealthPocket examined deductibles and other out-of-pocket costs for the 2015 ACA health plans, and here’s what they found.

Bronze plans, the most frequently purchased plan off-exchange, averaged a $5,181 deductible for individuals, up from $5,081 in 2014. The 2015 average amount is 326 percent higher than the average deductible documented for employer-sponsored health plans. Silver plans, the most frequently purchased plans on-exchange, averaged $2,927 as the deductible amount for individuals. The average deductible amount for families was $10,545 and $6,010 for bronze and silver plans respectively.

The average deductible for 2015 gold plans was $1,198, and top-tier platinum plans averaged only $243 for an individual deductible. In both cases, these averages were lower than the averages observed for 2014 ($1,277 for gold plans and $347 for platinum plans).

of pre-retirees are “terrified” of what health care costs may do to their retirement plans.

Source: Nationwide Retirement Institute

InsuranceNewsNet Magazine » January 2015

QUOTABLE A lot of people have never had insurance and do not know how to use it.

— Carl Dahlquist, Gulf Coast Health Center’s enrollment and outreach supervisor

Out-of-pocket costs for doctor visits and specialist visits fluctuated among the different ACA plan types. Doctor and specialist visits were 13 percent more expensive for bronze plans. Gold plans, in contrast, saw the average doctor visit copayment decline from $24 in 2014 to $23 in 2015.

HISPANICS TARGETED FOR ACA YEAR 2

The second year of ACA enrollment is being marked by a special push to sign up Hispanics for health coverage. Hispanics accounted for just 11 percent of those who bought private policies during the initial sign-up period, according to Associated Press reports. An estimated 25 percent of this population group has no health coverage.

In order to reach the Hispanic population, insurance companies and navigator groups are visiting churches and coin laundries. Spanish-speaking insurance agents in North Carolina are setting up shop in grocery stores that serve Hispanic customers. HHS Secretary Sylvia Burwell chatted with Hispanic bloggers and television interviewers on Univision and Telemundo.

Why aren’t Hispanics beating down the door to get health coverage? For many, it’s the fear that providing their personal information will get their undocumented family members deported, according to Covered California.

The California health insurance exchange is making a particular effort to dispel those fears in a series of TV ads aimed at Spanish-speaking residents. One commercial shows documents flying into a vault as a man tells viewers their information is “confidential and private.”

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HEALTH

Voluntary Can Ease Clients’ Growing Health Care Worries N ew exchanges, greater accountability and need will confront agents and consumers this year.

By Tye Elliott

T

he more things change, the more they stay the same, right? Well, not always. When it comes to the way insurance is purchased, paid for and delivered in the United States, things aren’t the same at all.

No one has a crystal ball that predicts exactly what human resources (HR) professionals will observe and experience this year, but it’s easy to make a few educated guesses based on the current health care atmosphere. Here are some key trends and issues to watch for in 2015.

[1 ] The Emergence of Private Insurance Exchanges

Privately run exchanges are steadily gaining momentum and are one-stop shops for the purchase of employer-provided health insurance. Seven percent of companies surveyed as part of the 2014 Aflac WorkForces Report moved employees to private exchanges in 2013, and another 7 percent planned to do so in 2014. Of those companies, 37 percent said they made the decision because moving workers to private exchanges would be financially advantageous for their companies.

A separate survey found that employers’ interest in private exchanges for active employees continues to grow, but many are awaiting additional evidence that exchanges can deliver more value than their traditional self-managed programs, according to the Towers Watson 2014 Health Care Changes Ahead Survey.

Separate and different from government marketplaces, private exchanges are a simple way for employers to offer comprehensive worksite benefits. With private exchanges, businesses designate an amount they’ll pay for coverage. Employees then compare insurance plans and 54

purchase a plan that’s right for their individual needs. This type of fixed-stipend approach helps employers control costs. If the plan selected by an employee exceeds the stipend amount, the remaining cost is deducted from the worker’s paycheck.

[2] Shifting Accountability

Remember when employees who enrolled in employer-sponsored health insurance plans generally paid the same rates, regardless of their physical condition or behavior? Times have changed. The new world of health care benefits allows for varying rates based on factors such as smoking and enrollment in wellness programs. The result is an increase in employee accountability because workers now have a bit of control over their health care spending.

Many workers view wellness and incentive programs favorably – perhaps

the expense, provided the procedure is performed at a preferred hospital or workers see a designated physician.

[3] A Growing Need for a Consumer Safety Net

As employees assume more responsibility for their health care choices, the need for strong safety nets to help protect their finances becomes more crucial. Rising health care costs also continue to be a concern. According to a recent survey, health insurance premiums have risen by 80 percent since 2013. During the same period, wages increased 1.8 percent and inflation increased 1.1 percent, according to the Kaiser Foundation 2013 Employer Health Benefits Survey.

Many Americans are not comfortable with their burgeoning health care responsibilities. Four in 10 workers (43 percent)

Since 2013, health insurance premiums have risen by 80 percent while wages grew by just 1.8 percent.

Kaiser Foundation 2013 Employer Health Benefits Survey

because these programs provide them the opportunity to keep more of their paychecks. According to the Aflac study, 79 percent of employees at least somewhat agreed they would be willing to change their lifestyle habits in exchange for lower insurance premiums. What’s more, 87 percent said it’s fair to reward employees for becoming healthier with lower premiums or incentives such as gift certificates or extra days off.

On the provider side of the accountability equation, some hospitals and insurers have teamed up to shift pricing models to value-based outcomes. At the same time, companies are trying to keep costs under control with bundled pricing. Some are even offering certain high-cost procedures without asking employees to share

InsuranceNewsNet Magazine » January 2015

at least somewhat agreed they will have a difficult time managing their health care coverage and decisions because they already have difficulty sticking to a budget.

Just over half (51 percent) said they would prefer not to have more control over their health care expenses because they don’t have the time or knowledge to manage them effectively.

These concerns are a natural opportunity for HR experts to use their expertise.

By providing employee education and decision-making tools, benefits professionals can help workers make wiser decisions about their health care benefits and choices.

[4] The Voluntary Solution

Workers’ concerns about financial security

VOLUNTARY CAN EASE CLIENTS’ GROWING HEALTH CARE WORRIES HEALTH open the door to conversations about how voluntary insurance such as accident, critical illness and hospital plans help protect them from out-of-pocket costs that could result in unexpected debt. Benefits from voluntary insurance options are paid directly to the policyholder, regardless of what type of major medical coverage they have in place.

Payments from voluntary policies provide employees with peace of mind because they can be used in any way workers see fit – whether it’s to offset high deductibles or copayments, or to help pay the bills that continue to roll in even when they are too sick or hurt to work. Here’s what one real-life policyholder had to say: “My diagnosis of uterine cancer in October 2013 was very stressful not only for me, but [for] my family as well. It seemed as if a ton of bricks had fallen on me, and all I could think of was how I was going to pay my bills and what kind of a burden I would be to my family. I got my first benefits check two weeks before my actual surgery. From that time on, all my worries

79%

of employees at least somewhat agree they would be willing to change their lifestyle habits in exchange for lower insurance premiums.

of being the sole breadwinner subsided. I no longer had to worry about how I was going to pay my bills. What a relief; it felt like that ton of bricks had just been lifted, and I could breathe again.”

Simply put, voluntary insurance helps workers protect their financial well-being in the event of a serious accident or illness.

What’s more, it’s also a win for employers: Companies can offer their workers voluntary insurance with no direct effect on their bottom lines. Employees decide whether to apply for coverage, and they are responsible for paying the premiums.

The HR Forecast

Changes to the U.S. health care system are coming fast and furious, and the demand for professional benefits advice is more

critical than ever. It doesn’t take a fortuneteller to see that HR experts will be a muchneeded information source for employees confused about what health care reform means for them.

The guidance of benefits experts will be integral this year and beyond as workers adjust to the changing health care landscape and look for the best solutions for protecting their families’ health, wellbeing and income in a new era of insurance possibilities and responsibilities.

Tye Elliott, a 20-year insurance industry veteran, is Aflac’s vice president of Core Broker Sales.

Tye may be contacted at tye. elliott@innfeedback.com.

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January 2015 » InsuranceNewsNet Magazine

55

FINANCIALWIRES

Delaying Retirement Saving? That’ll Cost Ya!

26

%

OF YOUR ANNUAL INCOME

Delaying retirement saving can carry a big price tag. A worker who waits until age 35 to begin saving for retirement instead of starting five years earlier at age 30 will receive 11 percent less in annual retirement income. That’s according to new research from the Insured Retirement Institute (IRI). Over the course of a 25-year retirement, the reduced income adds up to $62,000. If saving for retirement is postponed to age 40, income will be reduced by 23 percent, totaling $127,000 over a 25-year retirement.

“There’s no lost and found for retirement savings. When saving for retirement is delayed, the benefits of compounding interest are gone and can never be reclaimed,” IRI President and CEO Cathy Weatherford said. “Delaying retirement will only partially recover lost savings and may not even be feasible for some workers. And those who believe they can simply save a higher percentage later on will be in for sticker shock when they realize how much of their income will need to be dedicated to retirement savings to make up for lost time.”

The report also states that a worker who starts to contribute to a retirement plan at age 35 would need to save 16.5 percent of annual income to have the same amount of retirement income at age 65 as a worker who started contributing 10 percent annually at age 30. If the worker delays contributing to the retirement plan until age 40, he or she would need to save more than 26 percent of income annually to achieve the same level of retirement income at age 65.

AMERICANS’ TOP PRIORITY: PLAYING CATCH-UP

What is the No. 1 financial priority for Americans? It’s pretty simple: Catching up on their bills.

Nearly half of Americans told a Bankrate.com survey that they are most concerned with either getting current or keeping current with their everyday expenses. This is up from 32 percent who named the same priority in 2012.

Concern about paying bills was most commonly expressed in the 50-64 age group. Americans age 65 and older were most likely to report their top financial priority as providing help to family members.

Other top financial priorities included paying down debt and saving.

AMERICANS GET FAILING GRADES IN RETIREMENT KNOWLEDGE

If retirement knowledge were a subject in school, 80 percent of the students would fail.

The American College gave a retirement income literacy test to Americans ages 60 to DID YOU

KNOW

?

56

75 and found that 80 percent of them flunked.

They were asked 38 retirement literacy questions on basics, such as Social Security, life expectancy, individual retirement accounts, life insurance and investments, and how bonds work. Only two in 10 had passing grades, the college said.

Highlights of the test results include: » A significant minority have never tried to figure out how much they need to accumulate to retire securely. » Only one in four has a written plan for retirement. » Only 31 percent know that $4,000 is the most they can afford to withdraw per year from a $100,000 retirement account to make it last for 30 years.

U.S. HOUSEHOLDS CONTROL $33.5 TRILLION

Thanks to another strong year in the stock market, U.S. households controlled $33.5 trillion in investable assets at the end of 2013

57 62

SELF-REPORTED AGE OF THE AVERAGE RETURN ON AN INITIAL PUBLIC OFFERING was 20 percent Early RETIREMENT FOR AMERICANS this year. The average increase in the first day (or “pop”) is2012 13 percent.

Source: Renaissance Capitaland Personal Source: Gallup Economy Finance Survey

1990s

InsuranceNewsNet Magazine » January 2015

Source: Fidelity Investments

Half of us have nothing saved for retirement. bitly.com/qrnothing

QUOTABLE I’m not surprised that most Americans have low levels of retirement income literacy. And in many ways, can we blame them?

— Lynnette Khalfani-Cox, personal finance author

– an increase from $29.9 trillion in 2012.

Cerulli Associates reported that among the 122 million U.S. households that reached $33.5 trillion in 2013, 27 million are occupied by individuals under the age of 40 with investable assets of less than $100,000. These households have years of accumulation ahead of them, not to mention the expected wealth transfer from their baby boomer parents in the years to come.

“While many households may not need comprehensive advice, they could benefit from simple financial guidance or even a basic investment management account to help shape them as young investors,” said Tom O’Shea, associate director at Cerulli.

“Older households could benefit from investment services for which they would be unlikely to receive, based on their level of assets. These services could enhance future retirement income results.”

CHILD CARE COSTS HOW MUCH?

Many clients dream of saving enough to send their children to college. But before they can afford to send Junior to State U., they have to write some big checks to child care providers.

Child care can take a bite out of the family budget, and in some cases can be more expensive than college. Child Care Aware, a group that provides resources to parents and caregivers, reported that in 30 states, child care costs more than sending a child to a fouryear state college.

Parents in Massachusetts are spending more on child care than in any other state – an average of $16,549 per year to send an infant to a day care center. New York families pay a higher proportion of their incomes for day care than families in any other states – about 16 percent. Louisiana parents pay the lowest percentage of their incomes on day care – 7 percent.

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My name is Nick Nanton, and I’m an Emmy winning documentary film producer, author of the book Storyselling, and, in concert with an expert team, developer of an absolutely unique system for raising an advisor’s authority, credibility and celebrity to the UNASSAILABLE level required to operate in a competition-free zone and to attract a higher value client simply beyond the reach of most advisors. Instead of mud-wrestling with other advertising and workshopping advisors for the same clients, how’d you like to get better ones THEY CAN’T GET? Further, this very different system is available on an exclusive basis, to only one advisor per area. Its sophistication far surpasses any and all “marketing programs” being sold to advisors or provided to advisors by the companies they are affiliated with. And, bluntly, a pox on all that copycatting and look-alike, sound-alike stuff! As fast as you put money into it, it turns to dust because every Tom, Dick and Mary have it too. Aren’t you fed up with that?

If we could (1) increase the value of each of your clients by 50% to 100% or more, (2) attract exceptionally affluent clients other advisors never get an opportunity to talk to, (3) reduce the number of workshops you need to conduct, and (4) at least double the number of quality client referrals you get, what would you do with all the liberated time and increased income? And, if you are working at transition to rainmaker for a group of younger advisors, this can be doubly or trebly valuable. You can lock out competitors and have amazed peers green with envy! – but more importantly, you can finally see the “prestige factor” work for you, as you’d expected it to all along. I have free information for you, provided confidentially. Exclusive areas will be reserved for advisors, so delay in investigating this could result in you being locked out by a competitor.

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FINANCIAL

Variable Annuities Get Back to Basics With Investment Focus T he broader array of variable annuities that are more understandable to clients should make these products more attractive as retirement planning tools.

By Al Dal Porto

A

of investment choices, including alternatives. Subaccount management charges, mortality and expense fees, and commissions are lower. Most also include account value-only death benefits.

IOVAs are the most stripped-down or basic variable annuity product. They emphasize investment flexibility, lack living benefit riders but guarantee an income stream, and include enhanced death benefits only as optional riders.

Depending on the individual product and share class, they may have no surrender period, pay no compensation or

but with more restrictions on investment options. Providers also are introducing innovations like volatility control and risk-balanced funds, which aim to limit the downside risk to contract values. That, in turn, reduces the cost and risk of hedging the guarantees, making these products more sustainable than their predecessors.

pervasive message about variable annuities (VAs) is that they are Broad Implications for overpriced and therefore inefficient Advisors and Clients retirement planning tools. The unfortunate This transformation of the VA industry aspect is that this pejorative commentary poses distinct advantages for advisors on VAs has been based on outdated perand clients. Because individual product ceptions of variable annuity prodtypes are more focused, they can ucts and client needs. be understood more easily by conThe makeover of annuities sumers. The importance of this DID YOU since 2009, particularly VAs, is cannot be overstated. AccordKNOW changing the value proposition ing to recently released informafor advisors and clients. This evotion from KPMG, numerous surlution deserves to be more widely veys have shown that consumers understood and discussed. resist VA purchases because they »L arger range of investment choices, including are mystified by what they see as alternatives.

Greater Variety complicated products. Provided The 1990s were the decade of the industry invests in quality » Lower subaccount management charges, investment-option proliferaeducation programs, the advent of mortality and expense fees, and commissions. tion, combined with emphasis on more easily understandable produpside potential, tax deferral and ucts will remove a major barrier to » Optional account value-only death benefit. death benefits. The 2000s will be investment in VAs. Mentally and remembered as a race to marpractically, clients will gain another ket increasingly complex VAs, chock-full both. The more accumulation-oriented retirement planning tool, one with fewer of intricate guaranteed living and death IOVAs emphasize investment choices for restrictions than qualified plans have. benefit options combined with asset allo- asset growth. The more traditional variable The more targeted nature of many concation investment overlays. The present annuities with living benefit riders lim- temporary products means that advisors period from 2009 forward, in contrast, is it investment choices to less volatile asset should have greater control of the overcharacterized by more targeted product classes and investment strategies, reducing all combination of investments, optional structures and greater product diversity. downside risk in exchange for higher tar- benefits and guarantees added to clients’ By altering both the basic product and the geted payouts. portfolios. Because advisors can choose bolt-on benefits, the VA industry is craftTen companies offer IOVA products, among traditional, cost-efficient and ining more consumer-friendly offerings, up from four companies just a few years vestment-oriented VAs, they are better products focused on specific solutions to ago. Sales in 2013 were $7 billion and as able to help clients obtain and pay for only better meet clients’ retirement needs. of November stood at $4.2 billion. The the features they need most, based on inProviders are decoupling the basic VA number of investment options in these dividual client circumstances. accumulation “engine” from the guaran- products varies from 80 to 380, according A traditional VA may be the best fit for teed benefits, a trend that has given birth to Morningstar. a client with a retirement income gap. Tax to cost-efficient variable annuities and soAmong traditional VAs (those with deferral, breadth of investment options and called investment-oriented variable annu- living benefits fully incorporated in the tax-free transfers may make an IOVA a suitities (IOVAs). The predominant feature product), there is a growing trend toward able choice for a higher-net-worth client of cost-efficient VAs is an extensive range developing income-oriented products feeling the pinch of higher income tax rates

Investment-Oriented

Variable Annuities

usually feature:

?

58

InsuranceNewsNet Magazine » January 2015

since 2013. The value of tax-related benefits through tax deferral in today’s environment should not be underestimated. For those earning more than $250,000 annually, the combination of new Medicarerelated taxes on earned and unearned income and higher income and capital gain tax rates can have a substantial impact on their effective tax rate.

Better Suited to Retirement Income Modeling

Most retirement income portfolio models emphasize overall outcome (such as level of income or years of income) over investment return. These models aim to achieve the outcome through a mix of product categories, each of which plays a designated role. Product simplification and more specific product objectives will make it easier to incorporate variable annuities into such models. For example, a cost-efficient VA might be added to a model primarily as a cost-effective means of providing continued tax-deferred growth potential after age 70½, when minimum distributions from qualified plans become mandatory. Because the cost-efficient alternative has fewer “moving parts” than a traditional VA, fewer assumptions and “what-if” scenarios are required to project the range of its potential impact on overall portfolio results.

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A Promising Start

The progression in VA development since 2009 is a promising start toward a VA industry that will serve a wider variety of advisors and consumers based on their individual needs. Today’s VAs are not the final iteration, but future products will likely follow a similar path – producers will continue to refine and develop VAs based on the ever-shifting needs and demands of clients. Certainly, a broader array of VAs that is more accessible to clients should change the discussion surrounding VAs. It’s time to discard the question “Is a VA worth the cost?” and replace it with “Which type of VA may provide the optimal balance of cost and benefits for a particular client, and achieve the desired outcome?”

Al Dal Porto is vice president of product development and market research with Security Benefit. Al may be reached at al.dal.porto@innfeedback.com.

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59 12/14

BUSINESS

When my clients understand that I am human and that I face the same troubles they do, it builds trust. When I tell my stories to illustrate a point, they “get it.”

Stories That Will Inspire Action T elling your personal stories can move your clients to act on your advice.

By Thomas Cooper

I

am a very private person. I do not share information about my weight, my aches and pains, or my worries.

Most of all, I never share problems about my family and friends. However, I need to clarify that I also don’t share these things with my friends or family.

You probably will think I am speaking out of both sides of my mouth when I confide that I do share stories about my family and friends with clients. I do this for a very good reason. When my clients understand that I am human and that I face the same troubles they do, it builds trust. When I tell my stories to illustrate a point, they “get it.” Let me give you a few examples from my world.

When I speak with clients and their families about the benefits available to help them if they need assistance at home, in assisted living or in a nursing home, I tell them about my mother-in-law, May. May lived with my wife and me for more than 35 years. In her later years, she suffered a number of strokes. As a result, it became risky for her to stay at home alone all day – she might fall and she sometimes forgot when she turned on the stove.

Luckily, she was able to stay at home because our firm was familiar with a 60

Department of Veterans Affairs benefit called Aid & Attendance. Even though May’s husband, Fred, was a World War II veteran who passed away over 40 years before she needed assistance, she was able to take a survivor’s benefit because of his service. Because of this benefit, we were able to obtain a helper who stopped by every day during the week to make sure May was all right. The helper often prepared lunch for May and drove her to the mall.

What do my clients learn from this story? First, they learn that I care about family.

(My mother-in-law lived with us for years.)

Second, they learn that I know what they are going through in their lives (dealing with the strokes, worrying about a loved one’s safety). Third, they figure out that I know how to help them with the knowledge our firm applies to their situation.

As an elder law attorney, I often consult with families about planning ahead to prevent a catastrophic illness requiring long-term care from devastating their life savings. In Ohio, it often takes five years before the planning is effective. This is a long time, particularly when people are in their 80s or 90s.

Without going into all of the details of this planning here, I will share my approach. I begin by telling my clients that I believe planning is important and, what’s more, I have done the same thing for myself. I tell them that my wife and I have long-term care insurance and our health

InsuranceNewsNet Magazine » January 2015

is good. I tell them how I set up my plan involving my daughter as a helper when she was really not ready to take on the responsibility. Under the circumstances, why did I do this planning? Because it’s never too early to get the five-year clock started. I ask my clients: How old will you be in five years? What is the chance that you might begin to have health issues that will require special assistance? If I told you that it takes five years to plan, when should you start? Almost all will reply “yesterday.”

What does this story tell my clients?

Most certainly, it tells them that I walk the talk. They understand that I have done this myself. That is powerful.

Another tricky situation we deal with regularly involves clients’ children who may not be ready to take on the responsibility of an inheritance. This is a difficult situation. For some clients, I tell a story about my uncle who worked in the steel mills for many years. My uncle made good money as a steelworker, but he had a quandary. He loved his daughter and son, and they were “good” kids. However, his daughter was terrible at handling money and his son was terrible at handling women. My uncle was worried that his daughter’s lack of money savvy would lead to his hard-earned money going down a black hole. He also was not eager to have his hard-earned money going to one of his son’s exes.

So we decided to set up a special pension-

STORIES THAT WILL INSPIRE ACTION BUSINESS like trust for each of his children. In this way, they would always have an income to fall back on after he was gone. Also, they would have less money at risk at one time because they would receive a monthly check instead of a lump-sum payment.

Here was a way to relate to clients who have similar problems in their own families. As I tell the story, the clients are often nodding their heads, agreeing that this makes sense. Instead of discussing the trust mechanics, instead of talking in generalities, clients relate to a simple story that tells them what the problem is, how the solution solved the problem and generally how it works. The clients understand. This builds trust.

Here is one last situation in which a good story can illustrate a point. In our practice, we urge our clients to specify their wishes regarding their funerals. Most people do not want to discuss with their families which casket they prefer, whether they want to be buried or cremated, or what type of ceremony they would prefer.

I tell clients that the reason I believe it is important to do this advance planning is based on a personal experience in which advance planning did not happen. My wife’s aunt lived with us for about 10 years. She had completed her estate planning, but she never discussed nor planned her funeral wishes. One day, Aunt Marie woke up, sat down to eat her breakfast and died. It was sudden and unexpected. She had never been ill a single day.

Unfortunately, we had no idea whether she preferred to be buried or cremated.

We did not know where she wanted to be buried. Further, some long-out-of-touch relatives suddenly appeared on the scene, trying to interject their preferences for her funeral. It was a mess! From that point forward, I have made it a priority to make sure my clients and their families never have to face a similar situation.

This story illustrates to my clients the need for preplanning and the all-too-real results of doing nothing. None of us want

to leave a mess for our families. Again, the story is easy to follow and will most likely be food for thought as clients make their decisions about whom to work with for their estate planning.

Tell your clients what you believe.

Tell them what you value. Give them stories and examples from your life or from your practice that illustrate why the strategy you are suggesting for them is important. Tell them how the strategy will work for them, pointing back to the related stories. You will find that your clients and prospects will understand better and will choose to follow you because they understand.

Thomas Cooper, CELA, is the founder of the law firm Cooper, Adel and Associates, with offices in four locations in Ohio. He is one of only 22 attorneys in Ohio certified as Elder Law Specialists by the National Elder Law Foundation (NELF). He may be contacted at thomas.cooper@innfeedback.com.

Did you know? In the next 5 years, 65% of federal and postal employees will be retirement eligible – fueling a huge IRA rollover opportunity and life insurance replacement demand.

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January 2015 » InsuranceNewsNet Magazine

61

For more than 80 years, the Society of Financial Service Professionals has been helping individuals, families and businesses achieve financial security.

SOCIETY OF FSP INSIGHTS

Illustrations May Be Misleading B ecause illustration “math” is almost always based on assumed constant rates of return, advisors need to understand the mechanics of those assumptions.

By Richard M. Weber

AS

I wrote in the May 2014 FSP Insights column, policy illustrations may be useful to understand how a particular policy may work - but they also have the tendency to encourage the buyer to form an expectation that the policy will largely “work” the way it’s projected.

Illustrations for policies such as indexed universal life (IUL) run the risk of heightened expectations for unrealizable results. This primarily occurs when the illustration assumes a seemingly “conservative” crediting rate to reflect long-term results in equity indices. While current policy “caps” may well produce appealing policy credits in years when the equity markets are performing well, it’s important to look more deeply to see how crediting rates are determined out of volatile equity index returns.

Interesting Things to Know About Interest

Buyers of an estimated 90 percent of all IUL policies choose the Standard & Poor’s 500 1-year “point-to-point” index as the basis on which the annual crediting rate will be determined retroactively each year on the policy’s anniversary date. However, in most of these policies, the applicable index excludes reinvested dividends. For example: 14-Year Average Geometric Return

14-Year Average Credit to IUL

S&P 500 2000-2013 (with reinvested dividends)

3.6%

-

S&P 500 2000-2013 (excluding reinvested dividends)

1.6%

-

Resulting 10% Cap / 100% Participation

-

5.30%

Resulting 12% Cap / 100% participation

-

6.15%

62

The crediting rate averages in this particular time frame suggest that illustrated rates much greater than 6.15 percent will likely not produce the expected result. But there are more issues to consider. For example, there can be a significant difference in the 365-day “point-to-point” calculation of crediting rates based on the fluctuations in the chosen index in rolling 365-day periods. Once again, using the popular S&P 500 index, consider the different results within just a two-week period in August 2011 compared with its look-back to August 2010:

Annually Determined Crediting Rates S&P 500 1-Year Point-to-Point Return

12% Cap / 0% Guarantee

August 10, 2011

- 0.03%

0%

August 15, 2011

11.60%

11.60%

August 20, 2011

4.25%

4.25%

August 24, 2011

11.95%

11.95%

Anecdotally, we know that many buyers of IUL are not buying these policies for lowcost protection only. Accumulating cash value in a life insurance policy may be a strategically valuable complement to more traditional investment strategies. But some insurers add even more “zing” to the numbers by suggesting positive arbitrage at the point where tax-free cash value loans are taken to supplement retirement income.

This is accomplished when borrowed funds are credited with a favorable interest rate – and one that is projected always to be greater than the interest rate paid on the accumulating loans. But here’s the reality check: There isn’t always a positive relationship between the two rates, even when tied to outside interest rate indices. See the chart below for an example:

Testing an arbitrarily chosen projection of a lifetime 13 percent cap (typically guaranteed only at 3.5 to 4.0 percent) – with an alternative 11 percent lifetime cap assumption – the actual arbitrage underlying the illustrated 1 percent positive arbitrage (allowing generous policy loans) could wind up reducing the actual loans by as much as 25 percent.

In this chart, we assessed results from 1985 through and including 2012 (using midyear monthly results). The reality is that the indices on which crediting rates and loan rates are determined as dynamic and volatile. There is no ascertainable fixed relationship between these two rates.

A Caution for Producers and Consumers

Today’s life insurance policies – especially IUL – have evolved into complex financial instruments. There are many moving parts, and the explanation of how those parts “work” and interact can be difficult to understand. Policy illustrations can be a valuable tool to visualize how the policy works in a specific scenario. But those same illustrations almost always create an overly optimistic impression and expectation about policy performance. Because illustration “math” is almost always based on assumed constant rates of return, producers, financial planners, and other advisors need to better understand the mechanics and interactions of the assumptions underlying IUL policies.

Richard M. Weber, MBA, CLU, AEP, is immediate past president of the Society of Financial Service Professionals. He may be contacted at richard.weber@ innfeedback.com.

Loan Rate Arbitrage: S&P 500 1-Year Index vs. Moody’s Corporate Bond Average Time Period

Results Based on a 13% Cap Rate

Results Based on a 11% Cap Rate

1980s

0.2%

-1.4%

1990s

2.1%

0.9%

2000-2012

-0.9%

-1.6%

Total

0.4%

-0.6%

InsuranceNewsNet Magazine » January 2015

NAIFA

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With more than 50 programs and products designed to benefit your business, NAIFA membership is your best career investment.

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January 2015 » InsuranceNewsNet Magazine

63

MDRT INSIGHTS

The Million Dollar Round Table is the premier association of the world’s most successful life insurance and financial services professionals.

Lifestyle is an Integral Part of Retirement Planning D eveloping a lifestyle plan with your clients can help them prepare to live their retirement, not just survive it.

By Nick Cassis

F

inancial advisors are responsible for understanding what clients strive for financially before putting a plan in place. One tool that should not be overlooked is your client’s lifestyle plan. Having a lifestyle plan is an integral part of your client’s overall financial and retirement planning process. Lifestyle planning allows people to explore possibilities and identify outcomes that are typically beyond the scope offered by traditional financial services.

For example, when discussing retirement, clients should be empowered to take ownership of their nonworking years and the objectives they have in mind for that time of their lives. I have found clients are primarily concerned about when they will be able to retire and whether they will have enough money to last through their retirement years. Although these are valid concerns, we also should encourage clients to envision the lifestyle they want in retirement and how they plan to fund it.

This technique can be highly successful in helping clients navigate the reality of their financial situation. They might have the resources needed to sustain their desired lifestyle but not the flexibility to use them.

Clients’ day-to-day mindset may or may not change, but what will certainly change is their ability to choose how to spend their days in retirement. That’s why it’s important to ask clients open-ended questions to discover what their purpose in retirement will be. Find out whether travel is in their plans or if they want to start playing golf or to spend more time with their grandchildren. See if they want to perform volunteer work, pick up a new hobby or revisit an old one, or perhaps just relax at home. With so many lifestyle choices, it’s wise for clients to have some 64

idea of what they want their retirement to look like. The answers to these questions can mean very different things in the way a retirement is financed.

After you have a clear vision about the lifestyle your clients wish to live, you must analyze how that lifestyle will change as they age. Because people’s visions and desires change or expand, the horizon they originally seek is rarely ever reached.

In many cases, clients’ retirement income requirements are not necessarily the same every year. Clients may need or want a higher income in their early years of retirement when they are healthy and more active than they will be in their later years. Ultimately, clients need to have a base of secure fixed income to ensure their survival in retirement, and they also need some flexible income in order to live comfortably. The proper mix of fixed and flexible income will be largely determined by your clients’ desired lifestyle and how that lifestyle will transition over time.

Having an entire retirement mapped out isn’t practical for your clients, but having a general idea of what their retirement will look like can make a huge difference in what recommendations you provide. If a client wants to know how long their retirement savings will last, you can calculate numbers based on typical assumptions. Those assumptions will give them an idea of how many years they can

InsuranceNewsNet Magazine » January 2015

draw income or how much income they can afford to take each year. Ultimately, these recommendations, such as saving more, acquiring long-term care insurance and buying annuities, make more sense to clients because they have been an integral part of developing their plan. They will be more motivated to accept and act on your recommendations as a result.

Developing a lifestyle plan with your clients helps customize their overall financial plan. It gives a much more accurate picture of how well they can transition into their post-working years and what preparations may be required between now and then to ensure they can live their retirement as opposed to just surviving it. Retirement is not an ending but a new beginning. Some retirees have described that time of their lives as “a work in progress.” However, without discovering their lifestyle destination, they may never get to where they want. As with all aspects of financial planning, it is always better to have a map.

Nick Cassis, CFP, has been in the financial services industry for 16 years and is a 4-year member of the Million Dollar Round Table (MDRT). His company, Cassis & Associates Financial Services, is located in Dartmouth, Nova Scotia. Nick may be contacted at nick.cassis@innfeedback.com.

NAIFA INSIGHTS

Founded in 1890, NAIFA is one of the nation’s oldest and largest associations representing the interests of insurance professionals from every congressional district in the United States.

Policymakers Don’t Understand How Advisors Serve Clients I f regulators fully understood the ways advisors help consumers, they might avoid proposing rules likely to do more harm than good.

By Juli McNeely

E

ducating policymakers is a top priority for NAIFA as it seeks to create a favorable business environment for agents, advisors and the clients they serve.

A good example is the swift action the association took in reaction to guidelines issued by the Centers for Medicare and Medicaid Services (CMS). In August, CMS quietly issued a revised set of Medicare Marketing Guidelines that would have prevented agents and brokers from contacting their Medicare beneficiary clients via telephone “to discuss other plan options.”

Effectively, CMS was telling agents that they were not allowed to advise clients who had hired them to provide advice. Fortunately, common sense prevailed. After discussions with NAIFA, Medicare plan sponsors and other involved parties, CMS in October rescinded its August guidance.

Although all went well in the end, this episode points to a larger problem that can occur when policymakers have an incomplete understanding of exactly how insurance and financial advisors serve their clients. This lack of understanding can lead to regulations that unintentionally harm the consumers they are intended to protect.

Even when they eventually get it right – and we are thankful to CMS for doing so in this case – false starts and backtracking by regulators inevitably inject uncertainty into a space where chaos can do a great deal of harm.

Insurance and financial advisors help clients plan for the future. Uncertainty is the biggest obstacle we face. As advisors, there is much we cannot control or even predict with great precision – such as the economy, illness and death. But with training and experience, we can help our clients mitigate these risks.

Regulatory miscues fall under a different category because they could easily be avoided. If regulators fully understood the role of agents and advisors and the many ways we help consumers, they might avoid proposing rules likely to do more harm than good.

Other Examples of NAIFA’s Educational Efforts

This does not apply to CMS alone. NAIFA has been involved on behalf of advisors and their clients as the Securities and Exchange Commission (SEC) and the Department of Labor (DOL) determine whether registered representatives should be subject to regulations imposing a fiduciary standard of care on their practices.

The association has worked with the SEC, had conversations with each of the commissioners and provided input when they requested assistance with an ongoing cost-benefit analysis. We are encouraged by the SEC’s deliberate pace, inclusiveness and indications that it is interested in ensuring that middle-market investors are not harmed.

The DOL is another matter. In 2011, it proposed a regulation requiring registered representatives to act as fiduciaries on behalf of their retirement-account clients.

This regulation effectively would have prevented these advisors from receiving commissions as compensation. In the face of a political backlash and criticism from NAIFA and other groups, DOL withdrew the proposal.

Had the initial DOL proposal gone through, many of my clients with accounts too small to warrant fees would no longer have been able to turn to me or anyone else for affordable, individualized retirement advice. The department now says it will propose a new fiduciary rule as early as this month.

Until recently, DOL officials had rejected numerous offers to have meaningful dialog on the issue with industry stakeholders and even members of Congress. In public statements, they have continued to insist that commissions paid to retirement advisors present a conflict of interest, but have failed to show how the supposed conflict is harming consumers. They ignore or discount the fact that a poorly written DOL rule would provide no access to advice for those who have relatively low account balances or who are unwilling to pay fees.

When I meet with a client, it is never about a single transaction. It’s about providing ongoing service and creating a plan that is flexible enough to adapt to life’s inevitable challenges, successes and setbacks. If DOL regulators understood this, maybe they would be less concerned about the manner in which I am paid. They would ensure that any regulations they propose do not disrupt my relationships with my clients.

NAIFA will continue to educate regulators about insurance. I am convinced that when they know more about insurance and financial advisors, they will better understand how proposed regulations can impact our relationships with our clients.

Juli McNeely, CFP, LUTCF, CLU, is president of NAIFA and president and owner of McNeely Financial Services. Juli may be contacted at juli.mcneely@ innfeedback.com.

January 2015 » InsuranceNewsNet Magazine

65

AMERICAN COLLEGE INSIGHTS

With more than 87 years of experience, The American College is passionate about helping students expand their knowledge and opportunities as financial professionals.

Women of Color Seek a Seat at the Leadership Table T he industry is missing a tremendous opportunity by failing to address the lack of female advisors of color to serve a growing population segment in need of their expertise.

By Jocelyn Wright

I

have attended several conferences for women in the insurance and financial services industry over the past few months. They were great events that allowed women an exclusive opportunity to network, share ideas and celebrate successes. I left feeling energized and empowered.

However, despite my generally positive feeling about the events, there was this nagging reminder of how few women in our industry actually look like me – a woman of color. Based on my general observation, it would be fair to estimate that on average, women of color seem to have represented only 10 percent of the attendees at these conferences. Having been in the financial services industry for nearly 20 years and an advisor for more than 12 years, this is by no means a surprise. I often can count on one hand the number of women of color that I see, especially at smaller industry functions. In many cases, I have been the only woman of color present.

When I started as a financial advisor, my situation was unique in several respects.

I joined a firm owned by a black woman (unique point No. 1) where nearly half of the advisors were female (unique point No. 2) and the majority of those advisors were women of color (unique point No. 3). It was not until I relocated to a larger firm with less than 10 percent minority representation and no female advisors that I fully realized how uncommon my prior situation had been.

An overwhelming number of statistics indicate that women will own more than half of the wealth in this country. Furthermore, women of color make up approximately 36 percent of our country’s female 66

population and roughly 18 percent of the overall U.S. population. Given these considerable numbers, one would think that firms would take a more active approach in increasing the number of female advisors and women of color in leadership positions. However, according to a report by the U.S. Government Accountability Office on “Diversity Management: Trends and Practices in the Financial Services Industry,” minority women represented only 13 percent of senior management and about 23 percent of first-level and midlevel managers.

I am not stating that women will work only with other women; however, research suggests that some 30 percent of women prefer working with a female advisor. Additionally, it is not much of a stretch to assume that some people of color would prefer to work with financial advisors of color. These points alone provide a valid business case to explore this largely underserved market. To further echo this point, insights from a landmark study by the State Farm Center for Women and Financial Services at The American College on “The Financial Needs and Attitudes of Women of Color” show that 50 percent of female participants of color express a preference to work with advisors who specialize in helping women with their financial needs. We as an industry will be missing a tremendous opportunity if we do not address the lack of female advisors of color to service this growing population.

We advisors have an enormous impact on our clients’ lives. I firmly believe that our industry needs to look more like the population that we serve. If we are serious about helping more families achieve financial independence, we must do a better job of recruiting, training, mentoring and retaining a more diverse group of professional advisors. We can no longer sit quietly on the sidelines, afraid to address the issues of race and gender. We must make sure all of us believe that we have a seat at the table and a voice in determining our

InsuranceNewsNet Magazine » January 2015

financial future. A seat at the leadership table for women of color not only makes good business sense; it is simply the right thing to do.

As the recently appointed chair of The American College’s State Farm Center for Women and Financial Services, I am firmly committed to helping increase the number of women in our industry at every level and to building a more diverse group of women in the process. Having more women of color in the industry will lead to a greater number of women of color in leadership positions. Ultimately, more female consumers will realize they have a genuine invitation to work alongside their advisors to secure a brighter financial future for themselves and their families.

Jocelyn Wright is the chair of The State Farm Center for Women and Financial Services at The American College. Jocelyn may be contacted at jocelyn.wright@ innfeedback.com.

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67

More than 850 financial services companies in more than 70 countries turn to LIMRA first to help them build their businesses and improve their performance.

LIMRA INSIGHTS

The Disconnect in What Insurers Say vs. What Consumers Hear A disconnect exists between common insurance industry terms and language that consumers understand. As a result, consumers are turned off from buying life insurance and financial products.

By Scott R. Kallenbach

I

n a recent episode of the ABC sitcom Modern Family, Gloria wanted her son Manny to continue taking Spanish in high school, even though he preferred to study French. Manny turned to his stepfather, Jay, for help, and Jay agreed to sign the permission slip allowing Manny to transfer to French, much to Gloria’s dismay.

Why was she upset? Gloria is from Colombia and was pushing Manny toward Spanish so that she could communicate with someone in her own home in her native language. She has difficulty speaking English, and often what she intends to say and what she actually says are two different things. This causes a disconnect between what she says and what others hear.

How does this sitcom plot tie into financial services? LIMRA and Maddock Douglas collaborated to study and test the relative understanding, emotions and associations that consumers make, compared with the typical communications found in company websites and marketing materials.

We found that when companies and advisors use industry lingo and jargon, they might as well be speaking in a foreign language. Consumers don’t “hear” what is being “said.”

In face-to-face discussions with consumers, we learned that they often understand words and phrases that are in layman’s terms (Table 1). But when we introduced words and phrases commonly used in the financial services industry, we witnessed a disconnect (Table 2).

Companies devote significant effort and resources to improve the customer experience and their level of engagement with consumers. Communication ties right into this. Consumers seek authenticity and relevance from the companies and advisors with whom they do business.

Yet despite the industry’s best efforts, life insurance ownership is at its lowest level in 50 years. On the retirement side, only one in four non-retirees feels “very confident” that he or she is saving enough for retirement. This tells us that the industry is not connecting with consumers, and the gap between effort and desired results is glaring.

Our research uncovered a key factor to this disconnect with consumers – communication that lacks authenticity. More than just using everyday language and layman’s terms, authentic communication also includes relatable visuals and attainable goals.

What We Say vs. How Consumers Define the Words TABLE 1 - CONSUMER “GETS IT” Financial Security

“Feeling confident you can provide for yourself”

Nest Egg

“Future, security”

Those Who Matter Most

“Family, children”

TABLE 2 – CONSUMER DISCONNECT Accelerated Benefit

“The Cadillac plan”

Annuitize

Many consumers could not even guess “No idea, and I own an annuity”

Cash Value

“Value of an item, product or service in cash”

Death Benefit

“I don’t think death benefits anyone”

Premium

“The best” Source: LIMRA, Maddock Douglas

68

InsuranceNewsNet Magazine » January 2015

We’ve compiled six elements of authenticity for use by home office executives, field leaders and sales professionals. The idea is to recognize areas of improvement and incorporate changes that will aid effective selling and the customer experience.

The Six Elements of Authenticity

[1] Easy to understand – Language that we use every day [2] Down to earth – Images that feel realistic [3] Memorable – Communication that is interesting [4] Positive – Messages that are warm and comforting [5] Credible – Sources of information that are trustworthy [6] Relevant – Communication that says the company understands consumers and who they are At first glance, this list may seem overwhelming. However, it is not necessary to master every element in order to find success. Organizations that can improve just two or three may discover a greatly improved customer experience. Because communication is a part of every consumer touch point, it may take a new mindset to accomplish real change. For some companies it could lead to a cultural transformation.

At the end of that Modern Family episode, Jay understood why Gloria was upset and realized his mistake in letting Manny study French. To make things right, Jay hired a tutor to learn Spanish himself in order to speak the same language as his wife. How can you apply this lesson to your business?

Scott R. Kallenbach, FLMI, is research director of strategic research for LIMRA. He is responsible for identifying strategic issues that can impact the financial services industry and helping develop approaches to meet those challenges. He may be contacted at scott.kallenbach@innfeedback.com.

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