March 2015
Inside Cover
It is with great excitement that we officially announce that as of February 2, 2016, we have joined forces with yet another successful insurance marketing organization in the industry... 3-Mentors. As a result, the innovative and highly effective 3-Mentors sales and marketing programs will now be added to the already successful GamePlan Financial Marketing, LLC (GamePlan) value proposition.
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Financial Insights
with Dean Zayed
Brookstone Maintains Advantage with Enhanced Advisor Platform
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Dean Zayed, president and CEO of Brookstone Capital Management, shares his thoughts on current trends for registered investment advisors (RIAs) and their place in the ever-changing financial landscape today.
rookstone Capital Management is on a mission. In just the last year, CEO Dean Zayed has doubled his staff, created an open architecture solution with highly reduced fees, launched a robo-solution, initiated a partnership with the largest asset manager in the world, and forged several enterprise contracts with software vendors to provide sophisticated software services to the advisor. And all of this is offered at absolutely no cost to the advisor. What has propelled Dean Zayed to do all of this? His conviction that a powerful advisor investment platform will greatly empower Brookstone-affiliated financial advisors and position them for massive growth. In this interview, Zayed discusses how Brookstone is responding to the evolutionary changes the industry is undergoing and building the most flexible and competitive RIA platform in the industry today. Where is the industry headed and how is Brookstone staying ahead of the curve? A: Boomers are a generation of 80 million Americans looking for sustainable, predictable income. Their needs are much different from their parents’ generation. Not only must portfolios last significantly longer, but they must create enough income to sustain lifestyle expectations. This generation will force our hand to include creative, relevant and outcome-oriented investment solutions. Unlike the accumulation focus that the industry has had the last several generations, we must now transition to an industry that provides real financial planning while helping clients navigate choppy markets successfully. For example, many boomers will require income that will last 20 years or more and will have their plans derailed if they experience a large drawdown. Beating a benchmark like the S&P 500 should become less important 2
InsuranceNewsNet Magazine » March 2016
than building and implementing a plan that will allow clients to satisfy every one of their lifetime goals. Brookstone has met these specific needs with the launch of a true, open architecture platform that offers a plethora of relevant and powerful investment strategies alongside a seasoned investment team that includes CFPs and CFAs. What three things must advisors do in 2016 to stay relevant? A: First, advisors must communicate on a regular basis with their clients. This includes having a RIA partner who can provide meaningful, substantive content to assist with that communication. Second, it’s essential they incorporate more technology into their practice. Technology is transforming the way clients use and interact with financial advisors. Not to mention that this technological revolution is happening quickly and will force some unprepared advisors out of the industry in the next 10 years. In fact, during the second quarter of 2016,
What do I need to know about the aging bull market? A: If you lack sophisticated tools and don’t work with a RIA that has decades of experience in asset management, you will find this seven-year-old aging bull market to be very problematic as it likely heads toward a large correction at some point. Advisors must have specific strategies in place to stabilize a portfolio during the most volatile times. These strategies are often sophisticated in nature and not offered by many RIAs, since many RIAs simply lack the intelligence and resources to incorporate them. To meet this challenge, Brookstone’s platform includes a thoughtful blend of both strategic and tactical strategies that will meaningfully minimize targeted drawdowns. Advisors have the option to act as “portfolio manager” by selecting the strategies and allocations they think are best for each client. Alternatively, we have also built multiple, globally diversified, risk-based models that utilize the latest advances in portfolio
Beating a benchmark like the S&P 500 should become less important than building and implementing a plan that will allow clients to satisfy every one of their lifetime goals. we will provide our advisors with a completely digital solution (robo-like) to more effectively onboard new clients and manage these relationships in a seamless and efficient manner. This can all be done directly from the advisor’s website, providing clients the information they need on demand and freeing up the operational resources of the advisor. Finally, it is imperative that advisors provide sophisticated, 21st century advice and not just plain vanilla or unproven investment strategies. Portfolio construction will be a major factor that clients use in deciding to hire and fire advisors. Brookstone advisors don’t act alone in a vacuum as we provide them with a tremendous amount of collective intelligence and resources. Over the last 10 years, Brookstone has assembled a team of 45 investment professionals that are “on call” every day to service our advisors and has built the most comprehensive asset management platform in the industry today. S P O N S O RED CO N T EN T
construction as overseen by our investment committee. These portfolios are designed to handle and stabilize portfolios that span all types of risk tolerance. They give the advisor a turnkey ability to leverage our intelligence as we navigate the breadth of our open architecture choices to build these models and actively manage them as we anticipate a transition from this aging bull market. The flexibility we provide advisors is unmatched in the industry today. Why is the open architecture platform important to advisors? A: A true open architecture platform provides advisors a tremendous number of investment funds, strategies and money managers to choose from in constructing portfolios. It’s not just the number of choices a platform offers that is important but the quality and mix of choices is equally as important. Our team of CFAs along with our investment committee has built a rigorous due diligence
structure to evaluate every money manager and strategy that we allow on the platform. This provides a sophisticated layer of protection to our advisors and clients who have the confidence that the strategies they are using have been properly vetted and will undergo continuous oversight. Most other RIA platforms we have seen offer a limited number of strategies and these RIAs do not have a true
A: Fee compression is happening in the industry and will likely accelerate over the next several years. The robo-advisors and discount brokerage firms have made advisory fees a central topic in their national advertising campaigns. Add to this the movement towards a uniform fiduciary duty and the drive for total transparency in what an advisor is compensated, and you can see that the
investment committee that understands how to properly analyze a money manager. Frankly, as a proud fiduciary, this is a bit scary to me as it ultimately leads to poor results and unhappy clients. It is imperative for advisors to thoroughly understand the investment process and intelligence their RIA brings to the table. After all, the RIA that an advisor chooses is the best direct reflection of that advisor’s judgement and commitment.
writing is on the wall. I see some RIAs still charging close to 3% in fees! We think 2% is too high and that advisors that don’t work with a RIA with a progressive fee schedule will quickly lose their competitive edge. I firmly believe that both commissions and fees will come down across the industry and only those RIAs with critical mass and scalability will survive.
I see some RIAs still charging close to 3% in fees! We think 2% is too high and that advisors that don’t work with a RIA with a progressive fee schedule will quickly lose their competitive edge.
What kind of partnerships have you forged and how do they impact advisors? A: As part of the open architecture enhancement to our new platform, we have entered into game-changing partnerships with several investment industry giants. Our institutional investment partner is the largest asset manager on the planet with over $4.5 trillion in assets under management. They deliver to Brookstone the totality of their intelligence both as free-standing funds and through model portfolios. Our other partnership has allowed us to leverage a firm that has built robust,“smart beta” indexes that have consistently outperformed the broad market. Brookstone has a near exclusive opportunity to utilize this intelligence. We added a proprietary, volatility-based overlay to their flagship index to create one of the most unique investment strategies in the industry today, and one that simply doesn’t exist anywhere else. It is smart growth with a proven method of mitigating large drawdowns and it is only available through Brookstone. We are working on developing additional strategies that blend growth and protection and believe we are trailblazers in this area. What is Brookstone’s impression of fee compression?
Why do advisors need to be concerned? A: Let’s start with the movement towards a fiduciary standard and compensation transparency. This has already forced commissions down for many securities products in the broker-dealer world. It will likely impact the insurance and annuity space next. Advisors that have grown accustomed to large commissions for product sales stand to lose a substantial amount of that upfront revenue as commissions come down. If they don’t plan ahead, advisors may experience some really lean times ahead as they seek to replace that lost income. My best advice is for advisors to begin building their fee-based income now so that future commission reductions have a minimal impact on their firm’s viability. To do so, working with the right RIA partner is critical. It’s hard to be competitive when your RIA has a high fee schedule and is unwilling to compromise. Brookstone has recently made a meaningful reduction across our entire fee schedule without impacting the advisor’s fee. We hold the advisor’s portion of the fee to be sacred and recognize how important it is for our advisors’ fee to be consistent and reliable. Our size and scale have allowed us to lower our fees without impacting any aspect of our business or what we provide advisors.
What is Brookstone’s position on robo-advisors? A: Brookstone’s approach to the robo-advisor movement is to embrace it and not ignore it. While I am not convinced that today’s robo players will ultimately be the ones that thrive, I do believe that having the robo capability backed by a live, fiduciary advisor is the right business model to pursue. To this end, we want our advisors to be empowered to choose to add a robo solution to their practice in a manner that enhances their practice. Brookstone has made a substantial investment in technology the last few years and we now have our very own robo-solution that our advisors can access beginning in the second quarter of this year. This will allow advisors to attract clients they may have never acquired in the past or to use the robo solution for smaller accounts that can ease some of the servicing obligation. Robo clients today can be tomorrow’s full service clients who need more planning and access to other products built for income and retirement. Embracing technological solutions that help us adapt to the changing needs of the market will keep Brookstone far ahead of the curve. •
NEW OPEN ARCHITECTURE PLATFORM HIGHLY REDUCED FEES ENHANCED SERVICE MODEL YOUR GOALS ACHIEVED
See an exclusive, on-demand webinar from industry leader Dean Zayed on how Brookstone is adapting to today’s changing industry. Watch now at
www.BrookstoneAhead.com
March 2016 » InsuranceNewsNet Magazine
3
IN THIS ISSUE
View and share the articles from this month’s issue
» read it
MARCH 2016 » VOLUME 9, NUMBER 3
24
INFRONT
10 Expect DOL Rule to Look Much Like the Preliminary Version By John Hilton The industry soon will learn exactly what the Department of Labor’s fiduciary rule will mandate. Meanwhile, agents and advisors are in scramble mode as they get up to speed on the rule.
An interview with Gino Wickman – Part 2 Every business owner knows the frustration of putting more effort into the business yet going nowhere. Gino Wickman, author of Traction, has the solution to pull you out of the mud. In Part 2 of his interview with InsuranceNewsNet Publisher Paul Feldman, Gino describes how seeing your business using a very short view and a very long view will keep you on the road to success.
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InsuranceNewsNet Magazine » March 2016
42 L addered Annuities Beat RMDs for Guaranteed Retirement Income By Linda Koco Combining asset withdrawals and laddered purchases of immediate life annuities provides the best balance of lifetime income and flexibility, one researcher said.
24 How to Sell Annuities to Skeptical Clients By John Hilton Clients fear outliving their money. But they aren’t convinced that an annuity will alleviate that fear. Here is how you can help them change their perception.
44 44 D IAs: The Hot Annuity Trend That Can Nearly Double Payout By Cyril Tuohy Deferred income annuities are the weakest-selling of all fixed annuities, but they are picking up steam.
HEALTH/BENEFITS
48 M ed Supp vs. MA: Which One Is Right for Your Client?
34 14 Get Traction or Stay Stuck
ANNUITY
FEATURE
14
INTERVIEW
online
www.insurancenewsnetmagazine.com
LIFE
34 Feeling Charitable? Think Again
By Ron Sussman Two restrictions have severely limited the market for charity-owned life insurance. And industry professionals are beginning to feel the pinch.
36 Life Insurance as Executive Compensation By William Stark Nonqualified executive compensation plans are essential tools for advisors serving the business market.
By Elie Harriett When it comes to selecting Medicare coverage, your clients must decide whether they will choose “Old Faithful” or “the Scrappy Contender.”
FINANCIAL
54 How to Prevent These Five IRA Transfer Mistakes By Lloyd Lofton Working with an estate planning attorney and urging your clients to keep their information updated can help avert an IRA transfer disaster.
54
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ALSO IN THIS ISSUE MARCH 2016 » VOLUME 9, NUMBER 3
61 NAIFA: Laws Help Advisors Flag Fraud By Mark Briscoe Model legislation would allow advisors to report suspected cases of elder financial fraud or abuse.
62 T HE AMERICAN COLLEGE: Developing ‘Moral Perception’ By Julie A. Ragatz Before we can do the right thing, we need to be “aware” when we are in a situation that has moral implications.
BUSINESS
58 Red, Yellow or Green? How Client Ranking Can Lead to More Sales By Danny O’Connell Evaluating clients in light of your personal production goals helps you reach those goals every year.
64 L IMRA: It Pays to Pursue the Unadvised By James T. Scanlon Even though many mass affluents believe they don’t need professional financial advice, research shows that professional advice could make a big difference in their financial standing.
INSIGHTS
60 MDRT: Don’t Start With the End in Mind By Marc A. Silverman Begin with fact-finding and really understanding your client’s needs.
EVERY ISSUE 8 Editor’s Letter 22 NewsWires
32 LifeWires 40 AnnuityWires
48 Health/Benefits Wires 52 FinancialWires
INSURANCENEWSNET.COM, INC.
3500 Market Street, Suite 202, Camp Hill, PA 17011 tel: 866-707-6786 fax: 866-381-8630 www.InsuranceNewsNet.com PUBLISHER Paul Feldman EDITOR-IN-CHIEF Steven A. Morelli MANAGING EDITOR Susan Rupe SENIOR EDITOR John Hilton SENIOR WRITER Cyril Tuohy VP FINANCES AND OPERATIONS David Kefford PRODUCTION EDITOR Natasha Clague VP MARKETING Katie Frazier CREATIVE STRATEGIST Christina I. Keith AD COPYWRITER John Muscarello CREATIVE DIRECTOR Jake Haas GRAPHIC DESIGNER Bernard Uhden GRAPHIC DESIGNER Shawn McMillion
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WELCOME LETTER FROM THE EDITOR
The Lost Opportunity of Unpaid Attention
M
y tree is wobbly enough to be vulnerable to even the slightest breeze and my eagle would not make America proud. Those are two things I learned in yoga.
They are two poses that require balance on one leg. The tree is a graceful form that is the very picture of equilibrium. The eagle pose looks like a malformed pretzel trying to get up and hop out of the factory. Focus is the only way to do them well. That’s one of the benefits of practicing yoga: the ability to clear the mind of anything else and pay attention. I became interested in learning more about yoga as a way to balance other workouts. The stretches and the balance complement weight training. Kind of smooths out the rough edges of aging as well. Because I’ve tried yoga in the past to only comedic success, I was apprehensive. But, you know what? Everybody has the same thought. So why worry about that? The best part turned out to be exercises in concentration. They helped reinforce how critical attention is to success and enjoyment. For example, take this month’s interview with Publisher Paul Feldman. In it, Gino Wickman lays out a comprehensive program for leaders to get their business out of the mud and onto the road. Although the program has many parts, attention is the essential thread pulling those parts together. Gino’s methods direct business leaders first to cast attention on the company and determine its reason for being. Quite a few enterprises wander away from their purpose and pick up ventures they don’t do well because leaders haven’t kept their focus. Another significant part of Gino’s program is a report card detailing data that show whether the company is on track. It is based on the familiar principle that what gets watched, gets done. But it is more than just monitoring that makes the difference. It is the gift of attention, which lets other people know they matter to the company. Many of us have had jobs where 8
InsuranceNewsNet Magazine » March 2016
we felt eminently replaceable and felt that no one would miss us if we were gone. How motivating was that? Then there were the jobs where people took an interest and a mentor cared about our career. Those are conditions for real growth. The attention doesn’t just make the business more effective; the focus is critical for fulfilling work. It’s how we get in the zone. We focus on what is in front of us and love what we’re doing. Before we know it, it’s time to go home. And when we go home, what’s happening there? Is it a flurry of activity where no one talks to anyone else for very long? Is it just a couple of people watching TV and simultaneously poking at their phones? Are we destined for a lonely day when we wonder where the time went? I know a few people who went through a divorce they never saw coming. Their spouse just left or had an affair that they didn’t suspect for some time. How does that happen? In some of those cases, it had something to do with being disengaged. Already gone. Same thing with the kids. One day they’re young adults and we don’t know how they got there, with life an open road in front of them and home in the rearview mirror. All we have is the person or task in front of us. The degree of success in that moment
depends on our attention to it. If this is an employee looking for your direction, that person is not looking only for your opinion, but for your presence. Doesn’t that warrant looking up from your email? If we have wondered why we haven’t had a whole lot of fun with our spouse in quite a while, maybe it’s because we’re not really there. Instead we’re focused on a hurt from the past or a worry about the future. Or we’re just checked out. Perhaps having kids didn’t turn out to be the bliss that we had expected. It’s easy to be so subsumed in the constant demands presented by child-rearing that we miss out on the child. Attention is the water that makes things thrive. Here’s something else I learned in yoga: The less I worried about how I was doing and the more attention I paid to what I was doing, the better I did. I’ll admit my eagle never quite flew, but I know the sky is there, waiting for the day when it will. Steven A. Morelli Editor-In-Chief
The world's leading personal branding agency has exciting NEW media
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2. Co-author Brian Tracy's next book and become a Best-Selling Author® Brian Tracy is looking for authors for his brand new book, The Masters of Success. In this book, Brian is looking for financial advisors to tell their story on how they have mastered the financial world to help their clients achieve success in their life. We GUARANTEE that this book will hit at least one best-seller list, forever naming you a Best-Selling Author® alongside Brian Tracy. Once your book hits the Best-Seller list you will be invited to the ThoughtLeader Summit and Quilly Awards® to be inducted into the National Academy of Best-Selling Authors® this September in Hollywood, CA.
3. Be a star on Wall Street Today, and be seen on CNN, CNBC, and Fox News Stations from coast to coast 4x Emmy Award winning producer Nick Nanton is getting ready to shoot the second season of Wall Street Today, which overlooks the streets of Times Square! You will be interviewed about your business, the things that you do and how you help your clients and prospects. The interview will then air on CNN, CNBC and FOX News, forever giving you the recognition and credibility that you deserve for the work that you do.
4. Come speak at the most crediBLE venue in the entire world, The United Nations Headquarters in New York City The National Association of Experts, Writers and Speakers® is putting together its second annual event in conjunction with the Global Entrepreneurship Initiative™ called The Forum™. This event will be featuring twenty of the top financial advisors, experts, and professionals from around the world. world Each speaker will give a ten-minute presentation on his or her topic at the United Nations Headquarters. Headquarters Our Emmy Award winning film crew will be there to film it all in HD for you to use in your marketing and help you book yourself on more stages and position you as the go to financial advisor in your market.
5. Be interviewed and seen on ABC, NBC, CBS, and FOX affiliates across the country in the new season of the Brian Tracy TV Show Legendary success figure and 50+ time Best-Selling Author®, Brian Tracy, is hosting a brand new season of The Brian Tracy Show FL. Brian is looking for some of the top financial advisors from across the country to be interviewed on his show where in Orlando, FL they can gain credibility and awareness by being seen on ABC, NBC, CBS, and FOX networks. As a guest you will complete the ultimate media experience experience, which includes media training by Jess Todtfeld, a professional photo shoot giving you the “Celebrity Expert” look, and marketing training on how to use these credentials to grow your business. Plus you will have an Emmy Award Winning Team film your interview with Brian that will be seen on ABC, NBC, CBS and FOX affiliates across the country.
To learn more about any of these media opportunities we have set up a page just for you where you can receive a special documentary film on how you can crack the celebrity code, as well as hear from other financial advisors about the impact of using media to grow your practice.
To learn more and watch Cracking The Celebrity Code now, visit celebritybrandingagency.com/mymedia. You may also call our office and speak to one of our Business Agents® about these media opportunities, and see which is the best fit to help you grow your practice, by calling (888) 781-3442.
INFRONT TIMELY ISSUES THAT MATTER TO YOU
Expect DOL Rule to Look Much Like the Preliminary Version he rule should see light of day T by late April, setting off challenges and accommodation. By John Hilton
W
ell, it’s finally done. After months of comment letters, emails, hearings, webinars, meetings and plenty of lobbying on both sides, the Department of Labor (DOL) is finished with its fiduciary rule. The rule was sent to the Office of Management and Budget (OMB) on Jan. 28. Now a new reality is overtaking the insurance industry: it’s time to get prepared to work like a fiduciary. That doesn’t mean opponents are conceding — far from it. Lawmakers are still working on alternative legislation. And litigation is all but expected from some quarters. But changes that will be required, accompanied by substantial record keeping and beefed-up technology, cannot be completed overnight. So agents and advisors are in scramble mode to get up to speed on the rule.
Once OMB finishes its review, expected to wrap up well within its 90-day time limit, the rule will be published in the Federal Register. That’s when the industry will learn what it mandates. Analysts are warning opponents not to expect many changes from the preliminary rule. “It certainly would seem logical that the rush to deliver to OMB would indicate fewer changes to the proposal were made by the DOL,” said James F. Jorden, shareholder at the Washington, D.C., law firm of Carlton Fields Jorden Burt. Once the rule is published, agents will have eight months to transition to fiduciaries. The costs of this transition have been estimated at as high as $3.9 billion by the Financial Services Institute and Oxford Economics. The DOL’s preliminary regulatory impact analysis pegged the cost on broker/dealers and advisors at between $2.4 bullion and $5.7 billion over 10 years. “We think that the rule will result in large operational cost increases to advisors — time, money and resources,” said Jules Gaudreau, president of NAIFA. “We’re very
» Fiduciary Timeline 1934-1940: Investment advisors are subject to a fiduciary standard under the Investment Advisors Act of 1940. But broker/dealers are held to a suitability standard under the Securities Exchange Act of 1934. 1974: The Employee Retirement Income Security Act of 1974 (ERISA) defines a plan fiduciary to include anyone who gives investment advice for a fee or other compensation. 1978: The DOL is given fiduciary oversight responsibility under Title I of ERISA. 10
1981: U.S. workers are introduced to 401(k)-style retirement plans. This starts the beginning of the shift away from defined benefit plans.
July 2010: The Dodd-Frank law gives the SEC the authority to establish a fiduciary standard for brokers and investment advisors if it determines there is a need. The SEC has yet to act on that authority.
InsuranceNewsNet Magazine » March 2016
concerned that insurance carriers and broker/dealers would not be able to change their technology, their systems (and) their processes within the eight-month time period.”
The Devil in the Details
The DOL re-proposed its fiduciary rule in April after a 2011 effort proved unsuccessful. The agency’s revised rule includes six proposed prohibited transaction exemptions, designed to govern advice provided regarding qualified employer-sponsored retirement plans and individual retirement accounts. DOL officials and public interest groups say the proposed rules are necessary to protect retirement investors from high commissions. As fiduciaries, agents must always act in their clients’ best interest financially. If they don’t, they can be held liable. Industry observers are focused on three areas of potential transition difficulty: 1. Administrative — The rule adds substantial paperwork in the form of disclosures. For example, it requires information on all direct and indirect pay an advisor’s company receives on assets sold in the past year.
October 2010: The DOL announces plans to redefine when a person providing investment advice becomes a fiduciary under ERISA. January 2011: The SEC releases a staff study recommending a uniform fiduciary standard of conduct for broker/dealers and investment advisors. March 1-2, 2011: The DOL conducts a two-day public hearing for its fiduciary proposal. The agency hears from 38 speakers and receives more than 300 written comments. September 2011: The DOL withdraws its fiduciary-only rule, vowing to re-propose the rule later.
June 14, 2013: Rep. Ann Wagner, R-Mo., introduces the Retail Investor Protection Act (RIPA), which would bar the DOL from establishing a fiduciary-only rule until the SEC acts. February 2015: The White House releases a Council of Economic Advisors report, “The Effects of Conflicted Advice on Retirement Savings,” endorsing a conflict of interest standard for retirement savers. February 2015: The DOL sends a retooled fiduciary rule to the Office of Management and Budget for review.
March 2016 Âť InsuranceNewsNet Magazine
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INFRONT EXPECT DOL RULE TO LOOK MUCH LIKE THE PRELIMINARY VERSION This is going to require new systems to handle the record keeping, and a commitment by agents to learn the new reporting rules. 2. Education — Agents must take care to be disciplined in their conversations with potential clients. Answering questions and sharing information on products can easily morph into what the DOL will consider “advice.” Exemptions can apply in certain situations. 3. Variable Annuities (and maybe Fixed Index Annuities) — All sales of VAs will require a Best Interest Contract Exemption. That means a contract signed by agent and client. The preliminary rule calls for the contract to be signed up front, but this is one requirement analysts expect the DOL to soften in its final version. The BIC is still a significant change to how VAs are sold. Likewise, there is some speculation that the DOL will require a BIC exemption for fixed index annuities as well. Analysts say the most difficult weekto-week work transition for agents will be getting familiar with the exemptions. When and how the exemptions apply will be the key. Perhaps the biggest decision is whether to pursue an exemption at all. The DOL has said the exemptions allow advisors to receive common types of payment for services, including commissions, revenue-sharing and 12b-1 fees. “The rule is intended to provide
guardrails but not straitjackets,” DOL Secretary Thomas Perez said when the rule was unveiled. But critics say the DOL is trying to push all agents and advisors into a fee-only model. Whether agents hire consultants or go it alone, the fiduciary transition is going to be costly. That means a cost will be paid somewhere down the line, Gaudreau said, perhaps by ignoring small savers. “We’re very concerned with the moderate-income, smaller investor in America and their access to qualified financial advice,” he said. “The very people who need it the most would be deprived of that advice.” NAIFA will create a program for agents and advisors to get a crash course in converting to a fiduciary standard, Gaudreau said.
What’s Next?
Within OMB, regulatory reviews are handled by the Office of Information and Regulatory Affairs (OIRA). While the agency can take longer than 90 days to review some rules, the fiduciary proposal is expected to be completed in less time. President Barack Obama has made the rule a priority for his administration, which means he wants it implemented by the time he leaves office in January 2017. Among its duties, OIRA is responsible for determining which agency regulatory actions are “economically significant” and, in turn, subject to interagency review. A rule is deemed economically significant
» Fiduciary Timeline con't Feb. 25, 2015: Rep. Wagner re-introduces the RIPA bill to the House. April 2015: The DOL officially re-proposes a fiduciary-only rule, which is followed by a public comment period, which is extended from 75 to 90 days.
rule. About 75 speakers address the agency over the four days. Written comments and petitions number more than 391,000. Sept. 7, 2015: The DOL publishes the hearing transcript, which kicks off a second two-week comment period. Mid-September 2015: Ninety-six House Democrats sign a letter to Perez asking for improvements to the rule. Sept. 30, 2015: The House Financial Services Committee passes the RIPA bill.
Aug. 10-13, 2015: The DOL conducts a four-day public hearing on the fiduciary-only 12
Oct. 6, 2015: In a letter, 105 GOP House members urge the DOL to correct “shortcomings” in its
InsuranceNewsNet Magazine » March 2016
if it “is likely to have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy or a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local, or tribal governments or communities.” Rules that are determined to be economically significant require agencies to “provide (among other things) a more detailed assessment of the likely benefits and costs of the regulatory action, including a quantification of those effects, as well as a similar analysis of potentially effective and reasonably feasible alternatives.” As part of the final rule, the DOL must describe and respond to the public comments it received. All of these steps give more information to opponents in search of possible legal challenges. Several leading analysts, such as Fred Reish of Drinker Biddle & Reath in Los Angeles, say litigation is inevitable. “We need to fight it all the way to the end,” said Kim O’Brien, vice chairman and CEO of Americans for Annuity Protection. “I don’t concede that this is a train that has an eventual stop at the end and we just have to roll over.” InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john. hilton@innfeedback.com.
proposal. The DOL ignores the request. October 2015: Several industry groups say they are switching from trying to defeat the rule to changing troublesome aspects. Analysts say a final rule is inevitable. Oct. 27, 2015: The RIPA bill passes the House by a 245-186 margin. Obama says he would veto it. November 2015: The SEC says it plans to release a fiduciary rule by October 2016. Fall 2015: Speculation centers on opposing lawmakers inserting a “rider” crippling the DOL rule into a broader budget bill, but the rider fails to materialize.
Jan. 28, 2016: The DOL sends the fiduciary rule to the Office of Management and Budget for a review, which is expected to take 90 days at most. Opponents are poised to file suit against the rule after it becomes public.
Summer to Fall 2016: The financial services industry prepares for full compliance with the new rule. Decisions must be made — the biggest being whether to take the Best Interest Contract Exemption and to continue the commission-based model. Jan. 1, 2017: Projected date the new fiduciary rule will go into effect.
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InsuranceNewsNet Magazine Âť March 2016
T
GET TRACTION OR STAY STUCK INTERVIEW
raction is a life-or-death issue at this time of year for those of us living in states prone to snow and ice. But traction is just as vital for your business. In Gino Wickman’s book Traction, entrepreneurs learn how to get their businesses out of the mud and propelled into a more profitable ride as well as a far more pleasant one. Every business owner and practice principal knows the frustration of putting in more effort but getting nowhere. This month’s feature builds on last month’s interview, in which we focused on Gino’s Rocket Fuel concepts. That interview discussed the visionary CEO and the importance of adding an integrator who will make the visionary’s dreams a reality. With Traction, business leaders learn what it takes to get the rest of the staff on board, producing efficiently and accelerating growth. Some readers might be surprised by some of Gino’s suggestions, such as guiding the organization using a very short view and a really long one but nothing in between. In this interview with Publisher Paul Feldman, Gino tells how business leaders can take action today to get on the road to exponential success. FELDMAN: What do you mean by “traction,” and how do businesses get it? WICKMAN: Traction means bringing discipline and accountability into the business. We simplify that in what we call the five foundational tools. They are a vision/traction organizer, an accountability chart, rock-setting, a meeting pulse and a scorecard. The vision/traction organizer is the tool to help people get their vision out of their head, on paper, with their team — whether they’re a one-person or a 20-person organization. Getting it out of their head and on the same page with their team so everybody agrees, is bought in and on the same page with where we’re going and how we get there.
The second foundational tool, the accountability chart, is getting that business owner to take a big step back and look at their business through another lens that looks for the right structure to take the organization to the next level. This helps the entrepreneur understand the major functions of their business. Once those two foundational tools are in place, we now have a clear vision and we have a clear structure to start putting all the right people in all the right seats. At that point, leaders need to divide and conquer and bring in some talent to free themselves up from these functions. It might be time for that visionary entrepreneur to bring in an integrator to run the day-to-day matters for them. This
would free up the entrepreneur to continue to sell, be creative and build the organization. FELDMAN: Is the third foundational tool the one that really gets the machinery going? WICKMAN: Yes. The third tool is setting rocks, and that’s getting the entrepreneur to create a 90-day world for their organization and set rocks. That means coming together with their team every 90 days and setting 90-day priorities. But it is only 90 days. The list is made up of the three to seven most important things the company has to get done, and then everybody puts their heads down for these 90 days and executes these priorities. Everyone comes up for air after 90 days, and then they set another 90 days’ worth of priorities. They repeat that every 90 days, for the rest of that company’s life. From there, we go to what we call meeting pulse. And that’s getting the visionary to meet with their team every week for 90 minutes of what we call a level-10 meeting. And that agenda is right in Traction. It’s a very powerful agenda that maximizes the valuable 90 minutes that the team spends together to execute. So they meet once a week for 90 minutes for the level 10 meeting, and then they meet every 90 days for their quarterly and annual planning. We find that is the perfect meeting pulse for a leadership team to execute their vision and plan. The fifth foundational tool is the scorecard, which is a way of getting them to measure. We help them come up with the five to 15 most important activity-based numbers that the visionary can look at during every weekly meeting so that they always have a finger on the pulse of their business. We typically like to see the visionary have 13 weeks at a glance so that they can literally be sitting on an island and receive their scorecard every week and always have a finger on the pulse of their business. Ultimately, all of this gives them wellbeing, which is vision, traction and health. It's all going to help the visionary crystallize their vision and get everybody on the same page. It’s going to help them gain more traction, which is bringing more discipline and accountability into the organization. So they’re executing better.
March 2016 » InsuranceNewsNet Magazine
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INTERVIEW GET TRACTION OR STAY STUCK And the third element is health from the standpoint of helping them have a much more healthy, functional, cohesive company where everyone is rolling in the same direction.
FELDMAN: I had to do a double take when I read the question in your book “What is your 10-year target?” I don’t know that most businesses think that far ahead, do they?
FELDMAN: Let’s circle back to the vision/traction organizer. How does a visionary get the vision out of their head and on paper?
WICKMAN: No, they don’t, and they need to. But when I say 10-year target, the true range is five to 30 years. We have many clients who choose a shorter time frame than 10, but most do choose 10.
WICKMAN: With everything I’ve read about planning, I’ve been able to get it down to eight questions. I find that to the degree a visionary can answer eight questions about their business, they then have a clear vision and plan. But what’s important is that they not only need to answer those eight questions, but they need to make sure that their leadership team members hear the answers to those eight questions and are all in 100 percent agreement. I’ve been doing this personally now for 16 years, with 130 companies. And we’ve done it with another 2,000-plus companies with my team of implementers around the world. I can’t get those eight questions down to seven, and we don’t need to have nine. Those eight seem to be the magic questions that, through dialogue and pulling those answers out of the visionary’s brain, are the best way to do it. But the visionary needs to answer them honestly.
The Five Foundational Tools
with 10 years, we’ll have them do a five-year plan. Of my 130 clients, I still have about five who are incapable of putting something five years away or more on paper. FELDMAN: That’s a powerful strategy, to be looking out that far. But it’s the quarterly rocks, the 90 days, that are really key? WICKMAN: All that matters are your BHAG (big hairy audacious goal), which is the Jim Collins term for your 10-year target, and worrying about what you’re doing for the next 90 days.
1. Vision/traction organizer (V/TO): Eight questions that help develop vision and a business plan.
FELDMAN: Have you worked with any financial advisory firms or insurance companies and what are some lessons that you’ve learned from them?
WICKMAN: Of my 130 clients, at least 15 were in the insurance or financial services business. Among the 2,000 companies that our implementers work with, we have at least 200 financial firms. 3. Rock-setting: Short-term, 90-day priorities. These But what’s challenging about are the three to seven most important priorities for sharing this aha about the finanthe company based on the company’s vision. cial industry is that there isn’t 4. Meeting pulse: Well-run meetings with specific one. What often happens in the agendas. The weekly and quarterly meetings keep a financial industry is, you have a pulse on the business. visionary who doesn’t have an 5. Scorecard: A handful of numbers that can tell you integrator. at a glance how your business is doing. Anything They tend to be the visionthat is measured and watched is improved. ary entrepreneur who started the business. A lot of times they broke away from a large compaBut you bet, people struggle with this ny to take their entrepreneurial leap. They FELDMAN: Is answering them honestly one. If I had not come along with most built the business up to about five people, the hardest part? of the visionaries and forced them to put and then they’re facing all those five frusa 10-year target on paper, they would trations. So a lot of times, it’s this visionWICKMAN: Yes. They don’t answer them not have and they’re not used to think- ary who desperately needs an integrator honestly. But when we’re working with ing that way. to counterbalance them, and they are not the team, they’re forced to be honest. And It is so powerful when they finally put aware that this salvation exists for them. the people on the team also are forced to their star on the horizon and get the team Another example is where there’s a be honest. aligned to work toward it. Everything’s partnership. There can be only one visionThe other reality is that 80 percent of better. They get there faster. The team’s ary in a company. the time, there’s a change on the leader- better. People are more focused. They In one case, there were three partners ship team we started with because you make better decisions today. who started a financial planning firm. They have someone on the team who does So they must do this. But for most hu- built it up to about $2 million or $3 million not agree with the answers and really man beings, their brains do not go there in revenue, with about 14 or 15 people. shouldn’t be on that leadership team or intuitively. It was kind of a three-headed monster in that company. For somebody who’s really struggling at the top. It was almost like three vision16
2. Accountability chart: This starts with the fundamental belief that every organization needs only three functions. For example, sales/marketing, operations and finance. The integrator (covered last month) harmoniously combines the segments.
InsuranceNewsNet Magazine » March 2016
March 2016 Âť InsuranceNewsNet Magazine
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INTERVIEW GET TRACTION OR STAY STUCK aries in one seat. Once they really got clear on the right structure and their unique skill sets, one of them became the visionary, one became the integrator and the other became the pure technician. The technician removed himself from the leadership team because once he got really clear on what his true skill set was, he realized that it was not sitting at the helm of the organization. He just wanted to do the work he loved, and he found his passion in working with the clients, not running the company. I’ve seen several instances in which there were multiple partners and one of those partners was a pure technician. Michael Gerber did such a great job in The E-Myth. The E-myth stands for the “entrepreneurial myth.” That’s where an entrepreneur takes a leap and they think they’re an entrepreneur, and sometimes some of these people just aren’t. They need to be aware that they’re just great technicians. They should let the other partner run the business, if their ego can handle that. FELDMAN: How important is marketing in all of this? WICKMAN: Well, it’s huge. Once you put the right structure in place, one of the aspects of the structure is that you need a marketing function for your business, and you need to have somebody sitting in that marketing seat. Of the eight questions I shared with you, question No. 4 is, what is your marketing strategy? In that, we get the client to answer, who is your ideal target market? We get them to answer the three uniques that they’re selling to that market and their proven process for doing business. And they answer what is the commitment, pledge, promise or guarantee? When they have clarity around who’s accountable and clarity around those four aspects of the marketing strategy, then that marketing person needs to execute a consistent marketing strategy targeted at that particular market. Every firm is different. Some are marketing strictly to very high-end people with $50 million networks, and they’re working with the upper echelon. Some are working with people who are just starting out. Once they get clear on whom they’re going after, they have to be clear on how they want to market. Some firms are great at networking, and some are great at cold calling, so it’s all different in terms of whom they’re going after and how they want to build. Some firms do these amazing events, three huge events every year, and that’s where they generate a lot of their referrals. FELDMAN: A problem a visionary may have, even with an implementer, is getting the team to execute. What are some strategies on that? WICKMAN: By nature, visionaries are terrible executors because they are all over the place. They’re very creative idea people, and they’re very inconsistent. They have ADD. It’s what makes them great. The best way for the visionary to execute is to get an integrator. But beyond that, if I had to grab the three best ways to get this visionary to execute, I would say: 1. Set quarterly priorities/rocks. Establish quarterly priorities. 2. Do a weekly meeting with your team. 3. Use the scorecard. 18
InsuranceNewsNet Magazine » March 2016
How Developing Vision Leads to Traction To create a strong vision with the vision/traction organizer, you must first answer eight important questions: 1. What are your core values? These are a small set of vital and timeless guiding principles for your company. 2. What is your core focus? This is the mission or vision statement. 3. What is your 10-year target? Where do you want your organization to be a decade from now? 4. What is your marketing strategy? You can’t please everybody. What is your razor-sharp focus on your market? 5. What is your three-year focus? This is the longest span for a detailed plan. 6. What is your one-year plan? This gets down to the traction side of the business. Keep objectives to a minimum — perhaps three goals for the year. 7. What are your quarterly rocks? Once the oneyear plan is clear, narrow the vision all the way down to what really matters: the next 90 days. The most important priorities are called rocks. 8. What are your issues? Now that you clearly know where you’re going, identify all of the obstacles that could prevent you from reaching your targets.
Level 10 Weekly Meeting Agenda template Next Page
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INTERVIEW GET TRACTION OR STAY STUCK
The Level 10 Weekly Meeting Agenda
Your leadership team comes together every week, on the same day, at the same time and with the same agenda.
SEGUE
5 Minutes The meeting starts on time with a quick sharing of personal and business good news (this is a great segue and builds team health).
REPORTING
15 Minutes
Report on the three most important items in the business: (1) your numbers being on track (scorecard — containing a handful of weekly activity-based numbers), (2) your quarterly priorities being on track (rocks — the three to seven most important objectives for the company and each individual), and (3) your customers and employees being happy (quick headlines so everyone is in the loop regarding people).
TO-DO LIST
5 Minutes
From there, review your To-Do List to make sure that every action item from last week’s meeting was accomplished. As a rule of thumb, 90 percent of to-dos should drop off every week; if not, there is something wrong somewhere. You will get at least a 100 percent increase in productivity from this one simple discipline; we are human beings, and we need to be held accountable. To-dos are baked right into the agenda.
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InsuranceNewsNet Magazine » March 2016
ISSUE SOLVING
60 Minutes
Go to the magic of the weekly meeting. This is where you solve all of the relevant issues for the week. You first have everyone take a quick pause to think about and add any issues to the list, which already includes any issues from last week’s meeting that you couldn’t get to and the issues you added from the In some meetings, above reporting — numbers, Rocks and people issues. The issues are you will only solve baked right into the agenda. Quickly decide on the three most important issues by picking No. 1, No. 2 and No. 3 (never start at the top and work your way down).
one issue; in some meetings, you will solve 10. That’s OK as long as you are taking them in order of priority.
The owner of the issue quickly identifies the issue (hitting the nerve/ root or looking into the eyes of the person who created the issue or who is responsible for solving it). Once the issue is identified, everyone then discusses the issue — but only once because discussing it more than once is politicking — and when everything is on the table, you then move to solve the issue. Capture the conclusion as an action item on the To-Do List with the owner’s initials and move on to issue No. 2. Work through the Issues List in this fashion until there are five minutes left in the meeting. In some meetings, you will solve only one issue; in some meetings, you will solve 10. That’s OK as long as you are taking them in order of priority. On average, however, you should be solving five to 10 issues per week.
CONCLUDE
5 Minutes
Rate the meeting. You should be averaging an 8 or better.
With five minutes left in the meeting, conclude with three things: (1) Decide whether there are any cascading messages to share with anyone else in the organization based on what you discussed and solved in the meeting, (2) recap the to-dos and (3) rate the meeting on a scale of 1 to 10. You should always be averaging an 8 or better. Where it’s not an 8, this gives you an opportunity to self-correct by asking what would have made it an 8 or better.
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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. Guarantees are based on the claims-paying ability of the issuing company. The BenefitAccess Rider is an optional rider for chronic or terminal Illness that accelerates the life insurance death benefit. It is not Long-Term Care (LTC) insurance. Benefits received under the rider will reduce and may deplete the death benefit. Electing the BenefitAccess Rider results in an additional charge and underwriting requirements. Some benefit payments may be subject to a fee. Other terms and conditions apply. Clients should consult their tax and legal advisors. For New York contracts. Please also note the rider is not subject to the minimum requirements of New York Law, does not qualify for the New York State Long-Term Partnership Program and is not a Medicare supplement policy. In addition, receiving accelerated death benefits may affect clients’ eligibility for public assistance programs and such benefits may be taxable. © 2015 Prudential Financial, Inc. and its related entities. FOR THE EDUCATION OF PRODUCERS/BROKERS ONLY. NOT FOR USE WITH THE PUBLIC. 0275755-00002-00 March 2016 » InsuranceNewsNet Magazine
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NEWSWIRES
QUOTABLE
Fed Holds the Line on Interest Rates After its headline-making move in December to raise interest rates ever-so-slightly, the Federal “One thing I think we can Reserve chose to hold the line on rates earlier this say with more confidence year. Moreover, the Fed gave no indication that it is that financial conditions was changing course for its rate path ahead. There were a handful of changes to the Fed’s are considerably tighter outlook, including a lowering of what it considthan they were at the ers full employment, dropping that figure to 4.9 time of the December percent, which is just below the current rate of 5 meeting.” percent. Fed officials believe the labor market has tightNew York Fed President ened, though there is little indication of wage inWilliam Dudley flation. “Inflation is expected to remain low in the near term, in part because of the further decline in energy prices, but rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further,” the Fed’s statement said.
OBAMA PUSHING RETIREMENT SAVINGS PROPOSALS
More than 30 million people could gain access to retirement savings with a few policy tweaks, the Obama administration said. President Barack Obama is pitching new proposals to expand access to retirement savings accounts and revisit some old ones as part of his budget proposal. The biggest new proposal would permit small businesses from different fields to join and offer a retirement plan. Current rules permit businesses only from like fields, such as two law firms, to offer multi-employer plans. The change will help employers by allowing them to share administrative costs, the White House said. As an added benefit, if an employee moves between employers participating in the same multiple-employer plan (MEP) or is an independent contractor participating in a pooled plan using the open MEP structure, they can continue contributing to DID YOU
KNOW
?
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68%
the same plan even if starting work for a different company. An Employee Benefit Research Institute study concluded that those without pension coverage have a 60 percent risk of a financial shortfall in retirement. For those who have 20 years of enrollment in some type of plan, that risk drops to 18 percent.
MOST AMERICANS HAVE NO EMERGENCY CASH
A minor household emergency can destroy most Americans’ finances, according to a new Bankrate. com survey. Bankrate found that 63 percent of Americans don’t have enough saved to cover even a $500 financial setback. And just half Don’t have sufficient of higher-income respondents (defined as emergency those with $75,000 or cash more in annual earn-
63%
of Americans destroy their credit before they reach the age of 30. Source: Credit Karma
InsuranceNewsNet Magazine » March 2016
I talk to a lot of farmers, and they get it real quick. I tell them, you haven’t lost the wheat if you haven’t sold the wheat. You still own the grain in the bin. Keep it in storage until the price goes back up. — Jay Pitzer of Strategic Financial Concepts, on his advice for staying in the stock market despite its volatility
ings) said they have enough cash to handle such an emergency. About a quarter of respondents said they would cut back their spending in the event of such an emergency, and 15 percent would be able to borrow money from family or friends. Another 15 percent said they would use a credit card to pay for the emergency.
OBAMA SEEKS TO OFFER NEW MEDICAID EXPANSION INCENTIVE
Full federal funding for expanding Medicaid is set to expire at the end this year. So President Obama is proposing to extend the health law provision indefinitely for any of the 19 states that have not yet adopted the enhanced eligibility. But Obama would need the Republicancontrolled Congress to approve the offer. That appears unlikely considering Congress’ distaste for the Affordable Care Act. Obama is seeking congressional approval for extending the three years of full federal funding in his 2017 fiscal year budget proposal. Louisiana became the 31st state, plus the District of Columbia, to extend Medicaid eligibility under the health law. But 19 other states — including Texas and Florida — have decided against enacting the provision. That’s left 4 million people in those states without access to Medicaid.
[NEWSWIRES]
QUOTABLE
MetLife, AIG Getting Slimmer
Insurers cannot continue to have annual losses in the hundreds of millions and be expected to continue business as usual.
Two insurers dubbed “too big to fail” are shedding some excess weight in an effort to become small enough to dodge regulators’ scrutiny. MetLife announced it plans to carve off its U.S. life insurance business through a sale, a spinoff or an initial public offering as the company challenges harsher regulatory oversight. MetLife would keep its property/casualty and other businesses under the proposed plan. MetLife has been challenging its designation as a systemically important financial institution that’s too big to fail, and therefore subject to greater government oversight. The company said it believes the independent new company would compete more effectively and allow MetLife to benefit from reduced capital requirements. Another too-big-to-fail insurer, AIG, is selling its broker/dealer segment, starting an initial public offering for its mortgage-insurance division and slashing expenses after coming under pressure from activist investor Carl Icahn. Icahn has been pushing AIG to break itself into three separate companies. AIG Advisor Group will be sold to private equity firm Lightyear Capital and Canadian pension investment manager PSP Investments. The company said it will start an initial public offering for up to 19.9 percent of its mortgage insurance division, United Guaranty Corp. AIG also announced that it is looking to cut $1.6 billion of expenses within two years. Under the health law, the federal government pays the full cost for the Medicaid expansion for the first three years, through 2016, after which the federal funding will begin phasing down, but to no lower than 90 percent. States that have opposed expansion have listed a host of reasons, including concerns that Medicaid is a “broken” system, that they won’t have enough money to pay their share in coming years and that they don’t trust the federal government to meet its obligations.
MILLIONAIRES ARE QUALIFYING FOR ACA SUBSIDIES
Tax subsidies under the Affordable Care Act were designed to help low-income people afford
— North Carolina Insurance Commissioner Wayne Goodwin, in a letter to U.S. Health and Human Services Secretary Sylvia Burwell
While the interest payment is taxable, the initial investment in the bonds is not.
FEDERAL BUDGET DEFICIT TO RISE TO $544B
health insurance. So why are some folks in the seven-figure income bracket getting them? Some wealthy individuals are taking advantage of that federal financial aid because the subsidies are based on their taxable income – not their net worth. Carolyn McClanahan, a Jacksonville, Fla.-based financial advisor, told CNBC she has steered five wealthy clients toward obtaining health insurance with ACA subsidies. These clients were all retirees who stopped working before they were 65 years old. They no longer had the option of getting health insurance through their jobs and were too young to qualify for Medicare. The subsidy strategy included the clients’ use of bond ladders, which gave them steady income as the bonds matured over time and also spun off interest payments from the bonds’ coupons.
The deficit is growing, and the economy’s slowing. Tax cuts and spending increases passed by Congress at the end of last year are being blamed for increasing the federal budget deficit to $544 billion in 2016, an increase over prior estimates. That’s according to the Congressional Budget Office. CBO’s prediction also sees the economy growing at a significantly slower pace this year than it predicted just a few months ago. Revised Last summer, CBO foresaw 3 percent economic growth for 2016, but it growth revised that prediction forecast downward recently, projecting that economic growth will slow to 2.7 percent this year. CBO predicts deficits totaling $9.4 trillion over the next decade. That’s up $1.5 trillion from its August estimate, with much of the increase mostly due to December’s tax legislation, which permanently extended several tax cuts that Congress had typically renewed temporarily. Last year’s deficit registered $439 billion, the lowest of Obama’s term in office.
2.7%
13 million people have hidden a bank or credit card account from their spouse, partner or significant other. Source: Credit Karma
DID YOU
KNOW
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March 2016 » InsuranceNewsNet Magazine
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InsuranceNewsNet Magazine Âť March 2016
HOW TO SELL ANNUITIES TO A SKEPTICAL CLIENT FEATURE
March 2016 » InsuranceNewsNet Magazine
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FEATURE HOW TO SELL ANNUITIES TO A SKEPTICAL CLIENT
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Photo credit: Sarah Morreim Photography
avid Williams knows the frustration of trying to connect skeptical clients with an annuity that can give them precisely the retirement security they seek. It led him to develop his own sales program, a presentation that includes his “Triple S System,” which refers to Succession, Self and Significance. It helps clients focus on the important information. “I give them facts,” said Williams, who owns F.D. Williams and Associates of Long Lake, Minn., a retirement lifeplanning business aimed at business owners. “Like, if you and your wife were 65 years old, are you aware that there’s a 50 percent chance that one of you is going to live to be 92? A 25 percent chance to 97? And just over a 10 percent chance to 104?
“That’s a long time for your resources to last, and that’s a long time for you to think about giving your life meaning and purpose, if you never thought about it.” Williams has plenty of experience in retirement planning. In 1978, he founded Schwarz Williams, a Minneapolis company that handles insurance, investments, benefits and retirement planning. But he has limited experience selling annuities. Williams’ approach echoes what Jack Marrion has preached for decades: Patience and real-life straight talk will help clients connect with what annuities are and what they can do. An annuity expert and CEO of the consulting firm Advantage Compendium, Marrion distilled a lifetime of sales and research experience into the book Change Buyer Behavior And Sell More Annuities. Marrion is a big believer in creative sales techniques to solve what he calls “the annuity puzzle.” “People say that they want a lifetime income, but when you bring up annuities, you often get a negative response,” he said. “They want income they won’t outlive, and they’re concerned about hurting that income through market volatility.”
‘That’s Not Real’
“THERE’S A 50 PERCENT CHANCE THAT ONE OF YOU IS GOING TO LIVE TO BE 92 ... THAT’S A LONG TIME FOR YOUR RESOURCES TO LAST.” – David Williams 26
InsuranceNewsNet Magazine » March 2016
The way to start changing attitudes is by convincing clients they have a good chance of living a very long time. There are several ways to convey a more accurate picture about longevity, Marrion said. For example, ask the client to look backward to 1991 and what they remember from that time. Soon, you’ll have the opportunity to remind the client that 2041 is as far from now as 2016 was in 1991. And it will make the distant future seem not so distant, Marrion said. “Things that are in the future are seen as more abstract and less likely to
happen and there’s less need to take action on them,” he explained. “The attitude is: That’s not real. I don’t feel that is ever going to happen because it’s so far away, and since it is so far away, I don’t have to do anything about it today.’” Most people don’t give a thought to 2041, Marrion said, but they surely remember 1991 like it was yesterday. Tapping into that memory can mean the difference between matching a client with an effective annuity and seeing them pass on the product altogether. “Psychological distance” is just one of the many perceptions that must change if financial advisors are to successfully solve the annuity puzzle. And it is truly a mystifying puzzle, Marrion said. Consider that 93 percent of respondents to a 2011 AARP survey said it was “very” or “somewhat” important in retirement to obtain a dependable monthly income. Advisors need a specific strategy to drive home the bottom-line value of an annuity, Marrion said. After all, clients really want an annuity — they just don’t know it. They already get one very popular annuity in Social Security, so a supplemental annuity would seem to be a no-brainer. Yet 96 percent of people do not own one. Marrion recently delivered a webinar presentation to National Association for Fixed Annuities members on selling to solve the annuity puzzle. “Reframe the psychological distance” is one of his five sales tips. The other tips are: • Show the guaranteed income. Show clients the “real money” value in specific dollar terms, stressing the guarantee. • Make it part of the whole. Accentuate the crucial role annuities play in a balanced, responsible retirement portfolio. For example, a retiree might plan to use 50 percent of their nest egg for living expenses and 25 percent as a bequest to heirs. The final 25 percent can buy income for life in the form of an annuity. • Paint the next wall. Adopt this effective strategy for a client who has secured three-quarters of their retirement income. That client is highly motivated to finish the job, which can be accomplished with the right annuity.
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ANNUITIES | LIFE INSURANCE | RETIREMENT PLANS | MUTUAL FUNDS
Health care practitioner must state informal care is appropriate in the plan of care. Nationwide YourLife CareMatters may not be available in every state. Please contact Nationwide to determine product availability in your state. Guarantees and protections are subject to the claims-paying ability of the issuing insurance company. When choosing a product, make sure that life insurance and long-term care insurance needs are met. CareMatters is not intended to be a primary source of life insurance protection, so make sure life insurance needs have been covered by appropriate products. Because personal situations may change (i.e., marriage, birth of a child or job promotion), so can life insurance and long-term care insurance needs. Care should be taken to ensure these strategies and products are suitable. Associated costs, as well as personal and financial objectives, time horizons and risk tolerance should all be weighed before purchasing CareMatters. Life insurance, and long-term care coverage linked to life insurance, has fees and charges associated with it that include costs of insurance, which varies based on characteristics of the insured such as gender, tobacco use, health and age, and additional charges for riders that customize a policy to fit individual needs. Life Insurance is issued by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company, Columbus, Ohio. Let’s Face It Together is a service mark of Nationwide Life Insurance Company. Nationwide, the Nationwide N and Eagle, Nationwide is on your side and YourLife CareMatters are service marks of Nationwide Mutual Insurance Company. © 2016 Nationwide. March 2016 » InsuranceNewsNet Magazine NFV-0890AO.227 (6/15) 1
FEATURE HOW TO SELL ANNUITIES TO A SKEPTICAL CLIENT • Pivot around regret. Show the client the lowest monthly income first, which includes full return of principal. Then show additional options that increase the monthly income as more risk is assumed. That makes the annuity look more attractive to the client.
Perceptions > Reality
The difficulty confronting annuity sellers is a combination of the mores of human nature, psychological fears of dying and ingrained attitudes toward growing old. Add that to informational bias against annuities, and the molehill becomes a mountain. But Marrion encourages financial pros to tackle the mountain by making simple human-to-human connections. By making an emotional connection to personal memories, the prospective client begins to see the product in an unbiased light. For example, Marrion cited his favorite sales mechanism for breaking down the fear of aging. “Ask the consumer, ‘Do you have any relatives who lived into their 90s?’” The question places the longevity risk front and center, Marrion said, in the form of Aunt Sara, Grandpa Bill and neighbor Ted. And it works. “They’ll start thinking about all of the old people and now what you say is ‘This annuity will protect you from living too long,’ ” he explained. “And then it starts to make sense.” Advisor Jerry W. Chapman, who sells annuities for Thornhill Securities Inc. in Austin, is quick to ask the question. “I will have people say, ‘My mom or dad, or both, or aunts and uncles, they lived to, you know, some time in their 90s,’” Chapman said. Founded in 1988, Thornhill is an independent broker/dealer and investment advisor offering financial advisory services in more than a dozen states from New York to Florida. The longevity question is rarely a realistic conversation, Chapman said. “Most people, when I start talking about aging into the 90s, may intellectually know that that’s possible,” he said, “but I’ve had comments like ‘It’s not going to be me’ or ‘I don’t want to live that long.’ Unfortunately, those aren’t choices that you and I get to make.” 28
Confirmation Bias
Attitudes about aging and dying are difficult to reverse, Marrion said. That’s why it helps to have a few different strategies. Often, the client is afflicted with what Marrion calls a “confirmation bias,” meaning they are most influenced by factors that confirm their predetermined ideas. For example, a client may know several relatives and friends who lived into their 90s. But the same person is burdened by thoughts of an early death because an aunt died at 62. Guess which example carries more influence? Ironically, studies show that people in retirement feel more active and vibrant than they did at earlier ages. In a 2009 Pew Research Center survey, about half of 18- to 29-year-olds said they felt their age, while about quarter said they felt older than their age and another quarter said they felt younger. However, among adults 65 and older, 60 percent said they felt younger than their age, while 32 percent said they felt exactly their age and only 3 percent said they felt older than their age. Likewise, the gap in years between actual age and “felt age” widens as people grow older, Pew reported. Nearly half of the survey respondents 50 and older said they felt at least 10 years younger than their actual age. Among people 65 to 74, a third said they felt 10 to 19 years younger than their age, and about 17 percent said they felt at least 20 years younger than their actual age. The challenge for financial advisors is to match reality to reality — that is, the income guarantees in an annuity with the high likelihood that retirement life will be happy, healthy and long. It is not an easy task. “I can give all the actuarial statistics to someone, but it’s hard for them to absorb that information, integrate it all and put
InsuranceNewsNet Magazine » March 2016
“THEY’LL START THINKING ABOUT ALL OF THE OLD PEOPLE, AND NOW WHAT YOU SAY IS, ‘THIS ANNUITY WILL PROTECT YOU FROM LIVING TOO LONG.’ AND THEN IT STARTS TO MAKE SENSE.” – Jack Marrion themselves in that position,” Chapman said. “The younger they are, the more difficult it is.” Instead, most people secretly fear they are going to die within a few years. In reality, a 65-year-old person has an 80 percent chance of making it to 77. The number of U.S. citizens age 90 and older has nearly tripled since 1980, reaching 1.9 million in 2010, according to the Census Bureau. That demographic is expected to increase to more than 7.6 million over the next 40 years. “But we don’t view it like that,” Marrion said. “We view it as 50-50 because tomorrow we’re either going to be alive or dead. … It’s more of a 50-50 proposition because that’s how we feel.”
HOW TO SELL ANNUITIES TO A SKEPTICAL CLIENT FEATURE
‘Dead Silence’
Marrion recalled a conversation he had with a 56-year-old family member about a decade away from retirement. The man had $130,000 in an IRA and was “an annuity hater,” Marrion said. He explained to the man that if you place $130,000 into a fixed annuity, you can withdraw a guaranteed $12,201 a year for life. “There was dead silence for over a minute, and then he came back and said, ‘$12,201 a year for life? That’s real money,’” Marrion said. “We’re not talking about Wall Street terms, where you might get this or you’re projected to get this. “No, with the annuity, you are going to get $12,201 a year for every year that you live.” Chapman tries to steer the conversation toward guaranteed income and build a portfolio with that in mind. He said annuity sales are trending up at Thornhill. “The one point I do make with people is that chances are, you may well live in retirement as long as you were in your working years,” he said. “And your money has to last you while you’re not working.” Another important strategy for selling annuities is to stress responsible planning or, as Marrion puts it, “making it part of the whole.” That means stressing the place for guaranteed income within a retirement nest egg. Annuities play a strong part in helping retirees get to their number, the annual income level target in retirement, Marrion said. Most retirees will have some combination of Social Security, savings, 401(k), a pension and possibly other means. The annuity can help make sure guaranteed income is part of the equation, Marrion said. Marrion cites a retiree with a $400,000 retirement who buys a $100,000 fixed annuity. In exchange for 25 percent of their nest egg, this client has a $9,000-per-year income for the rest of their life. Stressing the income also means using words the client understands. “The consumer does not calculate the internal rate of return on the present value of the future income stream,” Marrion said. “They don’t do that. They say ‘I’m going to get $9,000 on my $100,000. Wow, what a great income.’ ”
Painting That Wall
An external wholesaler for Allianz Life Financial Services, Bill Streiff is responsible for sales strategy for Allianz’s team of agents. He is on the road “35 to 36 weeks a year,” meeting and advising about 300 reps nationally. About a year ago, Streiff found himself in St. Louis, where he called on Marrion. Streiff called his colleague and friend of about 10 years “the FIA guru” and said he usually picks up a few strong selling tips to take on the road with him. On this visit, Marrion explained his “painting the wall” theory, which calls on agents to analogize retirement planning to painting the four walls of a room. Once you have three walls done, you’re most likely “highly motivated” to paint that fourth wall, Marrion said. In retirement planning, the first three walls are usually “painted” with Social Security, a 401(k), pension funds or other means. “This is a very powerful concept,” Marrion said. “What makes it really work is the pictures … because they can see how close they are to painting the next wall.” Streiff modified the analogy to building a house. “When we’re talking to reps and we’re sort of creating ideas for them, this is just one that really resonates with them,” he explained. “What we have to do is paint the rest of that financial picture, and we do that with stocks and bonds and annuities — specifically, fixed annuities.” Streiff cited a typical client: a husband and wife who want $60,000 a year in retirement. The floor of the “house” begins with $20,000 to $30,000 from Social Security. In this example, the client has a $600,000 nest egg, and Streiff said a $400,000 Allianz 222 fixed index annuity will fill the second floor of the home and essentially complete the $60,000 need. That leaves $200,000 for the top floor, which serves as an emergency fund or money for additional investing.
“PEOPLE ARE AFRAID OF OUTLIVING THEIR MONEY. THAT’S THE BIGGEST FEAR IN RETIREMENT.” – Bill Streiff “People are afraid of outliving their money,” Streiff said. “That’s the biggest fear in retirement. Not only will they not outlive their money, but they will receive increased payments throughout their lives.” Not many people have planned to manage money for 20 to 30 years of retirement, he added. That makes it crucial to build a sturdy financial “house” with money the client can’t outlive, Streiff said. “That story is what resonates most with the reps,” he said. “It works better than anything I’ve ever thought of.”
Pivot Around Regret
The perception of buying income can be strengthened if the client is shown the lowest monthly income first, Marrion said. Many clients are tepid on annuities because they fear dying and losing the entire lump sum. So a discussion of options will likely include death benefit and period certain terms, both of which bring down the monthly income.
March 2016 » InsuranceNewsNet Magazine
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FEATURE HOW TO SELL ANNUITIES TO A SKEPTICAL CLIENT The mistake comes when advisors start with the big number (the total straight annuity payout), then move to period certain terms and conclude with the death benefit returns. “In that scenario, every time you’re talking to the client, the annuity income story is getting worse and worse and worse,” Marrion said. He recommended starting conservatively and showing the client how income can grow through various options. “It turns it into a positive,” he said. Annuities provide so many different options, Marrion said, that it is important to read the client’s concerns and be pre-
pared to discuss them appropriately. That talk usually comes down to risk versus income. A fixed index annuity with a guaranteed lifetime withdrawal benefit (GLWB) might be the answer for clients with both concerns, Marrion said. “When you have a GLWB, you’re always at breakeven or above,” he explained. “You’re never in a position where you have to fight to break even, to be a winner. With an annuity with a GLWB, you start out as a winner and life just gets better.” After all, some clients just don’t want to be “a loser” at the retirement game, Marrion said.
“THESE ARE YOUR DOLLARS. IF YOU CAN UNDERSTAND WHAT YOUR OPTIONS ARE — THE GOOD, THE BAD AND THE UGLY — YOU’LL MAKE A BETTER DECISION.” – Chris Everett 30
InsuranceNewsNet Magazine » March 2016
“Sometimes you can’t do away with the bias,” he said. “They do not want the chance of losing their money. That’s why people don’t buy the immediate annuity. They don’t want to be a loser.”
Bad Planning
The failure to connect clients with the right financial products can have disastrous results. With so much at stake, it is crucial that retirees maximize the money they have in order to make retirement work. Chris Everett recalls the time a client referred her 90-year-old mother for some straight-talk retirement planning. “The daughter was outraged,” said Everett, who owns Everett & Associates Insurance Agency for Life, Disability, Annuities & Long Term Care in Oak Park, Ill. “When I spoke to the mom, she really didn’t know what (investments) she had.” Turns out, a banker put the woman into a portfolio yielding a 0.6 return over a six-year period. Everett restarted the process and found the woman a Multi-Year Guaranteed Annuity (MYGA) that gives her a 3 percent annual return. It was the right product for the right client. The woman will probably live another five years at least, Everett said, and an annuity helps insure her against outliving her money. “I mean, she’s sharp as a tack, and physically doing well,” she added. Everett has several similar stories of matching clients with annuities that delivered retirement security. There’s the 93-year-old woman, and a 96-year-old man. Then there’s Everett’s mother, 85 and still going strong. Annuity sales fit for each case, Everett said, but only after a long exchange about the product. “You have to let them own it; let them buy it,” she said. “I tell them all the time, ‘These are your dollars. If you can understand what your options are — the good, the bad and the ugly — you’ll make a better decision.’” InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com.
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WILL ANNUITIES MISS THE RETIREMENT TRAIN? FEATURE
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LIFEWIRES
Life Insurance Activity Saw Historic Gains in 2015 As one presidential aspirant would describe it – it’s yuge! We’re talking about the unprecedented gains in life insurance activity during 2015. Application activity for individually underwritten life insurance posted its largest year-end gain in 2015, up 2.7 percent from the previous year, according to the MIB Life Index. Except for March, the MIB Life Index showed gains across every month in 2015. For the first time since 2001, the 44-and-under age group led all other age groups in growth at the end of 2015. This group saw a record-breaking increase of 3.9 percent over 2014. Activity in the 45-59 group was flat, with an increase of 0.7 percent in 2015, while the 60-and-older group saw a 2.3 percent hike in activity for the year.
‘PEOPLE LIKE YOU’ HAVE BIG INFLUENCE
“But everyone else is doing it!” may not have been a good way of convincing your parents to let you wear that risqué outfit or attend an all-night party. But it may be a good way of convincing a prospect to buy life insurance. A new LIMRA study using behavioral economics finds consumers are more likely to buy life insurance when people similar to themselves own coverage. In the study, consumers were given eight messages that challenged their biases toward life insurance ownership, with one stating “most Americans do own life insurance, including people like you.” “This was the most successful message we tested,” said Jennifer Douglas, associate research director, developmental and strategic research at LIMRA. “Attitudes about life insurance improved for all demographic groups in some way when having coverage is perceived as a social norm.” “We don’t want to believe that others’ behavior influences us, but it certainly does, and we’re often better off for it,” she noted. At the other end of the spectrum, a statement that emphasized how “quick DID YOU
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and easy” it can be to purchase life insurance was the least effective message in the study, both on a conscious and a subconscious level.
AGENTS COMPLAIN ABOUT EMAIL
Consumers may like to communicate via email, but it is causing headaches for insurance agents, according to a survey by Novarica. Agents cited email as a major disruptive factor in their ability to serve clients. “Email has drastically increased the demand from customers for immediate responses,” commented one agent participant in the study. In addition to the disruptive influence of email, other key findings of the survey indicate that after product, agents care most about relationships and ease of doing business when it comes to working with carriers. Agents said they also hate product limitations, bad service, poor tools, complexity and unexpected change when dealing with carriers.
Interest rates and the economy were named as the greatest challenges to the life insurance industry in 2016, according to a study of insurance company executives. Source: LOMA
InsuranceNewsNet Magazine » March 2016
QUOTABLE
As nice as it is to share memories of a loved one, I think we’d all agree that our families would be better off with the financial security that life insurance provides. — Marv Feldman, Life Happens CEO
WHAT DO AMERICANS REALLY THINK ABOUT LIFE INSURANCE?
• Americans say one thing and do another when it comes to life insurance, according to the latest survey by Life Happens. • An equal percentage of respondents (29 percent) said they believe life insurance and investing in the stock market provide the most valuable return for their money. But the majority of those surveyed (54 percent) said that family photos would be the thing they most likely would leave behind for their loved ones after their death. The death benefit from a life insurance policy was a distant second, named by 49 percent of respondents. • “Two aspects of the survey findings surprise me and provide important lessons about the need for education around life insurance,” said Marv Feldman, Life Happens CEO. “As many Americans believe that investing in the stock market will provide the greatest overall, guaranteed value as believe that buying life insurance will provide the greatest overall, guaranteed value. In reality, there are no guarantees from investing in the stock market, and the recent stock market correction underscores just how uncertain that investment can be. As morbid as it sounds, everyone will eventually die, which is why a death benefit from a life insurance policy provides a more valuable return on your investment.”
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LIMRA 2013-2014 Confi dential Sales Surveys, 4th Quarter. Ranked by Planned Recurring Premium for 30 participating companies. Planned recurring premium may differ by reporting company, meaning results could change if company reporting methods are changed.
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. Each insurer is solely responsible for the financial obligations under the policies or contracts it issues. 400 Robert Street North, St. Paul, MN 55101-2098 • 1-800-820-4205 ©2015 Securian Financial Group, Inc. All rights reserved. F82624-29 1-2016 DOFU 9-2015 22277
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.
March 2016 » InsuranceNewsNet Magazine
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LIFE
Feeling Charitable? Think Again harity-owned life insurance C has immense potential for social good, but industry professionals may not have the knowledge or tools to use it properly. By Ron Sussman
F
or decades, creating a charitable endowment through life insurance was a popular strategy meant to benefit all participants, including insurance carriers. But that’s not necessarily true anymore. Insurance carriers recently have begun either rejecting charity-owned applications in which the charity is also the beneficiary, or instituting rules limiting the amount of coverage and, ultimately, the dollar amount a designated charity receives. Both of these restrictions have severely limited the market for charity-owned life insurance. And industry professionals are beginning to feel the pinch. In a recent survey performed on behalf of a large national charity, only six of 35 insurance carriers replied they would consider allowing a charitable organization to be both owner and beneficiary. This is a marked drop from how we’ve done business in the past. Many carriers will allow a donor to apply for coverage with a qualified 501(c)(3) charity beneficiary as long as the donor remains the policyholder. But these same carriers have strict rules regarding previous gifts and, in many cases, coverage is entirely too low to suit the donor’s needs in the first place! Additionally, several carriers are concerned about concentration risk, and have limited the number of policies they accept from any individual organization. In a perfect scenario, any charitable organization would remain both owner and beneficiary, with the generous donor writing a check directly to the organiza34
tion to pay the premiums. This ensures the donor a tax deduction while simultaneously guaranteeing the charity will receive death benefits — a win for both parties. Various chief underwriters across the country have examined this topic over the years, and, unfortunately, there’s no clear reason for these arbitrary limitations. The only common themes uncovered were compliance-related concerns about state regulations and insurable interest and the ChOLI (charity-owned life insurance) arrangements involving third-party
financing that received particularly harsh attention from Congress and the Department of the Treasury in 2010. These governing bodies deemed such arrangements more beneficial for the insurance companies than for the charity. And at the time, they were correct. The ChOLI issue, which focused on
InsuranceNewsNet Magazine » March 2016
third-party financing on behalf of certain charities, reached its nadir in 2010 with the University of Oklahoma “Gift of a Lifetime” case. Lincoln National, the primary carrier, was included in a lawsuit that claimed it “understated the costs of the program and overstated its potential financial benefits and charged the university inflated premiums.” This particular case received national attention. Chief underwriters often cite the lawsuit as a reason for limitations on charity-owned policies. And while I agree third-party financing in a charitable setting is patently wrong, our industry should not penalize all charities that rely on direct donor gifts of insurance for survival. As far as insurable interest is concerned, the National Association of Insurance Commissioners’ website confirms the majority of states have amended regulations to include qualified charities as having an interest in their donors. We found no specific formulas for determining the coverage a donor may apply for, which means the carriers can make their own rules. To top it off, we’re dealing with a lack of industrywide agreement. Policies range from rules based on previous patterns of giving to systems based on a donor’s last gift. It’s no wonder we’re all so confused! And what about new donors? They have no pattern of giving and are often denied coverage. If this continues, charitable organizations will have no way to replenish deferred giving programs because — think about it — everyone is a new donor at least once. Because so many industry professionals remain tangled in fine print and frustration, it is becoming more difficult to find common ground. Through all of this, and even as our industry evolves, charitable gifts of life insurance — managed properly — can be mutually rewarding for both charities and
FEELING CHARITABLE? THINK AGAIN LIFE donors. As an industry, we should be encouraging this behavior, not restricting it. A qualified donor can make a huge impact by prefunding a large lumpsum charitable contribution. These policies should be well-funded and persistent and create no collateral risk for the carrier.
A Plan for the Future
Charity-owned life insurance can, and should, remain mutually beneficial. Here is my plan to present a charitable gift appropriately and fairly to an insurance carrier. » Ensure the donor can financially justify the gift. Underwriters need assurance a client is not jeopardizing his financial future. » Do your regulation homework. Do the regulators in your particular state consider qualified charities as insurable interest? » Obtain a copy of the donor’s signed pledge. Make sure the legally binding pledge card shows the total gift amount — an aggregate of all premiums over time.
» Craft a concise and informative cover letter. Include strictly essential information — such as a donor’s net worth and income — and reiterate the gift will not negatively impact a donor’s financial future. » Confirm the ownership and beneficiary information adheres to the specific carrier’s regulations and preferences. Many underwriters wrongly believe a charity has negligible insurable interest in the life of a donor. Eliminate this myth by ensuring your application is buttoned up and conforms to a carrier’s standards. Be specific! Additionally, what happens when the charitable organization employs the donor — either as a longtime worker or as a board member? Shouldn’t that valuable time automatically be considered when calculating insurable interest? This opinion shift is rooted in the University of Oklahoma case and other similar situations that attempted to insure far too many lives without re-
gard to their relationship to the organization. The result? A small group of insurance and financial firms contaminated an entire charitable market, and it’s an incredible shame for our profession. Fortunately, insurance professionals have the power to correct past mistakes and recognize the true social value in properly constructed charityowned policies. Deferred giving programs with life insurance can be extremely valuable to qualified charities. These and similar programs provide a simple way to engage donors with a guarantee of completion. Donors receive a current tax deduction and make a legally binding commitment that results in a large lump sum for a charitable organization. Life insurance carriers should encourage more of this charitable activity. Ron Sussman is founder and chief executive officer of PolicyAudits.com and CPI Companies. Ron may be contacted at ron.sussman@innfeedback.com.
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March 2016 » InsuranceNewsNet Magazine
35
LIFE
Life Insurance as Executive Compensation xecutive compensation E plans, using life insurance as the accumulation vehicle, are great tools to retain key employees. Structured properly, these plans can provide a current income tax deduction to employers. By William Stark
A
dvisors who serve the business market know that one of the most stressful events a business owner can experience is the departure of a key employee. Advisors serving business owners can help their clients potentially avoid this stress — and at the same time enhance their position as a trusted consultant — by encouraging business owners to consider executive compensation plans for key employees. Executive compensation plans are an effective way to recruit, retain and reward employees who are valuable and essential to a business. These types of plans can also supplement retirement goals for key executives. It is not unusual to see the most highly paid employees of a company limited on the amounts that can be contributed to a 401(k) or other types of qualified plans. The nonqualified executive plan may be an excellent strategy to make up for this limitation.
EXECUTIVE BONUS
The employer, often referred to as the plan sponsor, is able to select highly compensated employees and management who will participate. There are five common types of nonqualified executive compensation plans: (1) executive bonus arrangement (Section 162 bonus), (2) golden executive bonus arrangement (GEBA); (3) golden executive match (GEM); (4) split dollar, and (5) nonqualified deferred compensation. Some of these plans currently are income tax-deductible and some are not. A current income tax deduction often is very attractive to the employer, who will likely insist that the nonqualified plan that is implemented is currently taxdeductible. In this article, I will discuss the three types of nonqualified options that are currently income tax-deductible to the employer: executive bonus arrangement, golden executive bonus arrangement and golden executive match.
Reportable Income COMPANY
Premiums/ Bonus
Life Insurance Policy
36
InsuranceNewsNet Magazine Âť March 2016
Owner
EMPLOYEE
Taxes IRS
These nonqualified executive compensation plans often use life insurance as the accumulation vehicle. The diagrams show how the arrangement and the ownership of life insurance are intended. Life insurance is typically an effective accumulation vehicle if there is a sufficiently long timeline. Additionally, the tax-deferred growth and the tax-preferred access are attractive to the employee, often referred to as the plan participant.
Executive Bonus (Section 162 Bonus)
An executive bonus arrangement is a simple, nonqualified executive compensation strategy designed to provide supplemental benefits to key employees. This nonqualified employee benefit arrangement is structured as a compensation bonus to the key employee. It is income tax-deductible to the employer at the time the bonus is made and considered as income to the employee. The bonus is used to pay the premiums on a life insurance policy. The employee is the insured and owner of the life insurance.
Golden Executive Bonus Arrangement (GEBA)
The golden executive bonus arrangement is structured as an executive bonus plan. The employee is the insured and owner of the life insurance contract. The employer provides a bonus that is paid into the life insurance contract as premiums.
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37
LIFE LIFE INSURANCE AS EXECUTIVE COMPENSATION The bonuses are currently income tax-deductible to the employer and considered as income paid to the employee. The GEBA differs from the executive bonus plan in two ways. First, it requires an employment agreement specifying that the employee will work a certain number of years in order to receive the benefits. After the term of years is completed, the benefits are completely relinquished to the employee. If the agreement is not completed, the employee contractually owes the employer a specified dollar amount of the bonuses paid. Second, the employer and employee execute an insurance form that is filed with the insurance company. This is the “Policy Instructions” form, which prohibits the employee from surrendering, accessing or pledging the policy until the arrangement is 100 percent vested.
Golden Executive Match (GEM)
A golden executive match is designed with contributions by the employee as well as a “tax-match bonus” by the employer. The employee pays premiums into a life insurance policy. The employer agrees to a specific tax-match bonus, which pays the income taxes on the employee’s contribution. Since the employer pays a tax match, the employee is able to contribute more dollars into the GEM plan. The arrangement mimics a pretax contribution but without the complexity of a nonqualified deferred compensation (NQDC) plan, which allows an executive to defer a portion of their compensation — and taxes on that compensation — until the deferral is paid.
GOLDEN EXECUTIVE MATCH EMPLOYMENT AGREEMENT Employee hereby agrees...
Tax Match Bonus
COMPANY
Premium
Vesting POLICY INSTRUCTIONS
GEM is effective when key employees have limitations to qualified plan contributions and/or an NQDC plan is not practical. The employer’s cost is controlled because it pays only a tax-match bonus, rather than the premium and a tax-match bonus. GEM also allows for the employer to recover its proportional contributed costs if the employee leaves before a particular date. GEM also requires two additional steps not associated with an executive bonus plan. First, it requires an employment agreement specifying that the employee will pay the entire tax-match bonus, or a portion of that bonus, to the employer if a specified number of years of employment are not completed. After the term of years is completed, the benefits are completely in the control of the employee. Second, the employer and employee execute an insurance form that is filed with the insurance company. Again, this form prohibits the employee
Reportable Income
Premiums/ Bonus
EMPLOYEE
Owner
IRS
Life Insurance Policy
EMPLOYMENT AGREEMENT Employee hereby agrees...
Vesting
Taxes Owner
GOLDEN EXECUTIVE BONUS ARRANGEMENT
COMPANY
EMPLOYEE
from surrendering, accessing or pledging the policy until the arrangement is 100 percent vested. However, unlike with the GEBA, the employee potentially will be able to access their contributions simply by paying the specified amount of the tax match owed to the employer. These three nonqualified plans provide the employee with a life insurance contract at retirement. The life insurance provides protection in the form of a death benefit. Additionally, the employee can access the cash value to supplement retirement income. The employee also can take tax-preferred loans and withdrawals from the cash value. If the life insurance contract stays in force until death, no income tax will be paid on these retirement dollars. Nonqualified executive compensation plans are essential tools for advisors serving the business market. These types of plans are effective for exit and transition planning and retirement planning, as well as for recruiting, retaining and rewarding those employees who are key to a business. William Stark, JD, LLM, CLU, is senior advanced marketing counsel for Securian Financial Group affiliates Minnesota Life and Securian Life. He may be contacted at william.stark@ securian.com.
Taxes Like this article or any other? As seen in the
POLICY INSTRUCTIONS 38
Life Insurance Policy
IRS
July 2012 issue
Life
Annuities
of InsuranceNewsN
et Magazine
Health July 2012
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ANNUITYWIRES
Retirees Often Choose Risky Income Strategies
Your Savings Balance is:
$0.00
They may not realize it at the time, but many retirees choose strategies for withdrawing their retirement savings that put those savings at risk. Even worse, they can reduce the number of years their money will last. A LIMRA Secure Retirement Institute study of consumers between ages 45 and 75 with investable assets of $100,000 or more found that 56 percent do not have a strategy for income in retirement. Among those who do, their strategy consists largely of making withdrawals from their savings. In the study, six in 10 who have a strategy said they plan to withdraw from their savings only occasionally or when needed. At greater risk would be the 32 percent who plan to make regular withdrawals from their savings. Of this group, most plan to withdraw a constant dollar amount or percentage of their savings on a regular basis. Only 20 percent of those in the study said they plan to convert some or all of their household savings into guaranteed income.
IT HELPS TO HAVE A PLAN
We’ve all heard the advice “Get it in writing.” It turns out that piece of advice pertains to retirement plans. A LIMRA Secure Retirement Institute study finds that preretirees and retirees who have a formal written retirement plan are more likely to feel more confident they are saving enough for retirement. They also are more than twice as likely as those without one to feel very prepared for retirement. The study found that preretirees and retirees who have formal written retirement plans are more likely to roll over and consolidate their assets within two years. They are also more likely to convert a portion of their assets into an annuity within two years. Preretirees with formal written plans are twice as likely to convert a portion of their assets into guaranteed income (22 percent versus 11 percent). Retirees with formal written plans are three times as likely to convert a portion of their assets into guaranteed income (25 percent versus 8 percent). DID YOU
KNOW
?
40
RISING DEBT COULD JEOPARDIZE RETIREMENT PLANS
Which is more important for Americans — retirement planning or getting out of debt? In one study, retirement planning topped the list, and by a wide margin. But elsewhere, there are troubling signs that debt is becoming top of mind and may put retirement saving on the back burner. On the yes-to-retirement-planning side of the issue, 59 percent of more than 1,000 investors told researchers that retirement planning is their top personal financial objective for 2016. That’s according to a poll taken for TD Ameritrade. Their second-ranked objective, at 38 percent, was wealth accumulation, a financial activity often considered to be part and parcel of retirement planning. But there is another report in which retirement planning does not figure so prominently. This is from First Command Financial Services, which runs an index on financial behaviors, attitudes and intentions of middle-class military personnel. The latest First Command Financial Behaviors Index found that “get out of debt” is the top New Year’s resolution
41% of women who are the primary decision-makers in their households have developed a plan to generate retirement income from savings. Source: Insured Retirement Institute
InsuranceNewsNet Magazine » March 2016
QUOTABLE
People approaching retirement age often grapple with a central question — does the potential for market growth outweigh the risk of market losses when it comes to retirement savings? — Elizabeth Forget, MetLife
for 2016. This was named by 32 percent of those surveyed. Retirement saving and planning did make the First Command list, but only in eighth place.
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The Principal Financial Group has launched the Principal Secure Choice Indexed Annuity, a single-premium, fixed deferred index annuity with performance based in part on performance of the Standard & Poor’s 500 Index. It is simpler than other indexed annuities since there’s just one index to track and one application process for the two index-crediting methods investors can choose from. In addition, the product offers a four-year surrender charge period, which is rare in the indexed annuity marketplace. Vantis Life announced that its multiyear guarantee annuity, “Freedom I,” is being relaunched with special features for retirees. A version of the product was a best-seller for the company in 2010. Today, Freedom I features a return-ofdeposit guarantee during the initial five years of the annuity. MetLife has launched MetLife Shield Level Selector 3-Year, a single-premium deferred annuity. The new offering complements MetLife Shield Level Selector, which launched in 2013. Both allow clients to benefit from potential market growth while helping protect assets from market decline. Clients can now choose between the three-year withdrawal charge schedule offered by Shield Level Selector 3-Year and the six-year withdrawal charge schedule offered by Shield Level Selector, allowing them greater flexibility to select the time frame that best meets their personal investment needs.
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41
ANNUITY
Laddered Annuities Beat RMDs for Guaranteed Retirement Income Lifetime Inflation — Adjusted Income Following Retirement at Age 65 in 1932: Immediate Annuity vs. Combination Strategy, and Fund Balance
T his approach could prompt more use of immediate annuities with qualified retirement assets. It also could open the door to more innovation in retirement income strategies.
$9
A Twist on Combo Strategies
Numerous combo retirement income strategies already exist in the planning community. They typically rely on blends of two or more asset categories such as pension income, annuity income, qualified plan withdrawals, managed money earnings, Social Security maximization and even part-time income from work. But Warshawsky’s proposal has a twist: In addition to combining annuitization with systematic withdrawals, he suggests that the Department of the Treasury (DoT) broaden a current rule to provide a tax incentive that would spark greater use of this type of strategy. This rule is the DoT regulation that took effect in July 2014, creating qualifying longevity annuity contracts (QLACs) for use inside individual retirement 42
$8 $7 $6 $5 $4 $3 $2 $1
19 38 19 40 19 42 19 44 19 46 19 48 19 50 19 52 19 54 19 56 19 58 19 60 19 62 19 64 19 66
19 36
$0
19 32 19 34
A
researcher at George Mason University has come up with what he believes is an effective strategy to guarantee lifetime retirement income. The approach entails combining laddered immediate annuities with systematic withdrawals from retirement accounts, plus a tax rule change that provides an incentive to purchase the annuities. If the proposal gets legs, it could spur more use of immediate annuities with qualified retirement assets and thus greater use of annuitization to ensure lifetime income, Mark J. Warshawsky said. Warshawsky is senior research fellow at the university’s Mercatus Center and is the author of a new study on the strategy. The approach also could unleash more innovation in retirement income strategies, Warshawsky predicted.
annual income (thousands of dollars)
By Linda Koco
immediate annuity income
combination strategy total income
Source: “Reforming Retirement Income: Annuitization, Combination Strategies, and Required Minimum Distributions,” December 2015, Mark J. Warshawsky
accounts and defined contribution plans. The stated purpose is to promote partial annuitization, Treasury officials said. These specialized annuity policies are deeply deferred income annuities, also called longevity annuities. People who buy these contracts can defer taking required minimum distributions (RMDs) from their annuity up to age 85. The tax incentive is that people who buy these annuities can defer paying taxes on the annuity-related RMDs until the payouts (distributions) actually occur. Warshawsky said a similar tax approach applied to laddered annuities in a combination strategy would further support the government’s partial annuitization objectives and guaranteed retirement income goals. His reasoning goes this way: » Retirees who rely solely on a strategy of drawing down assets for income through systematic withdrawals run the risk of outliving their savings.
InsuranceNewsNet Magazine » March 2016
» Life annuities mitigate this risk by offering guaranteed income for life. However, converting the entire retirement portfolio into life annuities at retirement fails to provide end-of-life assets for bequests, is a poor hedge against inflation and does not provide sufficient liquidity in the case of emergency needs, he said. » Therefore, many financial planning experts favor partial annuitization strategies. However, while the 2014 tax ruling does provide an incentive to annuitize some of a person’s qualified savings to purchase longevity annuities, it does not provide an incentive to purchase laddered immediate annuities with qualified money. It is unclear why the current strategy “merits special treatment compared with other partial annuitization schemes, such as laddered purchases of immediate life annuities, which are more comprehensive and efficient,” Warshawsky wrote in the study.
LADDERED ANNUITIES BEAT RMDS FOR GUARANTEED RETIREMENT INCOME ANNUITY » If the current tax rule were broadened to include immediate annuities purchased with qualified funds, this would help promote greater use of annuitization in retirement income plans, he said, noting this is in keeping with government objectives.
Combining asset withdrawals and laddered purchases of immediate life annuities provides the best balance of lifetime income and flexibility.
His Suggestion
plan, Warshawsky continued. In addition, because longevity annuities typically have a higher expense load than immediate life annuities, the longevity-only approach may introduce unwanted costs. His suggestion is for the government to make “a broad and simple change” in the RMD tax regulations. Specifically, he said, “the minimum distribution requirements that govern tax-qualified retirement accounts for older retirees should be reformed to encourage the use of these partial annuitization combination strategies.” Current rules “penalize annuitization by not completely counting annuity payouts toward RMD requirements,” he said. The effect is that retirees with a partially annuitized portfolio will be required to pay taxes significantly earlier than retirees who do not purchase annuities with
Combining asset withdrawals and laddered purchases of immediate life annuities provides the best balance of lifetime income and flexibility, Warshawsky told InsuranceNewsNet. To illustrate, he pointed to an individual who retires at age 62 with $100,000 in qualified money saved for retirement. If the person lives to age 102 and has been taking $4,000 a year, inflation indexed, as withdrawals, the individual has a 35 percent chance of running out of money. “By comparison, the combination strategy would produce an average of $4,500 in yearly income, and the person would still have almost $76,000 left for bequests at age 102,” said Warshawsky. However, current tax rules do not provide consumers with an incentive to purchase those annuities in such an income
qualified money. The reform would “incentivize laddered purchases of annuities at whatever rate is deemed optimal for individual retirees,” he predicted. It would also “dramatically simplify an unnecessarily complicated portion of the tax code” and would require only “a change in regulations and not a change in law.” Even without the tax law change, combination strategies like this are “the way to go in many situations,” Warshawsky contended. “It’s up to the advisor to customize the recommendation to meet the client’s needs and goals.” InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.
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View current rates at: www.myprotective.com/asset Citi and Citi and Arc design are trademarks and service marks of Citigroup Inc. or its affiliates, are used and registered throughout the world, and are used under license for certain purposes by Protective Life Insurance Company or its affiliates (the “Licensee”). Citigroup Global Markets Limited (“Citigroup”) has licensed the Citi Flexible Allocation 6 Excess Return Index (the “Index”) to the Licensee for its sole benefit. Neither the Licensee nor Protective Asset Builder (the “Product”) is sponsored, endorsed, sold or promoted by Citigroup or any of its affiliates. Citigroup makes no representation or warranty, express or implied, to persons investing in the Product. Such persons should seek appropriate advice before making any investment. The Index has been designed and is compiled, calculated, maintained and sponsored by Citigroup without regard to Licensee, the Product or any investor in the Product. Citigroup is under no obligation to continue sponsoring or calculating the Index. CITIGROUP DOES NOT GUARANTEE THE ACCURACY OR PERFORMANCE OF THE INDEX, THE INDEX METHODOLOGY, THE CALCULATION OF THE INDEX OR ANY DATA SUPPLIED BY CITIGROUP FOR USE IN CONNECTION WITH THE PRODUCT AND DISCLAIMS ALL LIABILITY FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL DAMAGES EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. Please see https://investmentstrategies.citi.com/cis/us for additional important information about the Citi Flexible Allocation 6 Excess Return Index. Protective Asset Builder is a limited flexible premium deferred indexed annuity contract with a limited market value adjustment, issued under policy form series FIA-P-2011 or FIA-P-2010. Protective Asset Builder is issued by Protective Life Insurance Company located in Birmingham, AL. Policy form numbers, product availability and features may vary by state. Protective Asset Builder is not an investment in any index, is not a security or stock market investment, does not participate in any stock or equity investment, and does not contain dividends.
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March 2016 » InsuranceNewsNet Magazine
43
ANNUITY
DIAs: The Hot Annuity Trend That Can Nearly Double Payout M any deferred income annuity buyers are forgoing the return-ofpremium option in exchange for higher annuity payments — nearly double the payments — once they reach age 80. By Cyril Tuohy
D
o your clients feel confident in their retirement longevity? If so, there’s a new annuity trend that some in the insurance industry are calling “an amazing deal.” The trend involves the deferred income annuity (DIA). Deferring income, similar to waiting until age 70 to withdraw Social Security, is one of the attractions of a DIA. 44
The longer your clients wait to receive payments, the higher the monthly reward. It’s the crux of delaying gratification. That was the original intention with the product. But over time, a return-ofpremium option was added to counter client objections of dying before the income started. With the ROP option, the premium would be distributed to beneficiaries, at a cost, of course. Now, though, there’s a return to the old-fashioned values of DIAs, also known as longevity annuities.
Higher Income Becoming a Trend
It turns out that many DIA contract holders want more income at the expense of
InsuranceNewsNet Magazine » March 2016
the return-of-premium option. It’s the latest development that some industry consultants say they have come across in the DIA space. As a result, some DIA holders can recoup their initial investment in as little as three years from the moment they received their first payment. For those who do, the no-refund option is “an excellent deal,” said Andy Ferris, a Chicago-based director with Deloitte Consulting. “For the right person, this is an amazing deal.” Just how good is the no-refund option? Let’s do the math. Suppose a 65-year-old pre-retiree decides to put $100,000 into a DIA, or a similar
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March 2016 » InsuranceNewsNet Magazine
45
ANNUITY DIAS: THE HOT ANNUITY TREND THAT CAN NEARLY DOUBLE PAYOUT type of longevity annuity, and elects to option, said Hersh Stern, founder of the premium immediate annuities and debegin payouts 15 years hence, at age 80. online annuity brokerage ImmediateAn- ferred income annuities. The research Under a traditional longevity annuity nuities.com and publisher of the Annuity organization plans to release the results design, assuming the contract holder has Shopper Buyer’s Guide. later this year, a spokesman said. elected the return-of-premium option, a Stern, who didn’t begin to market DIAs DIAs are the weakest-selling of all $100,000 DIA might pay fixed annuities. They regout $18,000 annually beistered only $1.1 billion ginning at age 80. If the in sales in the first half annuitant dies before age of last year, a drop of 16 80, the premium is repercent from the yearturned to the beneficiary. ago period, according to But more DIA buythe LIMRA Secure Reers are forgoing the retirement Institute. LIMRA Secure Retirement Institute has just released a study on key factors to consider when purchasing a deferred income annuity to turn-of-premium option By contrast, hot-selling secure income in retirement. in exchange for higher anindexed annuities topped nuity payments — nearly $24 billion in the first DIA buyers tend to average between ages 55 and 62 and for the double the payments — half of last year, a drop of most part have not yet retired. The average deferral periods for DIA once they reach age 80. only 1 percent compared buyers range from seven to 10 years, and around 70 percent of DIA contracts use qualified savings such as rollovers from individual “For those who are with the year-ago figures, retirement accounts. The average investment amount is $147,000. well-prepared, they've LIMRA data show. planned and been diligent Like most financial products, a DIA is not a “one-size-fits-all” transand saving for that, and Good News for action. LIMRA SRI researchers ran several scenarios of various DIA purchases to determine how consumers can optimize their investnow their worry is ‘What Agents and RIAs ment and keep their income secure for a 30-year retirement. if I live too long?’ For relaThe DIA trend is good tively cheap, they can get ne w s for i n s u r a nc e The research reveals that to get the most out of the DIA and keep $30,000 a year for the rest agents, but also is attractincome secure requires a balancing of three key variables: of their lives beginning at ing the interest of regis1) At what age should an investor buy a DIA? age 80,” Ferris said. tered investment advi“In that scenario, you sors who usually are not 2) H ow much of the portfolio should be used are going to be made so annuity-minded. for a DIA? whole in just over three Although many finanannual payments,” he cial advisors remain skep3) What deferral period should the investor use? added. tical about annuities, some It would be easy to assume that a sizable investment in a DIA, Beneficiaries don't see an important opening deferred for several decades, would generate the best results, but need the cash refund for RIAs to sell the longevthe analysis suggests otherwise. Investing too much or too little, because the annuitant ity annuities as part of a or deferring too soon or for too long, can prevent purchasers from has enough in retirefinancial planning strategy getting the most out of their DIAs. ment assets to last him and as a hedge against livA natural question for advisors and clients to ask when considerbetween the ages of 65 ing too long. ing a DIA is: How big is the payout? The research suggests that a and 80, or 85. With longevity annubetter question is: How well does income from the DIA work with Annuity contract holdities, “RIAs could manthe investor’s portfolio to increase the security of their income in ers instead are saying, “I age the base retirement retirement? need more benefit at age Source: LIMRA savings outside of insur85,” Ferris said. ance products if he or she wishes, producing How Can Carriers Afford This? until late 2013 and 2014, said his research income to the client’s life expectancy,” Insurance carriers can afford to pay the indicates that buyers of longevity annu- Ferris said. “A small portion of that savmore generous sums on the DIA because ities lean toward the no-refund option. ings would be used to purchase this prodof all the other would-be annuitants who “I'd say there's a chunk, a substantial uct, for the purpose of protecting clients died before reaching age 80. Theirs are the number (of buyers), who always select a against living significantly beyond their “lives” to whom the carriers won’t be mak- no-refund option,” Stern said. “They are life expectancy.” ing any payments. willing to cover beneficiary payments Instead, the carriers end up making with other assets, or they have other lon- InsuranceNewsNet Senior Writer Cyril Tuohy has covhigher payments to those who live past gevity insurance.” ered the financial services inage 80. More data on longevity annuity buying dustry for more than 15 years. Using insurance carrier software, habits is forthcoming. Cyril may be reached at cyril. agents can offer illustration scenarios LIMRA is in the midst of collect- tuohy@innfeedback.com. with and without the return-of-premium ing detailed buying habits on single
LIMRA: When is a DIA the right choice?
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InsuranceNewsNet Magazine » March 2016
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HEALTH/BENEFITSWIRES ACA Has Some Health Insurers Foundering Two years after it indicated the health insurance industry was in a good position to deal with the Affordable Care Act, A.M. Best is changing its tune. The rating agency downgraded its outlook on the industry, from stable to negative. Some insurers are hinting that the marketplaces, also known as exchanges, could be unsustainable. United Healthcare, the nation’s largest health insurer by enrollment, has suggested it could pull out of the exchanges. The company expects to lose about $500 Fewer marketplace million selling individual plans this year. Anthem, the second-largest health insurer in customers than the country, signed up 30 percent fewer customers expected through the marketplaces than it expected and is facing pressure to keep health plan prices at what it called unsustainably low rates, its chief financial officer said. Anthem, which is in the process of acquiring smaller rival Cigna, expects to make a small profit margin on its marketplace business this year.
30%
FIDELITY LAUNCHES EXCHANGE
FEDS SUSPEND ENROLLMENT IN CIGNA MEDICARE ADVANTAGE
The federal government is suspending marketing and enrollment in all Cigna Medicare Advantage and stand-alone prescription drug plan contracts. Cigna said the suspension by the U.S. Centers for Medicare and Medicaid Services (CMS) does not impact current Cigna Medicare Advantage and Medicare Part D enrollees’ benefits or plans. Cigna continues to market and sell a wide range of private insurance plans. CMS imposed sanctions due to deficiencies discovered with Cigna’s operations of its Parts C and D appeals and grievances, Part D formulary and benefit administration, and compliance program, the company said in a Securities and Exchange Commission filing. “Cigna is working to resolve these matters as quickly as possible and is cooperating fully with CMS on its review.” DID YOU
KNOW
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Fidelity already has a foothold in many of the nation’s workplaces as a provider of 401(k) plans. Now it wants to help employees buy health insurance. Fidelity Investments has launched Fidelity Health Marketplace, which offers onestop access to health and wellness benefits to small and midsize businesses and their employees. Fidelity Health Marketplace offers employers the ability to choose from a
network of national and regional medical, dental, vision, and life benefits in addition to tax-savings options and access to wellness tools and programs. Several customers in Massachusetts and New York are already using the marketplace.
Colonial Life has launched an insurance policy for law enforcement officers that provides benefits in the case Source: Business Wire of a nonfatal gunshot wound.
InsuranceNewsNet Magazine » March 2016
QUOTABLE I now wonder, for the next 10 months or so, how many people are going to realize once they’re locked in that they’re in a narrow network? —Richard Lett, an insurance agent in Woodbury, Minn., on the number of health insurance policies with narrow networks of doctors and hospitals
IT’S MORE DIFFICULT TO MANIPULATE ACA
The federal government made it more difficult for people without health coverage to game the system. The Centers for Medicare and Medicaid Services eliminated six additional conditions that allowed people to sign up for health coverage outside of the general enrollment period. This action was taken in reused special sponse to insurance companies’ enrollment periods complaints that to obtain coverage consumers were waiting to buy coverage until they had a condition that needed treatment, and then dropping coverage after the treatment was completed and paid for. The government permits enrollment in health coverage outside of the annual open enrollment period if a person experiences a significant unforeseen life event that changes their health care situation, such as losing a job or getting married. Federal officials said nearly 950,000 people used special enrollment periods to get coverage through HealthCare.gov from late February to the end of June 2015. In some cases, insurers said, consumers dropped coverage soon after receiving costly medical services.
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HEALTH/BENEFITS
Med Supp vs. MA: Which One Is Right for Your Client? Your clients have two options when it comes to selecting Medicare coverage. Help them decide whether guaranteed premium or “pay as you go” is the right choice for them. By Elie Harriett
I
f you’ve been keeping up with everything that has been happening in senior health care, then you have noticed all the changes within the Medicare program. However, Medicare is more than just insurance. In many ways, Medicare is a capstone for the years and, in some cases, decades of planning and work that advisors have done to help their clients plan and save for a comfortable retirement. Health care costs continue to be the No. 1 cause of bankruptcies in the United States, and this is especially true among the elderly. A good, solid, compatible health care plan that works with Medicare can go a long way toward making sure your clients’ retirement years work out the way they, and you, have planned. The catch is that there are two solutions to these problems. Depending on where you live, both solutions are viable for some clients, but are
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not the right fit for others. A third option exists: employer or group coverage. I will skip discussing that third option in this article because employer/group coverage is not available to all your clients, and the benefits and costs associated with that coverage are vast. If a group option exists, take a look at it as a viable choice for your client, but do not assume it is better coverage than the private options. It always pays to do some due diligence comparisons with these plans. So let’s take a look at our two contenders.
InsuranceNewsNet Magazine » March 2016
Old Faithful: The Medicare Supplement
Medicare supplements have been mostly unchanged since 1990. Prescription drugs were removed from the plans in 2006. Over the years, a few plan letters were eliminated and a few more plan types were added. But for the most part, a Medicare supplement today is still the Medicare supplement of 20 years ago. That is important. Medicare supplements generally do not change their benefits much from year to year. Medicare supplements have plan letters. They range from A through N, with some letters skipped. And the plan letters from 1990 offer pretty much the same things today as they did then. The best way to get a look at Medicare supplement benefits is to review an insurance company’s summary of benefits or the government guide, “Choosing a Medigap Policy.” For most plans, a benefit is covered at 100 percent or not covered at all. If you have a client who wants something fully covered — no copays, no f uss, no annua l
March 2016 Âť InsuranceNewsNet Magazine
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HEALTH/BENEFITS MED SUPP VS. MA: WHICH ONE IS RIGHT FOR YOUR CLIENT? changes — this could be what they want. And to make things even more convenient, your client can use most supplements with any doctor, any hospital, anywhere in the United States as long as those doctors and hospitals accept Medicare. So there are neither network considerations nor travel restrictions on health care if your client opts for a Medicare supplement. But the Medicare supplement has two downsides. The first is the premium. Although premiums generally vary by state, county and even ZIP code, they tend to be larger than premiums charged by other plans. Medicare supplement premiums also have a tendency to go up, probably on an annual basis. The other downside to a Medicare supplement is underwriting. A supplement requires your client to answer health questions. Depending on your client’s health, the opportunity might be closed to them at a later date. Federal laws require one opportunity to get a Medicare supplement on a guaranteed basis once in a person’s lifetime. This is called an “open enrollment period.” Some states extend or repeat that
A good, solid, compatible health care plan that works with Medicare can go a long way toward making sure your clients’ retirement years work out ... period beyond the federally mandated minimums, but if your client lives in a state where there is only one open enrollment period in a lifetime, the idea of a supplement and the consequences of its premium should not be overlooked. This type of plan is a natural extension of financial planning and the other insurance products the advisor offers. The premium is easily projected coverage that’s guaranteed renewable for life.
The Scrappy Contender: Medicare Advantage
OK, that’s a bit of a misnomer. Medicare Advantage isn’t exactly new. This year marks the 10th anniversary of Medicare
Advantage in its current form, but Medicare Advantage has a history of more than 20 years in the market under different names. Medicare Advantage plans are alternative ways to receive health care. A person in a Medicare Advantage plan is still in the Medicare program (they must continue to pay their Medicare Part B premium), but they choose to replace Medicare Parts A and B’s cost-sharing with the insurance company’s coinsurance and copays. The 20 percent coinsurance of Medicare Part B is still there, just broken down and transformed into more projectable costs. There is no Medicare supplement-style product that will cover leftover costs as thoroughly
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InsuranceNewsNet Magazine » March 2016
MED SUPP VS. MA HEALTH/BENEFITS and completely as Medicare plus a Medicare supplement. But if you have clients with a preference for a reduced “pay-asyou-go” program, this is a way to give them what they want. Medicare Advantage plans are the right choice for some clients. A Medicare Advantage plan typically has a monthly cost that is lower than a Medicare supplement. In some areas, there are options available at no additional cost beyond the payment of the Medicare Part B premium. I’ve had financial advisors ask, “If these just change the structure of the Medicare Part B coinsurance, is there any reason to consider these plans Over having nothing at all?” The answer is a definite yes. The copays on Medicare are typically a flat 20 percent with no cap on them. Medicare Advantage gives you a schedule of costs your clients can plan for. Medicare Advantage plans also have a maximum out-of-pocket limit. This means that if the worst happens to your client’s health, there is a fixed amount of cost they can prepare for. Also, many Medicare Advantage plans include prescription drug coverage, adding a level of convenience for some clients. Medicare Advantage plans have some downsides, however. The two most critical are networks and the out-of-pocket maximum. Typically, that maximum is many times the annual premium of a Medicare supplement. If you are dealing with a client who is concerned about having many out-of-pocket costs, the Medicare Advantage plans might not be a good fit. And a Medicare Advantage plan is networked. The two most prevalent types of plans around the country are HMO plans and PPO plans. This means that access to doctors might be a concern, depending on your client’s needs and location. Medicare Advantage plans have another consideration: change. Medicare Advantage plans alter their cost structure annually. This means that the premiums, copays, coverage, drug list and even counties where they provide service can increase, decrease or drop completely. Essentially, every Jan. 1, any client you have in a Medicare Advantage plan has a brand-new plan.
The Referee: You!
We tell our clients that we understand they really don’t need us if they want to buy insurance. Just about every company will sell it to them online, over the telephone or by mail. The reason why you will get clients to buy from you is because you will do the analysis for them. A typical client does not know what they do not know about health care. And by showing the good and the bad about the choices available to them, you are doing as much to help them protect their assets as you would with any other line of product. Elie Harriett co-owns Classic Insurance & Financial Services Co., specializing in Medicare-related insurance. Elie may be reached at elie.harriett@ innfeedback.com.
March 2016 » InsuranceNewsNet Magazine
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March 2016 » InsuranceNewsNet Magazine
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FINANCIALWIRES
Millennials Want to Break Up With Debt Millennials hate debt, and they aren’t crazy about credit cards either. That’s what Facebook IQ found in a report that looks at how Americans between the ages of 21 and 34 manage their money. The report indicated that if you run a company that offers financial advice to millennials, the market is ripe. Only 37 percent of young adults have a money-management plan in place, according to the report. People in this age category are likely to save, with 86 percent saying they stash away some money on a monthly basis, but they are less likely than their parents to invest those dollars. Part of the reason behind that may be that millennials got their economic schooling during the Great Recession, making them more distrustful of established banks and institutions. Members of this age group are 2.5 times more likely than their parents to trust robo-advisors.
90 IS THE NEW 70
Once upon a time – 1955, to be exact – average life expectancy in the U.S. was close to age 70. Average life expectancy has inched upward over the past 60 years and now stands at 78.8 years. But that doesn’t tell the whole story. For example, for a 65-year-old couple of average health, there is a 50 percent chance one of them will live to age 93 and a one in four chance that one of them will see age 97, according to LIMRA Secure RetireBetty White ment Institute. Age 94 As a result, a retirement that once extended to age 70 now must be stretched out to age 90 or beyond. LIMRA found that in 2014, nearly threefourths of Americans claimed Social Security before they reached full retirement age. With longevity data suggesting that a person with average health could live into their 90s, claiming Social Security early
DID YOU
KNOW
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(instead of at age 66 or later) potentially would lock them into smaller payouts for 30 years or more.
QUOTABLE
Most people I talk to think the economy is in recession. — Kate Warne, an investment strategist at Edward Jones
with a lack of concern, 7 percent cite the desire for additional interest income on savings as the reason they’re not concerned. In fact, many Americans (15 percent) actually felt interest rates have been artificially low.
SPOUSES HAVE A GREAT DEAL OF PULL IN INVESTING Who has the most influence on an investor’s retirement planning decisions? Half of investors say their spouse holds the
41% OF AMERICANS FEAR RISING INTEREST RATES
You can add rising interest rates to spiders, the monster under the bed and thunderstorms on the list of things people are afraid of. More than four in 10 Americans (41 percent) admit they’re concerned about rising interest rates in 2016, according to a new Bankrate.com report. Americans are most worried about how rising interest rates might affect their personal finance situation and what the consequences may be for the economy/ stock market in a rising rate environment. Among age groups, millennials (20 percent) were most likely to voice concern about how it might affect their personal financial situation and least likely (12 percent) to worry about what it might do to the economy/stock market. But a larger number of Americans (56 percent) said they don’t see the need to worry about an increase in rates. Of those who responded
was ranked last among states THE AVERAGE RETURN ON AN INITIAL PUBLIC OFFERING wasthe 2050 percent this year. The average increase in the first day (or “pop”) is 13 percent. for its residents’ financial security and Source: Renaissance Capital
InsuranceNewsNet Magazine » March 2016
opportunities to build a better future. Source: Corporation for Enterprise Development
influence. Forty percent of investors say they rely on their advisor’s wisdom. That’s the word from the latest John Hancock Investor Sentiment Survey. Nearly half of investors (48 percent) surveyed expect to remain in their current home when they retire. Close to three in 10 (28 percent) plan to downsize and move to a smaller home, while 3 percent plan to upgrade and move to a larger residence. The investors in the John Hancock survey are for the most part optimistic about their own retirement prospects, but less so about their children’s. Sixty percent think their retirement experience will be better than their parents’ was. A quarter of investors believe their children’s quality of life in retirement will be better than theirs. More than a third of the investors surveyed think their children will have a worse quality of life in retirement than their own.
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FINANCIAL
How to Prevent These Five IRA Transfer Mistakes F ailure to keep information updated and failing to make the right beneficiary designation can cause problems. By Lloyd Lofton
L
et’s discuss the five most common mistakes people make with their individual retirement accounts and how a professional advisor can help make sure these mistakes are avoided, or at least minimized. They are not listed here in any particular order, so let’s start with No. 1.
1. Failure to make or update a beneficiary designation.
You would be surprised how often this happens. While some see it as complicated, it really isn’t. If the IRA owner 56
does not designate a beneficiary or update a beneficiary designation, the survivors’ fate turns on default beneficiary language in the IRA contract. Moreover, failure to update a beneficiary designation — after a divorce, for example — leaves the default beneficiary language in place. This happens more frequently than people might realize. IRA contracts generally default to a surviving spouse, which can be a good outcome, except for blended families. If no spouse survives, the IRA contract may default to the estate, depending on the contract’s specific language. Unless the estate has large debts against it, an IRA’s defaulting to the estate is almost always a bad outcome. Some IRA contracts now may contain language that revokes a standing beneficiary designation of a spouse upon the IRA
InsuranceNewsNet Magazine » March 2016
owner’s divorce. While this is not likely to undo community property rights, what an unpleasant surprise for the survivors (who could be your clients)! The beneficiary designation form is key to filing this crucial piece of information. When you make or update an IRA beneficiary designation, use the most current form approved for use by the custodian. Avoid using paper forms from the client’s file or records. Instead, go online and use the most current custodian’s portal to access a designation form. Verify that the date on the downloaded form is the most recent. If there is a question about that, call the home office and verify.
2. Failure to read the IRA contract.
This common mistake is the opposite of Mistake No 1. Help your clients ensure
HOW TO PREVENT THESE FIVE IRA TRANSFER MISTAKES FINANCIAL their wishes will be followed by reviewing the IRA contract with them. This will ensure that they are not risking what may be their family’s largest single accumulation of wealth. I know that these contracts sometimes can run 10 pages or more, some with disclosures, enrollment information or prospectuses. However, you are looking primarily for certain items in those contracts. Look at the beneficiary designation and the custodial account or trust agreement. If you find something that creates a question, make that phone call to the custodian. Check the effect of divorce on the existing spousal beneficiary designation. Ask whether there is a “choice of law” provision. If the IRA is going to a minor or an incapacitated beneficiary, find out what effect those funds will have on that beneficiary. Be sure of the provisions related to the beneficiary’s responsibility for calculating and taking required minimum distributions (RMDs). Examine the procedures for splitting IRA accounts upon divorce or legal separation.
3. Naming a trust as beneficiary without understanding the potential consequences.
If your clients want to name a trust as their IRA beneficiary, you might consider two things. The first is whether the client’s estate planning goals would be met simply by using the IRA beneficiary designation, for example, and not by routing the asset through the trust. The second one is ensuring the designated trust is a “seethrough” trust, in order to preserve the stretch option. It may also be important for the trust to be designed as a “conduit” trust that requires distribution of the RMD each year. In addition, if the trust is an “accumulation” trust, it could complicate the process of identifying trust beneficiaries. Naming a trust as beneficiary could fail the see-through test and destroy the stretch opportunity. It’s important to note that a conduit trust design could directly conflict with estate planning goals such as sheltering IRA assets from the spouse’s estate for estate tax purposes or putting a barrier between the beneficiary and the IRA funds. It is important to work with a good estate planning attorney throughout this process.
Before designating a trust, consider two options. Have the estate planning attorney provide input about using the IRA beneficiary designation to track what the trust would do with the assets. Also, consider using a “trusteed IRA” — an IRA established with a trust agreement rather than a custodial account agreement. One benefit of this approach is that the IRA holder may be able to predesignate who will take the account upon the death of the primary beneficiary. This approach could be useful in cases where there are concerns about an individual beneficiary’s spending of the funds.
I encourage you to work with an estate attorney to help prevent your clients from making common IRA transfer mistakes. 4. Naming an estate as beneficiary without understanding the potential consequences.
Many times an estate is named as an IRA beneficiary out of simple misunderstanding of what an “estate” is and how it is taxed. An estate can never be a designated beneficiary. For IRAs not in pay status, the five-year rule will apply unless a spousal conversion is possible. If your client needs the IRA assets so debts will be paid after their death, then designating an estate may be a good idea. Check with the estate planning attorney for state-specific laws governing this. A number of probating alternatives are available when an estate is designated an IRA beneficiary. One alternative is spousal conversion “through” the estate, which is
the only way to preserve stretch-out. Another option is the application of the fiveyear rule, which is not changed when the IRA is assigned to a trust or other beneficiary. Your client may redesignate the IRA account as an inherited IRA in the name of the decedent for the benefit of the trust or other beneficiary. The five-year rule will not change. In cases of assignment or retitling, the IRA custodian’s assistance will be needed.
5. Not understanding the correct spousal election in relation to the beneficiary designation.
Many times the IRA beneficiary is a surviving spouse who is younger than the IRA holder. Surviving spouses can make a spousal election (spousal rollover) giving the IRA a fresh start on RMDs and beneficiary election. In essence, this spousal election “jump-starts” the IRA stretch. A spousal election could still be available when an IRA beneficiary designation names an estate or trust. Under a trust or will, the surviving spouse must have and exercise the right to demand payment of the IRA benefits to themselves. While there is no IRS rule on this point, in previous private letter rulings the IRS has interpreted Treasury Regulations regarding rollovers and RMDs to permit spousal elections “through” an estate or trust. You should verify this with your client’s estate planning attorney. In most cases, you will need a letter from the lawyer to the IRA custodian, reviewing the legal precedent for permitting spousal election through trust or estate. Working with your client’s estate planning lawyer is best because they are usually the drafting lawyer or the one making the updates to ensure that the spouse is the sole trustee of the trust or executor of the estate, and that the spouse has the sole authority under the trust or will to pay the IRA proceeds to themselves. I encourage you to work with an estate planning attorney to help prevent your clients from making these common IRA transfer mistakes. Lloyd Lofton is president of the Senior Insurance Marketing Association. Lloyd can be contacted at lloyd.lofton@ innfeedback.com.
March 2016 » InsuranceNewsNet Magazine
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BUSINESS
Red, Yellow or Green? How Client Ranking Can Lead to More Sales A ranking system measures key information about clients and where they fit into your monthly and annual production goals. By Danny O’Connell
W
hen I was a young advisor, I often heard numerous veteran producers at conference after conference talk about ranking clients. I first thought to myself, “I don’t have enough clients for this to matter.” Then I thought, “I already know who my best clients are.” Finally, I began to think, “You know, I really need to do this.” When most advisors rank their clients, they simply look at the revenue each client generates. Although this is a main focus of ranking your clients, in my opinion it is not the only thing you want to track. I wanted my end result to have actionable meaning and not be simply something I would look at and think, “There it is.” I wanted it to be a document I could work from and use to grow my business. Group/Client Name Coverage in Force
Once I started, I realized I wanted to track and measure some key information such as: Revenue. Of course, the first key metric when measuring your clients is, what is the dollar value of each client? I chose to rank clients in three tiers — green, yellow and red — based on my personal monthly production goals. A green client represents one month of my personal production goal; therefore, all I need to do is obtain 12 green clients a year. A yellow client equals half of my personal monthly production goal. This makes it easy to complement my green clients by knowing that two yellow clients equals one green client. Again, this is a simple tool to measure my progress toward my goal. Finally, a red client represents 25 percent of my regular monthly goal. Again, I find evaluating clients in light of my personal production goals helps me reach those goals every year. Where did the client come from?
Coverages With Other Agents
$1,000/mo in revenue $500/mo in revenue $250/mo in revenue 58
InsuranceNewsNet Magazine » March 2016
Carrier
Key Person
P&C
Life
Was the client a referral and, if so, from whom? Tracking this information allows me to identify my best referral sources and become more active in working and recognizing those sources. Identifying the source also helps me track the efficiency of my marketing efforts and what worked best. Over the years, developing my referral sources has been a huge boost to my success. What lines of business/coverage do I have in force? Although this seems obvious, putting this information "on paper" helps me visualize what I actually have in force with each client. Identifying this information also helps me plan a road map of how I can get a yellow client to become a green client or how to convert a red client into a yellow or green client. Remember, for me two yellow clients equal one green client tier, so by moving up an existing client, I achieve half of my monthly goal. Often with my red clients I might realize there is no other business we can do together. In that event, I try to work those clients for referrals. Disability
Worksite
Health
AOR
Source
RED, YELLOW OR GREEN? HOW CLIENT RANKING CAN LEAD TO MORE SALES BUSINESS Additionally, I use this strategy to come up with specific marketing plans to crosssell to my existing clients. I sat down with a wholesaler and identified 22 prospects who did not have that wholesaler’s products and who I knew I could move from yellow to green. The wholesaler was so enthused she helped me create a marketing plan and let me know that if we hit a certain metric, I would hit a bonus level with her company, which I did. This bonus never would have been realized, in addition to obtaining all the additional revenue, had I not ranked my clients and shared that information with someone who could help me along the way. By really using this information, I can turn good clients into great clients and strengthen my relationships with my existing clients, thus increasing their loyalty. What lines of business/coverage do they have in force with other agents? This is a commonly overlooked metric. Sure, many of us include this information in our fact finders, but I list this on my client ranking. If a client or prospect already has purchased a certain product, that means several things. First, they are
open to that product, and if I can find a better one to better suit their needs, I need to contact them. Second, many products such as annuities and term life insurance have surrender/conversion dates. I will track those dates, and I will inquire about those products every other year in review to be certain the clients still have the product. In addition, this gives me a feeling of the client’s attitude toward the product. I have found many times people are not sure of when their policies do come up, so they eventually ask me to review to be sure. Carrier. As I created my client ranking list, I also included the carriers with which I have placed their policies. This gives me a better understanding of where I have placed my business, who has the best products for the specific client need and where I should move or place my new business if a carrier’s products change. Keeping track of what business I have with each carrier also helps me understand my block of business with each carrier. It also helps me when I am planning to conduct marketing events so that I can determine which carrier is best to contact based on the type of event I plan to have.
When addressing a key demographic of clients and prospects, I want to be sure to have the best carrier and solutions represented, along with a representative from the carrier with whom I have my strongest relationship. This will make me look good in front of my clients and prospects. If this ranking is done correctly, I would argue that you can easily double your block of business and achieve much higher levels of success. We all know it is easier to sell to existing clients. If we start actively marketing to our existing clients in addition to prospecting for new clients, our practices will be much more robust and we will be able to impact many more lives. I encourage you to use client ranking as a starting point for this. Ranking your clients should not be a “finished document” but instead a road map for greater success. Danny O’Connell is a partner with BRG in Dallas. He is a member of MDRT and NAIFA, and is a published writer, international speaker and frequent radio guest. Danny may be contacted at danny.oconnell@innfeedback.com.
March 2016 » InsuranceNewsNet Magazine
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The Million Dollar Round Table is the premier association of the world’s most successful life insurance and financial services professionals.
MDRT INSIGHTS
Don’t Start With the End in Mind tive annuity products is worth the risk mitigation they provide. The Financial Industry Regulatory Authority also requires advisors to strongly By Marc A. Silverman consider a longer holding period on anf you want to prospect for annuity clinuities. If you impose a shorter holding ents, be sure to start with the right period, additional costs will result. You approach. You should never start with must disclose everything to your client the end game in mind. Instead, begin with and sign off that they acknowledge they fact-finding and really understanding your are spending more for a shorter period if client’s needs. If a prospect is interested in that is what they want. The higher costs an annuity, ensure you can answer the folare because clients get added flexibility. lowing questions: For example, if a better product comes along, clients can move their funds into 1. What are the client’s needs, aspirathat product instead. They aren’t comtions and goals? mitted for seven years within a specific annuity. There is about 2. What do they want to aca 0.4 percent difference between complish? the longer holding period and the shorter holding period as 3. Are guarantees important far as cost is concerned, but you to them? must give clients the option of both and inform them of all the 4. Can they handle the exdetails. pense of those guarantees? When you are working with clients who are interested in an5. Are they aware of the exnuities, make sure at the end of pense of those guarantees? every meeting that you dictate back to them the set of notes you These questions are important took during the meeting. This ento answer in order to solve spesures everyone heard everything cific client goals and objectives. correctly and everyone is on the You should never start with the end game in In my practice, we don’t focus on same page. After the meeting, it mind. Instead, begin with fact-finding and really prospecting for annuity clients. is crucial to follow up and follow understanding your client’s needs. Rather, we conduct workshops through with your clients. I do specifically geared toward pentons of follow-up meetings and sion plans, 401(k)s and Social Security. Annuities typically are more expensive annual review meetings, and again those During these workshops, we do not talk than other products. An effective anal- notes are copiously dictated to my clients. about products at all. The goal is to get ogy to use when discussing the protecAs advisors, we must be committed to prospects into our office to do a one- tion an annuity provides versus the cost doing the research into the investment’s on-one comprehensive financial review. of the annuity is to have clients think of suitability for our clients. We must provide Then, if they’re interested, we talk about the guarantee and extra expenses as the clients with the crucial information to help where potentially to invest their money. “air bag” of their financial plan. Remind guide them toward the right solution for If an annuity is the right fit for the par- clients that when they are in their car themselves and their financial legacy. ticular client, we will explain the features they’re going to fasten a seat belt before of annuities, non-annuities, a short-term they drive. Today, all cars have seat belts Marc Silverman, MBA, CLU, holding period and a longer-term holding and air bags. However, that wasn’t always ChFC, founded Silverman Financial in 1989. He is a 30-year period. The decision ultimately is left to the case. Years ago, you had to pay extra MDRT member with 20 Top of the client. for a car if you wanted it to include an air the Table and five Court of the Annuities have many benefits when bag. Most people would prefer to pay a Table qualifications. He is a past they are used for the right person. One little bit of extra money to have that level chair of Top of the Table and of the top advantages is the guarantees of protection in case they were to get into an Excalibur Knight of the MDRT Foundation. Marc may be contacted at marc.silverman@ that clients can’t get anywhere else. In an accident. Similarly, the price for effec- innfeedback.com. S how clients all the investment options that will help them achieve their goals.
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my opinion, a variable annuity works well for someone who is 57 to 70 years old because the VA has upside potential and there is no cap on it. The income will not decrease as long as the parameters of the guarantee are adhered to, and clients will have guaranteed growth if they don’t touch the money. The guaranteed number is a fictitious number that the client cannot cash out, but it provides a base for the income that is provided to them forever. Yet with annuities comes skepticism, and one of the biggest sources of hesitancy stems from the fee structure.
InsuranceNewsNet Magazine » March 2016
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.
Laws Help Advisors Flag Fraud U nder model legislation, advisors could not be held liable for reporting suspected cases of fraud or abuse. By Mark Briscoe
M
y uncle did not recognize the caller when his phone rang one morning in the fall of 2014. But the predator on the other end of the line was well-informed and convincing. The caller said he had kidnapped my cousin, and demanded a ransom. As my uncle made arrangements to pull thousands of dollars from his retirement savings, he was fortunate enough to reach his daughter on the phone. The scheme had been very convincing. Only after my uncle had spoken with my cousin, his grandson and officers from two different police departments was he convinced that she was safe and he did not need to go through with the money transfer. He had been the victim of a cruel hoax and attempted financial fraud. Unfortunately, financial exploitation involving older people is not rare. Seniors are often targets because they are thought to have significant savings or investments, according to the National Council on Aging. They also are seen as soft targets who are unlikely to report financial crimes. Dementia and cognitive impairment can make segments of the senior population particularly vulnerable. It is a big problem. A 2011 MetLife study found that elder financial abuse in the U.S. costs its victims $2.9 billion per year. Other research says the losses are as much as 12 times higher. In fact, no one knows the true extent of the crime, because as few as one in 44 cases of elder financial abuse is reported to authorities. My Uncle Terry was a very smart man. He worked for decades as an electrical engineer and aerospace manager with the Boeing Company and collaborated on projects with NASA. He was the closest person to a rocket scientist I have known. He was also financially savvy and had made smart investments to accumulate a solid retirement portfolio. If someone like him could be vulnerable to financial fraud,
A 2011 MetLife study found that elder financial abuse in the U.S. costs its victims $2.9 billion per year. Other research says the losses are as much as 12 times higher. anyone can be. In many cases, a professional financial advisor may be the first to recognize the signs of potential financial exploitation. An advisor might see the suspicious withdrawal or reallocation of a client’s assets, for example. Or a potential victim may ask the advisor about a questionable investment scheme.
NAIFA’s Efforts to Protect Older Americans
NAIFA strongly encourages laws that would allow advisors to protect their older clients. These efforts include the development of model legislation that would permit advisors to report suspicious activity and possibly head off dangerous transactions. NAIFA also has suggested changes to a proposal by the North American Securities Administrators Association (NASAA) to make their model legislation more effective.
State reporting laws would provide greater protection to older Americans, but to be effective they must also shield advisors from liability and other consequences. Some proposals would make reporting mandatory. This would be a mistake, as advisors using an abundance of caution could unnecessarily overwhelm investigators. Under NAIFA’s model legislation, reporting would be voluntary, and advisors could not be held liable. They would report their suspicions to their broker/dealers or financial institutions, which would then determine whether to refer cases to state regulators or law enforcement.
Another provision would permit state insurance departments to provide training resources to help advisors recognize signs of cognitive decline while acknowledging that advisors are not medical professionals and will not be held responsible for determining a client’s cognitive condition. “NAIFA members develop close relationships with their clients and are well placed to recognize suspicious activities,” said Jules Gaudreau, NAIFA president and president of The Gaudreau Group. “But we aren’t law enforcement or investigators. It wouldn’t be fair to punish advisors for reasonable, good-faith actions. Brokerages and financial institutions have dedicated fraud investigators better suited to ultimately determine the merits of a case.” It is unfortunate that there will always be people willing to prey on older Americans, such as my uncle, who have worked hard their entire lives and have been responsible about preparing for retirement. It is important to offer these people any protection we can, and professional financial advisors can play an important role. “NAIFA members are already in the business of protecting the financial security of our clients,” Gaudreau said. “Senior protection laws that give us an active role in preventing financial exploitation simply make sense.” Mark Briscoe is senior director of strategic communications at NAIFA. Mark may be contacted at mark. briscoe@innfeedback.com.
March 2016 » InsuranceNewsNet Magazine
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THE AMERICAN COLLEGE INSIGHTS
With over 87 years of experience, The American College is passionate about helping students expand their knowledge and opportunities as financial professionals.
Developing ‘Moral Perception’ T he failure to be mindful often causes advisors to neglect their duties to their clients. By Julie A. Ragatz
M
arch is Ethics Awareness Month. Although it is important to remain focused on ethics throughout the entire year, dedicating a month to ethics awareness does provide us with a good opportunity for reflection on this subject. The emphasis on awareness is important. Before we can do the right thing, we need to be “aware” when we are in a situation that has moral implications. Moral philosophers call this sense of awareness “moral perception,” which is defined as the ability to recognize that an important moral value or principle is at stake in a particular situation. Here is an example: Jane is a new advisor whose mentor is Miguel, an established and successful financial planner. Miguel allows Jane to sit in on his client meetings in order to understand his sales process. One of the first meetings Jane observed involved Steve and Heidi Olson, who were both Miguel's longterm clients. Jane was impressed with Miguel’s technical knowledge but surprised by his treatment of Heidi. Every time Heidi asked a question, Miguel directed his response to Steve. When Heidi expressed concerns about the suggested investment strategy, Miguel dismissed them, although he did so in a kindly way. Observing this, Jane was confused by Miguel’s behavior since he had spoken respectfully of both clients before the meeting. Jane noticed that Heidi seemed alternately annoyed and angered by this treatment, but Miguel seemed oblivious both to his own actions and to Heidi’s response. This is an example of a failure of moral perception on Miguel’s part. We can assume that Miguel had no intention of disrespecting Heidi by ignoring her questions and concerns. However, his behavior constitutes a violation of his professional commitment to Heidi as his client. This illustrates how unintended negative consequences can result from our actions. Experience allows us to draw on a wide history of case studies to analyze our 62
current situation, but experience also can cause us to use heuristics or “cognitive shortcuts,” which can be misleading. Perhaps that is what happened to Miguel. It could be that his previous experiences have convinced him that most women are not interested in the details of family finances and that they tend to worry unnecessarily about rather trivial concerns. It could be the case that these statements are actually true of some of Miguel’s female clients, but they are not true of Heidi. In this situation, Miguel’s reliance on other experiences has led him to fail to perceive important elements of the current situation. Moral perception requires mindfulness. Being mindful enables us to notice new things in our environment becasue we remain receptive and engaged in the present situation. It also encourages us to remember that people and situations do not remain the same and are constantly evolving. Here is another example:
InsuranceNewsNet Magazine » March 2016
James had been working closely with Mark for the past year. One day, they met with two of Mark’s long-term clients, Gwen and George Field. Mark recently had become very excited about a new investment strategy that he believed would produce great results for his clients. However, the strategy was complex and hard to explain clearly, and it involved a level of risk that was higher than many of his clients had tolerated in the past. Before the meeting, Mark told James that the Fields were “raring to go.” When Mark explained the process again, James could see that George and Gwen looked confused and anxious. It was clear that they did not understand Mark’s presentation and felt more comfortable with their current approach. James worried that they were remaining silent because they were hesitant about questioning Mark, their long-standing advisor, given his obvious enthusiasm for the project. Mark seemed unaware of their discomfort and went on to arrange for his assistant to bring in the necessary paperwork.
Again, the failure to be mindful in these situations causes us to neglect our duties to our clients. There is a moral action or professional action that goes undone because we failed to pay attention. Our ability to be mindful affects the story we tell ourselves about what is happening in a particular situation. It is clear that James and Mark would give different accounts of what was actually happening in the meeting with the Fields. James’ account would acknowledge that a moral and professional wrong was occurring, while Mark’s account would likely contain nothing of the sort. In short, moral perception is crucial to acting ethically, and mindfulness is crucial to moral perception. How do we increase mindfulness? 1. Look for the differences. Instead of asking yourself, “How is this situation similar to what I have experienced in the past?” you should ask, “How is this situation different from what I have experienced?” 2. Refresh your opinions. This is particularly important in long-term relationships. You need to ask yourself, “How has this person changed?” If your answer is that the person has not changed, this is probably an indication that you need to take a closer look. 3. Ask for help. Our perception of a situation is dictated by our unique set of experiences and identity characteristics. It is necessary to ask other people for their impressions in order to broaden your view. Ethics Awareness Month provides a great opportunity for us to focus on the ways we can avoid making ethical missteps that we do not intend to make. It is a time for a renewed commitment to be more mindful and to sharpen our moral perception. This pursuit should extend well beyond a month. It is the pursuit of a lifetime. Julie A. Ragatz is director of the Cary M. Maguire Center for Ethics in Financial Services and assistant professor of ethics at The American College. She may be contacted at julie.ragatz@innfeedback.com.
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March 2016 Âť InsuranceNewsNet Magazine
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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
It Pays to Pursue the Unadvised A large percentage of mass affluent households are going it alone when it comes to financial planning. Here is how advisors can make a difference for them. By James T. Scanlon
T
he mass af f luent market, defined as those households with $100,000 to $499,999 of investable assets, presents a number of opportunities, as well as challenges, for advisors. LIMRA recently completed a series of studies on this market to find out who they are and whether they are obtaining professional financial advice. To better understand where the opportunities in this market lie, we divided the market into three household age groups: Emerging (ages 25-34), Core (ages 35-64) and Retired (age 65 and older). Although most mass affluent households use financial advisors, one-third of households between the ages 25 and 64 do not work with a financial professional, and one-fourth of the households in the 65-plus age group are unadvised. That is a market opportunity of 3 million households representing over $1 trillion in assets. This sounds great, but where do we find all these people? In the study, we discovered that nearly two-thirds of mass affluents would provide referrals if asked, but only one-fifth recalled being asked to do so. The analysis concludes that the best opportunities for referrals exist in the Retired segment, which could yield 26 percent more referrals for their advisors, and the Core segment, which could yield 11 percent more referrals. We also discovered a variety of reasons why so many are not getting advice. Foremost, 25 percent of mass affluents believe their financial needs aren’t complicated. The beliefe that they can manage finances on their own with family, friends and online tools is why more than one-third do not use an advisor. Affordability of advice and not having enough assets were other reasons cited. 64
For the mass affluent market as a whole, we know which financial planning activities are most relevant: Nine in 10 are interested in financial planning, 87 percent are specifically interested in retirement planning, and 87 percent indicate that tax advice and tax strategies are applicable to them. For the Core and Retired segments, estate planning also scores high in relevance. A marketing approach focused on these most relevant activities provides a good starting point for reaching the unadvised. The study also revealed that many mass affluent households are self-directed, even those with financial advisors. It’s important for financial professionals to define respective roles clearly in the client-advisor relationship. Many mass affluents may prefer an omnichannel advice model that allows them to select different methods for different financial activities. For example, they may prefer online tools for simple activities (such as charitable giving), access to a bullpen of advisors with knowledge on specific topics (such as life insurance), and access to a dedicated advisor to develop more complex and personal financial plans (such as financial planning, retirement planning, investments and tax advice). This omnichannel approach may work
InsuranceNewsNet Magazine Âť March 2016
to satisfy self-directed clients and still ensure an essential role for the personal financial advisor. So, even though the unadvised mass affluents say they prefer to manage their own finances, research from LIMRA Secure Retirement Institute has consistently shown that professional advice can make a big difference. Secure Retirement Institute studies show that when mass affluent consumers work with a financial professional, they are more likely to contribute to a retirement plan (78 percent) compared with those who do not have an advisor (41 percent). They also are more confident in their retirement security (71 percent versus 43 percent), and eight in 10 believe their advisor helps them in ways they could not achieve on their own. The opportunity and the need are there for those advisors who are motivated to pursue the unadvised. James T. Scanlon, MS, HIA, is a senior research director of insurance research for LIMRA, focusing on insurance product and service marketing. Jim may be contacted at jim.scanlon@innfeedback.com.
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