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KICK-a$$ Killer copy PAGE 12

  SecurSecur ian FiiannanciFinaancil Graolup,GroIup,nc. Inc.

are www.Our www. securisaecurn.comian.policyholders com

FAIREST OF THEM ALL Insurance Insuraprnceoducts productsare isarsuede issuedby Mibynnesota MinnesotLifaeLiInfsurance e InsuranceCompany Companyin alinl statall steasteexcept s exceptNewNewYork.YorkIn. INewn NewYork,Yorkpr, products oductsarare eisisued ssuedbybySecuri Securai n Life We think policyholders deserve the same opportunities and product enhancements as new clients. That’s why we’ve provided policy upgrades to our clients in the past, and we make it our goal to continue doing so in the future.

Insurance InsuraCompany, nce Company,a Newa NewYorkYorautkhautorizhedorizinedsurinesurr. Boter. hBotcompani h companies aresearheadquart e headquarteredreind Saiin Saint nPault Paul, MN., MN.PrProductoductavaiavailalbiabilitliytyandandfefeaturatueressmaymayvary by state.stEachate. Eachinsurienrsuris esolr ies lsoly relsponsi y responsible fbolre tfhoer tfhineancifinancial oblal ioblgatigoatnsiounder ns underthethpole policieicsieors orcontcontractsractsit istsues. issues. 400 Robert 400 RoberStretetStNortreet hNor, Stt.hPaul, St. ,PaulMN, MN55101-55101-20982098• 1-800-820-4205 • 1-800-820-4205 ©2014©2014 SecurSecur ian FiinananciFinaancil Graolup,GroInup,c. AlInc.l riAlghtl rsigrhteserved. s reserved. Because we are not a publicly traded company, creating value for policyholders and serving their long-term interests are our priority. Avoid the smoke and mirrors, and work with a life insurance carrier that believes in treating you and your clients like partners. Learn how we treat all of our policyholders fairly. Download the Policyholder Treatment Advisor Guide for FREE at:

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 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 ©2014 Securian Financial Group, Inc. All rights reserved. F80494-7 3-2014 DOFU 1-2014 A00359-0114

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MAY 2014 » VOLUME 7, NUMBER 5

44 ANNUITY

44 C onsumer Confusion Begs for Advisors’ Direction on Annuities

INFRONT

COVER FEATURE

22 Estate Planning Failures of the Rich and Famous

10 $201 Million Life Policy Could Be a Good Omen By Linda Koco The “story behind the story” of the life insurance case that Guinness World Records termed the world’s most valuable life policy.

By Steven A. Morelli Here they go again. Our annual list of folks who found fame and fortune during their lifetimes but messed up when it came to planning their estates.

By Linda Koco An analysis shows a lack of consumer awareness of how annuities function and confusion about the need for retirement income.

HEALTH

48 B ig ACA Changes Coming to Medicare Advantage By Andrea Koretz and Craig Ritter Changes in government funding and proposals to alter parts of Medicare are keeping advisors on the edge of their seats.

LIFE

36 Key Person Insurance Keeps the Family Business in the Family By R.J. Kelly Key person insurance helped keep a family-owned business in operation after a crucial employee died unexpectedly.

38 12 How to Write Kick-A$$ Killer Copy

InsuranceNewsNet Magazine » May 2014

FINANCIAL

54 Carriers Hope Captive Advisors Will Reduce VA Risk By Cyril Tuohy As the nation’s most powerful annuities carriers continue to reduce their exposures to the variable annuity (VA) market, they are looking at how those products are sold.

INTERVIEW

An interview with John Carlton He’s perhaps the most famous copywriter you’ve never heard of. John Carlton made his mark by by creating killer ads for his clients. In this interview with InsuranceNewsNet Publisher Paul Feldman, Carlton describes how to break down the process of creating advertising that gets your prospect’s attention.

38 E-Cigs Cloud Life Underwriting

By Josh Jackson The growing popularity of electronic cigarettes could affect the underwriting of those who use them.

BUSINESS

56 Was It Something I Said?

By Bryce Sanders Choose the most effective words for the particular selling situation in which you find yourself.

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ALSO IN THIS ISSUE MAY 2014 » VOLUME 7, NUMBER 5

INSIGHTS

58 S OCIETY OF FSP: Weighing Cost vs. Success of Life Insurance Products By Richard M. Weber The consumer push for the lowest price continues to puzzle the life insurance industry.

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62 L IMRA: Predictive Analytics May Help Forecast Consumer Behavior By Eric Sondergeld Predictive analytics could be a huge benefit to your practice and make you more effective in taking on the challenge of connecting with the right prospects.

60 MDRT: The Right Conversation Leads to the Right Retirement Plan By George R. Barnes Every retirement plan will vary from client to client, but your guidance and recommendations should remain consistent.

61 NAIFA: Staying on Top of Your Game By Ayo Mseka and John Davidson What should agents do when their prospects and clients repeatedly say no to their sales requests?

64 The Last Word: The Industry Must Remain Vigilant Against Attempts at Taxation By Larry Barton When agents are passive and assume that someone else is watching out for their best interests, everyone loses – their clients as well as their practice.

EVERY ISSUE 6 Editor’s Letter 20 NewsWires

34 LifeWires 42 AnnuityWires

46 HealthWires 52 FinancialWires

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Tim Mader Craig Clynes Brian Henderson Emily Cramer Christina I. Keith Ashley McHugh

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14 INN 05.14

May 2014 » InsuranceNewsNet Magazine

WELCOME

LETTER FROM THE EDITOR

This Is Your Cue

e are all fascinated by shiny, bright things, which include celebrities. That’s why we look forward to doing our “Estate Planning Failures” issue each year. We get to have a little fun with an important topic. The celebrity has always been the stand-in for a better version of us: stronger, sexier, richer and all-around more beguiling. It’s that allure of the life that seems so much more interesting than our own. What teenager wouldn’t want the rock star life? More than anything, it’s the story of their lives. Besides the rise and inevitable fall that every good drama traces, redemption is the story’s key feature. Either the character finds redemption or his life becomes a morality tale, warning others. Estate planning advisors (including a fair amount of lawyers) and insurance agents tell us that our examples help with the tough conversations that no one wants to start. I don’t mean to be shilling for our posters here, but some advisors have them hanging in their waiting rooms. So, when clients come into the office for the meeting, they will sometimes marvel, “Huh, Anna Nicole Smith sure messed up her estate” or “Wow, a billionaire like Howard Hughes didn’t have a will?” And, the conversation inevitably leads to the clients’ own estate planning. That is an obvious benefit from these stories. For me, it’s the celebrities’ ambition and priorities that intrigue me. These folks are exceptionally good at something. OK, it’s not easy to find that in Anna Nicole Smith, except that in her thinner phase she was quite the looker, and in her larger, outof-control phase she was a tractor-trailer full of fireworks plowing through a fiery 10-car pileup. Those wrecks leave survivors who have to pull themselves out and move on. The public might have difficulty sparing some pity for people who beg for public attention and then suffer from it. But their relatives, especially their children, are the ones left with the financial and emotional mess. In the case of Philip Seymour Hoffman, he wanted to be the best actor he could 6

InsuranceNewsNet Magazine » May 2014

possibly be as well as a family man. He worked diligently to reach the pinnacle of his profession but he did the family thing in half measures. In happier days, Philip Seymour Hoffman was often seen Hoffman had a will out in the streets of Manhattan with his girlfriend, Mimi but didn’t update it and O’Donnell, and their three children. didn’t even name two of his three children in his estate planning. Hoffman had a talent for acting and self-destruction, but not for details. Photos of Hoffman with his family in Manhattan show a guy happy with his family. Contrast that with the photos of his family at his funeral. His son, in particular, looks like he is going to have a rough road ahead of him for a long time, if not always. Hoffman might never have acted in Charles Dickens’ “A Christmas When Hoffman died of a drug overdose in February, he Carol,” but if the ghost left behind a bewildered family dealing with a mess of of Christmas future an estate plan. could have brought him to that moment, would he have had second thoughts about the be a bit player or a star. You could be the choices he made? No one can ever say. scorn or the savior of a grieving family. But the sad end of his story is an obvious So, please enjoy our tales of estate planstand-in for everyone else. Anyone can see ning disasters, but don’t forget to pass on their own loved ones holding their clasped the moral of the story. hands to their face, fighting tears. It’s difficult to put clients in that frame of Steven A. Morelli mind, but when you do, you are the ghost Editor-in-Chief of Christmas future helping clients write their own redemption story. That might sound like an odd role to play, but you are playing some role in their lives. You can

P.S. We finally have a blog section on our website! Assistant Editor Susan Rupe, Contributing Editor Linda Koco and I will be posting. We expect to be adding to the roster. See the latest ones on the homepage, insurancenewsnet.com, or blog.insurancenewsnet.com to see all of them. We welcome your comments!

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The S&P 500® Index is a product of S&P Dow Jones Indices LLC (“SPDJI”); it has been licensed for use by The Prudential Insurance Company of America for itself and affiliates including Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey (collectively “Pruco Life”). Standard & Poor’s®, S&P®, and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Pruco Life. Pruco Life’s products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates; and none of such parties make any representation regarding the advisability of purchasing such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500® Index. S&P 500® index values are exclusive of dividends. The BenefitAccess Rider is available for an extra premium. Additional underwriting requirements and limits may also apply. Obtaining benefits under the terms of the rider will reduce and may eliminate the death benefit. Benefits paid under the BenefitAccess Rider are intended to be treated for federal tax purposes as accelerated life insurance death benefits under IRC §101(g)(1)(b). Tax laws related to the receipt of accelerated death benefits are complex and benefits may be taxable in certain circumstances. Receipt of benefits may affect eligibility for public assistance programs such as Medicaid. Accelerated benefits paid under the terms of the Terminal Illness portion of the rider are subject to a $150 processing fee ($100 in Florida). Clients should consult tax and legal advisors prior to initiating any claim. A licensed health care practitioner must certify that the insured is chronically or terminally ill to qualify for the benefits. Chronic illness claims will require recertification by a licensed health care practitioner. Other terms and conditions may apply. This rider is not Long-Term Care (LTC) insurance and it is not intended to replace LTC. The rider may not cover all of the costs associated with chronic or terminal illness. The rider is a life insurance accelerated death benefit product, is generally not subject to health insurance requirements, and may not be available in all states. May 2014 » InsuranceNewsNet Magazine 9 All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing company.

INFRONT

TIMELY ISSUES THAT MATTER TO YOU

$201 Million Life Policy Could Be a Good Omen T he recent sale of the world’s most valuable life insurance policy could be a sign that the big life case market is reviving. By Linda Koco

he eye-popping $201 million life insurance policy – dubbed the “most valuable life insurance policy” by Guinness World Records – may be a sign that the big case market is reviving. Reinsurers are seeing an increase in jumbo cases as the economy improves. That’s significant because reinsurers support the direct carriers in the cases. If reinsurers are seeing more cases than previously, that means money is moving at the primary level. It’s a good omen for agents and advisors in the big case market and for others whose business swirls around big cases. It is an indication that some old normal is creeping back into the new normal. “The trend was actually higher pre-2008, prior to the economic downturn,” said Nate Johnson, vice president and chief underwriting officer at SCOR Global Life Americas in Leawood, Kan. But now, with the slow economic recovery, “the industry is beginning to see a slight trend upward again in larger/jumbo risks,” Johnson said. Michael Pado, president and chief executive officer of Aurigen Reinsurance Company of America, Red Bank, N.J., said he believes the increase is tracking with the growth of the ultrawealthy population.

Growth of the Ultrawealthy

That growth spans all the high-net-worth categories. In 2013, for example, the number of billionaires in the United States rose to 443 from 334 in 2008, according to WealthInsight. The multimillionaire category (over $30 million in net assets, excluding principal residence) is up as well – to 44,934 individuals, up from 30,807 in 2008, the researcher said. For the $25 million and up category 10

InsuranceNewsNet Magazine » May 2014

(excluding residence), Spectrem Group found there were 132,000 individuals in 2013 – up from 84,000 in 2008. For the $5 million and up category, the 2013 numbers hit a record high of 1.24 million, up from only 840,000 in 2008, Spectrem said. The $201 million case now deemed “most valuable” by Guinness is clearly outsized. The policy was sold by Dovi Frances, president of SG LLC in Santa Barbara, Calif., on the life of a well-known U.S. billionaire. It has unseated the previous Guinness record – a $100 million life policy sold in 1990 by Peter Rosengard from the United Kingdom on the life of a U.S. entertainment industry figure. Why would any ultrawealthy person want or need life insurance? Most jumbo cases are written for business purposes, said Pado. One frequently cited example is the case of the late Malcolm Forbes, publisher of Forbes magazine and father of Steve Forbes, the current chairman and editor in chief of Forbes Media. Malcolm died in 1990 with millions of dollars of life insurance in force. Reports differ over the total face amount he held at time of death – the range is from over $40 million to under $70 million – but virtually all sources agree the money enabled the family to keep Forbes magazine and other assets in the family, because the life insurance paid the estate taxes. That was over 20 years ago, but today’s ultrawealthy are still subject to estate taxes, so they buy life insurance.

Big Case Tips

Reinsurers have a few thoughts for agents and advisors who want to enhance the chances of their big cases being successfully placed. The most important thing is to ensure that there are control and coordination of the case as it moves through the underwriting process, Pado said. “If it’s a $100 million case, it will likely be placed with a number of insurers and reinsurers, ideally with no pre-existing ex-

posure to that life,” he said. “No one company has that much capacity available for one person – it’s just too risky.” Sometimes even the reinsurers’ capacity is taxed, so their own insurers – the “retrocessionaires” – may be involved too. Typically, when an agent has a big case prospect, the agent goes to his or her distributor, or to a broader producer group when necessary. This is for assistance with gathering the necessary information and searching for direct carriers. The distributor or producer group establishes a lead company, which will take the largest retention, say, $20 million on a $100 million case, Pado said. The lead company typically coordinates the approach to reinsurers. A structure such as this helps establish the control and coordination that Pado said are so essential. Each of the other companies that participate in the risk will have a lesser retention, but all will check their own records to see whether they have any additional exposure on that life. So will the reinsurers, when and if involved. (Typically, five or six reinsurers get involved.) “Primary companies often use the same reinsurer,” Pado noted. That means a reinsurer may have several requests on the same life, and a lot of coordination will be needed to ensure that capacity is not exceeded. Johnson of SCOR pointed out that the writing agent is not typically directly involved with the reinsurer.

$201 MILLION LIFE POLICY COULD BE A GOOD OMEN However, Pado noted that the originating agent does need to keep abreast of the case via the producer group, thus helping ensure that control and coordination continuing.

Things to Watch For

A few jumbo cases take years to close, but Johnson said the typical range is from six to 12 months. Here are a few things to be aware of in the process. » This market requires full underwriting. The agent should be prepared to present the entire financial justification of the case, said Johnson. That includes providing an outline of the need for the ultimate total line in force and applied for, and supporting documents, including any tax records and personal/business financial statements relative to the reason for the ultimate total line. “In addition, the agent should be prepared for each company involved to require

their respective age/amount underwriting requirements as well as all pertinent attending physicians statements.” The case will go much more smoothly, Johnson added, if the agent provides all the pertinent facts upfront. That “will hopefully avoid any ‘surprises’ for all involved entities.” » Not all direct carriers can play. There are 900 to 1,000 life companies, but only the top 25 or 50 would be suitable as direct carriers on jumbo cases such as this, Pado said. “The others are too small, don’t have the right products or do not have good enough ratings.” » It’s U.S., but it’s global. Jumbo cases on U.S. individuals are typically written in the U.S. by companies that are licensed to do business in the U.S., Johnson said. “But the reinsurers and retrocessionaires involved may be from all over the world, although they will be licensed to do business in the U.S.”

INFRONT

» Cases can and do “blow up.” Johnson noted that anywhere from seven to 15 or more direct companies can be involved in a case. “Implicitly that means that there may be more than one writing agent – as a matter of fact, there may be competition amongst agents. Invariably that tends to make the process very complicated and prone to ‘blow up.’” Blowups can also happen if there is not enough capacity at the reinsurer level, Pado said. It also can happen if a lead carrier is not selected first. Or it can happen if the case is not approached in a way that establishes control. “If a blowup occurs, you have to withdraw and start over.” Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda may be reached at linda.koco@ innfeedback.com.

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May 2014 » InsuranceNewsNet Magazine

InsuranceNewsNet Magazine Âť May 2014

HOW TO WRITE KICK-A$$ KILLER COPY

you want a warm, fuzzy feeling from your advertising, John Carlton is not your copy writer. In fact, he would tell you that you are wasting your money if you are comfortable with your copy and not generating results. John has written some of the most influential guides and courses for writing killer copy and is hailed as “The most ripped off copywriter on the planet.” Making him perhaps the most famous copywriter you haven’t heard of. While copywriting may not be on your list of skills you want to improve, it should be. Because even the greatest salespeople are severely limited by the number of people they can see or call in a day. Yet a great ad will work 24/7 for you and reach huge numbers of people. It’s “salesmanship multiplied.” In this discussion with InsuranceNewsNet Publisher Paul Feldman, John breaks down the steps of creating killer copy that breaks molds and fills coffers. FELDMAN: How did you get into copywriting? CARLTON: Early in my career, I was floundering around trying to figure out how to be a freelance copywriter with no mentors and no books on the subject. I had never even met a freelance copywriter. So, I was desperate for information. I was going all over the place. I was devouring books in the library. I was hunting sources down while I was working in the field doing small jobs with some agencies. And then I started getting bigger jobs. Most of the best sources of information that I found in books were written by guys who had been dead for decades by the time I came around. And they were talking about what I now call classic salesmanship. The idea of copy – in either a print ad, a direct mail piece, a video sales letter, a website, an email or even an audio like a podcast – is that it becomes your little salesman that you can send out into the world and multiply your ability to reach people you would never be able to reach face to face. The idea of little salesmen running out there into the world – either through the mail, online, on TV, on the radio or through any media at all – was a transformational image for me. I was dealing mostly with direct mail at the time. People consider most of the direct mail they

receive to be junk mail. The reason they think it’s junk is because it really doesn’t impact their lives. FELDMAN: How can a sales superstar become a great copywriter? CARLTON: For anyone who is good at face-to-face selling and persuading people to take action, I offer the three-step secret to your first great piece of copy. You record yourself talking to somebody, transcribe it and then edit it. That

INTERVIEW

they thought they’d give me a try. I came in using old-school classic salesmanship. I wrote a rather aggressive onepage letter, really trying to get into the head of the person who would be receiving the letter. This positioned the information much differently from what all the other writers had tried to do. The other writers were all about “here’s who we are and here’s why we’re great and here are the wonderful things we can do for you.” I switched that around to “here’s what you need,” as any streetwise salesman would do. I thought about a prospect holding the letter and having that letter hook him from the headline through the opening and then sentence by sentence, word by word, making sure he was interested because it affected his life. The letter was part of a conversation that I wanted to get going inside of the prospect’s head. That was my first success as a freelance copywriter, applying that idea of the letter being a little salesman going out there. The client actually caught onto it too, because I was speaking the language of the streetwise salesman. That was a very successful letter. It wasn’t asking for a sale. It was asking for a phone call, where the agents would then take it to the next step. But, that was very difficult to do, as anybody who’s been out there in the street face-to-face or on the phone with actual clients would know. There are a few old sayings that really ring true. I don’t know if people are still required to read Dale Carnegie’s How to Win

Copy should become invisible very quickly as it just melts into the reader’s mind and becomes part of this conversation. gives you your first powerful translation of your effective salesmanship. You can then take that copy and slap it online or put it in a sales letter or an ad. One of the first jobs I had was as a freelancer was for an insurance company. I can’t remember exactly what it was, but it was through an agency. They needed to have a letter written. Their in-house writers had failed to write anything that the client would mail. They tried a couple of freelancers, and what they produced didn’t make the client happy either. So,

Friends and Influence People, but they used to call it the salesman’s bible. In it, you read those basic presentations of ideas like walk a mile in your prospect’s shoes and look at things from inside of their head. It’s easy to have that as a little saying tacked up on your wall and to think about it. But actually doing it takes some effort. It takes practice and you’re really building a skillset that is very rare in society. It should reach people from inside their lives as opposed to talking at them. Your copy should become invisible very quickly May 2014 » InsuranceNewsNet Magazine

INTERVIEW

HOW TO WRITE KICK-A$$ KILLER COPY

as it just melts into the reader’s mind and it becomes part of this conversation that is happening. Another important component is that if you understand what the readers’ natural objections are, make sure you address the biggest one in your copy. This should usually be in the subhead. Start telling stories to tap into the brain’s hardwired need for storytelling as a way to transfer information. The copy should become invisible very quickly as it just melts into the readers’ mind and becomes part of this conversation. If you understand what the reader’s objections are, you can start addressing their objections in a website, in an ad, in any kind of copy at all. FELDMAN: How many objections should someone try to tackle in an ad, one, two, three…? CARLTON: That’s a great question that ties into the old question that comes up from rookies in marketing, which is, why do you guys write such long ads? When I was doing direct mail, I would write eightto 20-page direct mail pieces plus a lot of other things that would go in the envelope. These were thick letters that went out. When I wrote ads for some of my bigger clients, they were full-page ads in magazines and newspapers. Often, we would do three-page ads in magazines.

talk it out if you want to record it. If I wrote too much in a letter, it would affect the postage rate, and the cost of the mailings would go up. So, I had limits to how much I could write. After you have finished writing, then you start editing. Same with doing a full-page ad. There are only so many words you can fit in there until you start getting the type so small that it’s unreadable. Online, we’re kind of spoiled because you can go on for 100 pages online; that’s where your experience and testing come in. That’s when you move people from “Who are you again?” to “Wow, I’m ready to get this transaction done. Now.” FELDMAN: How do people get that process out of their heads and into a document? CARLTON: Salespeople often don’t know how many objections they encounter. The process is internalized. They just know in the back of their heads that they need half an hour, an hour, 90 minutes or five sessions on the phone over a week. One of the first things they do when they either hire a copywriter or sit down to write it themselves is to start breaking this down. How many times do they talk about the features and attach benefits? The basic feature/benefit is the physical property – the height, the weight, the number of

Start telling stories to tap into the brain’s hardwired need for storytelling as a way to transfer information. So, you would have a right-hand page – the first page. You’d turn it and you’d have what we call a double truck ad, which is both the left- and the right-hand page. It was all copy – no photos, no graphics. There was a headline and subheads, and there was eye relief, but it was just straight-on copy. The answer to how many objections, bullet points or parts of the sales angle you should include is to consider the entire sales process from “Hi, I’m Bob,” to “Thanks for the sale.” If you were talking face to face to the average prospect, what do you need to cover? Then you write that out or you 14

InsuranceNewsNet Magazine » May 2014

pages in the book, the number of DVDs in there, whatever. In insurance that might be the actual numbers, how much it’s going to cost you each month, for example. Writers attach benefits to each of those to explain what you’re talking about. Agents who have been in the business for 20 years tend to forget what is old hat to them but isn’t obvious to their prospect. The prospect is coming at it from the angle that this is the first time he has thought about any insurance. Big mistake. Translate it into non-expert language in ways that I can feel that I understand. This is a little trick that copywriters use. In a

good piece of copy, I will arm the potential buyer with enough conversational tidbits that he can go back and then convince his spouse; his brother-in-law, who thinks he’s an idiot; his neighbor, who’s always trying to one-up him; and all the people in his life who will contribute to his buyer’s remorse. He’s going to go back home and say, “Honey, I just bought insurance to cover us for whatever.” The spouse or the brother-in-law or the neighbor might say, “You don’t need that. Why do you have that? Why in the world do you have so much coverage?” And if you think about that beforehand, you help the prospect reply, “Oh, no. This is very average for my income. It’s a great deal and it’s going to make sure that I’m covered. Of course, this is what insurance is all about; it’s about sleeping well at night knowing that I’m covered.” You will arm the prospect for those conversations he doesn’t even know he’s going to have. By educating him in a way, without calling it education, you’re translating your expertise and knowledge into a simple, three-step story that he can internalize, remember and repeat when he needs it for the doubters in his life and repeat to himself when he wakes up in the middle of the night thinking, “Why did I buy that? What in the world was I thinking?” We call them meta-objections. They are the objections floating above the immediate objections to the actual sale. Once you understand that, then the objections that the prospect has to the initial sale start to become obvious. FELDMAN: How do you outline the message? CARLTON: When I sit down to kind of break things down, I try to start in threes. When you get down to the basic elements of salesmanship, it’s the same whether you’re selling knitting supplies to Grandma or a yacht to Bill Gates. What are the three major categories of objections that I will be dealing with? This is just part of the deconstruction process. Those things might be price, coverage and credibility. These are the three things that a prospect might want to know in dealing with an insurance agent for the first time. You would need to establish credibility even if you’re working for a

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Let’s say you average 20 attendees at each of your seminar events. You host a great event and book 10 appointments. If you host just one of these events per month, you are leaving 120 potential clients on the table over the course of a year. With two events per month that total is 240. That is a big hole in your profit bucket that needs to be filled.

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Then what about those that come in for appointments and never close? That’s another 60-120 waiting for you to be their expert and help them. And these were people that actually raised their hand to be contacted.

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Now multiply that number by the number of years you have been hosting these events. I’ll remind you again, how much does it cost you to put that person in that seat? And you just go and ignore them? You left money on the table!

Visit cbainsuranceagent.com or call (888) 548-4047 to go through this brand new video and see how the Celebrity Seminar System will end your current frustration and give you new hope for your seminars, your business and your own financial independence. May 2014 » InsuranceNewsNet Magazine

INTERVIEW

HOW TO WRITE KICK-A$$ KILLER COPY

global corporation. I still need to trust you, the individual agent. I need to feel comfortable that if you are a large corporation that I’m not just going to be a number in the system. Once you establish that credibility, then the prospect is going to know you are recommending what he needs and you’re looking out for his best interest. So, when we talk about coverage, I understand it. As any good salesman knows, you’re going to get to price as one of the last things before you close the deals. Then you can establish the price as either a bargain or an investment or something that just fits in with your life. FELDMAN: Once you have the three elements, how do you organize them? CARLTON: I like to write in longhand, so I pull out blank sheets of paper. I actually use printer paper, big 8.5-by-11inch blank pages with no lines, and I start scribbling. I might just do three pages or

three columns on the same page and write at the top: Credibility, Coverage and Price. Then I start listing. This is where most of the work comes from. You don’t sit down to write the final piece until you get all of this stuff covered. Answer the objections here: Why this much? Why do you have it structured this way? Why this coverage? What other options do I have? Is it enough? Is it too much? Then you have another sheet of paper where you break down the prospect. What are the prospect’s three basic elements? One would be the fears that he’s bringing to the table: He’s going to get taken. He’s going to pay too much. He’s going to get the wrong coverage. His wife will yell at him. All of this stuff. The second element is need. Include the prospect’s actual needs, the needs he brings to the table and the needs he doesn’t yet know are there. And then the third element we use, which people usually get very upset with,

is a word called greed. I would call it something else, but that is probably the best way to describe it. If you understand human behavior, it makes total sense. What is it that the prospect wants that’s going to make him really happy with what he ends up buying from you? Greed is an emotionally hinged word. People say, “I’m not greedy.” But, really, all humans are greedy at the base. FELDMAN: Sure, everybody has a bit of greed. How are you using greed in the process? CARLTON: We call it the “greed gland.” We like to get the greed gland salivating. You want to get to the point where prospects feel they are getting something better than anyone else got with the best deal possible. Then there’s the sense that, I am now armed against the dangers out there in the world. I think that is one of the main things that insurance agents would want

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InsuranceNewsNet Magazine » May 2014

HOW TO WRITE KICK-A$$ KILLER COPY

You want to get to the point where prospects feel they are getting something better than anyone else got with the best deal possible. to use. They call it coverage for a reason. It’s the idea of setting up a brick wall between you and the dangers out there that are going to happen so that you feel safe. I am greedy about my safety. I want my wife safe. I want my kids safe. I want my income safe. At this point, I am not thinking about the general good. I am not thinking about how I fit into society. FELDMAN: How do you know if an ad is good? CARLTON: When I write an ad for a client, if that client says to me, “This is a great ad. I can’t wait to run it,” I know I failed somewhere. The only acceptable response is I want him to be so nervous that he says,

“We can’t run this. This can’t possibly be what we’re going to run.” If I make a piece of copy that feels comfortable to him, then I haven’t pushed hard enough to be able to get the kind of results that we want. Advertising is not “comfortable” writing. Reading, watching TV, listening to the radio, surfing the Web – these are passive behaviors. You want to wake the prospect up. You want to be the most exciting thing he’s seen today. He didn’t even know he needed life insurance and now suddenly he’s scared and now he’s thinking, “Wow! But, here’s a solution. And wow! This is the solution I want. And I think I’m going to deal with you.” You take the prospects through this

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INTERVIEW

transformative process. It’s not passive. It’s very action-oriented because they will have to pull out their checkbook and actually write something afterwards. So, as far as life insurance is concerned, take the idea that prospects don’t want to buy it, take that objection and go as deep as you can with it. FELDMAN: How would your ad for life insurance read? CARLTON: Again, go with three. Start with writing down the basic objection, which is, I don’t even want to think about dying. So, you put that objection in quotes. How do you answer that objection? What are the three basic elements to doing that? You can tell the prospect, “You are going to die.” And you can tell the prospect things such as, “If you’re 45 years old, you can expect to live to age 82,” or something. And then you can actually break that down. That’s X number of days. There’s some real limit to how long we live.

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May 2014 » InsuranceNewsNet Magazine

INTERVIEW

HOW TO WRITE KICK-A$$ KILLER COPY

“GUN TO THE HEAD” COPYWRITING

Hyper-effective secrets of a copywriter who was forced to create successful ads...or starve.

You’re writing an ad. You’re not creating great literature. The response you want from your reader is not “Gee, that’s a great ad,” but “Hey! I WANT this!” How do you adopt this “gun to your head” philosophy? Take these simple strategies to heart and use them every time: 1. Don’t toy with your own life. Ask yourself: Would I use this word — this sentence —this paragraph — if my life depended on the success of this ad? Be clear. Be sincere. Make your case. 2. Every statement must pass the “So what?” test. Any time your reader says to himself, “So what?” you’ve lost him. People will read lots of copy about subjects they are interested in — but they will shrug and move on to something else the second they lose interest. 3. Get in bed with your customer. Your Number One job as a marketer is to get in synch with your customer’s innermost desires. You cannot understand her dreams and worries unless you feel comfortable moving in her world. Become a student of human nature. Get out there and talk to mechanics, 7-11 clerks, secretaries, retired jet pilots, new homeowners, day care workers. If you’re selling a diet, and

you’ve never had a weight problem, you had better find out what goes on in the head of someone who does. Every human on the planet has the same basic menu of needs and desires. I hear from business owners that “my customers are different.” They are not different. They’re human beings. They’re buying what you offer because it feeds an important need deep inside them. You cannot guess what will most motivate a customer unless you truly understand them. Remember this: It’s a mess to guess! 4. It’s all about HER needs. And his. Your customer may think you’re a swell guy. But you’ll never get him to buy unless you appeal to his selfish needs. “Selfish” is not a bad word in marketing. It is simply the realization that no matter how important you think your needs are, it is his needs that rank Number One. The most powerful word you can use in any sales pitch is “you.” That word is music to the ears of your reader. Use the word “you” in almost every sentence. 5. Have sympathy for his natural skepticism. No matter how good your product is, how honest you are, or how great the deal is — your

Section Two might be bringing up the prospect’s family or loved ones. I know a lot of ads start with a sobbing child at a gravesite. It’s a guilt thing. FELDMAN: A lot of people and companies would shy away from that kind of approach. CARLTON: Well, that’s old-school classic salesmanship. When I speak in front of experienced marketers sometimes – we’re talking about a thousand experienced marketers in a room – and I’m up there and I’m talking about copy and salesmanship, I often will stop and say, “Who wants to sell without selling?” A lot of gurus out there insist that they can teach rookie entrepreneurs to “sell without selling.” The reason they do that is people have an abhorrence toward sell18

InsuranceNewsNet Magazine » May 2014

customer will not buy just because you asked nicely. They don’t believe you. They don’t believe the deal. Use that disbelief. Confront it: “Does this seem too good to be true? I sure thought so myself when I first discovered it. But what convinced me was...” 6. Find a parade and get in front of it. Never try to create demand. Instead, feed an existing hunger. People already know (unconsciously) what they want, and they reveal it every day by paying for it. Your job is to convince them you can help them do what they already have a mind to do, but in a better way. 7. Romance the hell out of them. I don’t care if you’re Elmer Fudd in real life — when you’re trying to connect with customers, you’re the dashing Don Juan Of Selling. Seduce smoothly. Never be a bragging, obnoxious jerk. Your job is to ignite the passion in your reader’s heart. 8. Steal, spy and swipe. Do you have competitors who are doing better than you are? Find out why. If they’re appearing in certain magazines, then you start putting ads there. Place an order and see how they handle customers on the phone. Copy their sales techniques, if they’re

ing. They think selling is rude. They have this idea in their minds of the used car salesman in the checkered suit with the loud mouth, getting in your face and being bothersome. They don’t understand that everybody uses salesmanship all the time. If you’re married, you sold yourself on your spouse. If you’ve reached any goal in life, you’ve sold yourself to bosses to get the job. Sometimes you sell yourself on getting up in the morning. We use salesmanship all the time. The problem is that people have a very bad feeling about what we call classic salesmanship. So, when I ask this room full of people, “Who wants to ‘sell without selling’?” anywhere from a quarter to a third of the room will raise their hands because that’s what they want to do. They’ve heard that and they think it can be done. They think,

better than yours. If they’re blazing a trail to wealth and success, stay in their wheel tracks. Examine their products, the way they’re shipped to you, how quickly they arrive. Chart their “battle tactics” for getting and keeping a satisfied customer. Don’t be shy about using everything (legal) at your disposal to win. If there’s room in your market for the two of you to both win big, fine. If there’s only room for one, make sure you’re the last one standing. And when you find an opening... Go Out And Eat Their Lunch. 9. Make your copy a “greased slide.” The greatest ads ever written are just like a greased slide. The reader gets on at the beginning, and is rushed at a giddy pace straight through every page, until he arrives at the close, breathless and so excited that he can’t wait to get his money out and buy your product. That means you don’t go off on any tangents that interrupt the slide. Every point you make must be an emotionally logical step in the exact direction you want your reader to go — and that direction is always the same. You want action. You want the sale. – From Carlton’s Kick-Ass Copywriting Secrets Of A Marketing Rebel

“Oh, boy! John’s going to tell me how to not be that salesman.” And my answer is very abrupt. These people are holding their hands up, so I embarrass them. I say, “Grow up. You can’t sell without selling. You don’t need to be rude. You don’t need to be anybody you don’t need to be. You don’t need to say anything you don’t need to say. But, you do need to apply the basic fundamental principles of good salesmanship in order to move somebody from not wanting what you have or not being ready to act right now to acting right now.”

Read John’s blog The RANT at www.john-carlton.com

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NEWSWIRES

FINRA Foundation study shows millennials struggle financially bitly.com/qrfinra

Sebelius Out, Burwell In at HHS She was the public face of the headache-riddled rollout of the Affordable Care Act. Now Kathleen Sebelius has said goodbye to her job as Secretary of Health and Human Services. The new face of health care is Sylvia Mathews Burwell, whose most recent job was director of the Office of Management and Budget (OMB). President Barack Obama’s nomination of Burwell now Sylvia Mathews Burwell moves to the U.S. Senate for confirmation. Burwell already has earned some battle stripes from her time in Washington. As OMB director, she was in the forefront of negotiations that ended the partial government shutdown in October and led to a two-year budget agreement with Congress. Her lengthy resume includes having served on the board of MetLife. As for Sebelius, her resignation announcement came within hours after she broke the news that signups on the federal health care exchange had topped the 7.5 million mark. No word on what the former Kansas governor plans to do after leaving the secretary’s job.

AG PROBING HIGH-SPEED TRADING

Best-selling author Michael Lewis’ new book, Flash Boys: A Wall Street Revolt, triggered headlines with its allegations that highAttorney General speed traders have rigged Eric Holder the stock market, profiting from trades made at a speed unavailable to ordinary investors. Now, the U.S. Department of Justice is investigating high-speed trading for possible insider trading. The disclosure

comes the same week that securities regulators and the FBI also confirmed they are looking into potential wrongdoing by high-frequency stock traders. Regulators have been examining whether ordinary investors are at an unfair disadvantage to high-speed traders, who use computer algorithms to rapidly dart in and out of trades to earn fractions of a penny that add up to big profits over time. The head of the U.S. Securities and Exchange Commission, Mary Jo White, also confirmed that her agency has several active probes into market integrity and structure issues, including high-speed and automated trading. DID YOU

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Those who favor the practice have criticized the book, saying high-speed traders actually benefit other investors by providing liquidity to the market.

MAYBE IT’S NOT SO BAD AFTER ALL

It seems as if everywhere you turn, you hear stories of how most of us will be reduced to living out of a cardboard box in retirement because nobody saved enough money and pensions went the way of the rotary phone. But some research suggests that the state of retirement in America might not be as bad as thought. Two Towers Watson studies show that there is positive movement in the retirement front. One study showed that the financial health of large U.S. corporate pension plans improved sharply in 2013. The 100 largest public company pensions improved their funding levels by 13 percentage points during the year,

the best funding level since the end of 2007. The second study indicated that more American workers are satisfied with their finances and confident about retirement. Nearly half of those polled (46 percent) were “satisfied” with their current finances, up from 26 percent in 2009. Employees’ confidence in their ability to retire also

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InsuranceNewsNet Magazine » May 2014

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QUOTABLE Only about one-third of Americans are living within their means and think they are prepared for the long-term financial future. — Stephen Brobeck, Executive Director of the Consumer Federation of America

continued to climb: 23 percent were “very confident” of having enough income for the first 15 years of retirement. But the survey revealed a more pessimistic side, with 58 percent of workers remaining worried about their financial future and only 8 percent “very confident” of having adequate income 25 years into retirement. Nearly four in 10 respondents plan on working longer.

OR MAYBE IT COULD BE BETTER?

The U.S. is well down the list of nations with regard to meeting retirement needs through its retirement system. The Natixis Global Retirement Index survey showed that even though the U.S. ranks sixth highest in per capita income, it ranked in 19th place for how well its retirement system will meet the financial needs of retirees.

The survey authors said that the hallmarks of a good retirement system are its simplicity in overall design and structure. Retirees in countries that enjoy the greatest financial security in retirement live in Switzerland, Norway, Austria, Sweden, Australia, Denmark, Germany, Finland and New Zealand.

WHO WILL TEACH THE CHILDREN?

Parents say they want their children to learn about money but they don’t think they’re the ones who should be teaching. A survey showed that twothirds of parents interviewed said they are concerned about being good financial role models for the kids. But one in four parents said

they don’t believe they are qualified to teach their children about saving and in-

vesting, according to a T. Rowe Price poll.

[NEWSWIRES] The reason? The parents said it’s because they are not good at handling money themselves. Many parents don’t want to talk to their kids about finances, often because they don’t want them to worry about the financial challenges the family may be facing. Others don’t think they’re prepared to have the conversation. Or maybe they don’t want to fess up to some of their money-related misdemeanors. Nearly half of the 1,000 parents surveyed admit they bribe their kids with money to encourage them to do the right thing. And almost one-third admitted they sometimes “borrow” money from their children’s piggy banks.

AMERICANS SPEND MORE TIME PLANNING DINNER THAN RETIREMENT

Americans spend less time researching an IndividOR MORE ual Retirement Account investment than they do OR LESS choosing a restaurant, flat screen TV or tablet, according to a TIAA-CREF survey. Survey respondents said they are more

HOURS

Markets Cheer Fed’s Commitment That “Whoot! Whoot!” sound coming from Wall Street was the market reacting to news from the Federal Reserve. At a speech in Chicago, Fed chief Janet Yellen said the central bank will continue to bolster the U.S. economy, given the halting pace of the recovery and a still-sluggish job market. In some ways, labor conditions are tougher now than in any other recession, she said. She added the Fed’s “extraordinary commitment,” in the form of massive bond buying and ultra-low interest rates, is “still needed, and will be for some time.” Investors were closely monitoring Yellen’s speech for comments on interest rates. During her first news conference following the Fed’s Open Market Committee (FOMC) rate decision, investors were startled by the suggestion of an earlier-than-anticipated increase in rates. She hinted that a rate hike could come as soon as next year, but the Chicago speech tempered that idea. Stocks surged on the Fed chief’s assessment of the economy. The Dow Jones Industrial Average gave its own version of the “high five,” adding 150 points. cent over the last decade, and even though these advisors’ assets under management have increased “more than twofold, to almost $55 trillion,” the commission said in its new budget request for fiscal year 2015. In an effort to beef things up, the SEC is seeking $1.7 billion in funding for fiscal year 2015. That’s nearly 31 percent more than the $1.3 billion appropriated for fiscal year 2014, but the SEC said the increased amount would enable the agency to add 639 positions.

documents,” said Phyllis Borzi, assistant secretary for the department’s Employee Benefits Security Administration. A fee disclosure statement of no more than a page or two is envisioned.

more than half (55 percent) said they spent an hour or less planning for the investment.

WANTED: SIMPLIFIED 401(K) FEE DISCLOSURES

physicians received more than $3 million apiece – for a total of about $1.5 billion

SEC WANTS TO BEEF UP RIA EXAMS

er for those with 401(k) retirement plans and their employers to locate just what fees and expenses are attached.

HOUR

likely to spend two or more hours selecting a restaurant for a special occasion (25

percent), a flat screen TV (21 percent) or a tablet computer (16 percent) than they would planning an IRA investment (15 percent). Even among those who already have an IRA, In addition, the number of Americans who would consider an IRA as part of their retirement strategy has fallen sharply since 2013. Fewer than half (47 percent) of those not contributing say they would consider an IRA, down from 57 percent in 2013. If you’re a registered investment advisor (RIA) and you haven’t had any federal regulators drop by lately, it might be because the nation’s top cops in securities regulation don’t have the means to do so. The U.S. Securities and Exchange Commission (SEC) said it examined only about 9 percent of RIAs in fiscal year 2013. That works out to nearly 1,000 examinations that year from the total group of more than 11,000 SEC-registered advisors. This happened even though the number of RIAs has increased by more than 40 per-

You’re not alone if you think that it’s too hard to find or understand all the fees and expenses on some 401(k) retirement plans. The government thinks so too. The U.S. Department of Labor has proposed a new rule that would make it easi-

That would update a 2012 rule on the same subject. Many disclosure forms offered since then have become too lengthy, complex and confusing, department officials said. “Some are filled with legalese, some have information that’s split between multiple DID YOU

KNOW

MEDICARE DATABASE REVEALS TOP-PAID DOCS Who made the most money from Medicare? An Associated Press analysis of the Medicare database revealed that 344

from Medicare in 2012. Overall, Medicare paid individual physicians nearly $64 billion in 2012. The median payment was $30,265. The Medicare claims database is considered the richest trove of information on doctors, surpassing what major insurance companies have in their files. Although Medicare is financed by taxpayers, the data have been off limits to the public for decades. Physician organizations went to court to block its release, arguing it would amount to an invasion of doctors’ privacy. More than 825,000 physicians make up Medicare’s claims database.

FRANCE IS THE COUNTRY WHOSE RESIDENTS can spend the longest time in retirement.

AVERAGE BY YEARS

Source: Organisation for Economic Cooperation and Development (OECD)

WOMEN

MEN

27.4 22.6

May 2014 » InsuranceNewsNet Magazine

PLUS Winning Strategies for your RICH & NOT-SO-FAMOUS Clients » PAGE 32 22

InsuranceNewsNet Magazine » May 2014

ESTATE PLANNING FAILURES OF THE RICH AND FAMOUS

ames Gandolfini will be re- don’t know what the trust says.’ I was like, membered for many things, ‘That’s the point!’” and one of them might be Gandolfini actually did have one trust, surprise endings. for his 13-year-old son, that was funded Fans of his Tony Soprano by $7 million in life insurance. The life character will be forever per- insurance aspect also shielded the money plexed by the sudden, jarring end to “The from estate taxes. Sopranos,” the groundbreaking HBO seThe rest of his estate was not so lucky. ries. In the middle of a tense scene in a In the patois of La Cosa Nostra, it got diner, propelled by Journey’s “Don’t Stop whacked. Well, semi-whacked. Believin’,” the screen went black. Just like Twenty percent went to his wife, who that, the series that had occupied the cen- has an unlimited exemption as his spouse. ter of American pop culture was yanked. The rest, above the $5.25 million excluJust as suddenly, Gandolfini left the sion in 2013, is exposed to federal and world stage when he died of a heart attack after a day touring Rome James last June. He left an inGandolfini delible impression and a AGE: 51 pile of money that even DIED: June 19, 2013; Rome; a Mafia don would envy. heart attack Estimates place his estate at $70 million. ESTATE MISTAKE: He signed his will only Tony Soprano might have been a wise guy, but the six months before he actor who played him might died. He gets a point not have been too smart for for having a will, but not putting his estate into a experts have been leaptrust. ing on just about every He left only 20 percent of other aspect of his eshis estate to his wife, who tate planning. Or more had an unlimited deduction accurately, his lack of as his spouse. So 80 percent expert planning. of his $70 million estate was Julie Garber, the wills exposed to the estate tax. and estates columnist Bada-bing, bada-broke. for About.com, said many aspects of Gandolfini’s estate planning baffle her. state estate tax. The federal bite is 40 per“Why did this man just have a will?” cent, and it scales up from there with the asked Garber, who is also vice president state tax. Published estimates put the tax and senior trust officer of the Fifth Third bill at $30 million. Private Bank. “He should have had a revoTwo other problems Garber had with cable trust so that no one knew who was Gandolfini’s plan were with the lack of plangetting what. It was absurd that someone ning. One concerns a house Gandolfini of his stature just had a will.” owned in Italy that he included in his will. For very public people who want to “I found it odd that he had a whole seckeep some things private, a trust keeps tion on property in Italy in his U.S. will,” the estate from prying eyes because, un- Garber said. “From my understanding, like wills, the trust documents are not so many European countries have forced public. For example, in the case of for- heirship that you need to have a foreign mer Beatle John Lennon’s estate, no one will that covers that. You wouldn’t put it knows who got what because he had set in your U.S. will.” up a carefully constructed trust. Forced heirship is an ancient tradition “A reporter called me from New York in some countries, including Italy, where about one of the famous estates,” Garber certain division is required of estates. The said. “And the reporter said, ‘It’s so irri- only U.S. state that requires it is Louisiana. tating when they have a trust because we It takes advanced planning to circumvent

FEATURE

this rule if the client prefers another arrangement. A limited liability company (LLC) is one way to handle an asset in those situations. “There are ways around it like we have in the United States, such as setting up LLCs to convert property from tangible into intangible property,” Garber said. The other point is that Gandolfini drafted his will soon after his daughter’s birth, which is commendable. But she gets her entire inheritance at age 21. Think of yourself at 21. Now add several million dollars. Not a pretty picture.

At what age heirs should receive their inheritance is an issue for estates of any size, but few people plan for it. Attorneys and advisors all too often see the impact of sudden wealth on younger people. It is similar to how lottery winners burn their good fortune into ashes of regret soon after the big check is passed. Philip Seymour Hoffman was a master actor finely attuned to the details of the characters he played. He was not so in sync with his estate planning. As with Gandolfini, he earns a point for having a will. And also like Gandolfini, he flubbed the second act, which led to a disappointing denouement. Another similarity to Gandolfini was Hoffman’s surprise ending, dying in his Manhattan apartment at 46 with a needle in his arm. He left behind an estate May 2014 » InsuranceNewsNet Magazine

FEATURE

ESTATE PLANNING FAILURES OF THE RICH AND FAMOUS

Philip Seymour Hoffman AGE: 46 DIED: Feb. 2, 2014; Manhattan; drug overdose ESTATE MISTAKE: The famed actor was hyperfocused on his roles, but not as attentive to other details. He wasn’t married to his significant other, so she did not qualify for the spouse’s right to a tax-free inheritance. At least $12 million of the $35 million estate was lost to taxes. Also, his estate plan was not updated and did not account for all his children, so they might not be treated equally.

estimated at $35 million, along with a big tax bill. The first $5.34 million is excluded from federal estate tax, which is indexed for inflation. New York, however, exempts only the first $1 million. State laws are not even close to uniformity. He left some of his estate in a trust for his son and the rest to Mimi O’Donnell, his longtime girlfriend and mother of his three children. He did not account for two of his children because he violated the third commandment of estate planning for the rich and famous: “Thou shalt update your plan.” (The first two are “Thou shalt draft a will” and “Thou shalt establish a trust.”) Because Hoffman was not married to his girlfriend, she will not benefit from the spousal deduction of an additional $5.34 million. And apparently, he did not have life insurance, because O’Donnell’s lawyer said she wanted a quick resolution of the estate because she needed the money. Even the very wealthy should have life insurance for liquidity when the family needs it most. (Violation of the fourth commandment: “Thou shalt have life insurance.”) Hoffman drafted his will in 2004 after his son Cooper was born. By not updating his will, he did not account for his two daughters born after 2004. He did set up a trust for his son, which pays him the total at 30. Garber said Hoffman’s 30 is better than Gandolfini’s 21, but it is still dangerous for the recipient. 24

InsuranceNewsNet Magazine » May 2014

“We’ve been recommending lifetime trusts,” Garber said. “Maybe make the child a co-trustee at 30 and give them control, but that way at least it’s in a trust. It’s not their money. If they get sued, if they get married and divorced, it’s in a trust. It’s not their money. It’s protected for them.” There is also the option of graduated control. “Maybe at 30 become a co-trustee and 35 become a sole trustee,” Garber said. “But it’s so hard to tell when the kids are young how they’re going to turn out. We have trusts where people don’t get it until they’re 50.” The problem of trust-fund train wrecks has spawned a new industry to help heirs. Estate planning attorney Richard Sugar of Chicago said his firm goes even further than helping control the wealth. “We’re always looking for ways to preserve a person’s wealth and to make sure that it passes on to the next generation with as little diminution as possible,” Sugar said, adding that rich kids gone wild have a way of quickly diminishing wealth. “When I first started practicing, the routine way to distribute assets to heirs was to keep it in trust and pay a third at 25, a third at 30 and a third at 35. But the more I saw the consequences of that firsthand, the more I thought that’s really self-defeating.” His office started an apprenticeship program to train heirs in handling the wealth before they take the reins. When is the age of responsibility? That depends on the person, of course, but Sugar used 35 as an example.

“If an heir is less than 35 and both parents have died, the heir is going to have a third-party trustee for a period,” which could be up to seven years, according to Sugar. “That trustee is charged with training the heir on how to use the trust money – how to budget, how to invest and how to pay taxes.”

The program provides the follow-through that would ensure that all the planning effort wasn’t for naught. “It’s a way to preserve the trust vehicle,” Sugar said, “which has all kinds of tax benefits and creditor-protection benefits as well as giving heirs a sense of confidence that they can administer those funds correctly and won’t make mistakes and waste it.” Creating a family office is another option for the very wealthy. It is a company set up to manage a family’s finances, but family offices offer more services ranging from household upkeep to travel arrangements. The offices are expensive to operate, so it is an option only for ultra-high-networth families. But Sugar had another reason to avoid them. “A family office continues to carry the responsibilities and discharges all those responsibilities that heirs need to be trained to perform for themselves,” Sugar said. “In some ways, the family office promotes indulgence, dependency and the suppression of ambition. We’re trying

to promote the exact opposite.” The type of trust ensures the legacy as well. In Hoffman’s case, Sugar was pleased to hear that he established a trust for his son, and if he was prudent, it would have been a dynasty trust. “Dynasty trusts go on for many, many generations and it is particularly important with celebrities,” Sugar said, considering what it would have done for Hoffman’s son. “The dynasty trust would provide for the education and health needs, along with support, for his entire lifetime and when the son died it would pass on to the son’s children. And there wouldn’t be an estate tax ever again within the $5,340,000 exemption that Philip Seymour Hoffman would bless this trust with.” The trust could grow beyond the initial exemption and still be shielded. “That $5,340,000 set aside for Philip Seymour Hoffman’s son at the time of his death could grow to $20 million, and that $20 million would pass to his son’s chil-

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ESTATE PLANNING FAILURES OF THE RICH AND FAMOUS

Ed Koch AGE: 80 DIED: Feb. 1, 2013; Manhattan; heart attack ESTATE MISTAKE: He might always be the Mayor of New York for many, but he had his financial success after he left office. Smart as he was, though, he left most of his $10–$11 million estate to his sister and three nephews instead of a trust. That left it all subject to federal and state estate tax, which was expected to lop more than $3 million off the top.

dren and not be subject to an estate tax ever again,” Sugar said. “Since the federal estate tax is 40 percent and state taxes could also be imposed at another 10, 20 percent on top of it, you’re talking about a significant reduction in wealth otherwise.” It isn’t just cash and financial instruments that can go into the trust. “If you put a copyrighted item into a trust at a time when you’re not terribly well-known, the value of that transfer is small, but when you become well-known and you’re No. 1 on The New York Times Bestseller List, that copyright suddenly explodes in value,” Sugar said. “But be-

cause it’s already embedded in the trust at a much lower value, that asset is protected and is available for the next generation at a much lower value and with very little tax consequences.” If that book, that music master recording or those royalty rights were put in the trust when it was worth $10,000 and the value grew into the millions, that item would still remain $10,000 in the eyes of the tax man. And the work can still produce a revenue stream. This is just one of the many ways trusts can be used and why estate planners love them. But they are still not universally used, particularly in New York, where many of the largest estate messes reside. One of the most New York of New Yorkers, Ed Koch, was one of them. When he was mayor of New York City in the 1970s and ’80s, he would famously ask constituents, “How’m I doin’?” In the case of his estate, his heirs can return a resounding “Meh.” He left most of his estimated $10–$11 million estate to his sisters and three 26

InsuranceNewsNet Magazine » May 2014

nephews whom he adored. But they will be receiving $3 million less because of the estate tax bite. It was another case of not having a trust that would have helped shield his estate from prying eyes and some taxation, depending on its structure. But it’s not the New York way. West Coast celebrities seem to get the trust concept, although some do a half measure. Take the case of the “Fast & Furious” actor Paul W. Walker IV, who happened to have met a fast and furious end in a speeding Porsche. He had a trust, but it didn’t have anything in it. Consequently, his pourover will funneled his $25 million estate into the trust. Trusts are typically funded in life with the pour-over will directing the remainder into the trust, which saves probate costs and avoids public scrutiny. Walker did draft a will early, when he was 28, around the time he did his first

Paul W. Walker IV AGE: 40 DIED: Nov. 30, 2013; Valencia, Calif.; car crash ESTATE MISTAKE: The “Fast & Furious” actor used a pourover will to funnel his $25 million estate into a trust for his 15-year-old daughter. This arrangement makes the estate a public affair. He also failed to update his plan for 12 years, so it might not have represented his current wishes.

“Fast & Furious” movie. That and the five that followed (soon to be six) made Walker very wealthy, but he did not update his estate plan in the intervening dozen years. Because the trust is private, we don’t know how well the old structure supported the new wealth, but we do know that a plan needs more periodic updating to reflect new factors. Another thing we know is that he named his mother as guardian of his 15-year-old daughter Meadow, rather than the girl’s mother, who is reported to be an alcoholic. Overriding parental rights is always difficult in court and, in fact, Rebecca Soteros did get custody of her daughter in late March, pending a successful rehab stint. The lesson there is if there is not an agreement in life, sometimes the will won’t get it done. Another way to place wishes on precarious footing is to scribble them onto a will. That’s what Beastie Boy Adam Yauch did. When he died of salivary gland cancer at age 47 in 2012, his will revealed this section: “In no event may my image or name or any music or any artistic property created by me be used for advertising purposes.” Yauch had handwritten this part, “or any music or any artistic property created by me.” Yauch’s inclusion might have overstepped his rights, because the note was claiming a copyright over his artistic work. But as we all know it was The Beastie Boys – so others shared ownership. If the others shared his sentiment, and the odds are good they did, then his wishes may be carried out. If not, chances are

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ESTATE PLANNING FAILURES OF THE RICH AND FAMOUS

good they won’t. It’s an instance of someone amending a legal document without good legal advice. Lawyers have said it would be unusual to have mixed publicity rights with copyright in the same sentence. Yauch’s situation also seconds the lesson that an agreement in life is more likely to carry forward after death. Otherwise, Yauch had a simple, straightforward plan for an estate valued at $6.4 million, according to reports. Some other celebrities left a far more complicated situation that can take families several years to untangle. For example, who knew that the thumpthump-thump of disco music was basically the sound of a printing press making stacks of money? The phrase, “Stayin’ Alive, Stayin’ Alive, hah, hah, hah, hah, stayin’ aliiiiiiiiyiiiiiiiihiiiiiiiihiiiive!” has driven millions mad,

but apparently it also helped generate many millions of dollars (or pounds) for Robin Gibb before he died of colorectal cancer at age 62. Although he didn’t exactly stay alive, he did manage to leave an estate estimated at $43 million. Because of Gibb’s many properties, it took a while to unravel the entire estate, which was initially estimated at $148 million. Another complication involved his family life. Apparently while in his second marriage, he had what the media likes to call a “love child” with a housekeeper. Gibb did not leave the mother or child a monetary bequest in his will, but he gave them about $6.5 million as a gift before he died, according to reports. He also left the mother a house valued at $1.25 million. All of which made for two bitter children from his first marriage, who got about $780,000 each. That prompted one of them, Robin-John, to respond with the

Adam Yauch AGE: 47 DIED: May 4, 2012; salivary gland cancer; Manhattan ESTATE MISTAKE: This Beastie Boy scribbled a note on his will that prohibited the use of his music in commercials. But handwritten wishes on a will often leads to complications. The phrasing might not actually protect his work.

Clintonesque Facebook post, “Dad never slept with that woman,” along with some rude characterizations. Not only do disproportionate bequests leave bitter feelings, but they also fuel years of legal fights. So, just because people think they have the last word in a will, others might beg to differ, in court. Although disco and rap seemed to have paid well, punk rock was not so remunerative. At least that was the case for Johnny Thunders, the guitarist for the genre-defining, gender-bending New York Dolls. The band blasted out of the early 1970s, influenced a generation of rockers and then burned out just as quickly. He banged around in a couple of bands and on his own until he met his end in New Orleans’ French Quarter, curled up under a coffee table in his hotel room. The autopsy showed he mixed methadone and cocaine and may have had leukemia. Others said he was beaten to death for his methadone. The punk-rock life left little time for es-

Robin Gibb AGE: 62 DIED: May 20, 2012; London; kidney failure, a complication from colorectal cancer ESTATE MISTAKE: This Bee Gee’s large estate of $48 million was so extensive that it took at least a year to untangle. His personal life was a tad tangled, too, with a “love child” causing rifts with the heirs.

InsuranceNewsNet Magazine » May 2014

tate planning and, needless to say, he wasn’t terribly careful about his money. He apparently didn’t think he would need to bother with a will or a trust for the $4,000 he had left. That might have been the sad story of another artist living fast and dying young, if it weren’t for his sister, Mariann Bracken. She turned out to be the heroine because she was named administrator and grew that tiny seed into an estate worth hundreds of thousands of dollars. It paid

out twice to Thunders’ heirs, including two sons he had with his estranged wife and a daughter he had with a Swedish groupie. When Bracken died in 2009, the estate was thrown into chaos once again. The daughter had expected to take over the administration, but could not afford the $75,000 bond, so the estate has just been lying around. Thunders’ two sons are trying to take over the estate when they are not busy languishing in prison. Vito got out of maximum-security prison in New York fairly recently. Dino apparently is also out of jail in Texas. They plan to enlist the help of their mother. As soon as they can find her. They have no idea where she is and have hired a private detective. So, even on the path to self-destruction, it’s always a good idea to take a moment to do some estate planning. All the way over to the complete opposite side of the wealth spectrum was William M. Davidson, the Detroit Pistons owner who left an estate worth between $2.2 billion and $5.5 billion, according to wide-ranging estimates, when he died at age 86 in 2009.

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ESTATE PLANNING FAILURES OF THE RICH AND FAMOUS

Johnny Thunders AGE: 38 DIED: April 23, 1991; New Orleans; methadone and cocaine overdose ESTATE MISTAKE: He was living fast after helping define punk rock in the band The New York Dolls. So he didn’t get around to estate planning, which might not have been a big issue for his $4,000 estate. But his sister grew that into $250,000, which supports several beneficiaries. When she died in 2009, it left the estate in disarray, and it is still being worked out.

He was an industrialist who bought the floundering Pistons and grew it into a successful, and pampered, basketball team with a palace of a stadium. Davidson said he would never sell the team and expected it to remain in the family. The story followed a familiar theme after he died and the Internal Revenue Service submitted a $2.8 billion estate tax bill, which some say might set a record. The family needed liquidity in a hurry and sold Palace Sports and Entertainment, which included the Pistons and the stadium, supposedly for $325 million. It was a nice return for the $8 million Davidson paid in 1974, but the price was at least $100 million under value, according to some reports. It is a familiar problem for asset-rich estates. Besides sophisticated trusts that can best employ tax advantages, a good answer for many of these problems is life insurance. The message is getting through to some people. A recent $201 million policy made the Guinness World Records, although others say bigger policies have been sold but not publicized. There might not be reinsurers nervy 30

InsuranceNewsNet Magazine » May 2014

enough to cover a $2 billion policy, but maybe that’s not too far off. Then there are the estates that might defy planning altogether. In the case of Evel Knievel, any advisor would have faced some stiff challenges. When the legendary stuntman died at 69 of pulmonary problems in 2007, he named his second ex-wife as the sole beneficiary. For the honor, she inherited about $12,500 in assets. He left only memories for his five children and successive generations. Even if they were to profit from his image, a court judgment hangs over the proceeds. That had to do with an incident that occurred in the 1970s. Shelly Saltman had an insider’s perspective of Knievel because he helped promote Knievel’s famous Snake River jump as his press agent. He used that perspective to write a book about the experience in which he detailed Knievel’s abuse of drugs and family members. Knievel was not happy and awaited Saltman in the parking lot of a studio in Southern California to express his feelings. Saltman approached Knievel and was pinned down by two people as Knievel swung an aluminum baseball bat at him. Saltman managed to wrest one arm free and blocked his head. His head was saved but his arm was shattered. A judge awarded Saltman $12.75 million in a subsequent lawsuit. Knievel declared

William M. Davidson AGE: 86 DIED: March 13, 2009; Bloomfield Hills, Mich.; unspecified declining health ESTATE MISTAKE: The IRS slapped the industrialist’s estate, worth up to $5.5 billion, with a $2.8 billion tax bill. His widow was forced to sell his beloved Detroit Pistons along with Palace Sports & Entertainment for what was considered a bargain price of $325 million.

Evel Knievel AGE: 69 DIED: Nov. 30, 2007; Clearwater, Fla.; respiratory failure arising from idiopathic pulmonary fibrosis ESTATE MISTAKE: Evel was daring with his wealth, spending it down to about $12,500 at the time of his death. But even if he had had any more money, he owed millions for a lawsuit over breaking his former press agent’s arm. That $12.5 million judgment has grown to more than $100 million in interest.

bankruptcy and never paid it. But ignoring the judgment didn’t make it go away. It just passed the problem on to the estate. Saltman is going after the estate for more than $100 million, which he said has accumulated in interest. The case inspired The Associated Press to report: “Of all the bones Evel Knievel broke over the years, the costliest may have been the left arm of a PR man by the name of Shelly Saltman.” So, no company would have covered Knievel for life insurance, unless it was a stunt in itself. He seems to have been bent on self-destruction on or off the motorcycle ramp. The only real lesson to come out of this case is a twist on the Google credo: Don’t be Evel. Steven A. Morelli is editor-inchief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers, magazines and insurance periodicals. He was also vice president of communications for an insurance agents’ association. Steve may be reached at smorelli@insurancenewsnet.com.

May 2014 Âť InsuranceNewsNet Magazine

FEATURE

Strategies for the Rich and Not-So-Famous B eyond the curiosity factor of estate planning disasters of the rich and famous, these tales can be effective ways for agents and advisors to open conversations about uncomfortable subjects. Sales coach, speaker and former insurance agent Tom Hegna teaches others to use the examples to generate business. First, there is the sheer recognition factor. “They’ll say, ‘Oh, I remember Evel Knievel or Marilyn Monroe,’” Hegna said. “And then you can say, ‘Let me tell you a story about him or her.’” That’s when the discussion over how an estate lost millions of dollars can lead to a conversation about a will, trust or life insurance. “You can show how the problem could have been solved if they had just taken a few simple steps,” Hegna said. He has seen certain patterns over the years that are instructive for clients. “One is that they’ve had multiple relationships, maybe multiple ex-spouses, and they’re living with somebody they’re not married to,” Hegna said, describing a situation begging for an advisor’s attention. “If you’ve got a client who’s been married three times, that should set up a warning bell. They are much more likely to have an estate planning problem than the person who’s been married to the same woman for 52 years.” Some of those problems could be a 401(k), the beneficiary of which has not been changed since wife No.1; same with a life insurance policy. If they aren’t married, there’s always the issue of the spousal deduction they miss out on, as the actor Philip Seymour Hoffman did with the mother of his children. He left an estimated $35 million, but it is exposed to a substantial tax bite. A popular case to discuss now is James Gandolfini, because he was so recently high-profile with his Tony Soprano role. When he died at 51, he left about $70 million and a big tax bill. 32

InsuranceNewsNet Magazine » May 2014

Hegna recommends a strategy involving an annuity and life insurance that can help with ultra-high-net-worth families. “This is a two-step strategy to get money out of the estate,” Hegna said, using the example of a $50 million estate. “He may take $20 or $25 million and purchase life-only, or if he’s married, a joint-life annuity. When they die, that entire $25 million is out of the estate. Zero estate taxes because that money’s gone. Now, is the family going to be unhappy if $25 million is gone? No. Because that was paying the premiums on a $50 million life insurance policy in irrevocable life insurance trusts outside of the estate. So, he uses the immediate annuity to get money out of the estate and pays the premiums on the life insurance that builds up outside of the estate. And that is a very powerful strategy of using multiple products.” How about the merely really wealthy? Is estate planning less of an issue because of the high federal exemption of $5.25 million for an individual and double that for a couple? Hegna advocates a way for even that to work for an agent or advisor. “I say you can sell up to the exemption,” Hegna said. “You have somebody like Adam Yauch (of The Beastie Boys), who had about $6.4 million. But he could leave $10.5 million for his wife. In that case, you could go and say, ‘I can sell you a $4.1 million policy and when you die, you’re going to maximize your estate tax because you’re allowed to give $10.5 million tax-free to your kids or grandkids, or whoever you want. So, let’s do a $4.1 million policy to maximize your tax-free giving.’” Another important planning point is when the family controls a large business, as was the case with William Davidson, the owner of the Detroit Pistons. Although that estate was worth billions of dollars, even much smaller businesses can throw a family into turmoil after the owner’s death.

“Often, there’s a fire sale when they have to liquidate within a certain period of time, because the IRS doesn’t give you forever,” Hegna said. “With family businesses, farms and ranches, it’s the same thing. It comes back to treating the family equally versus equitably.” Treating the family equitably might not mean equal distribution. “A lot of business owners just say, ‘Well, it’s going to go equally to my three kids,’ when that is probably not what they should do unless three kids are actively involved in the business and get along really well.” Here is another opportunity for life insurance. “You need liquidity from life insurance to either buy out the children who are not in the business or buy out the business partners not in the business. Then, if you really want to get complicated, as business owners get divorced and wives have 50 percent of their deal, you could wind up with a business partner they didn’t even like. All of this could be solved very simply through life insurance.” An important aspect is to not talk about life insurance itself, but talk about what it does, Hegna said. “People say, ‘Oh, life insurance. I don’t need life insurance.’ No, what you need is when you die, a bunch of money can be there to solve the problem of your business. If there were another product that could do it, I’d recommend it. But stocks, gold, commodities and bonds can’t provide the right amount of money at exactly the right time. So, life insurance and annuities provide the perfect benefits at exactly the right time.” – Steven A. Morelli

INSURING TOMORROW TODAY SM

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(4-14)

May 2014 » InsuranceNewsNet Magazine

LIFEWIRES

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A few bright spots in all this were variable universal life, which jumped 24 percent in 2013, and indexed universal life, which was up 13 percent. In addition, whole life (WL) sales remained steady with new annualized premium growing 3 percent in the fourth quarter – the 18th consecutive quarter of positive growth. For the year, WL premium rose 4 percent.

JOHN HANCOCK SHIFTS FOCUS

KNOW

METLIFE

WILL PAY Source: Associated Press

and were pleased with their entire buying process. The study “Shopping for Life Insurance: Spotlighting Direct Response Customers” considered a variety of direct response methods such as Internet/email, through the mail and over the phone. Consumers said the greatest advantages of buying by direct response were convenience (nearly 40 percent), not feeling pressure to buy (20 percent) and saving money (16 percent). The biggest drawbacks to direct response involved uncertainty over whether the consumer selected the appropriate amount or appropriate type of insurance as well as the lack of personal contact.

AGENT FORCE LEADS NEW YORK LIFE TO RECORD EARNINGS

New York Life announced record operating earnings for 2013, and the company

$60M

InsuranceNewsNet Magazine » May 2014

to the state of New York to resolve claims that two of its subsidiaries solicited business without state licenses.

WHAT ARE THE CHANCES?

We all know that the odds of ASE dying from heart disease or HEART DISEASE cancer are somewhat high. But what are the chances that your client might die in some other way? Eric Smith, an independent life insurance agent, was curious about this and released an outline of the probability of dying in six relatively well-known ways. According to Smith, in “The 6 Different Published Causes of Death and the Probability of Happening to an Average American,” here are the odds of your client dying in some likely and not-so-likely ways: [ 1 ] Heart disease – 1 in 6 [2] Cancer – 1 in 7 [3] Car accident – 1 in 85 [4] Assault with gun – 1 in 300 [5] Lightning – 1 in 61,701 [6] Earthquake – 1 in 153,597

CANCER

E AK QU R TH EA

DID YOU

sumers who were direct buyers of life insurance said they experienced no problems

ING

Hancock launched an advertising campaign last year, featuring couples sitting around the kitchen table and at their financial advisor’s office, trying to figure out how they’ll prepare for retirement. In another sign of the increasing importance of wealth management services, Hancock has added 150 employees to the mutual fund division since 2005, enlarging it to more than 650 workers. The company also has made multi-million

When consumers were asked about buying life insurance through direct response, they replied, “No problem!” A LIMRA study revealed six in 10 con-

Mathas, chairman and chief executive officer, said the growth was fueled in part by the strong performance of its insurance agents. Mathas said the company had “never been stronger,” and he used the good news to remind policyholders that the company has paid policyholder dividends for 160 consecutive years. New York Life hired 3,460 full-time agents and has a career agency force of about 12,000 licensed agents. The company said it also will hire 3,600 full-time agents in 2014, more than half of whom will be women or who will “represent the cultural markets.” HTN

lege savings plans and retirement accounts such as 401(k)s have jumped 87 percent since 2010.

CONSUMERS OK WITH PURCHASING THROUGH DIRECT RESPONSE

operating earnings of $1.76 billion, an increase of 11 percent over 2012. Ted

LIG

After 152 years, it’s time for a makeover. Life insurance has been at the core of John Hancock’s business since 1862. But the company announced it is shifting its emphasis toward more profitable financial services, such as wealth management and mutual funds. The change follows sales declines for some of Hancock’s core insurance products. Life insurance sales have dropped 12 percent since 2010, while sales of longterm care insurance plunged 74 percent in the same period, according to the company’s financial statements. In contrast, sales of mutual funds, col-

dollar investments in technology to help manage 401(k) retirement savings plans.

president gave its agents the credit for reaching those heights. New York Life announced record 2013

AS WI SAUL TH T GU N

Total individual life insurance policy count fell 4 percent for the quarter and 3 percent for the year, ending the two years of positive policy count growth in 2011 and 2012.

— NAIFA President John Nichols, in announcing an advisory group to guide the relaunch of the Life Underwriter Training Council Fellow designation.

EN T

LUTCF is part of our roots, so we are making a major statement to the industry that our roots remain strong and we continue to have impact on our members.

RA CC ID

It was a case of three steps forward and one step back for individual life sales in 2013. LIMRA reported that after three consecutive years of positive growth, individual life insurance new annualized premium growth was flat in 2013. Individual new premium fell 8 percent in the fourth quarter, erasing the growth seen in the first half of the year.

QUOTABLE

Individual Life Sales Flat in 2013

May 2014 Âť InsuranceNewsNet Magazine

LIFE

Key Person Insurance Keeps the Family Business in the Family P roper planning helped keep a company in business when its most important employee died. By R.J. Kelly

ne afternoon early in January, I received a stunning text message. Typically, there are one or two members of the family’s younger generation whom the sole shareholder would like to see take over the business at some future time in order to keep the business as an ongoing enterprise when the sole shareholder dies. Pete, the key employee of a company owned by my client Dale (the names have been changed), had been killed in a freak accident. When Dale sent me the text, his plane was just touching down at the airport as he was on his way to be with Pete’s widow. Pete was like a son to Dale, and this was not going to be easy for anyone. I felt a deep sense of loss and sadness. Pete was a terrific guy. Full of spunk and someone who had lived life to its fullest, he truly would be missed by everyone. Not only was Pete’s loss a major blow to his family and friends, but what was going to happen to the business, its customers and its other employees now that he was gone? Would the company be able to continue? Pete had been with the company for more than 20 years. What was more important than Pete’s day-to-day activities with the company was that Pete was responsible for most of the long-term relationships with their loyal customers. When Dale bought the company in 2002, Pete made the transition almost seamless, and the customers, vendors and the other employees followed his lead. Pete was the key man in the business. The seriousness of the situation turned gradually to a profound sense of relief and thankfulness. Barely three months before 36

InsuranceNewsNet Magazine » May 2014

Pete’s death, we had put into effect a key person life insurance contract on his life, with the business as the beneficiary. We couldn’t guarantee Pete’s life, but we could guarantee that his loss of life would not cost the business its life as well. I was relieved and thankful that Dale had been willing to consider the wisdom of insuring Pete and then to take action to obtain the coverage even though the insurance premium was much higher than expected. That decision very likely saved the business. At a minimum, it gave them tax-free working capital to ensure several years of profits and the extra money with which to hire (or lure away!) Pete’s replacement. In general, key person insurance is a policy taken out by a business to compensate for financial losses that would arise from the death or extended incapacity of the member of the business specified on the policy. The policy’s term does not extend beyond the period of the key person’s usefulness to the business. The aim is to compensate the business for losses and to facilitate business continuity. Key person insurance does not indemnify the actual losses incurred but compensates with a fixed monetary sum as specified on the insurance policy. An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work or overall contribution is considered uniquely valuable to the company. The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) that the employer is likely to suffer in the event of the loss of a key person. In rare cases, as with Pete, unexpected deaths do happen. An even greater and more common risk is long-term disability.

Securing both key person life and key person disability insurance on all key employees is the best option for minimizing risk. Not all key employees are easily insured. Pete had led a very active lifestyle. Although he was only in his early 40s, he was a smoker, and he thrived on adventure. He lived hard and fast. Dale did pay more for the premium on Pete’s life insurance than most similar policies would have cost. But even when life insurance proves too costly or worse, unavailable, accidental death insurance may be a good solution. About six months previously, when Dale and I first started talking about adding this key person insurance, we had just completed a wealth legacy assessment of his business. This is a tool we use in our practice to determine how well an owner’s current planning aligns with their ideal objectives, both now and over time. With this assessment, we are able to provide an owner with an unbiased review of selected critical areas of their business. In this case, Dale requested a core assessment, which looks at the four areas most frequently of concern and interest to our clients: estate planning, risk management and reduction, retirement, and investments and financing. It was during our review of the risk management and reduction factors that we discovered both some good news and some not-so-good news. The good news: Dale had taken all the necessary steps to protect his business and family if something happened to him. He was proud of the fact that he was more than covered. Yet, during discussion of each of the factors of risk for business continuity, it seemed Pete’s name kept coming up. His name came up so often that it became clear that Dale was not the only key person in the business. The not-so-good news was that the business was at risk if anything happened to Pete. The business owner should never be

KEY PERSON INSURANCE KEEPS THE FAMILY BUSINESS IN THE FAMILY the only candidate when considering key person insurance. As Dale and I did, you should consider who is needed for the business to survive day to day. Who is irreplaceable? If a person is suddenly gone, will the business stop? Considering key person insurance should always be done as a part of a business owner’s risk management and reduction program. It should be implemented when: » The business is a professional services business where key employees and their intellectual property cannot be replaced quickly or easily. (This is the case in many small businesses.) » The business will not be able to continue in the event of the loss of a particular person. In the event the loss of a key person causes financial strain on the business, key person insurance will offset the cost of hiring or recruiting a replacement. » Business continuity is a concern. Will it be necessary to buy out a partner’s children,

wife and other heirs who don’t know or care about the business, and where will the financing come from? » Future growth or financing is possible. Most lenders will require this coverage to be in place before extending any financing or credit to the company. It is also important to mention the ever-changing tax laws. The Pension Protection Act of 2006, which includes the Corporate Owned Life Insurance Best Practices Act, requires all employers to report all business-owned key person life insurance policies to the Internal Revenue Service annually. If proper record keeping and reporting are not maintained, and the notice and consent requirements, as well as the exceptions and record keeping and reporting requirements, are not met, the tax burden for the business can be significant. Unfortunately, many certified public accountants are unaware of Form 8925, which must be filed annually. The loss of Pete will have a big impact

5 -year

G u a ra n te e d

LIFE

on Dale’s business for a long time to come. But with the good fortune of a key person life insurance contract in place, the company has been able to maintain stability during the initial adjustment period. Although most of the 120 company employees will tell you they have been deeply affected by Pete’s loss, the business is now back to an almost normal rhythm, and the future feels secure. Dale hasn’t been able to fill Pete’s shoes yet with just one person, but all the customers and vendors have stayed with the company, thanks to the key person insurance, which created a business-as-usual confidence even with Pete gone. Key person life and disability insurance can buy time for your client’s business, insulate their profits and ensure their business continuity. R.J. Kelly, ChFC, MSFS, is founder and president of the Wealth Legacy Group, San Diego, Calif., and co-founder and chair of The Center for Wealth & Legacy. R.J. may be contacted at rj.kelly@ innfeedback.com.

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May 2014 » InsuranceNewsNet Magazine

LIFE

E-Cigs Cloud Life Underwriting I s the profile of the traditional tobacco user going up in smoke? Or, more accurately, in vapor? By Josh Jackson

veryone seems to be weighing in on “e-cigarettes” – from the Food and Drug Administration (FDA) to WebMD to major news outlets such as CNN and everyone in between. What are e-cigarettes, and why are they all the buzz in the life insurance industry today? All smoking-related puns aside – what’s the deal with e-cigs? And – most important – what effect might e-cigs have on life insurance underwriting for those who use them? The FDA describes e-cigarettes as products designed to deliver nicotine or other substances to a user in the form of a vapor. Typically, they are composed of a rechargeable, battery-operated heating element; a replaceable cartridge that may contain nicotine or other chemicals; and an atomizer that, when heated, converts the contents of the cartridge into a vapor. This vapor can then be inhaled by the user. These products are often made to look like products such as cigarettes, cigars and pipes. They are also sometimes made to look like everyday items such as pens and USB memory sticks, for people who wish to use the product without others noticing. Basically, an e-cig is classified as a smoking alternative. The majority of e-cigs have been designed to simulate the experience of smoking an actual cigarette. They are available in a variety of options, including with and without nicotine (the major addictive drug in tobacco). E-cigarettes have been gaining in popularity quickly, with sales crossing the $1 billion mark in 2013. Sales are expected to grow to $1.5 billion this year and leap to $5 billion in 2015, according to some estimates. However, the main difference between conventional cigarettes and e-cigs is that e-cigs don’t contain tobacco; they use the process of vaporization for the user to absorb nicotine, as opposed to the combustion, or burning, of a regular cigarette. This is 38

InsuranceNewsNet Magazine » May 2014

one of the central arguments of proponents of e-cigs: the fact that there is no actual burning involved in the process and therefore no smoke – firsthand, secondhand or otherwise. Because the vast majority of the harmful chemicals in cigarettes are contained in the smoke itself, e-cig supporters tout this as a prime reason e-cigs are “healthier” than their regular cigarette counterparts. In fact, a recent FDA study tested e-cigarettes versus tobacco cigarettes and found nine contaminants in the e-cigarette versus 11,000 contained in a tobacco cigarette. E-cig proponents also highlight the fact that e-cigs are safer than regular cigarettes due to the fact that there is nothing burning, which could theoretically reduce accidents such as smoking-related house fires. In fact, the National Fire Protection Association cites smoking as one of the major causes of house fires. Thomas Glynn, the director of sci-

ence and trends at the American Cancer Society, also stated that “there were always risks when one inhaled anything other than fresh, clean air, but … there was a great likelihood that e-cigarettes would prove considerably less harmful than traditional smokes, at least in the short term.” However, there are a huge amount of conflicting information and a variety of questions swirling around e-cigs and their use. Are they actually safer than traditional cigarettes? How about exposure to secondhand vapor produced by their use? Are they safe for use in public places where smoking traditionally is banned, such as restaurants and airplanes? Should they be classified as a cessation device (used to help someone quit smoking, such as nicotine gum or the nicotine patch) or as a smoking alternative such as chewing tobacco? How should e-cig use be regulated? As e-cigarette use is still a fairly new phenome-

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Legal & General America life insurance products are issued and underwritten by Banner Life Insurance Company, Urbana, MD and William Penn Life Insurance Company of New York, Garden City, NY. Banner is licensed to do business in 49 states and District of Columbia. William Penn does business exclusively in New York; Banner does not solicit business there. Banner Life OPTerm policy form # ICC12OPTN and state variations. In New York, William Penn OPTerm policy form # OPTN-NY. Two-year contestability and suicide provisions apply. Policy descriptions provided here are not a statement of contract. Please refer to the policy forms for full disclosure of all benefits and limitations. Additional Insurance Riders, form AIR (1-11), can provide temporary life insurance coverage for 10, 15 or 20 years after which coverage ceases. Term riders issue ages vary from base plan. Premiums are guaranteed to stay level for the initial term period and increase annually thereafter. Premiums quoted include $60 annual policy fee. Term rider coverage ceases at end of term duration. A cost-free MediGuide Medical Second Opinion is included with new policies and administered by MediGuide America. Policy form MMGR(12-09) and state variations. Available only in approved jurisdictions. The service is not guaranteed for the duration of the policy. Premium Competitive rank based on CompuLife comparisons as of 3.17.2014 against top 13 brokerage term carriers. Standard Plus non-tobacco (SPNT), Preferred non-tobacco (PNT), Preferred tobacco (PT) and Preferred Plus non-tobacco (PPNT) underwriting categories. Legal & General Group Plc 8th largest insurance company ranking based on non-banking assets determined by A.M. Best research, 2012 data. Not for public distribution. For broker use only. Rates as of 03.31.2014. LAA1963 14-130 (03.31.2014)

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LIFE

E-CIGS CLOUD LIFE UNDERWRITING

A projection by Bloomberg News shows e-cigarette sales could surpass that of traditional tobacco products by as early as 2023. New York in December expanded the ban on smoking in public places to include electronic cigarettes. In Chicago, Mayor Rahm Emanuel pushed for the same restrictions, and they have been adopted. Brazil has banned e-cigarettes outright. The first commercially marketed device was created by a Chinese pharmacist, Hon Lik, and introduced to the Chinese market as a smoking cessation device in 2004. A 2011 study published in the Journal of Public Health Policy concluded that “a preponderance of the available evidence shows [e-cigarettes] to be much safer than tobacco cigarettes and comparable in toxicity to conventional nicotine replacement products.” It also said there’s “reason to believe that they offer an advantage over traditional nicotine delivery devices.” The other main ingredients in e-cigarettes are what the FDA calls “generally recognized as safe”: glycerin, found in many foods, and propylene glycol, the main ingredient in theatrical fog. The FDA is still considering whether to regulate e-cigarette sales.

non, there are comparatively few studies on the health risks involved, and as with many questions regarding the use of e-cigs, the jury is still out. However, e-cigarette use is a pressing matter for those of us in the life insurance industry, especially for carrier actuaries and underwriters. How do you underwrite potential clients who use these devices? Do they qualify for a smoker rate, even though technically they aren’t smoking? Because of the lack of conclusive studies on the matter, many insurance companies are currently erring on the side of caution and classifying e-cigarette users with tobacco-user status. 40

InsuranceNewsNet Magazine » May 2014

This stems from the fact that the primary method used by insurance companies to detect tobacco use is a urine test. These tests are designed to detect a byproduct of nicotine called cotinine, which is a metabolite of nicotine, or what nicotine breaks down to in the body. Due to the constraints of the current testing process, e-cigarette users are, for now, classified as tobacco users. At this time, there are a few notable carrier exceptions that currently classify e-cigarette users as nonsmokers. This is the same category as those applicants who qualify for “alternate tobacco use” such as cigar use and smoking cessation methods (such as

nicotine gum and the nicotine patch), as long as the applicant is using a non-nicotine e-cigarette. Regardless of how individual insurance companies classify e-cigarette users, the reality of the situation requires agents and advisors who engage in any kind of field underwriting to be aware of these devices and to ask the appropriate questions of their clients. Some relevant questions may be: » Do you currently use e-cigarettes? If so, are you still using regular tobacco products (and if not, when did you last use them)? » If you do currently use e-cigarettes, are they the nicotine or the non-nicotine variety? » If you do currently use e-cigarettes, are you aware that you may be classified as a tobacco user for the purposes of life insurance underwriting? The issue of e-cigarette use promises to be a hot-button issue for many of us in the months (and possibly years) to come, and life insurers are no exception. Actuaries and underwriters are keeping a close eye on the topic as dedicated research starts to look at the effects of e-cigarettes on their users and those around them. It’s refreshing to see that some of us in the industry are keeping an open mind with regard to e-cigarette users. We fully anticipate more positive changes to the way insurers will underwrite e-cigarette use as more research on its effects becomes available. However, for now it’s important to make our clients aware of the fact that if they are the typical e-cigarette user, they will most likely be classified as a tobacco user for the purposes of underwriting. Stay tuned! Josh Jackson, CAS, ALMI, ACS, is manager of competitive analysis with Zenith Marketing Group in Freehold, N.J. He specializes in product positioning insights and competitive industry research. Josh may be contacted at josh.jackson@ innfeedback.com.

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ANNUITYWIRES

QUOTABLE

Annuity Sales Top $220B in 2013 The fixed annuity industry had its best year since 2009, as overall annuity sales topped $220 billion for 2013. Morningstar and Beacon Research reported that increased fixed and variable annuity total sales during the fourth quarter pushed industry-wide sales to $59.3 billion, up 3.1 percent from 2013 third-quarter sales of $57.5 billion and up 17.2 percent from 2012 fourth-quarter sales of $50.6 billion. For the full year, industry-wide sales increased 4.2 percent to $220.9 billion from $212 billion during the previous year.

ANNUITY SALES 2013

$220.9 BILLION ANNUITY SALES 2012

$212B

Fixed annuity sales continued their upward momentum, totaling $78.1 billion for 2013, a 16.6 percent increase from $67 billion in 2012. Variable annuity sales rose during fourth quarter 2013 but dipped a bit overall for the year, slipping to $142.8 billion from $145 billion in 2012. Income annuity sales passed the $3 billion mark for the first time, ending the year at $3.5 billion.

JACKSON IS TOPS IN 2013 ANNUITY SALES

Once again, Jackson National led the list of top companies in total individual annuity sales for 2013, according to LIMRA. Jack-

son’s total of $23.1 billion in total annuity sales was driven by more than $20 billion in variable annuity sales.

Rounding out the 2013 Top 10 list for total individual annuity sales were AIG ($17.5 billion), Lincoln Financial ($16.5 billion), TIAA-CREF ($13.9 billion), MetLife ($12.3 billion), Prudential ($12 billion), Axa ($9.7 billion), New York Life ($9.6 billion), Allianz Life ($9 billion) and Transamerica ($8.5 billion). New York Life was top in fixed annuities for 2013, with sales of $6.4 billion.

INVESTORS CONFUSED ABOUT ANNUITY CHOICES

Despite these record-smashing numbers, investors are as confused as ever about the choices available to them in the annuity market. Annuities are still too complex and difficult for many people to understand, said Dr. Barbara Nusbaum, a money coach and psychologist. Nusbaum, who has worked with financial services firms, advisors, and large insurance and long-term care 42

InsuranceNewsNet Magazine » May 2014

carriers, says that complexity becomes problematic because it confuses investors about a product and turns them off.

“Especially since 2008, there’s a greater trust question,” Nusbaum told InsuranceNewsNet. “When things get complicated, the issue of trust comes in because they don’t understand what they might be getting into.” Consumers are overwhelmed, she said. The more difficult a product is to understand, the less the industry is helping itself. “Money is very emotional and hard to talk about,” she said. “It’s easier for people to talk about sex than money.”

A PBGC BOOSTER SHOT FOR ANNUITIES

A new proposal from the Pension Benefit Guaranty Corp. (PBGC) could provide a “booster shot” for the annuity business. The PBGC proposal aims to reassure workers and retirees who roll their defined contribution plan assets, such as 401(k) assets, into the defined benefit plan of the same employer. The reassurance is that PBGC won’t ding the rollover assets if the defined benefit plan receiving the rollovers should be terminated and come un-

der PBGC trusteeship. The details on the proposal get technical very fast, but the overriding message is as clear as a bell: “What we’re doing will hopefully give people an incentive to choose a savings option that they can’t outlive or

Longevity is something reps don’t talk enough about. — Douglas Dubitsky of Guardian Retirement Solutions, discussing why clients are reluctant to invest in annuities.

outspend,” said Josh Gotbaum, director of the PBGC. “Annuities always offer greater retirement security,” Gotbaum said in a statement.

LIMRA: FIXED ANNUITIES HAVE BRIGHT PROSPECTS

Fixed annuity sales have PREDICTION FOR TOTAL INCOME ANNUITY SALES bright prospects in the next five years, due in large part to anticipated strength in sales of income annuities and fixed index annuities, according to researcher Joseph 2013 2018 E. Montminy. In fact, income annuity sales are on such a tear that “their sales will double by the year 2018,” predicted the assistant vice president at LIMRA Secure Retirement Institute (LIMRA SRI). In 2013, income annuities totaled $10.5 billion, but by 2018, they will likely total over $21 billion, he predicted. As for fixed index annuities (FIAs), Montminy believes they will continue to do well out through 2018. “In 2014 alone, an FIA sales growth of 10 percent to 15 percent would not be unrealistic,” he said.

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Baby Boomer Retirement Confidence Slips Again The Insured Retirement Institute released a new report showing that baby boomers’ confidence in their retirement plans continues to decline, a trend dating back to 2011. bitly.com/qrboomer

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ANNUITY

Consumer Confusion Begs for Advisors’ Direction on Annuities A Cerulli analysis shows that consumers drastically underestimate how much they need to spend to secure a retirement income. By Linda Koco

erulli analysts were struck by the naiveté they found in the answers to a survey of older 401(k) participants regarding retirement income expectations. Their conclusion produced an enlightening perspective on the need for advisor-sold annuities. In 2013, the analysts posed the question to people age 55 and older who were active participants in 401(k) plans. Even though this study focused on retirement funds and variable annuities, it was instructive for fixed annuity sellers. The respondents’ answers are valuable for any annuity seller, but they might also be important in considering the analysts’ conclusions about fee-based versus commission-based sellers. The survey participants were asked to indicate the size of a one-time lump-sum premium they would hand over in order to receive $500 a month for life beginning at age 65. There was no mention of taxes, investment vehicle or feeds, the analysts said. Would the participants hand over $25,000, $50,000, $75,000, $100,000 or $200,000? (Before you read on – what would you guess?)

Survey Said!

The majority – nearly 72 percent – answered $25,000. Coming in second place was $50,000, with nearly 18 percent of the group selecting this answer. Third place went to $75,000, chosen by nearly 6 percent of the group, and fourth place went to $100,000, with nearly 4 percent picking that answer. The remaining answer – $200,000 – was selected by less than 1 percent of the survey participants. The majority answer was pretty far 44

InsuranceNewsNet Magazine » May 2014

off the mark. A $25,000 single premium immediate annuity “would most likely generate less than $150 per month for a 65-year-old female,” the Cerulli researchers said. And that assumed a single-life-only guarantee. Even when looking at the most aggressively priced products in that category, the same 65-year-old woman would most likely need to spend between $90,000 and $100,000 to generate $500 a month for life, without a death benefit guarantee, they said. This finding speaks to the complexity of annuities and the lack of awareness of how annuities function and the trade-offs that are involved, the Cerulli analysts continued. “It also helps verify why annuities remain advisor-sold products and why less than 3 percent of variable annuity sales were derived via the direct-to-consumer channel,” their report said.

Mixed Bag

The findings and conclusions drawn are among several points of interest in Cerulli’s new report, Annuities and Insurance 2013: Balancing Shrinking Supply and Increasing Demand for Guarantees. Those looking for an all-positive forecast for the annuity future will not find it in this report. The researchers present a mixed bag of potential annuity opportunities amid cautionary warnings, some with implications for advisors. On the plus side, the analysts predicted that net new sales of variable annu-

ities will reach $22 billion by 2018 – up 57 percent from 2012 levels. That is based on computations Cerulli performed using data supplied by Morningstar. Net new variable annuity sales did plummet in 2012 to $14 billion, said Donnie Ethier, associate director at Cerulli. But with interest rates now stabilizing, “we envision legacy variable annuity providers and new entrants, including nontraditional players, will join the marketplace.” Still, the variable annuity industry has an “urgent need” to tap new sources of assets in order to increase its net sales, Cerulli said. This will not only help boost the industry’s asset base; it will also help overcome the “negative perception” that Cerulli said the industry has because of its reliance on Section 1035 exchanges for much of its total growth. That perception has some basis in fact. Section 1035 policy exchanges represented about $74 billion of sales in 2012, according to Cerulli, which noted that this was more than half of variable annuity sales that year. Noting that the industry is experiencing outflows of more than $131 billion, the researcher concluded that this “substantiates the vital need to expand net sales.”

Fee-based Advisors

To accomplish this expansion, the industry will need to look into enticing more feebased advisors and younger generations or creating new concepts, Cerulli wrote. About fee-based advisors, the analysts

CONSUMER CONFUSION BEGS FOR ADVISORS’ DIRECTION ON ANNUITIES noted that fee use is on the rise. In fact, advisors from all distribution channels, not just registered investment advisors, told Cerulli that more than half (51 percent) of their revenue is now generated by fees. In addition, these advisors said they expect to increase their overall feebased percentage to 62 percent by 2015. That will further threaten commission-based products, mainly annuities, the researchers predicted. As for advisors who are considering moving toward fee-based sales, Cerulli pointed out that this transition “does not necessarily require an advisor to leave a broker/dealer to join a registered investment advisor.”

Living Benefits

The report devoted quite a bit of attention to assessing prospects for variable annuities with living benefit guarantees, the highly popular annuity feature from which a number of carriers have been retreating during the post-recession years. The trend to retreat began in 2008, with

WHILE CERULLI ANALYSTS SAY the Morningstar survey shows that clients have to have advisors for a clear view on retirement needs, a Moody’s analysis of the data concludes CHEC that captive rather than CARR K OUT CAPTIV IERS HOPE EA independent advisors can WILL R DVISORS EDU keep the VA market from VA RIS CE K overheating. page 54

various carriers embedding their annuity products with the flexibility to make “rapid product amendments, with little notice” so they can affect living benefit guarantees, Cerulli said. These flexibilities include features that allow the carrier to make changes to fees, permitted subaccounts, income and guaranteed growth rates, step-up frequency, and additional premium payments (i.e., sub-pays). The researcher predicted that this trend will continue. That’s because “whether

ANNUITY

right or wrong from a consumer point of view, insurers are under much pressure to allocate their rationed capital to profitable and sustainable businesses, which many have already determined does not include annuities,” Cerulli said. A joint study conducted by Cerulli and the Insured Retirement Institute in 2013 found that nearly half of all carriers and asset managers believe the supply of living benefits will decrease over the next three years, while less than 25 percent believe the supply will increase. Though that may seem discouraging, Cerulli pointed out that new carriers have also re-entered the living benefit space (New York Life), entered it for the first time (Forethought) and even enriched their guarantees (Allianz and Nationwide). So the living benefit traffic is not moving on a one-way street. Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda may be reached at linda.koco@ innfeedback.com.

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May 2014 » InsuranceNewsNet Magazine

HEALTHWIRES

ACA driving demand for temporary workers. bitly.com/qrtemphelp

ACA Sign-ups Hit 7 Million. Now What? A last-minute sign-up push brought the number of health care enrollees past the 7 million mark when the first enrollment period ended March 31. Only one month earlier, enrollment stood at less than 5 million and many wondered whether enough people would sign up in the final weeks to reach the Obama administration’s original enrollment goal of 7 million. So now that the initial enrollment period has ended, what’s next? Here are some things that experts will be analyzing: » Who signed up, and who paid the first month’s premium? » Will the states and the feds revamp the exchanges? » What will the enrollment advocates do to prepare for the next open enrollment period? » What will next year’s premium rates be? » Are enrollees happy with their coverage, and are they using it? The next open enrollment period begins Nov. 15.

IOWA, MINNESOTA STRUGGLE LEAST WITH HEALTH CARE COSTS

enough money to pay for medical care or medications.

Iowa and Minnesota tied for the lowest percentage of residents who were unable to afford needed health care or medicine, at 12.2 percent, followed by Hawaii,

The number of people who said they could not afford needed health care has dropped since 2008, a Gallup poll found. In 2013, 18.6 percent of Americans said they had trouble affording health care or medicine, compared to the national average of 19.7 percent in 2008. In 2008, 24 states reported 20 percent or more of their residents said they could not afford needed health care, but in 2013, this dropped to 16 states. Last year, the states whose residents struggled the most to afford medical care and medications were Alabama, West Virginia, Mississippi, Kentucky and North Carolina. More than 24 percent of people living in Alabama said that in the past 12 months they did not have DID YOU

1in68

AN KNOW ESTIMATED

North Dakota and Massachusetts.

HEALTH SPENDING HITS 10-YEAR HIGH

Health care spending rose at the fastest pace in 10 years in the fourth quarter of 2013, a development that could foreshadow higher costs for consumers this year. Expenses for health care rose at a 5.6 percent annual rate in the fourth quarter,

the Bureau of Economic Analysis reported. The jump triggered a sharp upward revision in the government’s estimate of consumer spending overall and accounted for nearly a quarter of the economy’s 2.6 percent annualized growth in the last three months of 2013. The 2010 Affordable Care Act gave incentives to hospitals to become more CHILDREN in the U.S. has been identified with autism spectrum disorder. This is 30 percent higher than estimates made in 2012.

Source: Centers for Disease Control

InsuranceNewsNet Magazine » May 2014

QUOTABLE People are making arbitrary decisions and not paying attention to their penalty math. — Colin Smoak, a Mount Pleasant, S.C., insurance advisor, on the penalties for failing to obtain health insurance coverage.

efficient and limit patient readmissions. Insurance companies increasingly have shifted costs to patients through high-deductible plans and other measures, prompting Americans to limit visits to doctors and hospitals. But those trends may be leveling off, and long-term upward pressures on health care costs, such as the growth of expensive high-tech treatments, are re-emerging.

PHARMACIES FEELING THE PINCH

Skyrocketing prices for generic drugs are making it difficult for pharmacists to fill some prescriptions because insurance companies have been slow to adjust their reimbursements to reflect the price spikes. Large chain pharmacies have felt the pinch, but it’s been especially hard on independent pharmacists. Some generics have seen price increases as high as 6,000 percent.

Kevin Schweers, senior vice president of public affairs at the National Community Pharmacists Association, said he wished there were a good, obvious reason for the generic drug price spikes. He said shuttered manufacturing facilities, possibly for safety reasons, is one factor. That diminishes supply, thus increasing demand and costs. U.S. consumers use drugs made in many places, including in India and China. Generic drugs are a growing segment of the prescription market, constituting about 80 percent of sales in the U.S. today. At the same time, more and more brandname drugs are losing their patent protection (20 years after being invented), thus allowing generic drug manufacturers to move in competitively and grab sizeable market share.

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HEALTH

Big ACA Changes Coming to Medicare Advantage A dvisors who seek to place their customers in the right plan will be even more valuable in the midst of changes in the Medicare Advantage program. By Craig Ritter and Andrea Koretz

ot only is Big Brother watching, but he is turning things upside down in the health care market. Agents who can successfully manage change and assess its effects will do well, especially if they can educate their clients and prospects without alarming them. Changes in government funding and proposals to alter parts of Medicare are keeping everyone on the edge of their seats. With the expiration of the Centers for Medicare & Medicaid Services (CMS) Demonstration Project on Star Rating Funding, Medicare Advantage (MA) carriers will have to juggle a myriad of financial factors to stay competitive and hold on to market share. Currently, CMS awards each MA plan a financial bonus for plans rated as a 3-star plan or higher. As of Dec. 31, CMS will no longer provide the 3 percent and 3.5 percent bonus on their reimbursement rates for plans rated as 3 stars or 3.5 stars, respectively. This significant change means less money for carriers to invest in these plans. Plans rated as 4 stars or higher will continue to receive a 5 percent bonus. In addition, there are some areas throughout the United States that will suffer even greater losses, as these “double bonus” counties pack a one-two punch, which means, if rated as a 3- or 3.5-star plan, they will see a 6 or 7 percent decrease in funding. Conversely, plans located in double bonus counties and rated as 4-star or higher will continue to receive their double bonus reimbursement or a 10 percent bonus. In 2014, there were 342 counties that were considered double bonus counties. Some of the states with higher numbers of selected counties include Pennsylvania with 24 and Ohio with 29. Since the criteria are based 48

InsuranceNewsNet Magazine » May 2014

on data that is used at the county level, some large states do not have the numbers of double bonus counties you might expect. For example, New York has 14, California has 10 and Texas has only three. What does it all mean? Although the effect on premium pricing would vary based on the county, the range of this disparity among plans would be as much as $25-$30 per month for a lower-rated plan versus a $50-$60 a month premium shift in double bonus counties. Some plans will not survive, while stellar MA programs will continue to provide quality coverage to consumers. MA carriers continue to work toward increasing the much-anticipated quality ratings for the future. However, any improvements seen will not change the reimbursements the plans receive this year, as the bonuses are based on the current star ratings. Indeed, some MA insurance companies with low-rated plans already have made massive changes that impact agents’ books of business by deeming select MA plans as noncomissionable. Insurance professionals who seek to place their customers in the right plan will be even more valuable in the midst of these disruptions. Working side by side with clients and

MEDICARE ADVANTAGE

taking the time to explain the impact of the CMS call letter will enable Medicare beneficiaries to better understand their options during this annual enrollment period and possibly predict if their plan will be around next year. Providing this level of expertise is really what being an agent is all about. Big Brother’s reach extends into the Medicare Supplement (Medigap) environment as well, even though, historically, Medigap policies were regulated by individual state departments of insurance and not CMS. However, with the implementation of the Affordable Care Act (ACA), history is being rewritten. At the time of this writing, there are 12 bills in Congress that seek to change some part of original Medicare and the Medicare Supplement plans. The Congressional Budget Office (CBO) report from Nov. 13 provides an analysis of the spending habits of those on Medigap plans, as follows: » According to a recent study done for the Medicare Payment Advisory Commission, Medicare spends 33 percent more per person on enrollees who have Medigap coverage, and 17 percent more per person on enrollees who have supplemental coverage

WHAT ARE DOUBLE BONUS COUNTIES? Payments are available to Medicare Advantage plans who have received 4 or more stars, as well as plans not rated by the Centers for Medicare & Medicaid Services (either because the plans are too new or they have too few enrollees). The bonus payments are calculated as a percentage share of the Medicare Advantage benchmarks. These benchmarks vary by county, and the bonus payments will also vary by county. The bonus payments are tied to the local benchmarks to recognize that the fee-for-service costs vary, and so the bonus payments used to cover additional fee-for-service offerings vary to ensure plans are able to reinvest DOUBL these payments into new benefits adequately.

Bonuses are doubled for plans offered in counties that meet the following criteria:

Lower than average Medicare fee-forservice costs

Medicare Advantage penetration rate of 25% or more

Designated urban floor benchmark in 2004

Source: Kaiser Family Foundation and Centers for Medicare & Medicaid Services

XXXXXXXXXXXXXXXXXXXXXX

HEALTH

from a former employer, than it does on enrollees without supplemental coverage. » Those estimates are largely consistent with the results of older studies of the relationship between supplemental coverage and Medicare spending, and they take into account various ways in which Medigap policyholders and other Medicare enrollees may differ. » The study also concluded that those differences in spending were mainly attributable to higher use of discretionary or preventive services by people with supplemental coverage, particularly those with first-dollar coverage. Another recent study concluded that spending by Medicare enrollees with supplemental coverage was growing at a faster rate than spending by enrollees without supplemental coverage. Neither of those recent studies investigated the effects of supplemental coverage on enrollees’ health. With the data analysis provided by the CBO, the ACA-mandated changes to Medigap plans are based largely on the addition of a cost-sharing component to aid in controlling health care spending. According to the CBO, approximately $58 billion would be saved by banning the first-dollar coverage Medicare Supplements provide to beneficiaries. Another $52 billion would be conserved if the Medicare Part A and Part B deductibles were unified. Additional proposals include taxing or assessing a penalty to Medicare beneficiaries’ Part B premium enrolled in some Medigap policies and unifying the Medicare Parts A and B deductibles. A unified deductible, proposed as a $550 annual deductible, would affect all Medicare beneficiaries, including those enrolled in Medicare Supplement plans. This financial exposure would cause each person on Medicare to provide more out of pocket but would save the government millions. This would lead to other complexities, including how to manage the guaranteed renewable Medigap policy for existing customers. In 2003, when the Medicare Modernization Act caused the elimination of Medicare Supplement plans H, I and J, many existing customers were grandfathered into their plans so that the insurance companies were not forced to break their contract with their insureds. If these

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HEALTH

BIG ACA CHANGES COMING TO MEDICARE ADVANTAGE

CMS 2014 DOUBLE BONUS COUNTIES BY STATE

COLORADO Arapahoe Archuleta Boulder Broomfield Denver

IDAHO Ada Adams Boise Canyon Gem Jerome Owyhee

KENTUCKY Barren Boone Campbell Hart Mclean Rockcastle Russell

ILLINOIS Carroll Edgar Jackson Mason Schuyler

MAINE Piscataquis Waldo

INDIANA Adams Allen DeKalb

MICHIGAN Allegan Barry Cass Clinton Ingham Ionia

MISSOURI Cass Christian Dallas Franklin Greene Jackson Johnson Linn Livingston Polk St. Charles St. Louis Warren Webster

NORTH DAKOTA Benson Cavalier Eddy Kidder McIntosh Mclean Oliver Pembina Slope

MONTANA Blaine Carbon Fallon Golden Valley Judith Basin

InsuranceNewsNet Magazine » May 2014

NEBRASKA Arthur Boone Box Butte Brown Cheyenne Dawson

NEW HAMPSHIRE Carroll NEW MEXICO Bernalillo Sandoval Torrance Valencia NEVADA Lyon Washoe NEW YORK Albany Erie Genesee Herkimer Livingston Monroe Montgomery Niagara Ontario Orleans Rensselaer Saratoga Schenectady Wayne

OKLAHOMA Tulsa OREGON Clackamas Columbia Jefferson Lake Lane

SOUTH CAROLINA Bamberg Calhoun Fairfield McCormick PENNSYLVANIA Newberry Allegheny Spartanburg Armstrong Beaver SOUTH Berks DAKOTA Bucks Brown Butler Brule Chester Charles Mix Columbia Clay Cumberland Corson Dauphin Edmunds Delaware Grant Erie Haakon Lackawanna Hanson Lancaster Hutchinson Lebanon Jerauld Lehigh Kingsbury Mercer Lincoln Montgomery Minnehaha Montour Shannon Perry Walworth Potter Westmoreland TENNESSEE Anderson Wyoming Blount York Carter RHODE Davidson ISLAND Hawkins Bristol Knox Kent Loudon Providence Rutherford Washington Sevier Sullivan Unicoi Marion Multnomah Polk Washington Yamhill

Additionally, the effects on new, smaller companies entering the Medicare arena could be devastating. Generally, larger companies and companies with mature blocks of business run at higher MLRs (generally high 70s or low 80s) and can afford this because of their economies of scale. New companies with no existing book of business to draw from would not be able to absorb the startup costs of entering the Medicare Supplement business if they had to operate at an 80 percent or 85 percent loss ratio from day one. What can agents do to position themselves for success in 2014 and beyond? Insurance professionals can embrace the changes in the marketplace and educate themselves by selecting key partners to grow with. Brokerages and field marketing organizations that provide cutting-edge technology,

MINIMUM MEDICAL LOSS RATIOS (MLRs) SET BY ACA:

80% 85% 85%

for Individual for Large Group for Medicare Policies Policies Advantage Plans

Union Washington Williamson date

OHIO Brown Butler Carroll Clark Clermont Columbiana Cuyahoga Darke Delaware Fairfield Franklin Hamilton Lake Licking Lucas Madison Mahoning Medina Miami Montgomery Pickaway Portage Preble Stark Summit Trumbull Union Warren Wood

TEXAS Atascosa El Paso Washington initial

Alamance Camden Chatham Davidson Davie Forsyth Guilford Haywood Hoke Hyde Person Randolph Rockingham Stokes Watauga

MINNESOTA Brown Jackson Kittson Mahnomen Otter Tail Polk Ramsey Waseca

proposals are made into law, it would cause the insurance companies that provide the Medigap policies to break their contracts with their insureds. America may have to hold on a while longer to find out what Big Brother will do. However, consumers and agents need not sit on the sidelines of inactivity. In our democratic society, it is never too late to pay a visit or write a letter to your congressman to voice your opinion on the impact of the proposals and to offer possible suggestions. Another trend that can be seen is the focus on setting higher Medical Loss Ratios (MLRs) on individual policies, large group plans and Medicare Advantage programs. According to CMS, the ACA requires health insurance issuers to submit data on the proportion of premium revenues spent on clinical services and quality improvement, also known as the Medical Loss Ratio (MLR). The ACA also requires issuers to issue rebates to enrollees if this percentage does not meet minimum standards. Increasing the MLR for Medicare Supplement would dramatically impact agents’ commissions and smaller companies. 50

NORTH CAROLINA

Furnas Garden Garfield Morrill Phelps Stanton

UTAH Davis Garfield Morgan Salt Lake San Juan Sevier Summit Utah Weber

VIRGINIA Bristol Grayson Prince Edward Scott Washington VERMONT Addison Caledonia Windsor

WASHINGTON Adams Clark Cowlitz King Kittitas Snohomish Thurston

WISCONSIN

Brown Calumet Kewaunee Milwaukee Oconto Outagamie Ozaukee Racine Sawyer Washington Waukesha Winnebago

Producer: Carolyn Petty

HAWAII Honolulu

KANSAS Clay Johnson Morris Norton Osborne

Valley Wheatland

Premedia Artist: Katy Clove

CALIFORNIA El Dorado Fresno Madera Placer Sacramento San Francisco San Joaquin Sonoma Stanislaus Yolo

GEORGIA Meriwether Wilkes

IOWA Kossuth Lyon Mitchell Page Palo Alto Taylor

Kalamazoo Kent Lapeer Lenawee Muskegon Newaygo Ottawa Van Buren

Project Leader: Ben Safchuk

ARIZONA Apache Cochise Graham Pima

FLORIDA Flagler Gadsden Jefferson Leon Osceola Volusia Wakulla

Delaware Huntington Rush Switzerland Wells Whitley

Art Director: Kathryn Clendenin

ARKANSAS Benton Crawford

Douglas Gilpin Jefferson Logan Park

WEST VIRGINIA

Cabell Calhoun Clay Kanawha Lincoln Pleasants Putnam Roane Tyler Winnebago WYOMING

Goshen Natrona

approvals

ALABAMA Autauga Baldwin Bibb Blount Elmore Jefferson Lowndes Mobile Montgomery St. Clair Walker

leadership with a keen eye on supporting individual agents’ ability to write more business, and accessible support staff can help agents understand the complexities of the senior market while growing their business. Agents can focus on their core strengths of building relationships with their clients, continuing to work as a trusted advisor and uncovering opportunities through needs analysis to cross sell to customers and build a strong referral base. Andrea Koretz is senior marketer for Ritter Insurance Marketing, Harrisburg, Pa., and an active health insurance agent. She formerly served in various Medicare sales and communications roles. Andrea may be reached at andrea.koretz@innfeedback.com. Craig Ritter, CPCU, AFSB, is president and owner of Ritter Insurance Marketing, Harrisburg, Pa. Craig began blogging about Medicare in 2008, and his blog is read by agents and insurance industry insiders with almost 1 million article views. Craig may be reached at craig.ritter@innfeedback.com.

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Keep in mind that as an acceleration of the death benefit, the payment of long-term care rider benefits will reduce both the death benefit and cash values of the policy. Additionally, loans and withdrawals will also reduce both the cash values and the death benefit. Care should be taken to make sure that your clients’ life insurance needs continue to be met even if the rider pays out in full, or after money is taken from their policies. There is no guarantee that the rider will cover the entire cost for all of the insured’s long-term care, as this may vary with the needs of each insured. Life insurance is issued by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company, Columbus, Ohio. Nationwide, Nationwide Financial, the Nationwide framemark and YourLife CareMatters are service marks of Nationwide Mutual Insurance Company. Let’s Face It Together is a service mark of Nationwide Life Insurance Company. © 2013 Nationwide Life Insurance Company. All rights reserved. May 2014 » InsuranceNewsNet Magazine 51 NFV-0770AO (10/13)

FINANCIALWIRES

Some IRA Savers Could Face the Tax Man

FINRA Foundation study finds millennials struggle financially. bitly.com/qrstruggle

NEW TAX RULE

ONLY 1 IRA ROLLOVER PER YEAR

Some taxpayers who rolled over their individual retirement accounts (IRAs) could face a nasty surprise from the tax man. But experts agree most (OR ELSE!) Americans won’t be affected. A recent U.S. Tax Court decision states a taxpayer can perform only one taxfree “rollover” of an individual retirement account each year – regardless of how many IRAs they may have. This differs greatly from the widespread perception that

a taxpayer can roll over as many IRAs as they want, and that the one-year cooling-off period applied to each individual fund. Experts say the decision wasn’t so much about IRA transfers but the practice of tapping into IRA money under the guise of a rollover and then having 60 days to play with it tax-free. In an IRA rollover, investors get a check for their funds deposited directly to them. They then have 60 days to deposit that money into a new retirement account to avoid any penalties. Any cash not rolled over in time, however, is marked as taxable income by the Internal Revenue Service and can be subject to an additional 10 percent tax if you’re under age 59½. By contrast, a direct transfer of IRA funds from one provider to another doesn’t allow you to touch a penny of the funds. It is done automatically, and can be done as frequently as you want without penalty. The fact that some people were withdrawing money from IRAs under the guise of a rollover and then having a “tax-free loan” for 60 days wasn’t sitting well with the IRS.

THE IDEAL ADVISOR? SOMEONE WHO’S A GOOD FIT

What does the ideal financial advisor have in common with a favorite pair of shoes? Both are a good fit, according to the results of a recent survey. Genworth conducted a person-in-the-street interview in Manhattan, asking people what they look for in a financial advisor. Although the answers varied, they stuck to a consistent theme around the idea of finding the right fit.

Interviewees also mentioned honesty and an advisor “who has your best interest at heart as opposed to theirs.” Trust and an understanding of the client’s needs also were high up on the wish list of qualities in an ideal advisor. One interviewee said DID YOU

KNOW

59%

she wanted an advisor “who understands realistically what my relationship is to money.”

3 IN 10 HAVEN’T VISITED BANK IN SIX MONTHS

Stopping by the local bank to conduct business at the counter or drive-up window hasn’t been on many Americans’ to-do lists, according to a survey. Three in 10 Americans haven’t visited a bank or credit union branch in at least six months, according to a Bankrate.com

report. One in five retirees has not visited a branch in over a year. ATMs were not counted as a bank visit in the report. On the flip side of that, the survey showed that half of Americans have visited a branch to conduct personal financial business within the past 30 days. Among those under age 30, 42 percent

OF MILLENNIALS,

THE AVERAGE RETURN ON AN INITIAL PUBLIC OFFERING was 20 percent compared with 75 percent this year. The average increase in the first day (or “pop”) is 13 percent. of baby boomers, said they have a monthly savings plan. Source: Renaissance Capital

Source: Ameriprise Financial

InsuranceNewsNet Magazine » May 2014

QUOTABLE It is not lack of access to information that is holding many Americans back from improving their understanding of financial matters. Rather, it is a feeling of being overwhelmed. — Dr. Barbara Nusbaum, a New York-based psychologist and money coach

have been to a branch within the last 30 days compared with 52 percent of those over age 50. Among retirees, 53 percent visited a bank in the past 30 days.

LAWMAKERS TAKE AIM AT SENIOR POVERTY They call them the “golden years,” but many aren’t finding much gold in their senior years. Based on the government’s Official Poverty Measure, nearly 15 per-

cent of noninstitutionalized seniors – about 6.1 million – were living at or below the poverty level,

Sen. Ben

according to U.S. Census Bureau statis- Nelson tics. Almost 50 percent of noninstitu- Sen. Susan tionalized seniors were living near pov- M. Collins erty level. With the baby boom generation entering the ranks of the retired, the fear is that even more seniors will come up short in having enough funds to take care of their basic needs. Lawmakers say the time has come to find new ways to ensure that Americans are financially secure as social safety nets have come up short. Sen. Susan M. Collins, R-Maine, and Sen. Ben Nelson, R-Fla., chairman of the Senate Special Committee on Aging, are sponsors of the Retirement Security Act of 2014. The bill would encourage small employers to offer retirement plans, urge employees to save more for retirement, and offer tax benefits to low- and middle-income taxpayers. “When we think of the poor, the elderly are not usually the first group to come to mind,” Nelson said. “In the popular image, retirees are free of worries about either their health or finances.”

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FINANCIAL

Carriers Hope Captive Advisors Will Reduce VA Risk S ales forces trained to sell in a particular way offer annuity carriers tighter control over their products, according to an analyst. By Cyril Tuohy

s the nation’s most powerful annuities carriers continue to reduce their exposures to the variable annuity (VA) market, how those annuities are sold is almost as important as tweaking product features: like ratchets, rollups and withdrawal payout rates. One of the most important lessons learned by companies selling VAs is that it’s better to sell them based on the types of funds that insurance companies make available within the annuity than it is to pitch the guaranteed benefits. Joel Levine, an analyst with Moody’s Investors Service, said companies also do well when they offer simple, straightforward VA guarantees that neither cost the carrier very much nor entail too much exposure to downside risk. “For many of the companies, this is where the captive field forces prove to be of great value,” Levine told InsuranceNewsNet. Sales forces trained to sell in a particular way offer annuity carriers tighter control over their products and, as a result, offer a “tamer product” with more “persistency,” he said. “If you rely on external distribution, you may have to offer richer benefits to get the attention of a distributor, or pay higher commissions, which will cost more ultimately,” he added. Carriers with “tied distributors” reduce the underwriters’ exposures to a greater extent and control product sales and performance more precisely, according to Levine. Selling VAs through a network of captive distributors means financial advisors don’t have to “spreadsheet” the gains and 54

InsuranceNewsNet Magazine » May 2014

the costs of one VA compared with another, which would happen with independent advisors, he also said. Northwestern Mutual relies on a captive sales force. Ameriprise Financial, which used to sell VAs through outside financial planner channels, no longer uses outside channels, Levine said. In addition to tweaking the VA guarantees, insurance carriers have resorted to buying out contract holders or buying back the benefit. Some carriers even have asked contract holders to redirect their investments, according to a Morningstar analysis from last fall. As strong an argument as there is to be made in favor of a captive distribution channel, there’s a case to be made for independent broker/dealer (IBD) distribution channels because it forces carriers to compete for business, said John McCarthy, a product manager for insurance solutions with Morningstar in Chicago. “It’s the competition argument. Competition is good for a lot of people in a lot of ways,” McCarthy said. Selling VAs through the IBD market may require a carrier to maintain a dozen relationships with IBDs, but the IBD platform is available to a dozen other carriers, so carriers must “sharpen their pencils” to stay competitive, he said. Carriers want to sell VAs through as many channels as they can: banks, captive agents, independent and regional broker/dealers, wire houses and direct response providers. Many carriers sell huge volume through captive agents and the IBDs. In the fourth quarter (2013), captive agencies sold 34 percent of all VA sales and IBDs captured 33.4 percent of all VA sales, according to the latest quarterly statistics issued by Morningstar. MetLife, for example, sold $890.6 million worth of VAs in the fourth quarter through its captive channel and $421.3 million through IBDs.

“As a carrier, I can decide how much I want to sell through whatever channel,” McCarthy said. “So MetLife has a massive internal broker/dealer, but they also have a huge independent broker/dealer system they sell through as well.” The role of the distribution chain and financial advisors in reducing the risk of VAs is important as recent financial stress tests have found that VA portfolios held by Prudential, Jackson National Life and MetLife remain exposed to “substantial variable annuities-linked risks,” according to Moody’s. Those three companies are among the largest VA underwriters in the country, and they mainly use non-captive distribution for the sale of variable annuities, Moody’s said. The Moody’s report said that for inforce business, Prudential and Jackson mostly have exposure to guaranteed minimum withdrawal benefits (GMWBs), while MetLife has exposure to guaranteed minimum income benefits (GMIBs). GMWBs allow contract holders to periodically withdraw between 5 percent and 7 percent of a prescribed benefits base. GMIBs allow contract holders to annuitize an accumulated account

CARRIERS HOPE CAPTIVE ADVISORS WILL REDUCE VA RISK value at a guaranteed rate after a waiting period. Of the three companies, Jackson, which has increased prices and reduced its living benefits, has the most “aggressive product,” Moody’s said. Jackson contract holders are authorized to allocate 100 percent of their VA assets to stocks, a volatile asset class. In addition, the lack of restrictions on policyholder investment allocations makes the Jackson VA portfolio more “challenging to hedge,” according to Moody’s. Jackson is selling “the least de-risked” product, and Moody’s maintains a financial strength rating of A1 on Jackson. Jackson has a total variable annuity account value of $106 billion. Prudential, which also has a financial strength rating of A-1, reported about $119 billion of VA account values. MetLife, with a higher financial strength rating of Aa3, had total contract account values of $138.6 billion, Moody’s said.

$48

BILLION estimated VA sales by captive agencies in 2013 As VA underwriters have spent the past two or three years reducing guarantees and raising rates, the companies depends on hedging to meet the obligations of their in-force blocks of VAs. New VA sales reached $141.2 billion in 2013, down slightly from $143.3 billion in 2012, Morningstar reported. Even with slowing sales and lower risk exposures compared with older versions of VAs sold before the financial crisis, “we do not expect the issue of exposure to variable annuities to dissipate as a credit

FINANCIAL

concern any time soon,” Moody’s analysts Scott Robinson and Min Son wrote. If VA portfolios have raised a few eyebrows among credit analysts, are they still a good deal for retirees and pre-retirees when bank savings accounts are paying next to nothing in interest? “If you buy an annuity with lifetime benefits but die the next year, it’s not a good deal because you weren’t able to use the product features,” Levine said. “But with regard to a VA with guarantees, the real risk is a huge dive by the market and outliving payments based upon your account value.” Contracts bought in 2008 with generous guarantees would typically still be in place, he said. Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.

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May 2014 » InsuranceNewsNet Magazine

BUSINESS

Was It Something I Said? C hoosing the right words can reassure your client, position you as an expert and close the sale. By Bryce Sanders

here’s a lot of truth to the saying “It’s not what you say but how you say it.” Choosing the right words can help close the sale. The words you use can set you apart from your competitors. Let’s look at some words and expressions that you may want to swap for more effective ones.

Powerful Expressions

1. Tell me more – The prospect is opening up. Perhaps a client has revealed a deep secret for the first time. Or maybe you have a really angry client on your hands. Saying “Tell me more” doesn’t interrupt the flow of conversation. It encourages your client to forge on. 56

InsuranceNewsNet Magazine » May 2014

2. Things haven’t been good lately – You’ve seen it before. You have a longstanding client relationship. One day, someone throws a switch and everything goes wrong afterward. Messages get lost. Investments founder. The client doesn’t get angry; they get silent. There’s the risk of losing the account. Take the client out to dinner and say, “Things haven’t been good lately.” Let the client get it off their chest. 3. What can we do to move forward? – Use this question after the previous scenario. You don’t argue; you listen. Draw your clients out. When their rage subsides, you calmly make your points. Look them in the eyes and ask, “What can we do to move forward?” After you ask that question, it’s difficult for a client to leave. 4. What keeps you awake at night? – Let’s assume it’s not snoring! You want to learn about the most pressing issues in

your clients’ lives. This question draws them out because they can relate to it. 5. Pay as you go – It’s difficult to talk about fees with prospects. Products often have front-end fees or declining back-end loads. Prospects see less money going to work or a big charge if they need to cash out early. Fee-based platforms and separately managed accounts typically charge you only for the time you use the service. It’s “pay-as-you-go pricing.” 6. We’ve held the line on pricing – How do you explain fee increases in a competitive environment where people vote with their feet? Unbundle. Your client likely uses several services. You might explain: “We’ve held the line on pricing for your auto and homeowners insurance, but unfortunately health insurance is going up this year.” Your clients now believe you are working on their behalf.

WAS IT SOMETHING I SAID? 7. Let me see what I can do – You want to help but aren’t sure how. You’ve committed to take action without specifying the outcome. You are working on the client’s behalf. Ideally, you must accomplish something. 8. Let me make this easy for you – You can’t say “Here’s what I want you to do next.” It’s too pushy. Saying “Let me make this easy for you” accomplishes almost the same thing. Everyone wants things to be easy. It positions your recommendation that follows. 9. Place your signature – It’s a gentler way of saying “Sign here, please,” yet it achieves the same outcome. 10. I would like to keep in touch. How may I do that? – You’ve met people socially. You share common interests. Asking “May I have your card?” or offering to exchange business cards might set off alarm bells with them. Put the ball in their court. After they provide contact information (probably a card), offer your own card in return.

of business.” Doctors and lawyers have practices. 6. Not in the picture any more – An industry expression from long ago, it is much more tactful than saying “dead.” This expression is useful for making the case that life goes on after the client has died. 7. Why? or What have you heard? – Your client makes a far-out observation or voices a familiar concern such as: “Everyone says the stock market is going down.” You might have an answer ready, but draw your client out to confirm you are answering the right question. 8. I realize your time is valuable – Too many people call and jump into a sales presentation. Acknowledge that your prospects are busy people and have other things to do. Give them a chance to speak.

Powerful Words

9. Is this a good time to talk? – Often clients or prospects are doing something else when the phone rings. Show respect for their time. As a result, they may volunteer another time to talk. If they do, they will expect your call.

1. Briefings – A regional manager once suggested using this word in place of “seminar.” Clients place a higher value on briefings. For example, the President holds briefings in the Oval Office.

10. Hang my shingle – Most clients respect professional certifications. They have them, and they often assume titles are honorific in the financial services industry. Saying “I can hang my shingle in any part of the country,” lets your client know that you have a genuine designation recognized outside the firm and across state lines. (Subject to state approval.)

2. Successful – Use this word instead of “wealthy” or “high-net-worth.” Most people don’t identify with those terms. Almost everyone believes they are successful at something.

11. Make you aware – It’s giving the reason for your call. It’s delivering information your client didn’t have previously. It establishes the connection that when you call, your client will learn something new.

3. Report card – It sounds more familiar than “portfolio review.” Say “If you take my advice, you should get a report card.” It conveys accountability. Clients like that.

12. Agreement – A softer sounding word than “contract.” After all, a contract is a form of agreement spelling out what’s expected of each party.

4. Consultation – Sounds better than “initial appointment.” It conveys seriousness. Heads of state consult with their advisors. Doctors consult with other doctors.

13. White paper – Basically an unpublished article or report. The purpose is to help understand a problem or aid in decision-making.

5. Practice – Much better than “my book

14. I’ll let you go – Tactfully ending a

Certain words or phrases, swapped for others, can reposition you as a professional and set you apart from your competitors.

BUSINESS

conversation with the unspoken understanding that their time is valuable and that you respect that.

Powerful Expressions in Other Industries

You’ve heard some of these expressions so many times that it gets very annoying. Still, they make the point. 1. Mistakes were made – A form of admission that there was some wrongdoing without specifically indicating you did anything improper. To a sympathetic listener, it sounds as if both sides admit they were at fault. 2. Check for your updated response time – Your electricity is out, and the power company provided an extremely optimistic estimate for when service would be returned. “Updated” sounds much better than “delayed.” 3. For well-qualified customers – Often heard in car ads. A tactful way of saying “We won’t be lending to everybody.” 4. Ask your doctor about – You’ve heard it in drug ads on TV. It’s a powerful way of placing your doctor in the uncomfortable position of explaining why an expensive new drug shouldn’t be used in place of a generic. 5. Ask if (X) is right for you – Another drug industry expression. It gets the patients to make the sales pitch to their doctor instead of the drug company pitching the doctor. The drug company isn’t directly involved. 6. Decision guide – So much nicer sounding than “sales literature,” don’t you think? Words can make a difference. Put some extra thought into how you present yourself or how you get your ideas across. It’s worth the effort. Bryce Sanders is president of Perceptive Business Solutions in New Hope, Pa. He provides high-net-worth client acquisition training for the financial services industry. He is the author of Captivating the Wealthy Investor. Bryce may be contacted at bryce.sanders@innfeedback.com.

May 2014 » InsuranceNewsNet Magazine

SOCIETY OF FSP INSIGHTS

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

Weighing Cost vs. Success of Life Insurance Products T he quest for the cheapest premium sometimes trumps the search for the most suitable product. By Richard M. Weber

erhaps it’s just human nature. Perhaps it was first inspired by Sam Walton’s motto: “low cost – always!” Whatever the reason for our focus on best price, it manifests in that intriguing Groupon for a service we didn’t know we needed until it showed up in our inbox, or in the search for the best deal on a 55-inch LED high-definition flat-screen TV. Just how far will we drive to get a dime off the cost of premium unleaded gasoline? And don’t forget that “two-fer” at the distant discount store! Inevitably, “What’s it gonna cost?” has been a distraction when it comes to helping clients make smart decisions on virtually all forms of insurance. Just ask “Flo” of Progressive Insurance fame! But how does this affect the professional life insurance producer? The push for lowest price has created its own mythology. “Buy term and invest the difference” and “Whole life is a lousy investment” are just two of the clichés that have entered the consumer’s lexicon without any consideration of what’s right for them. Consider the modern life insurance policy, exemplified by universal life (UL) in general and by indexed universal life (IUL) specifically. This is an amazing product in its flexibility. It’s also possibly the ultimate enabler when it comes to those who would prefer to pay as little premium as they want, as infrequently as they want, with a lot of the “upside” and none of the “downside.” Don’t get me wrong – universal life in its four incarnations (UL, variable universal life, IUL and no-lapse UL) has brought extraordinary flexibility and customization for those clients whose risk tolerance and portfolio diversification point to current assumption products to fulfill their need for life58

InsuranceNewsNet Magazine » May 2014

It takes an initial estimated premium of $8,750 to achieve close to 100 percent probability that the $1 million policy will be sustainable to age 100. time protection. But as the generations of UL proliferate, the products get increasingly more complicated. And that’s not a good thing when it comes to reconciling with best price. It’s too easy to focus on the obvious and miss the important. My healthy 43-year-old client wants $1 million in life insurance, but “What’s it gonna cost?” Because she has acknowledged a lifetime need, we’ll look past term insurance. In today’s low interest rate environment, we probably will also bypass traditional UL. But that IUL over there looks attractive! And with the insurance company’s back-tested 7.6 percent crediting rate, I’m confident she will like the resulting illustration-calculated lifetime planned premium of $5,728. Except this planned premium is not what it appears to be. It’s not guaranteed. And it’s not even likely to be sufficient to sustain the policy until my client reaches age 100. In fact, even though the policy will receive credits guaranteed to be no worse than 0 percent in “bad” years – and capped at 10 percent in “good” years – there will be a lot of volatility over the years between 0 percent and 10 percent. Confirming that the results from an average return are different from those of a constant return, we can test the sufficiency of $5,728 with 1,000 hypothetical illustrations in which each is exposed to a randomization of the last 60 years of S&P 500 annual point-to-point returns. And we find that only 196 of those 1,000 hypothetical illustrations sustain to age 100. That’s a “success probability” of

just below 20 percent. Is that an acceptable likelihood for you? I’m not aware of anyone who would be comfortable with such a low probability of success, but we can turn it to our advantage! What would be a comfortable probability of success for a premium that should sustain the policy as long as to age 100? Should it be 90 percent? Perhaps as high as 100 percent? Let’s see what the initial planned premium should be in order to achieve those objectives. It turns out that it takes an initial planned premium expectation of $7,500 to achieve a 90 percent success probability – and $8,750 or so to achieve close to 100 percent. Because the index is dependent on future equity index outcomes that can’t be predicted, these aren’t accurate projections. The projections are just a jumping-off place that sets a reasonable expectation that the client and the agent will manage over time with actual accumulations and modest course corrections in planned premiums. Members of the Society of Financial Service Professionals (FSP) have access to the Historic Volatility Calculator (HVC) to obtain supplemental information. FSP members can download the HVC from www.FinancialPro.org/HVC. Have you played the lottery lately? Do you know how impossible the odds are? In fact, the odds of winning are almost exactly the same – whether or not you buy the ticket! Increase the odds on your current assumption policy recommendations and use the HVC to test your illustrated planned premium recommendations. For an expanded discourse on these issues, see InsuranceNewsNet Magazine’s July 2013 cover article “Illustrated Promises, Unmet Expectations.” Richard M. Weber, MBA, CLU, AEP, is immediate past president of the Society of Financial Service Professionals. He may be contacted at richard.weber@ innfeedback.com.

Attention Financial Advisors, Wealth Managers And Retirement Specialists

Give Me 5 Minutes And I’ll Show You Why A 3X Emmy Award Winning Director and Producer Wants To FILM YOU SPEAKING at a Major Event in New York City As You Share Your Best Tips For Financial Success We want to invite you to be one of a select group of financial professionals who come to New York City to share your number one tip on how your clients can achieve success in today’s economy, while 3X Emmy Award Winner, Nick Nanton, oversees the direction and production of your film. Your presentation will be a 10-minute TED talk style presentation, filmed in HD. We will then show you how to use the film in your marketing to position you as the financial thought leader and expert in your market. It will build instant trust and rapport with your audience because of the prestigious platform you will be speaking from along with the reputation and authority of the CelebrityExpert® guests you will be speaking with. You will never again be seen as just “another advisor.” Your position as a financial authority will be elevated by speaking at such an event and having a film of your presentation to represent your expertise to prospects and clients. You will be able to let the event appearance and film speak for you as a private endorsement of who you are and what you do better than anyone else in your market.

Your appearance at this annual financial event will transform you into the CelebrityExpert® in your marketplace. The Celebrity who gets to fly out to New York City and meet and mingle with Emmy Winners, celebrities and other experts from across the country. Let me tell you about our Celebrity guests you will also be able to say you appeared onstage with from now on in all of your promotions adding another type of third party credibility to what you do. The first is Harry Dent, the world’s foremost expert on making economic predictions. He is the author of the current Best-Seller, The Demographic Cliff, as well as other books such as The Great Boom Ahead, The Great Depression Ahead and The Great Crash Ahead. For the past 30 years, Harry has used the Science of Demographics to predict major economic and market shifts with uncanny accuracy… decades ahead of time. Harry is coming to Success In The New Economy 2014 to share with you the trends that are affecting the ways that Baby Boomers are spending, or not spending, their money. This affects everything from retirement planning to college tuitions, from the housing market to discretionary spending.

Not only will you hear Harry’s predictions, but you will also get to meet Harry, get your photo taken with him and have him sign a copy of his latest book. These photos should then be immediately used in all of your marketing to leverage your association to both the event and famous financial celebrities you can reference and quote. In addition to the great Harry Dent, we will be holding an intimate Fireside Chat with New York Times Best-Selling Author and the star of the Celebrity Apprentice, Ivanka Trump. Ivanka will be sharing her best business building and success strategies with you and the audience and she will also be taking photos with you and signing books exclusively for you and the other attendees of Success In The New Economy 2014. Again, these photos and your association with this event can be used to show your existing clients and prospects how you are different from your competition by the knowledge you have, the events you are part of and the leaders you associate with. Instant credibility for you. And this is just the beginning. In fact, we have just filmed a new video that tells you more about Success In The New Economy 2014. In this video, we share how you can apply to be one of the few experts that are chosen to attend and deliver your presentation, meet both Harry Dent and Ivanka Trump and have your presentation filmed and produced by a 3X Emmy Award winning Producer and Director. We will write press releases about you and your presentation and appearance, and submit them to all of the major wire services enhancing your SEO and all Google search opportunities referencing your name.

To watch this special video, all you need to do is visit www.speakinnyc.com right now, or call us at (888) 568-2721 to speak with one of our Business Agents® who will send you the video and give you the complete information on this once in a lifetime event and experience. There are limited positions available and a very short amount of time to get on the production list of people we will vet for participation. So if you want a shot at this one time opportunity, you must act now and get on the list before it is filled. It truly is first come, first served.

*Special Bonus* We will also send you a digital copy of our Best-Selling Book, Story Selling, which reveals every Hollywood Secret to telling your story and makes selling easy and effortless. It is our gift to you just for replying to learn more about Success In The New Economy 2014 in New York City, even if you are not selected. Call (888) 568-2721 now to speak with one of our Business Agents® and claim your copy May 2014 » InsuranceNewsNet Magazine

MDRT INSIGHTS

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

The Right Conversation Leads to the Right Retirement Plan D o an honest assessment to determine your clients’ goals, assets and risks in order to prepare them for a secure retirement. By George R. Barnes

etirement is one of the most important phases of our lives, and we have an extraordinary opportunity to help our clients transition to that stage. To provide sound guidance, we need to ensure that our clients are an active part of the planning process. The best way to get clients involved is to do an honest assessment to determine their goals, assets and financial risks to make sure they are adequately prepared to enjoy their golden years. Below are key conversations to guide your clients toward a secure tomorrow.

Put their Vision into Focus

It’s imperative to understand the quality of life your clients would like to have and not underestimate their goals. This requires you to follow their vision of retirement, whether they wish to travel around the world or move closer to their children in a different state or if they just want to read a book on their porch. We, as stewards of this industry, must find out what they envision so we can provide valuable advice to help them understand what’s realistic in terms of their expectations.

Understanding Their Income

Once you understand your clients’ vision in retirement, you need to know what their income will be and where the funds will come from. Find out if their income will come from Social Security, a pension, 401(k), structured settlement, the sale of a house, etc. As a subset of income, you also need to know whether your clients plan on doing any part-time work. For example, even though they may be leaving a corporate career, they may have a passion to volunteer or work at a library. This could be a hobby, or it might generate money to 60

InsuranceNewsNet Magazine » May 2014

supplement their income. When you start talking about their income and where it will come from, you need to be aware of their tax bracket. This will help determine whether it makes sense to draw down on a tax-deferred vehicle or whether their tax bracket may change once retired. Understanding the tax implications over time will help you project where their money is coming from, what the money will pay for and how much income is needed to sustain their quality of life.

Wager the Odds

Another crucial part of helping your clients plan for retirement is having an appreciation for their risk tolerance. Depending on the timeframe in which your clients would like to retire – whether two, five or seven years out – you need to make sure you know what kind of risk they are willing to take and what the market is dictating at that particular time. The second phase is adjusting risk tolerance during retirement. Do they still want to take the same level of risk as they currently do? How much will they be living off of from their investments? Ensure that you have answers to these questions to prevent your clients from sacrificing their initial net pay for possible gains, or sacrificing principal just for possible gains. Start by asking them what it will cost to be able to live the quality of life they want. Depending on where they live, there may be a certain quality of life they want to keep.

Take the Future’s Temperature

In addition to helping your clients

sustain their quality of life, you need to discuss their plan for health care. Health care costs are one of the most critical expenses for which people must plan. Will your clients use government plans? Do they have a plan from work? Or will they have to self-insure? A subset of health care is finding out about their current health. Are they diabetic? Do they have high cholesterol? All medical issues are crucial to know. Once you have gathered this information, then you must schedule a series of follow-up meetings to talk about how these health care costs will be funded. I also think it is important for clients to anticipate the future. Life is ever-changing and yet constant. Consider what could go wrong. Be aware of the financial landscape and adapt to change. If you address these points in your planning process, you will have covered integral pieces needed for developing a secure retirement plan. Every retirement plan will vary from client to client, but your guidance and recommendations should remain consistent. The financial industry’s foundation rests upon the integrity and the nobility of what we do, and we have a tremendous responsibility to help clients plan for today as well as for tomorrow. George R. Barnes is a financial professional with The West Essex Agency, The Prudential Insurance Company of America, Newark, N.J. George may be reached at george.barnes@ innfeedback.com.

NAIFA INSIGHTS

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

Staying on Top of Your Game not excited and haven’t got a pulse when you walk in, that creates a problem. Your personality should be like your blood type: A positive. What I do when I am nervous is to go back to a place that makes me feel good, such as envisioning myself walking down the beach in Hawaii or playing a round of golf. Do anything that will get you to that special place.

A dvice on how to stay motivated and resilient in spite of the rejection you face in the insurance business.

By Ayo Mseka and John Davidson

f you sell insurance, you know you’re in the rejection business and you need a lot of resilience to make it from one day to the next. To help you acquire this valuable trait, we recently interviewed NAIFA Past President John Davidson, chairman/ chief executive officer of Davidson Insurance and Financial Services. The techniques Davidson has used over the years to survive and thrive will give you the momentum you need to keep on keeping on.

NAIFA: What has been your greatest motivator?

John Davidson: As you face one rejection after the other, you should:

death benefit to a widow or the time one of your clients called and asked you if there was any money left in their life insurance policy because they were about to lose their home to foreclosure. You said yes and asked them how much they needed. These motivational stories get people really excited, and they do make a difference.

» Stay focused on your goal. I quit this business a thousand times during my first two years because I was receiving a lot of “nos” from prospects. But I persisted and asked myself, “If you were not an agent, what would you do that will give you the satisfaction of doing something that has redeeming social value and makes a difference in someone’s life?”

» Ask yourself why you chose this line of work in the first place. What were you doing careerwise when you decided to become an agent? Were you working for someone else? Were you in a dead-end job? Were you lacking fulfillment? Then write down your best talent, and ask yourself if you are using that talent to make a difference in your clients’ lives.

» Join small groups. These can be accountability groups, study groups – whatever you want to call them – where you can share your experiences and frustrations with other agents and advisors.

NAIFA: How do you psych yourself up before you meet a powerful prospect?

NAIFA: What should agents do when their prospects and clients say no repeatedly to their sales requests?

» Don’t hang around negative folks. It has been said that it takes seven positive people to overcome one negative person. So, to stay motivated and upbeat, avoid negative people. They are energy-draining and will just drag you down. » Do something positive. This includes mentoring new agents and telling them the stories that buoyed you when you felt dejected. Talk to them about the difference you made when you delivered that

Davidson: I pray. I pray especially if it’s a big case so that regardless of the outcome, I’ll make a positive impact on that individual. I go into the meeting with a positive attitude, no matter whom I am meeting. You have to be comfortable with people from all walks of life because you’re talking about the same thing to all of them – the protection they get from insurance. NAIFA: How do you avoid sweaty palms and shaky hands just before meeting a prospect? Davidson: It’s good to be excited. If you’re

Davidson: My membership and involvement in NAIFA. Being a NAIFA member is extremely motivating. It is because of the life insurance industry (and my involvement with NAIFA) that I was able to be with my sons while they were growing up; it was a true co-parenting effort. I never missed one baseball game in 14 years, through Little League, high school and American Legion ball. That has made a huge impact on my three sons. As they now coach their own children in various sports, they have that role model, and they knew that they could always count on Dad. Also, it’s only because of my involvement in NAIFA that I’ve had the relationships with people who have helped me when I was struggling with rejection issues. It’s only because of my involvement in NAIFA that I’ve had the relationships that are the closest in my life. It’s not just that we are in the industry, are making money and selling products. It’s the lifelong relationships that make the difference in everything we do. Ayo Mseka is editor-in-chief of Advisor Today, the official publication of the National Association of Insurance and Financial Advisors. Ayo may be reached at ayo.mseka@ innfeedback.com. John Davidson, FSS, LUTCF, is past president of NAIFA and chairman/chief executive officer of Davidson Insurance and Financial Services in Thousand Oaks, Calif. John may be reached at john.davidson@ innfeedback.com.

May 2014 » InsuranceNewsNet Magazine

LIMRA INSIGHTS

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.

Predictive Analytics May Help Forecast Consumer Behavior I nsurers are developing predictive models to help advisors better engage with the people who need life insurance. By Eric Sondergeld

hen faced with a challenge, we must first assess the situation and then figure out the best approach to overcome it. One formidable challenge LIMRA has identified involves how to get more people to buy life insurance. We know from LIMRA research that half of households believe they do not have enough life insurance. And yet, despite that need, ownership levels are still at alltime lows. It certainly isn’t due to a lack of information. Consumers have access to more information than ever before, and the sheer volume of data is growing at a tremendous pace. Many industries have begun to use predictive analytics to harness data in new ways to predict consumer attitudes, preferences and behaviors. The life insurance industry is no exception. In fact, insurance companies have always made predictions. Those predictions lead them to decide who to insure and how much premium to charge. Insurers are now developing predictive models to help advisors better engage with the people who need life insurance. Here are some ways in which advisors may benefit from these predictive models. » Better Leads: Unless you’re fortunate enough to have so much business that you no longer need to seek new prospects, you probably value leads. To most effectively target individuals who may be the best prospects for sales, insurers are building models that: 1. Score leads in order to share with advisors only those consumers with the greatest chance of buying. 62

InsuranceNewsNet Magazine » May 2014

Predictive Analytics

Applied to Insurance Products Customer Acquisition and Retention

Identifying the best prospects and best customers

Increasing likelihood to buy

2. Intelligently match leads with advisors, based on the advisor profile (e.g., shared prospect-advisor characteristics, book of business profile and of course, location). 3. Improve cross-selling success by recommending the next most needed product to offer existing customers. » A Shortened Approval Process: The extended length of time it took to process and issue a life insurance policy was often a deterrent to actually closing the sale. This has long been a challenge for insurers. Sure, electronic applications, electronic policy delivery and other process improvements help, but their impact has led to only incremental improvements. The longest part of the process is underwriting, in both gathering requirements and underwriter review. Predictive underwriting seeks to change that. By incorporating outside data such as credit history and prescription drug use, predictive models can be used as decision tools for underwriters or to make the underwriting decision without underwriter involvement. The benefit is that approval times can shrink from months or weeks to days, or even minutes!

Determining cross-selling opportunities

» Customer Retention: Insurance companies make predictions for policy lapses, as with mortality and morbidity, in their pricing programs. Some companies are building models that function like “early warning systems” to predict which customers are at highest risk of letting their policies lapse. This information could be shared with advisors so they may proactively contact clients to help retain the coverage or to reassess their needs. If these approaches sound like they could help you reach more clients and make more sales, talk with the insurer(s) with whom you work most closely about the programs they may be developing. Predictive analytics could be a huge benefit to your business and make you more effective in taking on today’s challenges. Eric Sondergeld, ASA, CFA, MAA, is corporate vice president and director of Distribution & Technology Research for LIMRA. Eric is charged with ensuring that LIMRA produces relevant research to help member companies maximize distribution effectiveness and the use of technology in marketing and distribution. Eric may be contacted at eric.sondergeld@innfeedback.com.

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May 2014 » InsuranceNewsNet Magazine

THE LAST WORD

The Industry Must Remain Vigilant Against Attempts at Taxation C ompany-owned life insurance could be the next taxation target for Congress. By Larry Barton

hey’re at it again. Our members of Congress continue to sift through the president’s budget package and will continue to do so until their summer break. Before they go home and shake hands with the voters, you have a stake in asking your congressional representatives if they actually read about the target on your clients’ backs. But before the bad news, let’s share some sunshine. There is nothing in any current legislation that appears to disturb the tax-favored treatment of the inside buildup of cash value life insurance. This situation could change at any minute. But for now, lawmakers realize that for many families, cash value life insurance remains one of the few meaningful savings mechanisms trusted and protected by a safe and secure industry. We are watching our elected officials play dice as they try to figure out how to pay for the staggering cost of entitlement programs. Changes to the structure of individual retirement account programs and layered taxation that punishes those who worked hard and saved are likely in 2015 when Congress is not preoccupied with re-election. In the meantime, House Ways and Means Chairman David Camp, R-Mich., is seeking to revise our tax code. Proposals now under review would have a negative impact on your clients. Chris Morton, vice president of the American Association of Life Underwriters (AALU), believes that once Congress is able to pass a few key provisions that capture revenue from the roughly 75 million Americans who rely on life insurance, it will be difficult – if not impossible – to turn that momentum around. AALU notes, “One provision, on company-owned life insurance (COLI), 64

InsuranceNewsNet Magazine » May 2014

would impose new taxes on life insurance used by businesses small and large. Many businesses use COLI to protect against financial risk or job loss stemming from the death of owners or key employees. COLI also is a widely used funding mechanism for employee and retiree benefits. Congress affirmed the benefits and tax treatment of COLI and ensured its responsible use with bipartisan legislation enacted in 2006. “The industry also is concerned about a whole new series of tax increases on life insurance companies that would, if adopted, make industry products such as life insurance and annuities less affordable. In the aftermath of the financial crisis and with people living longer than ever before, the guarantees offered by the industry are more important than ever. Proposals to make industry products less accessible make no sense.” When agents are passive and assume that someone else is watching out for their best interests, everyone loses – their clients as well as their practice. Now that billions of dollars reside in COLI and numerous other life-based products, the administration can begin to target the affluent. Their argument is that those making less than $250,000 a year as a couple rarely if ever have access to a COLI product. Fair enough. But this same administration and numerous congressional staffers are seeking to hit COLI hard and are seeking new models to tax the individual retirement account buildup that goes across all income levels. David Walker, a candidate for Connecticut lieutenant governor and former chairman of the U.S. General Account-

ing Office, has a reasoned approach to the deficit debacle we face and how all of us can make sacrifices to relieve pressure points on the credit ratings of the United States. Walker said each taxpayer will sacrifice something in order for society to gain. I believe in my heart that most Americans would agree. However, the notion of NIMBY – “not in my backyard” – applies to everyone’s wallets. We want some other industry – some other segment of the economy – to pay. That’s what is troubling me about the attack on COLI. Let’s say that those who lead our industry associations ultimately have to cave on this issue in 2014 in order to protect the inside value proposition. Let’s say assurances and handshakes give everyone a sense of relief. Have you ever met any politician you could trust, especially those in Washington who are motivated by so many activists and political interests? I suspect that you will see some concessions by these associations this year in a belief that “we need to demonstrate that we want to be conciliatory.” Fast-forward to next year. No ballot boxes. The debt continues to soar. The life insurance industry continues to remind society of its dividends, massive reserves and profitability. If I’m a member of Congress and have not heard from any constituents who are licensed, capable agents representing that industry, I yield. After all, silence is acquiescence. Being silent in 2014 is not a healthy proposition for you, your practice and especially your clients. Start reading. Dig in. And remember, when you shake the hand of a congressional candidate this year, ask, “May I have a moment to get your specific opinion on something?” Larry Barton, Ph.D., CAP, is Chancellor of The American College. Larry may be contacted at larry.barton@ innfeedback.com.

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