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IN THIS ISSUE
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DECEMBER 2016 » VOLUME 9, NUMBER 12
FEATURE
22 2016: The Year of Flying Dangerously
By Steven A. Morelli Headwinds from the DOL conflict of interest rule have blown the insurance industry off its course, but an advisor’s answer to that terrifying flight might show a glimpse of a way out of the turbulence.
INFRONT
12 D OL Rule Coming Into Focus
34 Whole Life and IUL? Why Not Have Both?
By John Hilton With just four months to go before the Department of Labor fiduciary rules begin taking effect, the agency is providing some much-needed clarity.
By Frank Chechel and Anthony Domino A concept that provides attractive whole life guarantees along with the opportunity for index-linked upside potential.
INTERVIEW
14 How to Have a Scrappy New Year
An interview with Terri Sjodin So your hard work and persistence aren’t getting results? It’s time to get scrappy! Terri Sjodin, author of the best-selling book Scrappy, tells InsuranceNewsNet Publisher Paul Feldman how to cultivate that fighting spirit that will move you past your obstacles.
LIFE
32 Shareholders Stake Shaky Claim in Death Benefit Cases
ANNUITY
38 Treasury Rule Allows Split Between Annuities, Lump Sum By John Hilton A new rule will give pension plan participants more flexibility and choice.
46 How DI Can Be the Key to the Executive Boardroom By Steve Brady By informing executives of a need they may not have previously considered — and providing a solution — you can build strong relationships and establish trust that will lead to future referrals and sales.
52 A Family Limited Partnership Eases Bite from New Gifting Rule By John Gephart The Treasury Department proposed regulations designed to curtail the use of so-called valuation discounts by owners of closely held and family businesses.
40 Why an Annuity in a Roth Is Such a Tasty Combination
By Dawn Williams Shareholders of publicly owned insurers are going to court over the issue of unclaimed property and use of the Social Security Death Master File. 6
HEALTH/BENEFITS
InsuranceNewsNet Magazine » December 2016
By Ali Hashemian Many of the negative aspects of an annuity can be eliminated by funding it with Roth assets.
BUSINESS
54 Googleproof Your Reputation by Managing Online Reviews By Drew Gurley An advisor’s online reputation is carrying more weight with consumers than ever before. The smart advisor will be proactive about managing, curating and encouraging online reviews.
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ALSO IN THIS ISSUE DECEMBER 2016 » VOLUME 9, NUMBER 12
INSIGHTS
58 MDRT: ’Tis the Season to Discuss Charitable Gifting
56 THE AMERICAN COLLEGE: ACA: Time for a Checkup By Adam Beck As the Affordable Care Act heads into another enrollment season, it still faces some challenges in order to be a success.
60 H elp Wanted: Managing Health Care Expenses in Retirement
By Brian Tarpey Ask your clients the right questions to help them develop a plan to support their favorite causes.
57 NAIFA: What to Know Before You Bring in the Next Generation
EVERY ISSUE
By Danny O’Connell Before you bring that younger family member into your practice, have a frank discussion so that both sides can express their expectations.
10 Editor’s Letter 20 NewsWires 30 LifeWires
36 AnnuityWires 44 Health/Benefits Wires
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WELCOME LETTER FROM THE EDITOR
Rebuilding Is Living
A
s speaker after speaker talked about disruption, my attention wandered out the door, down the street and into the Chicago River. That’s where I had been the day before the LIMRA annual meeting in October. A boat trip on the river offers the best view of the buildings and history of downtown’s development. Near the boat’s dock off Michigan Avenue and Wacker Drive was where Chicago started as a trading post established by a black man from Haiti in the 1780s. Since then, Chicago has been constantly disrupting and disrupted, never more so than in 1871. That’s when fire left a four-mile-long and mile-wide scar where neighborhoods and the business district existed. Three hundred died and 100,000 were left homeless. Chicago got right to work and built its Second City. It is easy to imagine that people just started building like crazy. But reconstruction had a rough start. People were supposed to use fireproof material, but it was expensive. So, many people still used wood. Another fire put an end to that in 1874, when 60 acres of the city burned again. Innovation carried the day, though. Terra-cotta made from sand and clay proved to be an inexpensive answer. Chicago could have blown away with the ashes but it still had a strong position for meat, grain and lumber processing and shipping. There was never any doubt that Chicago was coming back. After all, the town faced existential threat before. In the 1850s, it became apparent that Chicago’s frequent flooding was a public health hazard. The standing water engendered typhoid and dysentery, besides just being all around nasty. The problem was that the city was level with Lake Michigan, the small ocean at its door. But what to do? Buildings and whole neighborhoods were already built.
Just Doing It
In an era before mechanical engines or electrical power, people decided to raise their buildings about six feet. After a few individuals did it first, others joined in and
10
soon city blocks were lifted with jacks and manpower. After a trial by flood, fire came next and Chicago boomed out a modern city, inventing the high-rise building in the meantime. Even when nothing was ready for the work, they did it anyway. In 1883, just over a decade since the fire, Mark Twain said: “It is hopeless for the occasional visitor to try to keep up with Chicago. She outgrows his prophecies faster than he can make them.” The next impossible task was preparing for the 1892 Columbian Exposition World Fair, which was touted to surpass Philadelphia’s 1876 fair, London’s 1851 Crystal Palace Exposition and many others. Again, no one and nothing was near ready to attempt it, but they succeeded against all odds. From the river, the city passes by like pages of architectural textbook of the past century and a half. All were examples of innovation and drive blasting through obstacles.
Disrupted Disruption
Back in the hotel auditorium, uncertainty was the theme, particularly with the election campaign raging in the background. Obviously, the Department of Labor’s conflict of interest fiduciary rule is the precipitating factor, but the insurance industry already faced difficulty. Just as the demographics are making the industry’s products and services more relevant, agents and advisors are also aging out. Products that sell best, with some exceptions, dangle the taste of an equity-like return in combination with an insurance guarantee. That sounds as good as putting together chocolate and peanut butter, but people don’t realize they pay for the balance of gain and safety. They don’t know because it is really difficult for even salespeople to explain some of the products, which can get pretty complicated to fulfill some promises. The New York Times in late October had a headline across the top of one of the sections reading: “Even Math Teachers Are at a Loss to Understand Annuities.” It had the usual, an example of someone who was not well-served by an agent and some inaccu-
InsuranceNewsNet Magazine » December 2016
rate information about how annuities work. (By the way, Sheryl Moore of Wink did a masterful job rebutting the article in online comments.) So, the fact remains that the industry has not gotten very far in rehabilitating the image of annuities. That was partly what led to the DOL rule. All of this is failing Americans who need the products. In the magazine feature this month, we look at where we are amid the DOL fallout. Company plans are still forming, which is a little disconcerting. But some people are going ahead, even if no one and nothing is ready. The story of Curtis Cloke shows how a bit of insight helped him create a new way to offer better service for his clients and sell a range of insurance and financial products. He is by no means the only person doing it.
Starting All Over
During a break in the LIMRA meeting, a group of disruptors past and present stood around a table. The subject was how old regulation stifles innovation. The example at hand was from a breakout session that discussed online marketing and rules against targeting and excluding sexes. Apparently, they said, rules would not allow you to target an insurance product to just women. This would counteract the trend in online marketing to find the niches that need your products and services. Marketing to everyone on the internet without being able to select a segment of the audience is not affordable and does not serve the consumers who would want that product. Does everything have to go through Amazon, then? Byron Udell, who created the online insurance quoting system, Accuquote, in the 1990s said it would be better to start all over again with regulations. He’s a disruptor from way back, constantly fighting against new disruptors all around him. But he’ll probably do OK for himself. He’s from Chicago. Steven A. Morelli Editor-In-Chief
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Health care practitioner must state informal care is appropriate in the plan of care. Nationwide YourLife CareMatters may not be available in every state. Please contact Nationwide to determine product availability in your state. Guarantees and protections are subject to the claims-paying ability of the issuing insurance company. When choosing a product, make sure that life insurance and long-term care insurance needs are met. CareMatters is not intended to be a primary source of life insurance protection, so make sure life insurance needs have been covered by appropriate products. Because personal situations may change (i.e., marriage, birth of a child or job promotion), so can life insurance and long-term care insurance needs. Care should be taken to ensure these strategies and products are suitable. Associated costs as well as personal and financial objectives, time horizons and risk tolerance should all be weighed before purchasing CareMatters. Life insurance, and long-term care coverage linked to life insurance, has fees and charges associated with it that include costs of insurance, which varies based on characteristics of the insured such as gender, tobacco use, health and age, and additional charges for riders that customize a policy to fit individual needs. Life Insurance is issued by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company, Columbus, Ohio. Let’s Face It Together is a service mark of Nationwide Life Insurance Company. Nationwide, the Nationwide N and Eagle, Nationwide is on your side and YourLife CareMatters are service marks of Nationwide Mutual Insurance Company.© 2016 Nationwide. NFV-0890AO.2 (6/15)
INFRONT DOL RULE COMING INTO FOCUS
DOL Rule Coming Into Focus ith just four months to go W before the Department of Labor fiduciary rules begin taking effect, the agency is providing some much-needed clarity. By John Hilton
I
n the first promised guidance, the DOL released 34 FAQs in late October. The questions came straight from the industry, officials said, touting the effort as proof the DOL will work with financial services to make the new rules a success. “Gathering these questions from multiple sources and making the answers public is another example of our sincere efforts to work with the financial services industry to craft a rule that makes sense and works in the real world of investment advice,” said Phyllis Borzi, assistant secretary of Labor for DOL’s Employee Benefits Security Administration. One rumor the DOL dispelled is that it will delay implementation of the rule. “DOL reiterated its prior finding that an applicability date of April 10, 2017, provides adequate time … apparently signaling a disinclination at this time to extend the applicability date,” Sutherland, Asbill & Brennan stated in its analysis of the FAQs. After that date, all commission-compensated products must be sold in accordance with the new rules. That means fixed annuities will require Prohibited Transaction Exemption 84-24, while fixed indexed and variable annuities will need the Best Interest Contract Exemption. However, the guidance clarified that although agents and advisors must use the exemptions beginning on the initial date, 12
the DOL will not be in fierce compliance mode as long as good-faith efforts are being made. “The transition period gives these fiduciaries additional time to prepare for full compliance with all of the conditions of the exemptions, while providing basic safeguards to protect the interests of retirement investors,” the DOL guidance stated.
More Key Points
The bulk of the DOL guidance covered level-fee fiduciaries, nuances of the BICE and disclosures, said Kim O’Brien, vice chairman and CEO of Americans for Annuity Protection. However, analysts found a few important points clarified by the FAQs. On these points, the DOL provided largely positive news for independent agents who sell annuities, O’Brien said. Here are three selected questions:
1. Can insurance companies rely on independent insurance agents to sell fixed rate and fixed indexed annuities to retirement investors?
The answer here is yes. The department’s exemptions for annuity sales (PTE 84-24 and the BICE) do not require insurance companies to use any particular distribution channel. While insurance companies may rely on a captive sales force to distribute their proprietary products, they may also distribute annuities through independent insurance agents or other channels. In this arrangement, the insurance company would act as the financial institution with regard to the sales of its proprietary products, but would not serve in
InsuranceNewsNet Magazine » December 2016
that oversight role for products sold for other insurers. Under the exemption, the insurer must adopt and implement prudent supervisory and review mechanisms to safeguard the agent’s compliance with the impartial conduct standards. “If an insurer chooses to act as the supervisory financial institution for purposes of the exemption, its obligation is simply to ensure that the insurer, its affiliates, and related parties meet the exemption’s terms with respect to the insurer’s annuity which is the subject of the transaction,” the DOL stated. In other words, independent agents may continue to offer a variety of products from a variety of insurers, with each insurer serving in the oversight role with regard to its products. This is “a significant development for independent annuity advisors and insurance marketing organizations,” O’Brien said.
2. What is the role of insurance intermediaries, such as independent marketing organizations (IMOs), in the sale of annuity contracts?
Under the exemption, marketing organizations like IMOs are not treated as financial institutions that can execute the BICE, although they can apply (and many have) to be granted financial institution status. Instead, the exemption expects that the insurance company (or another financial institution) will take responsibility for ensuring that the exemption’s conditions are met and that best interest recommendations are made. Sutherland pointed out two statements
DOL RULE COMING INTO FOCUS INFRONT DOL makes in its guidance about the role of IMOs:
» DOL noted that it would be permissible for an insurance company selling through independent agents to bolster its compliance by contracting with an IMO to ensure that agents working through that IMO satisfied the impartial conduct standards. » IMOs can continue to receive commissions and override payments under either BICE or PTE 84-24 if the conditions of the applicable exemption are met. The prevailing recruiting tactic today is that you must be with one marketing organization or financial institution to continue to sell annuities and you may only sell its products, O’Brien said. “By recognizing that advisors can and do have multiple carrier relationships, the advisor seeking as many carriers, IMOs and FIs that offer the products his clientele demands, may remain independent,” she added.
3. How are “front-end” and “back-end” bonuses treated under the rule?
With regard to advisor recruitment programs, the DOL clarified that front-end bonuses or awards tied to ongoing service by the advisor are “consistent with the warranties under the full BICE.” However, back-end bonuses or awards tied to the achievement of sales or asset targets on an “all or nothing” basis are not. “This is a more absolute statement on this point than anything in the preambles to the BICE,” Sutherland noted in its analysis. DOL will allow relief under the full BIC Efor binding commitments to pay “back- end” awards entered into prior to the October 27 date of the FAQ if the firm “determines in good faith that it is contractually obligated to continue those awards, and adopts special and stringent procedures to oversee conflicts created by those awards.”
Lawsuits Ongoing
Opponents sought clarity through the federal court system with multiple law-
suits filed this summer. But those court cases — in Minnesota, Kansas, Texas and Washington, D.C., federal courts — are moving at a snail’s pace. As of press deadline, National Association for Fixed Annuities vs. Department of Labor was the only case nearing any resolution. Thrivent Financial vs. DOL is not even scheduled for a hearing until March 3 in St. Paul, Minn. Lawsuits in Kansas and Texas are in between and awaiting a resolution. Even when rulings are eventually issued, appeals seem very likely. Meanwhile, the industry players cannot wait. Most are scrambling to put procedures and technology in place to comply with the rule by April. The DOL has promised that additional guidance is forthcoming. InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@ innfeedback.com
December 2016 » InsuranceNewsNet Magazine
13
In this interview with publisher Paul Feldman, Terri Sjodin shows how an attitude adjustment will solve sales problems and bring in the big deals.
14
InsuranceNewsNet Magazine Âť December 2016
I
f your marketing is hitting the world with a dull thud, don’t try harder, try smarter. That’s the message Terri Sjodin conveys in her book, Scrappy: A Little Book About Choosing to Play Big. Terri has been helping individuals and companies improve their sales for more than 25 years now. What she sees is that a lot of people aren’t having success with the usual sales methods, so they try harder using the same methods and get the same results. Terri says you have to back up and get your scrap on. Like a street scrap, it’s a left when you expected a right. Call on the element of surprise. But how do you do it? Scrappy is the feisty, fighting spirit, but it does need the focused shot rather than wild roundhouse swings. In this interview with Publisher Paul Feldman, Terri talks about the three parts to effective scrappiness. FELDMAN: I think most insurance agents and financial advisors consider themselves scrappy. How do people who might already see themselves as scrappy become scrappier and take their careers to the next level? SJODIN: We define scrappy as being full of fighting spirit, synonymous with having moxie, being feisty, enthusiastic, gutsy, sparky. It’s a mix of all of those things. One
street fighter. You have to work smarter. You’ve got to be willing to work a little bit harder when you need to. You’re going to take some risks, and you’ve got to try to play big no matter what the obstacle. FELDMAN: How does being scrappy differ from being persistent?
of my favorite definitions comes from the Urban Dictionary, which describes a scrappy person as someone who is little, but can really kick some ass. I kind of like that one. If we’re talking about small-business entrepreneurs in the insurance and financial services space, I think that is a perfect description of what it takes to be successful if you are working day to day in that environment. When you have what I would call a tiny and mighty team, you have to have a little bit of that determination of a
SJODIN: I think the easiest way to explain it would be to go back to that classic film Wall Street. Bud Fox is played by Charlie Sheen, and he’s a little player who’s trying to get a big client but the odds are against him. Even his friends and colleagues are saying, “Look, dude. It’s not going to happen for you. You might as well let it go.” But he gets that gumption, that fighting spirit. So at first, he is persistent. He cold-calls Gordon Gekko’s office for 59 days in a row. That’s persistent, but that doesn’t get him in the door. So you can keep doing the same thing day after day after day. It doesn’t mean it’s going to get you in. Now he must craft some sort of clever plan in order to gain access. He does some research and starts schmoozing Gordon Gekko’s secretary, who is also the gatekeeper. He finds out when Gordon Gekko’s birthday is and what his favorite cigars are as he’s nurturing this relationship with the gatekeeper. Ultimately, he decides he’s going to make his big, bold play.
December 2016 » InsuranceNewsNet Magazine
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INTERVIEW HOW TO HAVE A SCRAPPY NEW YEAR He gets a box of Gordon Gekko’s favorite cigars, which are pricey. He shows up at the office with the nod from the assistant. He gets his shot. When I was watching that film, I was in my first sales job and could completely relate to the Bud Fox dilemma. I’d been doing the things I needed to do to be persistent, but nothing was happening. His illustration inspired me to get scrappy. While he got his shot, I got the lesson. That was the impetus for my doing my very first scrappy effort. This is exactly what small- and medium-sized businesses and even people who work within large companies are facing every day. We can be persistent, but if you really want to capture someone’s attention, maybe it’s time to get scrappy. FELDMAN: Your book is broken into three parts: the attitude, the strategy and the execution. What is the attitude? SJODIN: Attitude speaks to that fire in your belly. Having a scrappy attitude is characterized by your mindset, and it speaks to your fighting spirit. Most people are pretty happy, so why do they need to get scrappy? Some people get scrappy because they want to get a new client. Sometimes they just want to earn the right to be heard. Sometimes they’re trying to get a promotion. Usually, people have had enough irritation to want to break out of where they were. I liken it to that little piece of sand inside the shell of an oyster. Without that irritation, it creates no pearl. What we typically find is if you’re sitting on the beach enjoying your life, having a pina colada in the Caribbean, you’re probably not thinking, “I need to get scrappy.” But if you have a big deal in play and the chips are on the line, that’s probably going to be your go-to play. FELDMAN: How do you implement good strategy? SJODIN: Strategy is the second piece of the scrappy puzzle. You could have the greatest attitude in the world, but unless you come up with a really clever plan and you make it work, then all you have is a great attitude. 16
You might as well live in the land of persistence if that’s all you’ve got, because it’s the strategy that changes the game. Let’s define strategy. A scrappy strategy encompasses all of your efforts. That includes research, due diligence and sweat equity. It helps you to channel these efforts in the most productive directions, and it’s the tactical planning necessary to achieve a specific goal. That includes how you focus on a specific industry, decision-maker or opportunity. What investment do you have to make? Maybe you’re going to have to change your skill set. FELDMAN: Then comes the hard part — the execution. SJODIN: One of my favorite quotes is by Amelia Earhart, and she said, “The best way to do it is to just do it.” Sometimes people spend so much time tinkering, tinkering, tinkering, that they never take action and just get it done. That third piece is about executing
and scrappy. I don’t do anything that’s going to be offensive or off-putting, or put myself in a situation that would be dangerous or not considered welcome. In simple terms, I think your scrappy play must be designed to pleasantly meet the expectations of the receiver. Probably one of my favorite stories in the book comes at the very, very end. It’s from this gentleman named Steven Varela. Steven was an Imagineer with Disney. That’s kind of a really good job by any stretch of the imagination. He was very well-respected in his firm, but he wanted to try something different. He wanted to move. He wanted to explore other opportunities. His dream was to go to work for Wizards of the Coast, which is a video-gaming company. He knew that if he just submitted his resume through the front door like any other person, he would probably get screened out because they’re looking for a different skill set than they might think he had by working for Disney as an Imagineer. He decided that if he was going to do
Usually, people have had enough irritation to want to break out of where they were. I liken it to that little piece of sand inside the shell of an oyster. Without that irritation, it creates no pearl. your plan. Execution is about putting your tush on the line. How do we really think that through? We say scrappy execution is about putting your plan of action into play. It’s the go phase, the transition from planning into actual engagement, moving forward on a course of action that you’ve developed. This, of course, is where the risk comes in, but so does the reward. How do you play bigger? Bigger is dependent on the person. The first thing to assess is your risk tolerance. You don’t want to make a play that’s so big that you’re not going to feel comfortable with the outcome. My whole strategy is let’s keep it classy
InsuranceNewsNet Magazine » December 2016
this, he was going to be all-in and come up with a really clever plan. He came up with this incredible, very elaborate strategy to deliver his resume to the CEO of the company. He embedded the resume in tablets that were sealed in these big crates. Once you opened each crate, there was a little hammer and chisel to crack open the tablet and it would reveal the resume. But he also knew that when the first person opened the tablet, the jig would be up. He had to send two crates. Before he decided to execute this, he shared his idea with his closest colleagues and friends to see if it was too over the top. There was a moment of
3 Tips to Gaining a Scrappy Advantage in 2017 silence, and everybody said, “Steven, if you don’t do this, we’re going to be disappointed in you.” That gave him that confidence to go. The CEO of Wizards actually reached out to Steven and told him it was the most incredible resume delivery he had ever seen. The CEO said that even though they didn’t have an opportunity for him, they had a colleague who he thought really needed Steven’s skill set, and he asked if he could refer Steven to this other opportunity. Steven said, “Yeah, with a referral from the CEO of Wizards, I think that’s pretty amazing.” So he gets this opportunity and ends up getting the dream job that he never even knew existed. So the other back end of getting scrappy is that when you come up with an incredible strategy, there’s a little element of serendipity and you don’t know how beautiful and amazing the outcome can be. He may have been aiming for A, and he ended up getting B, but B was even better than he possibly could have imagined. Every single person reading this article can think of a time when they walked into a situation and thought it was going to go one way. But if they simply put their best foot forward and got a little bit scrappy, it could lead to unimaginable, amazing opportunities that they never expected.
As we look ahead toward 2017, I say let’s put a little flair in our resolutions for the New Year and try something entirely different. How about a Scrappy New Year? Here are a few tips to help you stand out from the crowd.
1. Choose to get scrappy.
It all starts with attitude. Having a scrappy attitude is characterized by your mindset and speaks to your fighting spirit. It’s about the “fire in your belly” and a determined nature that can’t really be quantified. When you foster a scrappy attitude, you’re far more likely to commit to making a scrappy play, and when you do, it changes your perspective. You are not going to get scrappy every day, but certain situations call for a scrappy effort.
2. Craft a truly clever strategy.
A scrappy strategy encompasses all of your efforts: research, due diligence and sweat equity. Whatever the goal, it’s crucial to customize your strategy to meet the needs of the recipient and separate yourself from the competition. Remember, the idea is to move your intention forward while also dazzling the key decisionmaker. The more you know about the person, the easier it will be to tailor your strategy for maximum effect. So do some homework and ask these key questions: • What do I know about this individual or the people on this committee? • What might be a classy way to approach this person or group? • Have I ever met this person, or is he or she a complete stranger? If they’re a stranger, whom do I know who might be able to introduce me or at least give me additional information about them?
3. Execute — put your tush (a little) on the line.
Scrappy execution is about putting your plan of action into play. This part of your scrappy effort includes considering your risk tolerance, thinking through your plan, going forward and leaving a little room for serendipity. If you want your circumstances to change, at some point you have to stop strategizing and launch. My advice is to start small with a simple play and then build up from there.
FELDMAN: What are ways of coming up with scrappy ideas in your business? SJODIN: This is really where the rubber meets the road. We all can get our heads around the fact that you need to have a good attitude and you have to execute. But where people get stuck is in this middle place of coming up with ideas. The first thing you want to do is ask yourself who the decision-maker is. What do I know about them? What are their wants, needs and expectations? Whom have they been working with before? All those basic things that we know from Selling 101. Those are a given. Now we’re going to use our analytics. How do we take this one step further than anybody else does? Depending on how much time you have, you could really customize it in a clever way. There are illustrations of people who took everybody to a golf outing so they December 2016 » InsuranceNewsNet Magazine
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INTERVIEW HOW TO HAVE A SCRAPPY NEW YEAR could have extra time with them on the course. That’s a no-brainer. Who doesn’t do that? The bigger question would be, what if you guys all were going to go to an outing, and you said, “So that you don’t have to worry about drinking and driving, why don’t we come pick you up? I’ll be your designated driver for the evening. Let’s go out and have a really great time. Then we’ll go to the show, and I’ll be the driver.” The strategy has to be about what you are trying to gain. Are you trying to gain access? Are you trying to develop a relationship? Are you trying to move a deal forward? Your strategy is going to be based on that, but it goes back to some pretty simple principles. How do we become dazzling?
up the conversation and get in the door. It’s these clever little workarounds. So, does Entrepreneur Barbie stand out more than a guy who sends a plant? Yeah, I think she does. That would be a scrappy little play. If you really want to get clever, you can do some little things just to touch base, to reconnect. Just don’t do a whole bunch of them. Maybe five to 10 at a time. Follow up with them in the next couple of weeks. Sometimes they land, and sometimes they don’t, but it can also just be a really nice follow-up tool. I really recommend doing things in small batches, so that you can follow up and execute and customize in a way that you can manage. Sometimes people say, “Oh, we send to everybody on our list — 500 people got
This works in three ways: We stand out from the crowd, we’re showing our appreciation and we avoid any conflict that might come up with anybody’s religious beliefs during that holiday season. Yet, even though we’ve talked about this for years, last year we received one Thanksgiving card. Most of the vendors who call on me still send me Christmas treats. I love the treats. Don’t get me wrong. I love treats, but I just think it’s funny that that’s what everybody does. If you really want to stand out, why not have a scrappy Thanksgiving concept? FELDMAN: What are some ways of scaling and creating a scrappy culture within an organization? SJODIN: We did a mini case study of Crossroads Hospitality in the book. They wanted to inspire people to take some chances. It became a defining quality of their entire company. The company’s four divisions had acronyms. The Northeast division was BRATS for Booking Revenue And Taking Share, which was super cute. They said the rules basically were, “Here’s the circle. These are the boundaries. We want to make sure everything that you do is legal and ethical and positive and creative. As long as you stay within those boundaries when you’re proactively going after clients, you’re free to go do whatever it is you want to do.” The salespeople were like, “Wait, what?” If you encourage a scrappy environment within your organization, you’re really giving people a sense of entrepreneurial freedom. One of the things we’ve tried to do with the book is to say: Understand what your risk tolerance is as an individual or as a company. But I like to say that getting scrappy is redemptive. Because nobody remembers what you did before. They only remember the win. So it’s really very redemptive.
So, does Entrepreneur Barbie stand out more than a guy who sends a plant? Yeah, I think she does. That would be a scrappy little play. There are 21 different suggestions in the book that I hope will inspire people. There’s an illustration of how I wanted to open some doors with some pretty tough businesswomen. I had gone to see a speaker from Mattel, and he was talking about this amazing new Entrepreneur Barbie doll. I fell in love with the idea of Entrepreneur Barbie. I picked up Entrepreneur Barbie, and I gave her to a couple of my friends. They went crazy. I’m like, “You know what? I’m going to send Entrepreneur Barbie to a couple of these power women, and see if they fall in love with her too.” Not only did they fall in love with her, but it made them pick up the phone and call me. It was a perfectly appropriate approach for me to send Barbie to a woman who’s a pretty tough cookie, who’s the head of a financial services firm. That helped open 18
this.” But how is that scrappy and how do you manage that? FELDMAN: What are some smaller things that you do? SJODIN: One of the things that we do is send Thanksgiving treats. We don’t send holiday treats around Christmas time. We want to avoid all that ruckus. Some people celebrate Hanukkah. Some people celebrate Christmas. Some people celebrate Kwanzaa. You’re going to get into a sticky wicket if you send holiday treats. But by sending Thanksgiving treats, we really set ourselves apart, because most people don’t. That’s really the whole point of Thanksgiving — to show gratitude for your partnership over the year and say you’re looking forward to working with them in the new year.
InsuranceNewsNet Magazine » December 2016
FELDMAN: Does it help the culture when people in the company are encouraged to get scrappy together?
HOW TO HAVE A SCRAPPY NEW YEAR INTERVIEW
Common Scrappy Mistakes To Avoid Here are a few examples of common mistakes people have made when attempting to get scrappy: • Telling a lie to make something happen • Sending an inappropriate gift • Dropping by unannounced or uninvited • Breaking the law to obtain access • Making a poor judgment call • Playing dirty • Missing the window of opportunity • Overreaching and setting unrealistic expectations • Scaring the prospect • Pushing too hard or not knowing when to back off • Failing to consider the outcome or possible negative consequences
SJODIN: I think that’s where it gets fun. This is a little silly, but I’ll share this one. Of our 10 Halloween treats that we sent out last week, yesterday one of those 10 people called. I was out of the office at an appointment, but they called my assistant, and they said, “We’d like to move forward. We’d like to confirm the date.” When I got in, my assistant was jumping up and down, saying, “Oh, my gosh. One of our scrappy treats worked.” I’m like, “Oh, my gosh. Which one?” We were screaming. That’s fun. So when you try something scrappy, then it actually lands and you get a deal, even if you only get one, it pays for all 10 — tenfold. It’s a huge, amazing, fun thing when it lands. That’s what keeps you going. It only takes one to make your day awesome. You get two and you’re like, “Oh, my gosh.
2016, Scrappy, Terri Sjodin, Portfolio/Penguin
I’m on fire.” Salespeople need those wins. That’s what inspires you to go for the next one. FELDMAN: That was simple. Would you say it doesn’t always have to be this grand thing that shocks and awes people? SJODIN: I call it the pleasant surprise. Why not give somebody a pleasant surprise? I hear this all the time: “I sent out 500 emails yesterday.” I say, “You and everybody else.” Are you going to create that creative of an email that it’s just going to land? It’s not going to happen. FELDMAN: Mass emails would not be where the big wins come from.
SJODIN: It’s really hard. Each of our inboxes is inundated every day. I think we can do better with the good, old-fashioned, handwritten note. Imagine that. FELDMAN: How do you know when you’re being scrappy or pushing too hard? SJODIN: You have to sense it. Sometimes we all make mistakes when we’re going for a big dream and pushing really hard. I call it the crash and burn where people do things in the name of getting scrappy that were stupid, quite frankly, or stalkery or creepy. Leaving all those things out, we have a whole lot of things you should never do because they’re not scrappy. They’re creepy. It’s usually that the individual who’s executing has pushed himself too far because he’s exhausted. It’s those little details, those little nuances, those little things that fall through the cracks, and then that’s when you’ll blow something. You’ll blow a deal, or you won’t be on your game because you’re exhausted. There’s that balance to be an excellent performer. You have to be alert and awake, on time, and ready for game day. Make sure you cross all your t’s and dot all your i’s. FELDMAN: We’ve all had that happen. How do we pick up again? SJODIN: Sometimes we’re trying so hard that we drop the ball. That doesn’t mean quit altogether. It just means pull back, slow down, regroup and then go back out again. I love that saying that mistakes just mean you’re trying. You don’t want to make them all the time. But just know that when you’re executing scrappy efforts — whether they’re small, medium or large — there is a little risk involved. You are putting yourself on the line. Look, all we can ever do is put our best foot forward. Jim Carrey has a great quote. He says, “You can fail at doing what you don’t like doing. So you might as well fail at doing what you love.” My thinking is you don’t have to fail. You might as well try harder at doing what you love.
December 2016 » InsuranceNewsNet Magazine
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NEWSWIRES
QUOTABLE
Alexa Aims at the Insurance Business
Rising premiums get all of the political attention, but lack of choice between insurers could be a bigger problem for consumers.
The newest insurance agent could be named Alexa. That’s Alexa as in Amazon’s virtual voice that sounds forth from the company’s cylindrical Echo device. Much like the iPhone’s Siri, Alexa answers questions and delivers information. But now she is being programmed to do much more than recite the weather forecast. Alexa is increasingly being programmed to take on the more complex tasks of a virtual assistant and is creeping into territory once reserved for insurance agents. Do you need to pay a bill or get an insurance quote? Alexa can help with that. Liberty Mutual programmed some of its insurance services onto the Echo, allowing consumers to locate a nearby insurance agent, get an estimate for insurance or learn how to keep their premiums down. Fidelity Investments is letting customers check their account balances by speaking with Alexa. Financial firms are investing in voice-controlled technology on the bet that consumers will eventually prefer to speak commands instead of typing on a laptop.
4 WAYS GEN Y IS SMARTER ABOUT MONEY
Poor Generation Y. The much-maligned millennial generation gets a bad rap for being underemployed and saddled with debt. But Gen Y may get the last laugh after all. Millennials are making some financial moves that are making that generation money-smart, according to a survey by TD Ameritrade. Eight in 10 millennials have a budget, compared with 61 percent of baby boomers, according to the survey. Millennials were also more likely to be following their budget. Compared with boomers, millennials were more likely to be saving for a goal other than retirement and more likely to have a written plan for their financial goals. Millennials were more likely than boomers to use the services of a
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professional when faced with a major financial decision. And finally, millennials tended to be more realistic than older generations in terms of planning for retirement.
MORE AMERICANS ARE LIMITING THEIR MONTHLY SPENDING
Many Americans are choosing to play it safe with their money, according to a Bankrate study. As a result , nearly two in three Americans report they are limiting their monthly spending. The majority of those polled said they were reining in spending because they need to save more. One-quarter blamed stagnant income, followed by worries
Nearly two-thirds of voters expect their financial health will deteriorate regardless of who wins the presidential election. Source: Insured Retirement Institute
InsuranceNewsNet Magazine » December 2016
— Caroline Pearson, a senior vice president with Avalere, on open enrollment season for health insurance
about the economy and having too much debt. Although Americans are prioritizing saving more than in earlier years, a lack of emergency funds remains a critical issue for many, the Bankrate study indicated. Most Americans have more credit card debt than emergency savings.
DIDN’T WE LEARN ANYTHING?
It appears that Americans didn’t learn any lessons from the Great Recession of 2008. A survey by the Financial Industry Regulatory Authority (FINRA) showed that Americans haven’t become any more financially literate than they were when the markets crashed. The long-running study by the FINRA Investment Education Foundation includes six questions intentionally designed to be very easy. They asked things like calculating whether an account earning 2 percent on $100 would be worth more than $102 after five years, or whether 15-year or 30-year mortgages had higher monthly payments but lower overall interest payments. Five of the six questions have been on the test for several years. In 2015, only 37 percent got four out of the five questions right, versus 42 percent in 2009. The most difficult question: “If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?” Only 28 percent gave the correct answer, which is that bonds will fall.
NEWSWIRES
QUOTABLE
Could the ACA Be Stalling? It has been three years since the first Americans signed up for 28.6M 28.4M 2015 health insurance under the Affordable Care Act. Now a gov2016 ernment agency is sending out signals that the law may have hit a wall as far as getting people into coverage. The Centers for Disease Control and Prevention released a report suggesting the ACA may be reaching a limit to its UNINSURED effectiveness. The CDC said the number of uninsured people dipped by only 200,000 between 2015 and the first six months of this year, which it called "a nonsignificant difference." The findings come from the National Health Interview Survey, which has queried more than 48,000 people so far this year. The CDC study found that during 2015, an estimated 28.6 million U.S. residents were uninsured. The corresponding number through the first six months of 2016 was 28.4 million. Health and Human Services Secretary Sylvia Burwell has set a goal of enrolling about 1 million more customers for 2017, but outside experts say that's going to be a challenge. The next president will inherit a program still in search of stability.
FEWER AMERICANS ARE ‘UNBANKED’
In what some experts are saying is another sign of an improving economy, fewer Americans are without access to a savings or checking account. The percentage of Americans who are “unbanked,” or do not have a bank account, declined to 7 percent in 2015 from 7.7 percent in 2013, according to the Federal Deposit Insurance Corp. The improvements mostly came from households making less than $15,000 a year. Although consumers have a number of reasons why they may not use the services of a bank, the most common reason, the FDIC found, is that they do not believe they have enough money to obtain a bank account. Lack of money was cited as the main reason by 57 percent of those surveyed.
57% of those without a bank account said it’s because they don’t have enough money
Life expectancy for today’s 65-yearold is six months shorter than it was last year
AMERICANS ARE DYING FASTER
We tend to take for granted that life expectancies in the U.S. will continue to increase. But here is some disturbing news from the Society of Actuaries: Life expectancy for today’s 65-year-old is now six months shorter than it was last year. And it’s not just older Americans who are affected by this longevity shift. A 25-year-old woman last year had a 50/50 chance of reaching age 90. This year, she is projected to fall about six months short. Some of the reasons? Deteriorating health, particularly that of middle-aged, non-Hispanic whites. Other culprits are drug overdoses, suicide, alcohol poisoning and liver disease. From 2000 to 2009, American death rates improved by 1.93 percent for men
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Americans have had their identities stolen. Source: Bankrate
Advisors report feeling increasingly monitored rather than supported by their firms. — Sonia Sharigian, senior product manager and report co-author at Market Strategies, on the Department of Labor fiduciary rule
and 1.46 percent for women annually. From 2010 to 2014, American death rates plunged to 0.6 percent for men and 0.42 percent for women.
FINANCIAL MARKETS HAVE BECOME ‘A VEGAS CASINO’
Forget blackjack and roulette. Unprecedented monetary policies have turned the world’s financial markets into a casino, said bond investor Bill Gross of Janus Capital Group. And global central bank policymakers are to blame. “Our financial markets have become a Vegas/Macau/Monte Carlo casino, wagering that an unlimited supply of credit generated by central banks can successfully reflate global economies and reinvigorate nominal GDP growth to lower but acceptable norms in today's highly leveraged world,” Gross said in his latest Investment Outlook, titled “Doubling Down.”
“Investors/savers are now scrappin' like mongrel dogs for tidbits of return at the zero bound. This cannot end well.” — Bill Gross
Gross, who oversees the $1.5 billion Janus Global Unconstrained Bond Fund, recommended bitcoin and gold for investors who are looking for places to preserve capital. Gross blasted ultra-loose central bank policies for hindering global economies by keeping so-called zombie corporations alive and inhibiting “creative destruction.”
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Headwinds from the DOL conflict of interest rule have blown the insurance industry off its course, but an advisor’s answer to that terrifying flight might show a glimpse of a way out of the turbulence. By Steven A. Morelli 22
InsuranceNewsNet Magazine Âť December 2016
2016: THE YEAR OF FLYING DANGEROUSLY FEATURE
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urtis Cloke didn’t need the Department of Labor to tell him to focus on his clients’ needs. Two pilots laughing during a terrifying plane trip made it all too real. Cloke, a retirement income advisor and well-known sales trainer, has always been thinking about how to distill the complicated world of finance and insurance down to the essentials. But it was severe turbulence that shook some palpable empathy into him. He was aboard an 18-passenger, single-propeller plane that took off into a 40-mph ground wind on a rainy, misty day from his tiny home airport in Burlington, Iowa, three years ago. Although Cloke flew weekly, this trip stood out. “I was the only passenger in this plane, and I’m just focused on keeping my stomach in check and not getting sick. I couldn’t even see out the windows,” Cloke recalled. “And all of a sudden I heard this laughter. I looked up and while on autopilot, these pilots had their phones up and beamed at each other for some game, and one had yelped out a happy moment.” But “happy” was not how Cloke would have described the moment for himself. “I yelled at the cockpit, ‘Hey, what are you doing up there?’ The pilot looked back, looked at his co-pilot, and they laughed. He said, ‘Relax. We have five gauges on this dashboard right here that are telling us that nothing’s flying into us and we aren’t flying into anybody else. So just sit back, relax and do your best to enjoy the ride.’” The pilot’s smug demeanor didn’t help Cloke enjoy the rest of the flight, but he was at least reassured that they weren’t going to crash. Back on the ground, during his third drink to steady his nerves for the plane ride back through the same rough conditions, Cloke had an epiphany. “This is exactly what our clients are experiencing as they face retirement,” Cloke said. “They hate the ride. They can’t see out the windows, and they just want somebody to tell them if it’s safe or not. They want to know, ‘Am I going to make it?’” Armed with that insight, Cloke went back to the office and instructed his team to figure out a better way to present information to clients. They needed to start with a dashboard that showed a bigger picture that clients and the advisor could adjust and readjust, rather than columns
of numbers that clients couldn’t relate to. Although this was Cloke’s journey to better client service, the DOL has spent 2016 pushing advisors in a similar direction: toward more clarity with holistic care, and less persuasion with product-selling. The conflict of interest fiduciary rule goes into effect on April 10, 2017, but 2016 alone has brought a wave of surprises. First was the inclusion of fixed indexed annuities (FIAs) in the best interest contract exemption (BICE). The BICE requires not only that the client’s best interest be protected but also that a financial institution must sign a contract with the client promising to uphold that standard. Variable annuities were already under that standard in the rule’s original version released in April 2015. FIAs were under the prohibited transactions exemption
in the best interest of the client. And also show that their compensation was reasonable, which has not been defined. Pressure on the industry is also increasing from other sources. Insurance companies themselves are turning away from commission-based sales. And a potential rule from the Securities and Exchange Commission would widen the scope of who falls under the fiduciary duty standard.
Advising by Gauges
Cloke and his team came up with a dashboard similar to the selection of gauges Cloke saw in the plane’s cockpit during his flight from hell. They came up with 12 gauges, but that seemed too complex. So they cut it to four. The gauges are simple, but the methodology behind the numbers is not. Even taking the first one, which indicates a safe
Curtis Cloke realized after an unsettling plane ride that his clients were facing similar anxiety riding into unknowns of retirement. (PTE) 84-24, which featured different requirements. After several months of hearings and comments, the DOL released a final version that moved FIAs into the BICE. The final rule was not subject to comment or hearings. A key effect was that FIAs, one of the fastest-growing insurance products, now needed a financial institution to sign the contract with clients and assume liability for the advisor’s conduct. Simply put, the financial institution could be looking at a class-action lawsuit at any time after the sale. Another surprise was the amount of documentation advisors would need to show that they made the recommendation without the influence of a commission and
withdrawal rate, requires several bits of data. “We talk about this in the context of traditional asset management,” Cloke said. “We talk about this in reference to Monte Carlo simulation. But we had never quantified it from the day of retirement to the end. I put in inflation for their nonmedical flows. I put a higher inflation in for all their medical flows to cover health insurance premiums, Medicare Part B, et cetera. I put in their pretax dollars that are taxed one way. I put in their Roth dollars taxed another. I put all the analytics in that I can ascertain.” The program puts together a dynamic tax estimate. Cloke described it as an automatic 1040 for each year based on flows.
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FEATURE 2016: THE YEAR OF FLYING DANGEROUSLY “I don’t have to think about it. I just have to know that it’s under the hood,” Cloke said. “When we get to the withdrawal rate column, it immediately tells the consumer for every single year from the day of retirement until the day we project the last spouse passing away what the withdrawal rate requirement is, based upon all that dynamic math.” Quite often, that withdrawal rate is around the typically advised 3 percent. The next gauge is income — what percentage of that income do clients not want to risk? “You’re asking a very emotional question,” Cloke said. “And whether they have
maintain their income. The $1 million they have between them in retirement accounts will yield $30,000 annually with a 3 percent withdrawal. Then they have $30,000 in pension and $30,000 in Social Security — $90,000 altogether. Gauge No. 3 shows discretionary liquidity. The hypothetical couple has an allocation liquidity with stocks and bonds that can move from one place to another. But they don’t have any discretionary liquidity — that gauge is zero. “So, now I help them understand the difference between investment allocation liquidity and discretionary spending liquidity,”
CLIENT BASELINE GAUGES
Curtis Cloke’s practice uses four charts to show clients their current trajectory and a new trajectory based on recommendations. $2,000,000
Net Worth $1,671,689
$1,500,000
$1,500,000
Free Liquid Assets
$1,000,000
$1,000,000 $522,294
$500,000 $0
140% 120% 100% 80% 60% 40% 20% 0%
2016 2021 2026 2031 2036 2041 2046 Reliability of Income Avg. ROI 90.66%
$500,000 $0
25%
0%
Client’s initial plan $100 million or they have $500,000, somewhere between 70 and 80 percent is the consistent answer. “But when all the data is entered, often the withdrawal rate is closer to 7 percent, and they are living on 20 to 40 percent reliability of income.” Cloke and his team do not have to tell clients that their plan does not match their reality. The gauges do. Gauge No. 3 sharpens the picture for people who thought they were relatively well off. For example, say a couple has agreed to the guidance of a 3 percent withdrawal and needs $90,000 a year to 24
Avg. WR 5.85%
10% 5%
2016 2021 2026 2031 2036 2041 2046
Withdrawal Rates
20% 15%
Avg. ROI 61.35%
2016 2021 2026 2031 2036 2041 2046
Avg. WR 1.26%
2016 2021 2026 2031 2036 2041 2046
With recommendations Cloke said. “And you know what liquidity they care about? Discretionary, every time.” If they wanted to travel or spend money on some other activity or purchase, they wouldn’t have room to do it. Cloke said this is when an annuity makes sense for a dependable income that they don’t have to worry about outliving. To get to the extra 3 percent withdrawal that clients may want for discretionary income, half of the $1 million in retirement funds would get the extra $30,000, Cloke said. The $500,000 is no longer a hostage to produce the $30,000 annually. The fourth gauge is net worth. Clients
InsuranceNewsNet Magazine » December 2016
can see how adjusting one gauge affects the others. It is not always a given that the purchase of an annuity reduces net worth more than other strategies would. As a financial and insurance advisor, Cloke sells a range of products. So his process is not a sales technique to sell annuities alone. “When clients see their baseline with those four things, they want those gauges fixed,” Cloke said. “Sometimes they can get the income that they said they wanted if they’ll just allow me to use all the tools in my toolbox — mutual funds, stocks, bonds, notes, life insurance and annuities of all different types and size.” Cloke said he believes his model is something the DOL wants to see — more focus on client goals and less on a particular product. Although his system sells annuities, they are in only one group of products his company sells. “DOL regulations are going to require us to stop being product-specific, and be product-agnostic,” Cloke said. “We need to start focusing on what the clients want, not what we want.” Because clients are in control of making decisions, Cloke is not worried about defending against a lawsuit under the BICE. “We can go back and say, ‘This is the discovery of what the client wanted and what they needed,’” he said. “‘Here are the holes that were defined in the quantitative results. Here are the 18 things that we tested, and this clearly won hands down.’ Nobody is going to be able to attack that.”
Companies Still Assessing
Cloke’s new process seems to align with the DOL. But many advisors and companies are still trying to find that direction, even though the rule was long in coming and the effective date is only months away. In October, LIMRA CEO Robert Kerzner said companies were still at a stage where it was difficult to see a general model or direction for the industry. “We’re still in the assessment state, and very few have made very specific broad exhortations of what they’re going to do,” Kerzner said. “I still think we’re very much in the chaos stage.” One trend that has been clear is the move by some companies, brokers in particular, to drop commission sales. But as companies move toward fee sales, they
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25
FEATURE 2016: THE YEAR OF FLYING DANGEROUSLY move away from the lower end of the consumer market. That is what happened in the U.K. after commission sales were banned in 2013. “There are some recent studies from the U.K. government that reaffirm that there has been a reduction in advice to the middle market,” Kerzner said. “We have certainly predicted that that’s what will happen in the U.S. This is not the time to be removing choice.”
approach to help them learn budgeting better, and working on some basics.” Even though Kerzner has been talking for years about gamification and other ways of reaching consumers, few companies have done it. On the bright side, Kerzner said he saw some good fundamentals for the industry. Despite the headwinds, demographics are working in the annuity industry’s favor. “It’s hard to escape the fact that nearly
“We’re still in the assessment state, and very few have made very specific broad exhortations of what they’re going to do. I still think we’re very much in the chaos stage.” — Robert Kerzner, LIMRA CEO
That means many people who have fewer assets and are younger will be left behind. Or, more accurately, they will be left with robo-advisors, which about 80 percent of Americans don’t even know about, Kerzner said. Consumers have said they want people and not robos to advise them. “There is some new research that suggests people want a combination of robo and human advice,” Kerzner said. “When one looks at the data of how millennials want to buy life insurance, mid-40 percent still say, ‘I want it face-to-face.’ That doesn’t mean they mean face-to-face over a kitchen table, but we need ways to leverage technology where a combination of technology and some form of human interaction can reassure people.” But it is going to become critical very quickly because consumers need the push to take action on securing their future. “It could be with some type of tool with a millennial. That may be a gamification 26
59 percent of the retail market is in IRAs,” he said of annuities. “The products provide what that older demographic needs and is worried about — they don’t want to outlive their income. We have a product that can help with that.” Despite low interest rates, even traditional fixed-rate products, such as singlepremium immediate annuities, have been selling well. Usually, sales plummet when interest rates drop. But sustaining that growth will require some innovation, Kerzner said. “The product is going to have to be different,” Kerzner said, “and we’ll see how innovative we can be.” It will be in a different market environment, though. Mergers and acquisitions are changing the players in the business, from smaller marketing organizations that won’t be able to absorb the changes to large corporations that can’t afford another couple of bad quarters.
InsuranceNewsNet Magazine » December 2016
The mergers are not helping with recruiting and retaining advisors, even though the trend toward a fee-based business would seem to appeal to younger workers. “The optimist would ask, ‘When we’re in a more fee-based business, might the millennials actually rather be in a noncommission, giving-advice kind of profession?’” Kerzner said. But companies are having trouble recruiting and retaining even with that sales model, he said. “There’s no question we are going to have to find new ways to provide advice and new models of how we can bring people into the business to provide help and guidance to prospective customers,” Kerzner said. “Because, remember my basic premise — robo-advice alone is not going to do it.” The problem is that companies have pushed aside projects and development to react to the immediate crisis caused by the DOL rule. “It just sucks the air out of the room,” Kerzner said. “Any ability to think about innovating is now being directed toward the DOL. It’s a huge resource drain, especially on IT. Companies, instead of building that product of the future, are going to spend the next two years redesigning every one of their annuity products.” Necessity may be birthing innovation, though. As an American College instructor, Jamie Hopkins sees how the DOL rule has divided students into two camps. “Millennials as a whole — even though some of them are primarily in the insurance world — actually view the DOL more as a positive,” Hopkins said. “They would like to see a move away from commissions and more to salaried employees at some point, like other professions. That is very different than if I talk to the CLU life insurance agent who’s 56 years old and who thinks that the DOL is a terrible thing and companies are still trying to figure out what we can do on commissions.” The commission system is scary for someone just getting started, with student loans and a growing family. “It’s exactly like our retirees — all of a sudden they have all these fixed expenses, and what do they want? Well, they want guaranteed income at that point,” Hopkins said. “Most people aren’t willing to take on that risk.”
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27
FEATURE 2016: THE YEAR OF FLYING DANGEROUSLY The DOL push for reasonable and level compensation might spur creativity not only in how advisors get paid but also in how products can attract a wider audience of advisors. Perhaps including some who would not have considered annuities. Already, some companies are suggesting strategies using annuities as assets. “You can still have variable compensation that isn’t commission-driven,” Hopkins said. “The asset under management (AUM) model is in a lot of ways a commission-type model. It’s how many assets you bring in and you get paid.” Another approach is with assets under advisement (AUA), which are owned by the client and are not actively managed like assets under management would be.
“There used to be a term — annuicide — which means if you’re asset under management and you annuitize everything, you don’t get paid anymore,” Hopkins said. “That’s a clear incentive not to do that, but you’ve seen a little bit of a change there where people will put assets under advisory and you can include the annuity there.” Already this year, companies have introduced several no-load annuities for fee-based planners.
States Get Into Retirement Game
Another area where the industry is going to see more government involvement is in state-run retirement plans. Those are automatic-enrollment IRA programs that
“People aren’t going to put insurance first. Insurance is planning for the what-ifs, which is incredibly important. But people have never been good at that.” — Jamie Hopkins, American College professor
Hopkins isn’t under any illusions that investment advisors are going to flock to insurance products, though. “Obviously, a large portion of the RIA world is just traditional for-fee planners,” Hopkins said. “They don’t have an incentive to look at insurance products. I do believe that’s changing a little bit as their clients are starting to move into the retirement phase. They do recommend things like long-term care insurance, and they’re realizing the most efficient way to generate this person’s retirement income is going to be partial annuitization.” There is another element to the reluctance. 28
several states have been developing with the support of the federal government. Some have criticized the programs as government intervention that is attempting to supplant an industry, but Hopkins is enthusiastic. “All of a sudden we’re going to have all of these people who are not in retirement plans automatically enrolled into a staterun IRA program,” he said. “They can opt out if they don’t want to be in it, but we know from watching 401(k) automatic enrollment that it works really well.” As far as the programs taking business from advisors and the financial sector, Hopkins didn’t see that happening.
InsuranceNewsNet Magazine » December 2016
“These people are not saving today, and they don’t have advisors,” he said. “I know some advisors say they might not be part of the process, but most of the advisors I talk to think this is good because it opens the possibility in 10 to 15 years of actually having people who did save and now can do something the advisor can help with.” The fact remains that the current employer-based retirement-saving system has not worked that well over the past 40odd years despite many attempts at changing the incentives. Hopkins said one of the unintended consequences of the statebased system could be another nudge out the door for the employer-based system. Rather than assume liability with their program, the employer could drop the program and default to the state system. The state system might help with retirement funds, but it would not solve the problem of getting people properly insured, which has been a struggle even in better times. “People aren’t going to put insurance first,” Hopkins said. “Insurance is planning for the what-ifs, which is incredibly important. But people have never been good at that. We’d much rather take the instant gratification as opposed to putting money away in case something bad happens.” Hopkins said he understands the argument against the conflict of interest with commissions. He even sees the argument’s good intentions. But that conflict of interest does not mean that the sales are inherently evil. “We’re trying to get people to get more consumers insured so they have the right protection for their families and their assets,” Hopkins said. “We’re not selling bad things to people; we’re incentivizing people to go out and do good things for them. Yes, there’s conflict, but we’re still doing good things for people. If we take that away, does the incentive to do good things for people diminish, too?” Steven A. Morelli is editor-in-chief 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 can be reached at smorelli@ insurancenewsnet.com.
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29
LIFEWIRES
QUOTABLE
MetLife Gives Snoopy the Boot Even America’s most beloved beagle isn’t immune to corporate layoffs. After 31 years as the face of MetLife, Snoopy and the rest of the Peanuts gang have been given the pink slip. The company is launching a new global branding campaign as it spins off its domestic retail life insurance business to focus more on corporate clients. MetLife is dumping the cartoon characters and adopting a new logo, which will be a blue and green M. MetLife announced earlier this year it plans to spin off its U.S. retail life business and rebrand it as Brighthouse Financial.
CHINA OCEANWIDE BUYING GENWORTH
Genworth became the latest of a string of U.S. life insurers to be bought by overseas companies. China Oceanwide is purchasing the company for $2.7 billion. Genworth officials said it will be business as usual for the company and its operations will continue to be headquartered in Richmond, Va. As part of the $2.7 billion transaction, China Oceanwide contributed an additional $600 million of cash to Genworth to address the debt maturing in 2018, as well as $525 million of cash to the company’s U.S. life insurance businesses.
China Oceanwide’s contribution is in addition to $175 million of cash previously committed by Genworth Holdings to the U.S. life insurance businesses, Genworth said. Low interest rates combined with high longevity rates and higher-than-anticipated claims have taken a toll on Genworth’s long-term care business. Earlier this year, the company announced it would suspend new sales of life insurance products and fixed annuities to help reverse financial losses. DID YOU
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PENN MUTUAL, VANTIS LIFE TO COMBINE
Penn Mutual announced it is merging with Vantis Life, which will become a wholly owned subsidiary of Penn Mutual. The deal would allow Penn Mutual to expand the reach of its life insurance and annuity products through Vantis Life’s direct-to-consumer and bank channels. Both companies will continue to operate under their current brands and maintain their respective management teams and workforces. Vantis Life has distribution agreements with more than 150 banks and credit unions, including large super-regional and regional banks, and a footprint that spans 45 states with more than 10,000 branch locations.
We're seeing that as [the millennials] buy homes and have children, they are purchasing at levels of prior generations. So it's a matter of timing. — LIMRA CEO Robert Kerzner
paying off the mortgage and paying off home expenses. In addition to paying off expenses, people are increasingly looking to life insurance as a way to fund long-term savings and achieve financial security, the LIMRA report said. And permanent life insurance isn’t just for wealthy consumers. LIMRA researchers found more than 71 percent of all permanent life insurance policies issued in 2013 were for those who make less than $100,000 a year. Top reasons for owning life insurance 100%
75%
FUNERAL EXPENSE STILL TOP REASON FOR COVERAGE
Although the main reason why Americans buy life insurance is to cover burial and final expenses, they have other reasons for buying the product, according to the 2016 LIMRA Life Insurance Barometer Study. Paying for a funeral tops the reasons for buying life insurance. Leaving an inheritance and replacing lost income also motivate people to buy. Rounding out the top five reasons to buy life insurance are
Prudential will give new employees hired through campus recruiting programs up to a $5,000 incentive to help pay off student debt. Source: Business Wire
InsuranceNewsNet Magazine » December 2016
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Insurance products issued by: Minnesota Life Insurance Company | Securian Life Insurance Company 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. Minnesota Life is not an authorized New York insurer and does not do insurance business in New York. Both companies are headquartered in St. 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 ©2016 Securian Financial Group, Inc. All rights reserved. For financial professional use only. Not for use with the public. This material may F88056-2 10-2016 DOFU 10-2016 75027
not be reproduced in any form where it would be accessible to the general public. December 2016 » InsuranceNewsNet Magazine
31
LIFE
Shareholders Stake Shaky Claim in Unclaimed Property Cases nclaimed property has been U a focus of regulators and plaintiffs’ counsel for the past several years. Now shareholders of publicly owned insurers are jumping on the bandwagon, with mixed success. By Dawn B. Williams
S
hareholders of publicly held insurance companies have joined state regulators, life insurance beneficiaries and policyholders in staking a claim in unclaimed property. Two recent decisions in these cases highlight the dangers and the weaknesses of this type of litigation in addition to other theories being asserted against the life insurance industry. A federal court in New York dismissed the case in City of Westland Police & Fire Retirement System v. MetLife. Meanwhile, the federal court in New Jersey certified a class action in City of Sterling Heights Gen. Employees’ Retirement System v. Prudential Financial Inc. Shareholders allege improper use of the Death Master File. In both cases, the shareholder plaintiffs claim that the insurers overstated their earnings and financial strength because they did not hold enough reserves for death benefit claims that were incurred but not reported. Although the insurers used the Social Security Administration’s Death Master File (DMF) to terminate annuity benefits, the insurers did not use the DMF consistently enough to trigger life insurance benefits. The shareholders claim that it was only after regulators began investigating this activity that the insurers revealed the scope of the regulatory investigations, and that they also took tens of millions of dollars in charges against their reserves. The complaints allege that stock prices fell after these revelations, causing shareholders economic harm. A federal court in New York rejected the class claims. Most recently, the 32
U.S. District Court for the Southern District of New York granted MetLife’s motion to dismiss all but one small subset of those claims. The plaintiffs identified three purported misrepresentations: the amount of the allegedly inadequate reserves; qualitative statements about MetLife’s mortality results, underwriting practices and approach to risk; and that the regulatory investigations were without merit.
WHAT WE CAN LEARN FROM RECENT COURT CASES
Cross-checking insurance policies against the Death Master File has become a common practice in the industry today. But recent lawsuits teach us that failing to do so had legal consequences. City of Sterling Heights Gen. Employees’ Retirement System v. Prudential The parties settled the case for $33 million. The retirement system claimed those who invested in Prudential stock suffered damages when the stock dropped in price after the company disclosed it had to increase its reserves in light of its DMF practices. City of Westland Police & Fire Retirement System v. MetLife The majority of the claims against MetLife were dismissed in federal court in New York, although the plaintiffs have refiled their complaint in the same court. The court initially ruled MetLife lacked the intent to deceive or to harm policyholders. Plaintiffs in both cases claim that the insurers overstated their earnings and financial strength because they did not hold enough reserves for death benefit claims that were incurred but not reported.
However, in the first purported misrepresentation, the plaintiff did not claim that MetLife believed, prior to checking its policies against the DMF, that its reserves were inadequate. Regarding the qualitative statements, the court found that most of them were mere puffery. Part of one claim survived, however. The plaintiffs claimed that the reported mortality ratio — a number that compares the observed number of deaths to the expected number and is indicative of the
InsuranceNewsNet Magazine » December 2016
company’s underwriting and experience — was an untrue statement. The court found that MetLife did not make those statements with an intent to deceive; however, that was not required under one subsection of the securities laws. Finally, the court decided that the plaintiffs had not claimed any facts suggesting MetLife believed that the regulatory investigations had merit during the class period. Nor should MetLife have expected that its supposedly inadequate reserves would trigger fines or liability that would have a material impact on the company’s future financial performance. Thus, the vast majority of the claims against MetLife were dismissed. The plaintiffs have since refiled their complaint in that same court. A federal court in New Jersey certifies a class. In the Sterling Heights v. Prudential case, the U.S. District Court of New Jersey allowed many of those same claims raised in Westland v. MetLife to survive the pleading stage. The court also certified the shareholder class. Prudential argued that the stock drop following the charge to reserves was caused by other disclosures. The court rejected that contention and found that Prudential had not successfully proved a lack of price impact. Because the court found that issues of common proof predominated over any individual issues, it certified the class. Prudential appealed, and the parties settled the case for $33 million.
Broader Implications
In other cases involving insurers’ use of the DMF to identify deceased policyholders, these courts can make persuasive discussions of whether there was a misrepresentation or omission, whether it was intentionally made, and whether it caused damage. For example, in the MetLife case, the court’s determination that the insurer did not believe that its reserves were inadequate until it checked its policies against the DMF is critical. Despite regulatory investigations
and cross-checks of other blocks of life insurance policies against the DMF occurring years before, MetLife cannot knowingly have made misrepresentations prior to the date it actually checked the group of policies at issue against the DMF. Nor are these theories susceptible only to claims under the securities laws. A class of policyholders, for example, might bring suit against an insurer claiming that, due to the various misrepresentations, the policies they purchased either were worth less or were inherently more risky than represented. While the “worth less” theory has been rejected by some courts, it has served as an adequate foundation to certify a class in other recent decisions. In Walker v. Life Insurance Co. of the South West, the court ruled that the worth-less model is not a viable theory of damages. In Abbit v. ING, the court certified a class where alleged damages were predicated on the worth-less theory. Claims that plaintiffs paid premiums for policies that are less financially secure than the insurer represented them to be also have met with mixed results. In Ross v. AXA Equitable Life Insurance, the court dismissed a similar claim. The reasoning in the MetLife case might be fatal to such claims, but a court could gloss over the deficiencies of a complaint just as in the Prudential case, exposing insurers to potential class liability. Cross-checking insurance policies against the DMF has now become a common and consistent practice in the industry, but lawsuits such as these are brought to cover classes from prior years, when perhaps the practice was not so consistent. If faced with such a lawsuit, take a cue from MetLife — focus on the lack of intent to deceive or to harm policyholders. Attempt to distinguish your case from Prudential by emphasizing that everyone had different reasons for purchase and was affected differently. Dawn B. Williams is a shareholder in the Washington, D.C., office of Carlton Fields, where she represents a variety of clients, including insurance companies, in class action and other complex commercial litigation disputes as well as regulatory enforcement proceedings. Dawn may be contacted at dawn.williams@ innfeedback.com.
December 2016 » InsuranceNewsNet Magazine
33
LIFE
Whole Life and IUL? Why Not Have Both? Offering a new type of paid-up addition would give permanent life insurance a new twist and give clients the best of both worlds. By Frank Chechel and Anthony Domino
I
ndexed universal life insurance is the twist on permanent life insurance that is driving the sales of most major insurance carriers. Once a client decides to purchase a permanent insurance product, the next decision they must make inevitably becomes — whole life or IUL? Make no mistake — the upstart has not yet overtaken the tried and true. Whole life continues to be the top-selling life insurance product by premium, as it has been for many years. However, IUL has experienced explosive sales growth since the 2008 financial crisis. IUL now stands as the next most popular life insurance product after whole life, according to LIMRA sales data. Both IUL and whole life generally are sold for death benefit protection today with potential for cash value accumulation and retirement income down the road. Whole life touts its robust death benefit, premium and cash value guarantees along with steady dividend performance, while IUL promotes its index-linked upside performance combined with some level of downside protection. Whole life is the traditional fixed-rate stable performer that most people associate with permanent life insurance. Universal life is an “unbundled” version of permanent life insurance in which premiums are flexible and generally are estimated based on current charges and credits. But this also means that the carrier can raise or lower those charges and credits if so desired. “Indexed” universal life means that the policyholder can allocate their cash value account to the traditional fixed-rate or an
34
equity-style index (typically, the Standard & Poor’s 500). The downside risk is mitigated by inherent performance guarantees, but the upside potential of the gain is limited or capped as well. Also – because it is an index – dividend payments are not factored into the equation. As the sales numbers demonstrate, both products resonate with a broad cross section of insurance consumers. However, despite the overwhelming popularity of both products, it is a rare breed of agent who sells both product types. Not quite as stark as opinions of the designated hitter rules— nonetheless, agents
policyholder to pay an additional premium over and above the base premium. This creates the growth of death benefit and cash values in a participating whole life policy. Adding large amounts of paid-up additions may create a modified endowment contract (MEC). A MEC is a type of life insurance contract that is subject to lastin-first-out (LIFO) ordinary income tax treatment, similar to distributions from an annuity. The distribution may also be subject to a 10 percent federal tax penalty on the gain portion of the policy if the owner is under age 59½. The death bene-
What Are Paid-up Additions, and How Do They Work? Paid-up additions (PUAs) are additional life insurance that a policyholder purchases with the policy’s dividends. PUAs also can be a type of rider on a whole life insurance policy. PUAs also can earn dividends.
PUAs’ cash value can increase over time. These increases are tax-deferred.
generally live in one camp or the other. Most present only whole life or only IUL to the vast majority of their clients. But why do agents, and ultimately clients, need to settle for one? Isn’t there a way for carriers to offer agents and clients a better solution, combining the best of both worlds? Interestingly, carriers have been experimenting with this notion for some time, going back to the 1990s. Generally, the concept has been to create a new variation of whole life paid-up additions (PUAs). PUAs are purchases of additional insurance (death benefit) that have a cash value. These purchases are made with dividends and/or a rider that allows the
InsuranceNewsNet Magazine » December 2016
The policyholder can surrender PUAs for their cash value or take a loan against them; however, that may reduce the policy’s cash value and death benefit.
The policyholder can use PUAs to increase their coverage without having to go through medical underwriting again.
fit is generally income tax-free. The dividend performance of traditional PUAs would be replaced by the performance of the S&P 500 or another popular equity market index. At least one carrier developed a “variable paidup addition” for their whole life contract in the late 1990s, tying the cash value performance of the variable PUA to the movement of the S&P 500 equity index. Unfortunately, sales of this product were hampered by the “dot-com bust” and the unlimited downside risk inherent in this design. In a twist on the King Solomon story in the Old Testament, the insurance carrier has managed to successfully “split the baby” — satisfying both camps and
WHOLE LIFE AND IUL? WHY NOT HAVE BOTH? LIFE keeping the baby alive. Oftentimes, an innovation fails or succeeds not based on the idea itself, but based on its entering the marketplace at the appropriate time. As consumers, agents and carriers emerge from the 2008 crisis and have become familiar with the concept of indexed insurance products, we believe that now may be the perfect time to reimagine a new type of whole life PUA — an “indexed PUA.” This innovation works as follows: » Indexed PUAs would receive a positive or negative adjustment of the traditional dividend based on the performance of the S&P 500 index, subject to a cap and floor. » This adjustment would be available only on PUAs, thus ensuring that the base whole life policy guarantees are not impacted by equity market volatility. » Clients would have the ability to adjust their allocation between traditional and indexed PUAs over time as their needs change.
Whole Life Sales on the Rise, IUL Sales Drop
7%
IUL sales declined 7 percent in the second quarter of 2016, only the second time in 10 years that IUL premium dropped. IUL sales account for 20 percent of all individual life premium.
Whole life sales keep climbing as new premium increased 6 percent in the second quarter of 2016. Whole life represents 37 percent of the total life market. This year is on track to become the 11th consecutive year of sales growth for whole life.
6%
Source: LIMRA
To be fair, this solution may not necessarily work for all clients. There will be many clients who will still prefer a traditional whole life product or a traditional IUL. However, given the significant size of the whole life and IUL marketplaces, we believe the time is ripe for carriers and agents to begin offering a “best of both worlds” indexed PUA solution to their clients. This concept could be attractive to many of today's insurance buyers, providing attractive whole life guarantees
along with the opportunity for indexlinked upside potential. Frank Chechel is second vice president, product management, individual life, with Guardian Life. He may be contacted at frank.chechel@innfeedback.com. Anthony Domino is managing principal with Associated Benefit Consultants, Rye Brook, N.Y. He may be contacted at anthony. domino@innfeedback.com.
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*Available on the Protection and Enhancement Packages for a charge. The basic package is available at no additional charge. **Via the Enhanced Guaranteed Minimum Withdrawal Benefit (EGMWB) rider for an additional cost. Additional limitations and restrictions apply. The EGMWB is the greater of: initial premium plus 18% bonus, initial premium at 6.00%, which is guaranteed for up to 10 years. Prosperity Elite surrender charges vary by product and state. Optional provisions and riders may have limitations, restrictions and additional charges. Availability of product and features varies by state. Form numbers: ACI-1018(06-11), API-1018(06-11), ARI-1046(11-12), ARI-1040(11-12), ARI-1068(03-14); et al For Producer Use Only – Not For Use In Solicitation to Consumers “FGL” when used herein refers to Fidelity & Guaranty Life, the marketing name for Fidelity & Guaranty Life Insurance Company issuing insurance in the United States outside of New York. Contracts issued by Fidelity & Guaranty Life Insurance Company, Des Moines, IA. 16-957
December 2016 » InsuranceNewsNet Magazine
35
ANNUITYWIRES
18 Apply for DOL Exemption How will independent marketing organizations sell fixed indexed annuities under the Department of Labor fiduciary rule? By applying for a special exemption – and 18 IMOs have done exactly that, records show. The exemption would grant the IMOs “financial institution” status. This would allow agents under contract with the marketing organizations to sell commission-based FIAs. Commission-based FIAs can be sold by independent agents under the DOL rule’s Best Interest Contract Exemption. The 18 insurance marketing and product development companies that have applied for a financial institution exemption from the DOL so far include: Advisors Excel, Topeka, KS
Gradient Insurance Brokerage, Topeka, KS
Alpine Brokerage Services, Marlton, NJ AmeriLife Group, Clearwater, FL
Ideal Producers Group, Overland Park, KS InForce Solutions, Woodstock, GA
Annexus, Scottsdale, AZ Brokers International, Panora, IA
Insurance Advocates, Kapolei, HI InsurMark, Houston, TX
Clarity 2 Prosperity, Westlake, OH ECA Marketing, Eden Prairie, MN
Legacy Marketing Group, Petaluma, CA M&O Financial, Southfield, MI
Futurity First Financial, Hartford, CT Financial Independence Group, Cornelius, NC
Saybrus Partners, Hartford, CT The Annuity Source, Bellevue, WA
Average street-level compensation for indexed annuities has been on a slide, hitting a decade-long low of 4.6 percent in the second quarter. That’s according to Wink’s Sales & Market Report. Moore Market Intelligence, a firm that consults on indexed products, did some research into agent indexed annuity compensation and average compensation reported that comhit a low of missions on indexed annuities range from 2 percent to 12 percent. However, the majority of products pay a commission in the 7-7.99 percent range. This commission is generally 50 percent lower for older annuitants.
4.6%
64% ?
KNOW 36
Guaranteed There are 11 companies income foroffering life is QLAC critical (qualifying to a long, longevity comfortable annuity retirement. contract) products. While this is a small and new part of the DIA market, we expect to see an uptick — Roger W. Ferguson Jr., in salesandinCEO 2016. president at TIAA
Asbill & Brennan shows. Sutherland tracks cases and fines levied by FINRA. FINRA investigators are looking into the sale of L-share variable annuities with long-term riders that offer more liquidity and a shorter surrender period. The drop in the number of cases also may have to do with slower variable annuity sales due to shifting demand from consumers and advisors. It also may be that FINRA investigators are turning their attention to other areas of enforcement.
NEW PRODUCTS HIT THE SCENE
AVERAGE AGENT COMP AT DECADE-LONG LOW
DID YOU
QUOTABLE
2015 Fines: $15M 2016 Fines: $30.7M (200% increase)
VA FINES WILL REACH RECORD HIGH
The Financial Industry Regulatory Authority is expecting a banner year for fines in cases involving variable annuities. Projected fines assessed by FINRA in connection with VA cases will reach a record $30.7 million, a number driven by a huge MetLife fine. This is an increase of nearly 200 percent over 2015. This record high in fines comes in a year when FINRA expects to handle a smaller number of cases involving VAs. FINRA is on track to finish the year with just 16 cases involving VAs. This is a drop of 36 percent compared with last year, a projection by the law firm of Sutherland
of indexed annuity sales will be affected by the fiduciary rule. Source: Wink’s Sales & Market Report
InsuranceNewsNet Magazine » December 2016
Here’s the latest on some new annuity products to hit the marketplace. Lafayette Life has enhanced its Marquis SP, a single-premium, deferred, fixed indexed annuity. The carrier has added one- and two-year point-to-point allocation options associated with the GS Momentum Builder Multi-Asset Class Index, sponsored by Goldman Sachs. The new options are in addition to Marquis SP’s three-year point-to-point allocation option associated with the GSMAC Index. Great American Life announced that its new, fee-based, fixed-indexed annuity with optional guaranteed income rider is now available through financial advisors at Raymond James. The Index Protector 7 fixed indexed annuity marks Great American Life’s entry into the investment advisory channel. As one of the first fixed indexed annuities to hit this emerging market, the Index Protector 7 is designed for financial advisors who offer fee-based services.
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37
ANNUITY
Treasury Rule Allows Split Between Annuities, Lump Sum A new rule will provide pension plan participants with more flexibility by giving them the option of a lump sum or an annuity. By John Hilton
N
ew Treasury rules could be a boon for annuities as an option within defined benefit plans, but only if agents and advisors get better at educating clients, experts say. The changes, announced in early September, simplify rules to allow retirees to simultaneously elect a partial lump sum and a partial annuity from a defined benefit pension plan. Annuities are rarely offered in DB plans. Those plans that do include an annuity option see little participation in that option, but experts say better regulatory clarity will likely contribute to increased interest. “This rule will provide pension plan participants with more flexibility when [they are] given the option of a lump sum or an annuity,” said Cathy Weatherford, president and CEO of the Insured Retirement Institute. “It removes the all-or-nothing choice that these workers must make when given the option, and in doing so, it will hopefully encourage more Americans to take their benefit, at least in part, in the form of a lifetime income stream.” The new rules apply to distributions with annuity payments starting in plan years beginning on or after Jan. 1, 2017. The rules are intended to encourage plans to offer hybrid distribution options that include an annuity, Treasury Department officials said. Whether or not clients choose the annuity option could depend on the attention and education they receive from their agent/advisor, said Harold Evensky, professor of practice at Texas Tech University and chairman of Evensky & Katz/Foldes Financial Wealth Management. “The ball is in our court basically,” he said. “As people sit down and if they begin 38
“It removes the all-or-nothing choice that these workers must make when given the option, and in doing so, it will hopefully encourage more Americans to take their benefit, at least in part, in the form of a lifetime income stream.” — Cathy Weatherford, president and CEO of the Insured Retirement Institute to do some serious planning and they look to the numbers, I think people are going to realize that’s about the only way they’re going to come close to achieving their goal.”
Balancing Present and Future
First proposed in February 2012, the regulations are an attempt to balance retirees’ need for longevity insurance through partial annuity payments with the increased liquidity provided by lump sum payouts. J. Mark Iwry, senior advisor to the Treasury secretary and deputy assistant secretary for retirement and health policy at the Treasury, spoke this summer about efforts to give retirees more lifetime income they can’t outgrow. Too often, new retirees are only given a choice between lump sum, which most take, and rolling all the money into an annuity, Iwry said during an IRI conference in June. In response to comments, tentative rules were streamlined to allow a participant’s accrued benefit to be bifurcated. That means only the minimum present value requirements under the tax code will apply to the portion of the accrued benefit that is paid as a lump sum. Under the tax code, the minimum present value of a benefit offered by a pension plan cannot be less than the present value calculated by using a specified mortality table and interest rate.
InsuranceNewsNet Magazine » December 2016
The final rules allow two (rather than three) ways to split a benefit between a lump sum and an annuity, another change made in response to comments. Although some approaches appeared to fit very well with certain plan designs, some didn’t fit into any of the three, Treasury officials said. Offering annuities is one hurdle. Their attractiveness as an investment depends on other hurdles, Evensky said. Obviously, advisors would like to see a better interest-rate environment. “The payouts are very dependent on current rates, roughly the 10-year Treasury rate, which is historically extremely low,” he said. On the other hand, advisors have a natural sale if they can help clients see the value in safety and peace of mind, Evensky explained. “Any other investment gain is going to be from dividends, interest or capital gains,” he said. “An immediate annuity offers the potential for a mortality return, which can be an extraordinarily positive element, as well as the reality that it lasts for a lifetime.”
Administration Push
Treasury wants to encourage more investment in annuities, Iwry has said. This is part of a general push by the Obama administration to prod Americans to save
more for retirement. Earlier this year, the administration rolled out the MyRA plan, which allows participants to save up to $15,000 for retirement, with no fees or risk of loss in principal. The funds are held in U.S. government debt, a safer alternative than stocks and corporate bonds. In 2010, Obama signaled support for annuities when his Middle Class Task Force announced a series of policy proposals designed to aid middle-class families. Among them were a few initiatives for boosting retirement programs and savings, including specific language supporting annuities. A July 2014 Treasury ruling allowed qualifying longevity annuity contracts (QLACs) within 401(k)s and individual retirement accounts. The rules allow qualified plan owners to divert some of their qualified assets into a QLAC, which is a type of deferred income annuity, up until age 85. So far, they have been slow to take off, due in part to low interest rates and low education, Evensky said. The potential is there, however. “It’s a much smaller chunk of someone’s nest egg, so I think it will be an extremely important vehicle in the next decade,” he said. The Sept. 9 rules change came on the heels of a Government Accountability Office report that admonished the Department of Labor for not doing enough to encourage workers to consider lifetime income options. The report focused on workers who rely on their 401(k) plans to finance their retirement. The GAO report came from responses from retirement plan administrators to a questionnaire. Those administrators represent more than 40 percent of all 401(k) assets and about a quarter of plans as of the end of 2014. The GAO found that of the plans covered by the questionnaire, about twothirds did not offer a withdrawal option — payments from accounts, sometimes designed to last a lifetime — and about three-quarters did not offer annuities, which are arrangements the GAO said can guarantee set payments for life. InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@ innfeedback.com.
SBLI will now offer LegacyShield’s core service, “Shield,” with every issued policy. SBLI joins the quickly growing list of LegacyShield enterprise accounts to meet the demand of today’s socially connected customer. Integrating LegacyShield’s digital legacy planning platform creates a way to meet and exceed consumers’ expectations while adding enormous value to distributors. “In a sea of lookalike products, we at SBLI believe LegacyShield’s platform will play an integral role in delivering unique experiences and enhanced value for our policyholders and distributors alike.” — Denis Clifford, SVP and Chief Distribution Officer of SBLI
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Digital legacy planning is the future, and those who do not embrace it are in danger of being left behind. Learn About LegacyShield Today! Get access to LegacyShield and download the white paper, “Offering Digital Legacy Planning Gives You the Ultimate Edge,” at EngageAndSellMore.com or call 844.308.0707. December 2016 » InsuranceNewsNet Magazine
39
ANNUITY
Why an Annuity in a Roth Is Such a Tasty Combination he only thing better than getT ting income guaranteed for life is getting that income without having to pay any taxes on it.
S
By Ali Hashemian
ome things in this world complement each other so well that they will always be considered classic combinations. If given the choice, most people would take ice cream with their cake and would enjoy cheese with their glass of wine. However, some great combinations come from pairings you might not expect. Who would have thought that salt
could taste good with caramel or a slice of cheese could accompany apple pie? Now that your mouth is watering, let’s shift to a healthier topic: financial planning. Specifically, let’s explore the seemingly strange yet powerful combination of an annuity inside a Roth IRA. Here is my first warning to clients who are looking at an annuity: Anybody who tells you annuities are the best investment is wrong, and anybody who tells you annuities are the worst investment is wrong. Just as with every other place clients can put their money, annuities have advantages as well as disadvantages. However, many of the negative as-
Many of the negative aspects of an annuity can be eliminated by funding it with Roth assets. 40
InsuranceNewsNet Magazine » December 2016
pects of an annuity can be eliminated by funding it with Roth assets, and the benefits of an annuity can complement the tax advantages associated with a Roth. In our practice, we have learned that clients don’t complain about the downsides of an investment; they complain about the downsides they didn’t know about. So first we need to explore two of the main drawbacks of putting money in an annuity contract: taxes and liquidity.
Downsides of Annuities
Let’s start out by looking at the taxation of annuities. In most other investments, the growth in the account is taxed at long-term capital gains rates if that investment is held for more than 12 months before selling it. In an annuity, the growth will be taxed at ordinary income tax rates, regardless of how long your client holds the annuity before taking their money out. This
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INCOME THEY CAN’T OUTLIVE FG Retirement Pro’s® Guaranteed Minimum Withdrawal Benefit (GMWB) feature creates a lifetime income while maintaining 2 flexibility until annuitization is required. FG Retirement Pro® focuses on growing income over time by crediting indexed interest directly on the GMWB feature’s Benefit Base as opposed to the annuity’s Account Value. This innovation produces the opportunity for the income Benefit Base to grow faster. The Benefit Base is used for computing the GMWB and is not available in a lump sum.
HELP PROTECT RETIREMENT PLAN FG Retirement Pro® was specifically developed to keep retirement savings and income safe from market downturns while enhancing the opportunity for long-term growth potential. With the FG Retirement Pro®, the Account Value earns a minimum fixed interest rate. It can’t earn 0%. It may earn much more through Breakthrough, a feature that’s first of its kind. If Breakthrough is achieved, the Account Value has the same growth rate potential as the Benefit Base.
CHANGING FAMILY CIRCUMSTANCE Sometimes plans don’t work out the way we intended. Preserving an increasing benefit for loved ones and family requires an innovation like the Enhanced Death Benefit which is paid in lieu of the Base Annuity Death Benefit. There are no fees or charges for this unique legacy builder.
Please call us for more information (800-445-6758) or visit FGLAllSeasons.com. 1 When High Fees Stink Up Your 401(k), What Can You Do?, NPR.com, October 30, 2015 2 If you elect annuitization under your policy, you must elect a lifetime only payment option as defined in the policy in order to receive payments for life. Annuitization amount may be different than the Guaranteed Withdrawal Payment Amount. For Producer Education and Use Only. Not For Use in Solicitation to Consumers. “FGL”, when used herein, refers to Fidelity & Guaranty Life, the marketing name for Fidelity & Guaranty Life Insurance Company issuing insurance in the United States outside of New York. FG Retirement Pro policy form numbers: API-1074(01-15), ACI-1074(01-15); et al. 16-958
December 2016 » InsuranceNewsNet Magazine
41
ANNUITY WHY AN ANNUITY IN A ROTH IS SUCH A TASTY COMBINATION is one of the disadvantages of annuity products, since long-term capital gains rates are much lower than ordinary income tax rates for the same individual or family. However, this disadvantage can be avoided by using Roth accounts to fund the annuity. Since the account registration supersedes the tax rules of the annuity, all the growth in an annuity funded with Roth money potentially will be tax-free (as long as the rules for qualified distributions are followed). Many annuities can provide investors with decent returns, considering the low risk of principal. So being able to take advantage of this type of risk-adjusted return in a taxfree setting makes it very appealing to clients. The next big downside of an annuity is the lack of liquidity. In most annuities, there are surrender periods between three and 10 years long. Potentially high penalties can result if a client liquidates the annuity within that surrender period. But in a Roth IRA, investors will want to wait at least five years from when it was initially established or until age 59½ (whichever comes later) to make sure the distributions are qualified and thus taxfree. In addition, most people who put money into a Roth will wait even longer before they start accessing that money. This is because investors want to get tax-free growth on the asset for as long as possible, and the true tax advantage comes from taking the money out in the distant future (when tax rates potentially will be much higher). Since most people will avoid liquidating their Roth accounts in order to maximize the tax-free growth, the surrender periods on annuities are seemingly less restrictive if they are funded with Roth dollars.
Benefits of Annuity/Roth Combo
As you can see, two of the biggest pitfalls of annuities are of much less concern if the annuity is used inside a Roth. On top of that relief, many of the benefits of an 42
annuity contract can be enhanced by using it within a Roth account. Let’s take a look at how three of the main advantages of using an annuity can be made
even better by using Roth assets: lifetime income, protection of principal and contract bonuses. One of the main reasons clients consider using an annuity in their financial plan is the fact that it is one of the few items that will provide guaranteed income for life. With medical advances and the enhanced risk of retirees outliving their money, the lifetime income benefits of annuities have become increasingly attractive. And most insurance companies will offer higher guarantees or potential returns on the income benefit of the contract to incentivize people to use the lifetime income features. This unique benefit is made exponentially better if the lifetime income is taxfree, which can be done if the annuity is funded with a Roth. The only thing better than getting income guaranteed for the rest of your life is getting that income without having to pay any taxes on it, although taxes are due with a Roth conversion or any contributions to the account. Another positive feature that can be
InsuranceNewsNet Magazine » December 2016
found in many annuities is protection of principal. In a fixed annuity, the client cannot lose money due to market performance. This risk management strategy can be particularly attractive in a Roth because the only thing worse than losing money is losing money that could have been distributed tax-free. In addition, there are no tax advantages associated with taking market risk in a Roth, because losses in a Roth account cannot be written off or carried forward. The last benefit of an annuity that pairs well with a Roth is the contract bonus. Many insurance companies will offer annuity products that have an upfront bonus. This feature can be very impactful inside a Roth account, as it can help mitigate or washout the taxes that were paid on a Roth conversion or the deduction that was missed on a Roth contribution. In some cases, we have seen the bonus on an annuity contract completely offset the taxes paid on a Roth conversion, which helps people get over the emotional hurdle of paying taxes today to avoid taxes down the road. It’s always surprising when a client has not considered an annuity in their portfolio or a Roth strategy in their financial plan. But it’s even more shocking when a client has both an annuity and a Roth and never considered the effect of combining these strategies. Although a Roth annuity might not be right for every portfolio, it should be analyzed and considered by almost everyone. Ali Hashemian, CFP, MBA, is president of the Kinetic Agency, Los Angeles. Ali may be contacted at ali.hashemian@innfeedback.com.
Like this article or any other? Take advantage of our award-winning journalism, customizable licensure and reprint options. Find out more at innreprints.com.
Indexed UL Can’t Should Be Sold to Seniors IT’S ABOUT TIME SOMEONE SET THE RECORD STRAIGHT.
Nobody can deny that seniors dominate as the biggest and most sought-after market for agents and retirement planners. But advisors are getting some bad advice these days when it comes to selling Indexed UL to this lucrative group.
MORE THAN 90% OF THE AGENTS WE TALK TO BELIEVE THE SAME MYTHS: • “Seniors simply can’t get approved”
• “Underwriting on an IUL policy takes too long”
• “There’s not enough time for the policy to grow”
• “IULs are best sold to Gen Xers and Millennials”
• “Fees are too high to capture gains”
WHAT AGENTS NEED TO KNOW.
Agents are being done a huge disservice by excluding Indexed UL for their senior clients. If this is your mindset, make no mistake: you’re missing out on one of the best ways to fulfill your moral obligation to senior clients by offering them a way to control their taxes and their losses, receive tax-free income and have a tax-free benefit to pass on to their heirs.
WHAT IS YOUR TIME WORTH?
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December 2016 » InsuranceNewsNet Magazine
43
HEALTH/BENEFITSWIRES
More Workers Moving to HighDeductible Plans
QUOTABLE 3 in 10 covered workers are in high-deductible plans
More employees were moved into lower-cost health insurance plans or high-deductible health plans in 2016, according to a Mercer survey. This shift contributed to a 2.4 percent increase in employers’ total benefit costs per employee — one of the lowest increases in decades. About three in 10 covered workers are enrolled in high-deductible plans, Mercer said. The total cost of health benefits averaged $11,920 per covered employee. With all the news of increasing health premiums, The Commonwealth Fund reported a different story. Premium growth generally has slowed for employer-based policies since 2010, according to The Commonwealth Fund’s research. The Commonwealth report said employees typically have had to contribute more to their health plans. Even though that contribution growth rate has slowed, the report said families are feeling pinched because income growth has failed to keep pace with rising premiums and deductibles.
MEDICARE LAUNCHES DOCTOR PAY OVERHAUL
Medicare is changing the way it does business with doctors and clinicians who provide service for the program’s participants. The changes are so far-reaching, in fact, that the regulations are nearly 2,400 pages long and will take years to implement completely. MACRA, the Medicare Access and CHIP Reauthorization Act, creates two new payment systems, or tracks, for clinicians. It affects more than 600,000 doctors, nurse practitioners, physician assistants and therapists, who were a majority of clinicians billing Medicare. Medical practices must decide next year what track they will take. Starting in 2019, clinicians can earn higher reimbursements if they learn new ways of doing business, joining a leading-edge track that's called Alternative Payment Models. An estimated 590,000 to 640,000 clinicians will be in a second track called the Merit-Based Incentive Payment System. It features more modest financial risks and rewards, as well as accountability for quality, efficiency, use of electronic medical records and self-improvement. DID YOU
KNOW
?
44
OVERALL PREMIUM ON RISE IN DI $392.2M in 2015 $248.5M in 2014 Overall disability insurance premiums saw their highest annual percentage increase in 15 years, rising to $392.2 million in 2015. This was an increase of 5.8 percent over the previous year, according to Milliman. Individual policy counts also rose, inching up 6.5 percent to 243,371 in 2015 from 228,437 in 2014. Although 2015 saw big gains on the DI front, 2016 is shaping up to be a strong year for DI as well, judging from the sales figures from the first half of the year. Annualized premium rose 7.2 percent in the first six months of 2016 compared with the same time period last year, Milliman said. Contributing to the increase is that DI coverage is penetrating farther into the corporate executive segment. Last year, 25 percent of new individual DI annualized premium was generated by the corporate executive occupational category. This was the highest percentage since 2008.
Evergreen Health, one of the few successful health insurance CO-OPs, will be acquired by a consortium of private investors and Source: Northwestern Source: Baltimore Sun converted toMutual a for-profit insurance company.Source: Business Wire
InsuranceNewsNet Magazine » December 2016
Contrary to early predictions that many employers would stop offering health insurance in response to the Affordable Care Act … there has in fact been little change in the share of the nonelderly population covered by employer plans since the law went into effect. — A report by The Commonwealth Fund
HEALTH CARE PENALTY: THE LESSER OF TWO EVILS?
That tax penalty that was supposed to punish people for not buying health insurance? Many have taken a look at the cost of coverage and figured that paying the penalty is the lesser of two evils. Come April, those who have avoided buying insurance will face penalties of around $700 a person or more. For the young and healthy who are badly needed to make the Affordable Care Act work, it is sometimes cheaper to pay the tax man than to shell out big bucks for a health plan that has large premiums and high deductibles. The IRS said 8.1 million returns included penalty payments for people who went without insurance in 2014, the first year in which most people were required to have coverage. A preliminary report on the latest tax-filing season said that 5.6 million returns included penalties averaging $442 per return for people uninsured in 2015. Pay the penalty!
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HEALTH/BENEFITS
How DI Can Be the Key to the Executive Boardroom Making inroads with C-suite executives can open the door to larger sales. By Steve Brady
I
nsurance sales are often made because of a combination of persistence and timing. It can take time to go from first meeting your client to developing a good relationship to making your case for the need for certain products and ultimately to making the sale. This is often the case with producers who sell individual disability insurance (IDI). This much-needed but somewhat-overlooked form of income protection is a must-have for high-wage earners or for those who may not have a base disability insurance policy. The sales process of what is often called a fully underwritten sale of IDI can last months before a policy is in 46
InsuranceNewsNet Magazine » Septe
place. But advisors who have done it can tell you their tenacity in making this sale paid off in the end. This is especially true for advisors who sell to high-income clients, such as C-suite executives, and end up turning that sale into what could be considered the holy grail of IDI sales: the guaranteed standard issue (GSI) sale. I’ve counseled many advisors over the years on how they can not only approach executive-level clients but also open the sale to the entire boardroom. Here are a few strategies that can help ensure success. Presenting the need for income protection to executives. Top business executives have a lot on their minds. Regardless of the size of the company or industry, their jobs often come with demanding workloads and high-stakes decision-making. Most likely, planning for a potential disability is not even on
their radar. But these highly compensated executives are ideal candidates for IDI to protect their livelihoods in case of a debilitating injury or illness. Many high-level executives wrongly believe their company’s group long-term disability (LTD) plan will fully cover them. While LTD is a great employee benefit, C-suite executives may need the additional safety net of an IDI policy for more comprehensive coverage should a disability occur. These executives may not realize that relying on their employer’s LTD policy and its maximum monthly benefit may not fully cover their high salaries. This is because an LTD policy’s maximum monthly benefit often places a cap on the benefits payment the group provider will pay out and may include restrictions on the types of income that can be considered part of an executive’s annual salary.
December 2016 Âť InsuranceNewsNet Magazine
47
HEALTH/BENEFITS HOW DI CAN BE THE KEY TO THE EXECUTIVE BOARDROOM Sharing the facts. The best time to discuss IDI with these executives is when you are already talking with a well-paid executive or professional about financial planning or life insurance. During your meeting, ask about their company’s LTD coverage and share these eye-opening facts:
C-suite executives may need the additional safety net of an IDI policy for more comprehensive coverage ...
» Payments from most employer-paid LTD plans replace only 60 percent of an employee’s earnings.
Thinking Beyond One-on-One
» Group LTD policies have a maximum monthly benefit payout — typically $10,000 to $12,000 — that may not cover the full salary of a highly paid individual. » LTD benefits are usually subject to income tax, which can take a significant bite out of what could be an already limited benefit payment. » Benefits don’t cover bonuses or incentive pay, which often makes up a significant portion of a successful executive’s annual income. Once you’ve opened an executive’s eyes to the limitations of LTD coverage, explain how an IDI plan can help fill these gaps and protect a substantially larger percentage of income. By securing an IDI policy on top of the group LTD plan, your client can have peace
Helping one executive realize the importance of additional disability coverage can open the door to additional sales. Once you’ve gained commitment from an executive to learn more about IDI, ask whether there are other executives or leaders in the company who might want information, too. Companies often have several highly paid executives — perhaps a vice president, chief operating officer or chief financial officer — who may be in a situation similar to your client's. By scheduling a luncheon meeting to explain IDI to a group of business leaders, you have the opportunity to sell the entire boardroom on the need for coverage. A similar approach is effective for professional groups, such as law firms or dental clinics, which likely employ several high-salaried individuals who could benefit from IDI coverage.
Making the Guarantee Issue Sale
When multiple executives or professionals are interested in IDI, you have the
By scheduling a luncheon meeting to explain IDI to a group of business leaders you have the opportunity to sell the entire boardroom on the need for coverage. of mind that their full income will be protected in case of a disability. IDI not only helps protect income during a disability leave but also secures future income should the executive be unable to return to work due to a long-term illness or injury. 48
opportunity to sell GSI policies instead of individual, fully underwritten policies. GSI policies have numerous benefits for customers. One of the chief benefits is that clients do not need to go through medical underwriting or extensive lab work or tests before securing a policy.
InsuranceNewsNet Magazine » December 2016
Instead, an advisor simply needs to understand the employer’s census, as well as the ages and gender mix of applicants, to help craft the right coverage for the group. In addition, there is a significant premium discount that GSI applicants can receive by submitting an application together. This type of premium discount can be secured only through a GSI sale and is difficult to achieve when a client is submitting an application individually. At this point, employers often want to get in on the sale and help supplement the coverage offered as part of an employee benefits package. Depending on the group and the employer, GSI policies can be entirely employee-paid, a mix of employee-paid and employer-paid, or paid for solely by the employer. GSI policies benefit the advisor by generating increased commissions with multiple policies. Unlike with group LTD plans, the advisor cannot be replaced on GSI policies. So you have locked-in income from GSI sales.
C-suite Opportunities
Don’t overlook the profitable opportunities in the C-suite. By informing executives of a need they may not have previously considered — and providing a solution — you can build strong relationships and establish trust that will lead to future referrals and sales. Your clients who purchase an IDI policy will have the comfort of knowing they’ve made a smart investment for themselves and their families, and you’ll enjoy the profits for years to come. Steve Brady is national accounts director, individual disability insurance, at Standard Insurance Company (The Standard). Steve may be contacted at steve. brady@innfeedback.com.
THE PRESENT THAT PLANS FOR THE FUTURE
P Full agency management platform P Manage your clients & policies P Stay on top of policy renewals P Auto emails & text messages P Acord forms integration P On-demand reporting P Automated licensing process P Manage your commissions
A insurance agency technology CRM | LEAD SYSTEM | REPORTS | COMMISSIONS Explore the solution worth getting excited about. We’ve added hundreds of new features to boost productivity, assist with client retention and make everyday tasks easier. AgencyIntel will transform your agency while delivering superior results. For a free demo, call: (800) 898-7212 or visit www.agencyintel.com
December 2016 Âť InsuranceNewsNet Magazine
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NEWSWIRES
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QUOTABLE
RIA Mergers & Acquisitions Rise 23% in 3Q It’s a big-fish-eating-little-fish scenario as mergers and acquisitions of registered investment advisors (RIAs) jumped in the third quarter. Third-quarter RIA mergers and acquisitions rose to 37 deals compared to 30 in the year-ago 100 Deals YTD in 2015 period as buyers gobble up smaller firms, according to a survey. There were 109 RIA transactions in the first three quarters of the year compared with 100 deals in the year-ago period, according to research published the DeVoe & Co. RIA Deal Book. Last year was one for the record books, with 132 RIA deals, according to DeVoe. RIA consolidators, banks and private equity companies remain among the interested buyers. Many RIA sellers face decisions on whether to leave the industry or remain in the market by selling to a larger buyer.
109 M&A Deals So Far in 2016
tention of changing the approaches they follow, according to consultant Howard Schneider. The majority of advisors – 81 percent – prefer a more generalist bent to positioning their practices, the report found.
ADVISORS LACK CONSISTENT RETIREMENT STRATEGIES
Something advisors can agree on: Clients need to generate a retirement income stream they cannot outlive. What advisors can’t agree on: How clients can achieve it. The number of approaches to managing retirement assets is as varied as the number of retirement clients advisors serve. That’s according to a report, “Advisors and the Delivery of Retirement Income Support 2016.” The report shows advisors have a plethora of approaches to helping clients generate retirement income, and that there is no single guideline that appears to be generally followed. In addition, there is no indication that advisors have any inDID YOU
KNOW
?
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IS LPL FINANCIAL FOR SALE?
The nation’s largest independent broker/ dealer is keeping mum on reports that it is looking for a buyer. Reuters reported that LPL Financial is looking at a possible sale. The company, which also has an RIA, declined to confirm or deny the report through a spokesman who said, “As a matter of policy, LPL does not comment
THE AVERAGE RETURN ON AN INITIAL PUBLIC OFFERING was 20 percent this year. The average increase in the first day (or “pop”) is 13 percent.
There are about 12,000 registered investment advisor firms in the Source: Renaissance CapitalU.S. Source: U.S. Securities and Exchange Commission
InsuranceNewsNet Magazine » December 2016
For many of us, I don't think it's going to be a condo by a golf course. I'm not sure retirement has ever been that for most people. — Jennifer Putney, Prudential Retirement
on rumors or speculation.” Reuters based its report on anonymous sources who said LPL is working with investment bank Goldman Sachs on a potential sale that could attract other companies and private equity firms.
OUR BRAINS COULD BE WIRED AGAINST SAVING On some level, most people know they should save more money. But maybe one reason why they don’t relates to some form of “stranger danger.” That stranger they don’t want to give their money to? Their future selves. Prudential Retirement delved into the psychology that works against saving and found that 56 percent of adults see their future selves as strangers. Prudential calls the idea “longevity disconnect bias,” and it can present a problem for people saving for their retirement. They see it reflected in the 2016 Prudential Challenge quiz, where a little more than half of its 48,000 respondents said, “I might live how long?” when asked to articulate their reluctance to save. Behavioral science researchers tested the longevity disconnect theory by showing people photos of their own faces, “aged up” with photo-manipulation software. In response, the subjects’ brains responded as though they were looking at strangers.
Financial Insights
with Dean Zayed
RIA Expert Shares Startling Warnings for Annuity Advisors
D
ean Zayed, President and CEO of Brookstone Capital Management, warns advisors about several mistakes they may be lured into as the Department of Labor (DOL) ruling surges forward.
Q: Why are there more RIAs forming now than ever before? The industry is changing, and it is clear that more financial professionals want to capitalize on the explosive growth of RIAs. There are an increasing number of insurance agents exploring the addition of fee-based management to their practices, and that interest will grow with the DOL ruling. Demand for an
also important, and you should use caution with firms that are focused on duplicating their competitors in an effort to create the illusion of innovation. Finally, many advisors are receiving advice to start their own RIA to comply with the post-DOL world. We believe that this could be an inherent conflict of interest, as owning an RIA and signing your own Best Interest Contract Exemption (BICE) contract may not be acceptable to regulators. You may need an independent, larger and more established firm, like Brookstone, to sign the BICE contract.
Now more than ever, IMOs may need to help their agents understand the value of becoming Series 65 licensed.
Q: How should advisors continue to prepare for the DOL ruling? Advisors should continue to educate themselves and ask questions of their FMOs/IMOs and RIAs. Preparation for permanent implementation of the rule is the best course of action. Holding out while hoping that the rule will be overturned could put an advisor in a position that causes panic at the last minute. Advisors should review their business and strategic partners and make any necessary changes to ensure there is not a negative impact to their practices.
Holding out while hoping that the rule will be overturned could put an advisor in a position that causes panic at the last minute. RIA partner is higher than ever, and newly formed firms are trying to capture part of that business. The success of established firms like Brookstone has not gone unnoticed, and it is not surprising to see new players attempt to duplicate that. Q: What should advisors know about startup RIAs? Experience, stability and longevity should always be factors in choosing any partner that has a direct impact on your business. In the post-DOL world, experienced fiduciaries will be the preferred choice for many IMOs/ FMOs and insurance carriers. Brookstone has been involved in meaningful conversations with many of these firms who view us as a true thought leader and the most DOL-capable RIA. Infrastructure and platform design is
committed not only to helping IMOs and their agents from a compliance standpoint, but also to helping them become the most enhanced asset gatherers possible.
Q: What are your predictions for IMOs in a post-DOL world? While I can’t speak for all IMOs, I do believe that it will be important for them to embrace a relationship with an RIA firm that is willing to be a fiduciary partner. Under the current rule, IMOs are not an approved financial institution. This is a severe limitation to their DOL compliance and specifically with authority to approve a BICE. Now more than ever, IMOs may need to help their agents understand the value of becoming Series 65 licensed, or they may find the post-DOL world challenging. Brookstone is 100 percent
S P O N S O RED CO N T EN T
Q: How does Brookstone’s experience make you uniquely positioned to assist advisors as well as IMOs in a post-DOL world? For the last 10 years, Brookstone has been an industry leader in the independent RIA space. Since our inception, the focus has been on building partnerships with independent insurance agents who want to add fee-based money management to their practices. We understand the insurance industry, support the sale of annuities and are fully committed to advisors who rely on that space as part of their business. Our seasoned management team has extensive experience overseeing FIA and securities sales with a goal of making the transition to the post-DOL world as seamless as possible for advisors. Brookstone has been a preferred fiduciary partner even before the DOL ruling, as we have exclusively focused on working at the intersection of the insurance and RIA space since our inception. This niche we have worked in is embedded in our company’s DNA, and our track record of success puts us in a leading position to help advisors in the post-DOL world. •
Is Your RIA DOL Ready?
Learn the 7 Important Things to Consider at
www.BrookstoneDOL.com
December 2016 » InsuranceNewsNet Magazine
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A Family Limited Partnership Eases Bite from New Gifting Rule n important deadline is comA ing up for your family business clients at the end of the year. By John Gephart
C
lients who own closely held or family businesses are facing proposed federal regulations that could have a dramatic impact on their estate planning. The Treasury Department issued proposed regulations designed to curtail the use of so-called “valuation discounts” by owners of closely held and family businesses. The rule takes effect when it is
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published after a Dec. 1 hearing. The discounts have been permitted due to the market reality that an asset or a share of stock that is conveyed with little or no control to the holder should be worth less than an asset or share of stock without such limitations. Known as “lack of control and/or marketability discounts,” these valuation adjustments have permitted family business owners to discount gifts of business shares or units by 35-45 percent. Discounting the value of the gift also reduces the gift tax due on the transfer. Reducing the estate and gift tax credit needed to cover the gift leaves
InsuranceNewsNet Magazine » December 2016
more credit available to offset estate taxes due at the death of the last of the couple to die. In 2016, that credit was $10.9 million equivalent for the husband and wife. The proposed regulations will not take effect until December 2016 at the earliest. So advisors should consider valuation discount opportunities for their clients who own family businesses. The family limited partnership (FLP) is one of the most popular intergenerational transfer techniques that typically incorporates valuation discounts. It should be considered in any family business succession strategy.
A FAMILY LIMITED PARTNERSHIP EASES BITE FROM NEW GIFTING RULE
Family Limited Partnership
A family limited partnership must have one or more general partners. These usually are the parents, a trust or corporation controlled by the parents, and one or more limited partners, who usually are the parents, children or grandchildren. General partners manage and control the partnership. In some circumstances, the general partners can have personal liability for debts and obligations of the partnership in excess of their investment. Limited partners, on the other hand, cannot be involved in the day-to-day operations of the partnership. In addition, they cannot have personal liability beyond their investment in the partnership.
Life Insurance Trust Substitute
An FLP may purchase life insurance on the life of one or more partners as a partnership asset. It is important to have
other investment assets as well to show that the partnership has a true business purpose. In this kind of partnership, the insured — usually one or both parents — will retain a low-percentage interest in the partnership, and other family members will retain a high-percentage interest. Thus, when the insured dies, only the portion that is equal to their interest in the partnership will be included in their estate.
Asset Protection
The family limited partnership affords some degree of protection from creditors. Suppose, for example, that a limited or general partner is sued by a creditor on a matter unrelated to the partnership. Further suppose that there are assets in the partnership worth $1 million and the creditor obtains a $200,000 judgment against Partner A, who is a 1 percent
The Treasury regulations will eliminate most valuation discounts in connection with interests in family-controlled corporations, partnerships, limitedliability companies and other business entities. The changes in Section 2704 will take effect when they are published in the Federal Register, following a hearing scheduled for Dec. 1, meaning the regulations might be effective by the end of the year. Section 2704 was enacted by Congress in 1990 as one of four sections constituting special valuation rules that were aimed at closing several perceived loopholes in the estate and gift tax laws.
general partner and a 60 percent limited partner, with other partnership interests being held by other family members. In most states, the most the creditor can do is obtain a charging order against Partner A’s interests in the partnership. This means that the creditor can assume Partner A’s right to receive distributions from the partnership. However, if, according the terms of the partnership agreement, no distributions are made, the creditor must recognize the income that Partner A would have otherwise had to have recognized but will not receive any distributions from the partnership. Obviously, this is an unfavorable position for the creditor to be in, having to recognize income without actually receiving any distributions from the partnership. Even if state law permitted a creditor to eventually reach the underlying assets of the partnership, the extra steps required to do so might make the creditor think twice before making the attempt.
Crossing T’s and Dotting I’s
Care must be taken to structure and operate the partnership so that the general partner/creator does not treat the assets in the partnership as their own assets as though the partnership does not exist. Failure to do so may result in all of the general and limited partnership assets that the general partner owns — plus the current value of partnership assets they gave away in previous years — being included in their estate as a retained life interest. Nor should the general partner/creator have the unilateral power to make distributions from the partnership, especially distributions that favor the general partner over the limited partners.
Time Is Running Out
The proposed regulations may become final and take effect as early as Dec. 31. If you have any clients with children and closely held family businesses, share with them as soon as possible the power of FLPs to leverage family business succession strategies. John Gephart, J.D., CLU, is second vice president, marketing counsel, with Ameritas Life, Cincinnati. John may be contacted at john. gephart@innfeedback.com.
December 2016 » InsuranceNewsNet Magazine
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BUSINESS
Googleproof Your Reputation by Managing Online Reviews oday’s consumers want to T see online reviews of a company before committing to doing business with it. The strength of those reviews can make or break your reputation. By Drew Gurley
T
he days of receiving a friendly letter or a gift basket are behind us. In 2016, any insurance agent knows that what people say about them online is a big deal. Perception is reality, and the smart agent will be proactive about managing, curating and encouraging online reviews. Let’s look at the different platforms and 54
approaches to managing your online reviews.
Get on Board With the Value of Online Reviews
Every purchase decision starts with a Google search. Often, after your initial conversation with a prospect, they will Google your company name and reviews. Or they will Google your name specifically. What they see can be the deciding factor when it comes time to make a purchase, ask about your products or even make a recommendation to a friend. Managing this is called online reputation management. More and more, I believe
InsuranceNewsNet Magazine » December 2016
the only reputation you have as a business is the one shown in your online reviews. Do you use Yelp? Google has pushed its own reviews. Many websites use markup language to show star ratings and reviews in their AdWords ads and in their organic search listings. Online reviews are becoming more prevalent each day. It’s clear that consumers want to see reviews before they make a decision about your company. This online rating, no matter how frivolous the source, is what makes you trustworthy and reliable, attracting new customers and retaining old ones. If you have 4 out of 5 stars but your top
GOOGLEPROOF YOUR REPUTATION BY MANAGING ONLINE REVIEWS BUSINESS competitor is listed just underneath you at 4.5 out of 5, then why would a customer choose you? This rating can help differentiate you, especially to those who are unfamiliar with the market.
Online Reviews: The “Where” Matters
Even though all review platforms can help form an opinion about a company, some platforms are clearly more reliable than others. The type of review platform used can vary from industry to industry, even company to company. While a platform such as Yelp can be more important to a restaurant than to an insurer, this definitely doesn’t mean there isn’t reputation management in the insurance industry. No matter whether your insurance agency is two years old or 20 years old, it’s important to have control of your online reputation. With this in mind, let’s take a look at some of the most popular review platforms.
of factors, including the type of business, length of operation, complaints, advertising issues and a handful of others. Keep in mind there are tons of review platforms out there, and it is important to figure out which one your customers use. Target a handful of platforms — maybe only one or two — but remember that you can’t manage them all. This is where
wait too long, or they will have moved on from the experience or may not even remember it. Another thing business owners often overlook is simply asking customers for a review. Find people who have done business with you multiple times and seem satisfied with their experience. These will be the people you want to have post reviews, because (1) they are more likely to
Google Reviews
Google reviews are often what come up as soon as you search a company’s name, so they’re often the first reviews that a customer will see, and arguably the most important. Displayed right underneath your company name in big, bold letters are the bright yellow stars that immediately catch your attention. That’s why it’s vital to manage this reputation carefully.
Yelp
Being the most widely used review platform, Yelp is often next on the list when someone wants to check your company’s reliability. Some niches are more prevalent than others on Yelp, but since Yelp is so popular, it’s always a good idea to keep your Yelp reputation in check. Keep in mind that both Yelp and Google reviews are user-generated, so the reviews shown are based on the opinions of customers.
Better Business Bureau
The BBB has managed to stay relevant in the digital age and takes a different, more authoritative approach to reviewing companies. Instead of displaying user-generated reviews such as Google reviews and Yelp do, the BBB assigns companies a grade. The grade ranges from A+ to F and is based on a variety
you should encourage customers to share reviews and where you should always manage and resolve any complaints.
Effective Methods for Collecting Online Reviews
It’s one thing to recognize the need to manage customer reviews. But you must have a plan to put into action. And it starts with getting people to actually post reviews. One tactic, and often the most effective one, is to hit customers at the point of purchase. Customers are more likely to review your company immediately after interacting with you. The experience is fresh in their memory, they still have the emotion from it and this is when they are most likely to share their experience with others. If you don’t get the review at the point of sale, all hope is not lost. You can still reach out via an email campaign shortly after the purchase. Remember not to
review in the first place due to your ongoing relationship, and (2) they will likely leave positive reviews. Finally, I think it’s beneficial to provide incentives. Traditionally, you might think of a restaurant giving a discount for checking in on Yelp or a bike store offering a free tune-up with a review. Whatever the incentive is, the key is to find something of value to your customers so they have a reason to leave a review. For an insurance agency, this can be tough. Setting up a simple sweepstakes to give away a gift card is one suggestion I’ve seen work. Mostly, your success in getting customers to post reviews depends on your asking, and asking nicely. Drew Gurley is co-founder of Redbird Advisors. Drew may be contacted at drew.gurley@innfeedback.com.
December 2016 » InsuranceNewsNet Magazine
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THE AMERICAN COLLEGE INSIGHTS
With over 89 years of experience, The American College is passionate about helping students expand their knowledge and opportunities as financial professionals.
ACA: Time for a Checkup he Affordable Care Act has T achieved some of its goals, but it needs some major changes in order to be successful. By Adam Beck
I
n the recent federal elections, health care reform was essentially a nonissue. To be fair, most actual policies were not topics of debate. However, behind the scenes, the Affordable Care Act (ACA) is at a crisis point. No, it is not failing or destined to fail, as many opponents claim. Nor is it a smashing success, as its proponents believe. The ACA is achieving some major successes, such as its primary goal of reducing the number of uninsured Americans. But the central component of the law, the marketplaces (or exchanges) it established, is in danger of needing life support. The marketplaces were supposed to enroll a large and growing segment of the population by this point. Instead, last year there were 12.7 million enrollees, far short of the 21 million the Congressional Budget Office predicted in 2015. In states across the country, insurers have been exiting the marketplaces, leaving many states with little or no competition for plans. The fact that insurers are leaving the marketplaces isn’t a failure, but rather an indicator that something more fundamental is broken. Four things happened on the way to the ACA marketplace that have prevented the law from being a resounding success.
1. The marketplace enrollees have been sicker than originally predicted.
The good news here is that people with serious medical conditions are getting needed medical treatment. The downside is that it costs a lot to treat sick people, and when people with serious conditions comprise a disproportionately large share of the risk pool, everyone pays more. In many states, the marketplace population resembles the Medicaid population more closely than was predicted. This is partly a result of too many states refusing 56
to accept federal funds to expand their Medicaid programs. As a result, many low-income individuals were forced either to forgo insurance altogether or to enroll in a qualified health plan through the marketplace. But too few people signed up for coverage. Getting nearly 13 million people to enroll in something that was brand-new a few years ago and began with a failed website launch is incredible enough. But we need 25 million people — including healthier and younger individuals — enrolled so that there is a large enough risk pool to make the program work.
2. The law centers on choice: the consumers choose, and insurers can choose not to participate.
For all the partisan babble about the ACA depriving everyone of choice when it comes to their health care, the law itself actually relies a great deal on the freedom of choice and free markets. That’s the thing about free markets — nobody can force you to buy or sell something. With the ACA, there are tax consequences for not purchasing coverage, but nobody is out there actually making anyone enroll or making anyone choose a plan that makes sense for their specific circumstances. Many consumers considered a plan with a very high deductible and chose to take the risk of lacking coverage. Many insurers looked at the risk pools and threats to their bottom lines and simply passed on participating. Congress and the administration can take action to make universal health coverage a reality, but as long as the private sector is a key player, the ball really is in the insurers' court right now.
3. Congressional intransigence is a real problem that is hurting both insurers and consumers.
If the private sector will not react the way the marketplace needs, then it is up to Congress to try to do something — literally anything — because it has not meaningfully weighed in on the ACA since its passage. There is no such thing as a perfect law. But the ACA was a monstrosity of a law
InsuranceNewsNet Magazine » December 2016
that, while virtuous on many accounts, was flawed in ways that even proponents could identify from its earliest days. The problem was that nobody could do anything about it. The law barely passed as it was. Then Congress refused to touch it for years thereafter, largely because one party would only vote to repeal it, rather than to reform it. In the next Congress, with President Obama no longer in office, there may be an opportunity to make commonsense changes to the weaker points of the law. Congress should enact risk corridors for the exchanges (much like it has already done for Medicare Advantage plans), extend the reinsurance program and encourage multistate exchanges. These are relatively simple fixes that should win bipartisan appeal and make for good policy. These changes would provide health insurers with a safety net and some encouragement to get back into the marketplace.
4. Payment models must change.
Health care continues to be far too expensive at every level. The ACA has taken steps to reform payment models and encourage more competition on price and quality, but more needs to happen. Much of that must come from the private sector and medical providers themselves. This poses a challenge when many health insurers are publicly traded companies with a responsibility to increase profits, and medical providers exist in a market that demands high compensation. The political and economic obstacles are steep, but other industrialized nations have achieved universal health care without sacrificing quality of care. Accountable care organizations are a start, but a more comprehensive approach is needed to help us pay less for medical care, instead of shifting the cost to a different payer. Adam Beck, Esq., is assistant professor of health insurance and interim director of The American College MassMutual Center for Special Needs. Adam may be contacted at adam.beck@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.
What to Know Before You Bring in the Next Generation Let 's talk stock opt io
et the right person for the G job, support them, have clear expectations and put things in writing. By Danny O’Connell
W
e are aware of the business continuation crisis in our industry. We have heard that the average age of an insurance agent is somewhere in the mid50s, and we have seen the sale of insurance agencies to aggregators because of a lack of business continuation options. Yet some boutique and family agencies are surviving and thriving. After working in such an agency for 10 years, I would like to share how a first-generation owner — a GI owner — can successfully add a second generation — a G2 — to their agency. And, if this is done the right way, that G2 can become a G2 owner.
Make Sure You Have a Legitimate G2
As a G1 owner, understand that despite your best efforts, your son or daughter might not be interested in joining your business. Any G2’s curiosity will be piqued by your continued success. They will be attracted to your business mainly because of its perks — such as the ability to set one’s schedule, the earning potential, the reward for hard work, etc. But this does not mean they are necessarily a good fit for your agency. Too often, I have seen G1s who are so eager to bring in their G2 family member that they make major hiring and management mistakes. To avoid this, make sure you have ongoing discussions with your G2 about the business before they commit to joining your firm.
Define Expectations
Before bringing on a G2, have early discussions with them on various topics, including: » The G1’s expectations and requirements for the job.
ns...
» What it takes to be successful, in a G1’s mind. » The G2’s expectations and requirements for the job. » The G2’s definition of success. » The G2’s passion. Ask them why they want the job. » The G2’s long-term vision. Ask them where they want to be in three, five and 10 years. » What support does the G2 expect, need and want? » What can a G1 realistically offer the G2 to help them grow and achieve their goals? » What is the value of the agency when the G2 enters the business? » How does the G2 feel successful or appreciated? Because you are family, you often think you know and understand the answers to these questions. But for both the G1 and the G2, it is important to address these questions and carefully articulate the answers.
Put Something in Writing
Having a written plan is key. Every successful team has a game plan. While all of us understand that you have to “earn it” in this business, I am not advocating that you sign away your agency on the G2’s first day on the job. Instead, have metrics in place — quantifiable measures that the G2 can use to assess their progress. For example, there is nothing wrong with your saying to the G2: “At the end of X number of years, we are going to see where you are, and if you are able to hit Y amount of production, you can be eligible for certain things, such as equity,
bonuses, executive benefits and education support.” You are not signing away the company — you merely are making sure that all parties are clear about goals and expectations.
Realize the Workforce Is Changing
Our workforce is constantly changing. It is important for the G1 to realize that today most households have two working parents, numerous child activities and many parental responsibilities. Employees with advanced degrees are joining our industry and are looking for employers who not only care about them, but also can help them develop professionally. As a G1 and an employer, it is your responsibility to understand what motivates your employees, and these include your G2. Understand what is important to them and support them in the best way you can. When bringing a relative to work for you, remember to treat that individual like any other employee. If you rave about their work, be sure to rave about the other employees’ good work as well. And while you’re at work, be sure to address all employees in the same way. Finally, have a compensation plan that ensures that employees with the same job description and duties are paid equitably — not necessarily the same amount, but by the same standard. Danny O’Connell is CEO of Next Level Insurance Agency, a Dallas-based agency specializing in employee benefits, executive benefits and retirement. Danny may be contacted at danny. oconnell@innfeedback.com.
December 2016 » InsuranceNewsNet Magazine
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MDRT INSIGHTS
The Million Dollar Round Table is the premier association of the world’s most successful life insurance and financial services professionals.
’Tis the Season to Discuss Charitable Gifting elp your clients develop a H strategy that will enable them to give their funds with confidence. By Brian Tarpey
C
haritable giving is an important component of financial planning, but it often is overlooked. In fact, one top financial planner said 90 percent of advisors never discuss it with clients. Although philanthropy is a personal decision, there are still many ways for you to help clients realize their charitable giving objectives. To start, here are a few questions that may help you raise the subject of charitable giving comfortably and effectively with your clients: » What kinds of charitable issues do you care about? » Are you currently involved with any community groups or charitable organizations? » If so, do you give the same amount every year? Are there certain factors the amount depends on? » Do you support the same organization every year? Do you want that to vary from year to year? » Which donations have given you the greatest satisfaction? » Are there donations that you have regretted? » In what form have your past donations been? Cash, checks, other non-cash assets? » To whom do you turn for advice when deciding which organizations to support and how much to give?
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» What values would you like to preserve and pass on to your family in addition to your wealth?
As expected, most charities receive the majority of their yearly donations during the last few months of the year, especially as the holiday season ramps up. Giving to a charity is not only emotionally rewarding, but it also can reduce taxes for your clients and allow them to give even more.
come tax bracket increases, the real cost of their charitable gift decreases, making contributions more attractive for highnet-worth clients. When helping clients with charitable giving, it’s important to keep the timing in mind. All contributions are tax deductible in the year they are made. If a client puts a contribution on their credit card before the end of the year but doesn’t pay the bill until 2017, it’s still deductible for that particular year. The same goes for a check they write this year that is not cashed until next year.
Tax Benefits of Giving
Make Sure It Qualifies
» Would you like to support any charitable organizations after your death?
Charitable contributions of money or property can be deducted against income tax if itemized and larger than the standard deduction available to those who do not itemize. The standard deduction amounts for 2016 remain the same as for the previous year — $6,300 for individuals and $12,600 for couples filing a joint return. For deductible charitable gifts made to qualified organizations, the actual cost of the donation is reduced by the donor’s tax savings. For example, a client in the 33 percent tax bracket would pay only $67 of a $100 donation. As the client’s in-
InsuranceNewsNet Magazine » December 2016
Before clients make donations, be sure the charities they choose qualify for tax-exempt deductions. As advisors, we play a role in educating our clients about the online resources available to research charities and learn more about their overall impact. Clients may deduct a charitable contribution made to, or for the use of, any of the following organizations that otherwise are qualified under section 170(c) of the Internal Revenue Code: » Churches and other religious organizations.
ADVERTISER INDEX Advertiser
Website
Phone
Pg
Advertiser
Website
Phone
Pg
Advantage Media Group
www.advantagefamily.com/ insurancenewsnet
13
Legacy Shield
www.engageandsellmore.com
844-308-0707
39
American Equity
www.life.american-equity.com
888-647-1371
9
Mutual Trust
www.mutualtrust.com/ opportunity
800-323-7320 ext 5140 47
American National
www.img.anicoweb.com
888-501-4043
27
Nationwide
www.nationwidefinancial.com/ uprooted
Assurity Life
www.assurity.com
33
Oxford Life
www.oxfordlife.com
Brookstone Capital
www.experiencedria.com
51, IBC
Peak Pro Financial
www.iulforseniors.com
Dressander
www.dbhc.com
Petersen International
www.piu.org
800-345-8816
45
Family First Life
www.compchallenge.com
FC, 2-3, 4-5
Securian
www.securian.com
888-413-7860 opt 1
31
Fidelity & Guaranty Life
www.fgallseasons.com
800-445-6758
35, 41
The American College
www.theamericancollege.edu/clu 888-795-6306
8
Imeriti Financial Network
www.winningiul.com
855-601-9442
IFC-1
Triquest USA
www.7trillionmarket.com
7
Intruity
www.agencyintel.com
800-898-7212
49
Tucker Advisors
www.nextclientbytucker.com
Kansas City Life
www.kclife.com
855-277-2090 ext 8120 29
800-201-0224
37
If a client puts a contribution on their credit card before the end of the year but doesn’t pay the bill until 2017, it’s still deductible for that particular year. » Tax-exempt educational organizations. » Tax-exempt hospitals and certain medical research organizations. » A government unit, such as a state or a political subdivision. » Publicly supported organizations such as a community chest. » Certain private foundations that distribute all contributions they receive to public charities within two and a half months after the end of the foundation’s fiscal year. » A private operating foundation that pools all of its donations in a common fund.
» Certain membership organizations that rely on the general public for more than a third of their contributions.
Limitations on Deductions
The average annual household contribution to charity is $2,974, according to the National Philanthropic Trust. For the majority of clients, there is no limit on how much they can deduct. The general rule is that clients should not contribute more than 50 percent of their adjusted gross income computed without regard to net operation loss carrybacks. Additionally, contributions made to certain private foundations, veterans organizations, fraternal societies and cemetery organizations are limited to 30 percent. Clients who donate property other than cash to a qualified organization gen-
11
888-826-4073
25 43
855-454-2638
BC
erally may deduct the fair market value of the property. If the property has appreciated in value, some adjustments may be required. When talking with clients about their current and long-term goals for their wealth, charitable giving should be a natural part of the discussion. Explain how better understanding their interest in charitable giving will help you give the best possible investment and financial planning advice. After evaluating and selecting a giving strategy, your clients get to experience the joy of giving back with confidence, knowing their donations were made strategically and with their long-term financial goals in mind. Brian Tarpey is the president of The Tarpey Group, an employee benefit services and solutions firm in Fairfield, N.J. He is a 13-year member of MDRT and has been awarded 10 Top of the Table honors. He also is the treasurer for the MDRT Foundation. Brian may be contacted at brian. tarpey@innfeedback.com.
December 2016 » InsuranceNewsNet Magazine
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More than 850 financial services companies in more than 70 countries turn to LIMRA first to help them build their businesses and improve their performance.
LIMRA INSIGHTS
Help Wanted: Managing Health Care Expenses in Retirement Wealthier consumers and those currently working with a financial professional are more likely to believe that financial professionals can help deal with out-of-pockBy Cecilia Shiner and Jafor Iqbal et medical expenses in retirement. Six in any consumers are ner10 consumers with household financial vous about the unknowns assets of $100,000 or more and seven in in retirement — 10 consumers whose houseespecially when holds already work with a fiA Health Care Expense Shock in it comes to health care costs. nancial professional agree the Retirement Would Seriously Recent LIMRA Secure Retirefinancial professionals can help Compromise My Financial Security ment Institute research found minimize the impact of outPercentage of Non-Retirees that half of consumers conof-pocket medical expenses in 6% sider paying for health care retirement. Strongly costs beyond what Medicare Consumer desire for assis7% disagree and Medicare supplement will tance with health care expense Not sure cover to be a major concern planning for retirement rep7% 26% with regard to maintaining their Somewhat resents a big opportunity for fiStrongly standard of living in retirement. nancial professionals who curdisagree agree Health care expenses that acrently offer this service or plan cumulate significantly over a to offer it in the future. Specialshort period of time (health care ization may require significant expense shocks) can be particutraining to achieve but could larly challenging and scary for become an offering necessary 25% Neither agree consumers to manage. After to meet future demand. A sepor disagree all, these events take financial, arate LIMRA SRI study found 29% emotional and physical tolls on that four in 10 advisors said Somewhat households. Here is what LIMthey need a significant amount agree Base: 668 RA SRI research found. of training in health care cost non-retired More than half of non-retirplanning. consumers ees believe that a health care Advisors should discuss expense shock (defined as an health care options with their out-of-pocket medical expense of $15,000 shortfalls. Such withdrawals could even clients and include health care cost needs or more over the course of a single year) result in penalties, depending on the type in formal written plans. during retirement would seriously com- of investment. promise their financial security. This feelOnly three in 10 non-retirees said they Cecilia Shiner, M.A., FFSI, ALMI, ing is nearly universal among men and are confident they will be able to pay for ACS, senior analyst, LIMRA’s Retirement Research, is rewomen as well as among different genera- significant non-routine out-of-pocket sponsible for conducting mations of non-retirees. health care expenses without withdrawing jor primary research projects Despite a somewhat limited period of from their savings. Half of the non-retirees conducted within LIMRA’s Retime in retirement — an average of eight said they are confident they will be able to tirement Research Unit. Cecelia may be conyears — one in 10 retirees already has expe- pay for routine out-of-pocket expenses tacted at cecilia.shiner@innfeedback.com. rienced such a health care expense shock. without tapping their retirement savings. Jafor Iqbal is associate manRetirees have a variety of ways to plan Overall, both retirees and non-retiraging director, retirement research, for LIMRA Secure Reand pay for out-of-pocket health care ees believe that financial professionals can tirement Institute. In this role, costs beyond what Medicare will cover. help consumers manage health care cost he is responsible for managing Many of these costs are routine and paid risks in retirement. Four in 10 non-retirretirement income research directly from retirees’ incomes. How- ees believe they’ll need somebody to walk projects. Jafor may be contacted at jafor. ever, more significant or non-routine them through a plan to manage these risks. iqbal@innfeedback.com. alf of consumers know that H health expenses can wreck their retirement.
M
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expenses might require retirees to withdraw directly from their retirement savings if they have not saved separately for health care costs. This can prove especially problematic because retirees are reducing their future sources of income, adjusting their lifestyles to make up for financial
InsuranceNewsNet Magazine » December 2016
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