November 2012

Life Annuities Health

November 2012

New 2013 tax hikes & spending cuts could cost families millions PAGE 18

John Maxwell’s Unbreakable Laws of Leadership PAGE 10 What to Do When Clients “Check Out” PAGE 32 New Annuity Products Emphasize Safety Over Glitz PAGE 38

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NOVEMBER 2012 » VOLUME 5, NUMBER 11

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38 ANNUITY 38 A nnuities Suit Up For Retirement Game

By Linda Koco A review of recent annuity products suggests that the ballgame certainly isn’t over where new annuity development is concerned.

INFRONT

18 N ow THAT’S a Cliff

8 Is the NAIC Warning for Veterans a Shot at Annuities?

By Linda Koco The alert is directed to retired military veterans, but some in the industry question if the report is a little too critical of annuity products.

By Linda Koco According to LIMRA, 14.5 million U.S. households could be looking at a $494 billion estate tax liability under the new law to go into effect Jan. 1. It’s up to advisors to help pull clients back from taking this 504 percent fall.

40 A nnuity Clients Getting Divorced?

Step Carefully

By Linda Koco Breaking up is hard to do, and when clients divorce there’s much for an advisor to consider when negotiating the financial fall-out.

HEALTH

46 M edicare Advantage Survives, Even Thrives, Post-ACA

10 28

By Steven A. Morelli The rumors of the death of Medicare Advantage have been greatly exaggerated, as the program appears to be flourishing.

LIFE FEATURES

28 How Whole Life Outshines the Shiny Objects

By Allan D. Gersten Whole Life has been around for nearly a century, and it’s still a good foundation for clients’ future financial security.

10 T he Unbreakable Laws of Leadership

An interview with John Maxwell, Part II New York Times best-selling author of 15 Invaluable Laws of Leadership and more than 60 other books, John Maxwell continues the dialogue of mastering, and passing on, leadership skills from one of his best-known books, The 5 Levels of Leadership.

2

32 When Clients ‘Check Out’

InsuranceNewsNet Magazine » November 2012

By Channing Schmidt A trip through the check-out stand at the End O’ The Road Supermarket illustrates how the estate and transfer tax adds up for clients.

48 FINANCIAL 48 I s Gold Still a Glittering Investment?

By Steve Tuckey The hand-wringers say that the finite supply of gold is in danger, and imply it’s now or never to invest in the precious metal. But is it?

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ALSO IN THIS ISSUE NOVEMBER 2012 » VOLUME 5, NUMBER 11

BUSINESS 50 Generating Business at the Gym Without Being ‘The Creep’

By Bryce Sanders Take a new view of your gym time and your co-members and you could generate more than endorphins.

50

INSIGHTS

52 M DRT: Don’t Blow it with Social Media

By Ryan J. Pinney Tips on what – and what not – to share, how often to post, creating a blog and more from a four- time MDRT Top of the Table qualifier.

54 L IMRA: Estate Taxamegeddon Equals Opportunity

By Robert Kerzner Nearly 15 million households could face huge tax liabilities on Jan. 1 if Congress allows the current estate tax law to expire. Advisors should be armed and ready.

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56 R ide the Social Media Tsunami

By Larry Barton Larry Barton of The American College discusses the swell of business communications via social media, and the futile attempts of compliance departments to hold back the tide.

56

EVERY ISSUE 6 Editor’s Letter 16 NewsWires

26 LifeWires 36 AnnuityWires

44 HealthWires 55 Advertiser Index

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The Apocalypse is upon us. Again.

The Fiscal Cliff. The Estate Tax Cliff.

The Election. The Affordable Care Act. The War(s). Zombies. And, of course, the Mayan calendar runs out on Dec. 21. I am sure everybody’s list is different, but they all mean the same thing – these are The End Times.

Turn on the TV and it’s pretty clear that we are going to be zapped by aliens, eaten by the undead or evaporated by a nuclear bomb at any moment. I don’t know about you, but I just got up and locked my door.

But, here’s the thing (spoiler alert!), most of us will live to see another season of fear-fueled fiction. And in the real world, all the media noise will move on to a new political, financial or natural cataclysm. New day, different disaster.

Those of you who have been through a few upheavals know that these are also The Beginning Times. Everything reconstitutes and renews – ashes to ashes, American Horror Story Season One to American Horror Story Season Two. This month’s feature, by Linda Koco, discusses what happens if we go off the Estate Tax Cliff. Some families will lose millions of dollars on the way down.

Some won’t, because they have good advisors. As Linda’s article points out, advisors not only have an opportunity to generate business but have a duty to warn clients about the pending fall.

We have heard a few horror stories about what will happen when the ACA takes a chomp out of Medicare Advantage (MA). But as we see in our health section this month, MAs are doing pretty well, enjoying more popularity than ever.

In fact, MA could be seen as a triumph of the private insurance market.

No doubt you have heard that the federal government pays the evil insurance

companies extra money to administer needless private Medicare plans. But it turns out that most companies are paid less than Medicare rates, 5 percent less.

And yet they can pay health-care providers well enough to stay in the plans and keep clients happy and well served.

Enrollment went up 28 percent since ACA and premiums have gone down 10 percent.

MA plans manage care for more efficiency, better outcomes and for less money. Magic? Maybe. It’s The American Way to open up the marketplace of ideas and see what sells. Heck, we even made the elections a nonstop reality show of debates. We’re out there sparring with words and jabbing with metaphors. Kind of a magical process we have.

Is there disaster coming? Count on it!

As advisors, you always have to be prepared to be the people out there in the front helping guide people to new lands and opportunities. OK, I think my metaphor is a little punch-drunk, but you get the idea.

End Times? Beginning Times?

Whichever – but these are definitely not The Boring Times.

Steven A. Morelli Editor-in-Chief

6 InsuranceNewsNet Magazine » November 2012

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November 2012 » InsuranceNewsNet Magazine

7

INFRONT

TIMELY ISSUES THAT MATTER TO YOU

Is the NAIC Warning for Veterans a Shot at Annuities?

T he commissioners caution veterans on using annuities to qualify for a pension, but the notice seems to be an opportunity to criticize the products.

By Linda Koco

A

detailed consumer alert from National Association of Insurance Commissioners may have stirred the pot a bit in the annuity ranks.

Even though the alert is directed to retired military veterans, and even though it says it will provide veterans with some tips for evaluating important decisions regarding putting money into financial products, some in the industry are concerned that the warnings about annuities might be misleading for not only veterans but also the general public.

At issue are warnings included in the document about using annuities – in particular, deferred annuities – to help low-income wartime veterans qualify for a government pension. These warnings are in addition to cautionary notes about gifting and moving money into trusts, checking an advisor’s accreditation and licensure, deceptive sales practices and marketing practices.

Shot Across the Bow?

“When I first read the alert, I thought that the National Association of Insurance Commissioners (NAIC) was taking a shot across the bow at special programs that target veterans,” says Christi Daughenbaugh, president of Borden Hamman Agency, a brokerage general agency (BGA) in Dallas, Texas.

She got that impression because the alert focuses its attention on veterans who turn to “financial and estate planning services that are accredited by the Veterans Administration (VA) to assist veterans and their families in accessing pension benefits to help with their future care.”

The issue raised by the NAIC? “Some of these insurance agents, financial plan8

ners and lawyers are taking advantage of veterans by putting their money in financial products that may not be suitable for the veteran,” the alert says, citing a recent Government Accountability Office (GAO) Report.

Those statements “made me wonder if some bad apples may have surfaced among those marketers,” Daughenbaugh says.

There is nothing wrong with special marketing programs that are designed to serve veterans, the BGA adds. But maybe some bad practices were surfacing and the NAIC was trying to head that off. “If so, the alert is not out of order,” she says.

Second Thoughts

When Daughenbaugh studied the alert’s comments about annuities, however, she became concerned. “Some of the statements seem misleading,” she says.

In a section on investing in annuities, the alert says “according to the GAO report, some planners were placing senior veterans in products that may not be age-appropriate because the veteran may lose access to funds needed for future expenses.”

Then the alert puts the spotlight on sales of deferred annuities in this marketplace.

“Some organizations may sell deferred annuities to an applicant that would make their funds unavailable to them during their expected lifetime without facing high withdrawal fees,” the NAIC document says, again citing the GAO report.

The alert does allow that “There are annuity products that could be appropriate or useful to a veteran who is looking to receive a monthly income beyond their pension.”

However, it continues, “a deferred annuity is structured so that payment for the premium investment is not received for several years and withdrawing funds from it early can be very costly. This kind of annuity would probably not be desirable for an older veteran.”

InsuranceNewsNet Magazine » November 2012

Why it’s Misleading

The statements about deferred annuities seem misleading, Daughenbaugh says, because “they seem to imply that it is never appropriate for an older retired veteran to purchase a deferred annuity.”

It is true that deferred annuities have surrender charges if policyholders pull their money out early, she says. But certificates of deposits are structured that way and so are other products that people buy in and for retirement. “The products are set up so that, if you take the money out early, there will be a charge.”

Veterans should be careful and understand the limitations in annuity products, as should all consumers, the BGA says. But the alert seems to generalize about investing in deferred annuities, she says.

“If a veteran has a portion of funds that the person won’t need for a long time, it might be appropriate for that particular veteran to put the money into a deferred annuity,” Daughenbaugh explains. “But this is provided that the veteran understands the pros and cons of what the veteran is buying, and that the advisor has asked enough questions about the customer, understands the circumstances of the individual and knows what the person is trying to accomplish.”

For example, before making a recommendation, the advisor will need to find out if the veteran has enough liquidity, she points out. And, if the veteran is trying to set up a monthly income, the advisor may want to consider using a single premium income annuity instead.

“The point is, the alert needs balance.

Deferred annuity products are not bad, and veterans don’t need to be afraid. In some cases, the deferred annuity might be best, regardless of age and if the customer is a veteran. Look at the specifics.

Don’t generalize. Be rational. And do what is best for the client,” says Daughenbaugh.

Do MEDICAL Additional Points

The NAIC alert touches on a couple of those points in a checklist that also appears in the alert. It says: “Remember, an annuity is not an investment product to help reach a short-term financial goal.”

“Before signing a contract for an annuity, it is important to understand the terms of the contract, how any money is invested, and when the benefit payments will begin.”

“Get educated about annuity choices and the deceptive practices that can be used when selling annuities in this consumer alert.”

“Report suspected deceptive sales to the state insurance department.”

Lee Covington says the Insured Retirement Institute (IRI) encourages all consumers to gather as much information as possible when making financial decisions. He is senior vice president and general counsel with the Washington, D.C., trade group.

Furthermore, he writes in an email, “we support in all states the adoption of the NAIC Annuity Suitability Model, NAIC Annuity Disclosure Model and NAIC Senior Designations Model, as well as FINRA’s annuity suitability rules.”

Covington does not comment directly on the alert, but he does note that the above models “all require sales practices that provide suitable financial products given an investor’s individual holistic retirement situation. And, we expect financial professions to provide advice in a manner that meets the requirements of these important laws and regulations.”

As for veterans, “we owe an enormous thanks to and respect for our nation’s veterans,” Covington writes. “Given their service to our country to protect us all, our industry and its regulators should ensure they, like all consumers, are protected and receive good financial advice during their later years.”

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

Linda can be reached at Linda.Koco@ innfeedback.com.

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John Maxwell shows how to develop and teach leadership to take your organization further

L

ast month’s feature with John Maxwell focused on development, the central theme of his newest book, The 15 Invaluable Laws of Growth. This month, John moves onto leadership, life, death and everything in between.

The second of a two-part series with John focuses on ideas from one of his best-known books, The 5 Levels of Leadership. The book is a manual to becoming a more effective leader that inspires others to achieve their fullest potential, regardless of position or level of leadership.

As one of the world’s most renowned leadership experts, Dr. Maxwell also discussed his personal journey. He tells of significant, pivotal choices he made, including one that might have saved his life.

In this interview, John shares a few secrets with InsuranceNewsNet Publisher Paul Feldman and how to become a level 5 leader in your organization and life.

FELDMAN: What made you focus most of your work toward leadership?

MAXWELL: Leadership is one of my

10 InsuranceNewsNet Magazine » November 2012

passions and so is teaching it. I’ve dedicated more than thirty years of my life to helping others learn what I know about leading. The subject is inexhaustible, because everything rises and falls on leadership. If you want to make a positive impact on the world, learning to lead better will help you do it.

The conclusion I came to early on is that leadership is influence. If people can increase their influence with others, they can lead more effectively. As I reflected on that, a concept for how leadership works began to crystallize in

THE UNBREAKABLE LAWS OF LEADERSHIP

FEATURE

Used by permission from The John Maxwell Company, www.johnmaxwell.com

Find out more about The 5 Levels of Leadership and Maxwell’s other books at www.johnmaxwell.com

November 2012 » InsuranceNewsNet Magazine 11

FEATURE

THE UNBREAKABLE LAWS OF LEADERSHIP

my mind, and that became The 5 Levels of Leadership, which took me about five years to develop.

FELDMAN: Many people hear the word “leadership” and think that because they aren’t the CEO or a manager that they are not a leader, so they don’t develop the skill and basically shut down when the word is mentioned. But as you say, leadership isn’t about a position.

MAXWELL: It’s very simple. Everybody is a leader. They just don’t always have the position, because leadership is influence. You’ve got a mother that still has two children at home. She’s a leader.

The question is not “do we influence somebody?” The question is “how many

Used by permission from The John Maxwell Company, www.johnmaxwell.com

“When adversity comes, it very quickly separates the people who make good choices versus bad choices. People who make good choices during adversity look at opportunity.”

12

do you influence?” The more people you influence, of course, the better leader you are. That’s a fact. But too many people look at leadership as a noun. It’s not a noun. It’s a verb. Leading – it’s connecting. It’s adding value. It’s doing. Everybody is a leader.

I wrote a book that won a Business Book of the Year award and I was told that it won by the largest margin of any business book ever. It was so popular because it was called The 360 Degree Leader. It was a book on leading from the middle and influencing people above you, beside you, beneath you, all around.

It worked because it was very eye-opening to people. For the first time people began to see themselves truly as a leader, even though they didn’t always have a leadership position.

FELDMAN: What would you say is the most important principle of 360 Degree leadership?

MAXWELL: I would just say that the more influential leaders of the last century weren’t the highest leaders. I don’t know who’s the most influential leaders of the last century, Mother Teresa maybe.

I mean look at her. She was a little nun in Calcutta, weighed about 88 pounds.

Maybe it was Martin Luther King. He never was a senator or a president. He was certainly the most influential man in America during that century. He didn’t have a high political position.

When you look at influence and how it works, when people think it’s title or position all you’ve got to do is very quickly cite those kinds of examples. They’ll say, “Oh my goodness. I never kind of thought of it before,” but that’s exactly what it is.

let. I looked at those Wells Fargo men and women and said, “Sixteen months ago you didn’t have to work. All you had to do was answer the phone. Life was good. You didn’t even have to be smart.

You just had to be able to fill out papers to make money. Now all of a sudden everything is changing. You’re going to have to work. You’re going to have to be creative. And some will do well and some won’t.”

When adversity comes, it very quickly separates the people who make good choices versus bad choices. That’s exactly what happens with adversity. People who make good choices during adversity look at opportunity.

I was playing golf in Michigan with Alan Mulally, the CEO of Ford, who is probably without any question one of the three top CEOs in the world today with what he’s done at Ford. We were talking about leadership challenges and he said, “John, I like to call them leadership opportunities because every problem has an opportunity. I’ve always found that problems are the greatest seed to doing well and making it big.”

That’s all choice. The way Alan looks at it is, “My goodness. I’ve got an opportunity here.” Most people just say, “Dear God, might as well close up shop. Things are terrible.” It’s a choice.

FELDMAN: You have said that you didn’t like rules when you were young, yet all of your books center on rules. How did you learn to accept and write rules?

MAXWELL: I still don’t like rules. I like principles and laws. Rules work only in certain situations. Principles work in most situations. Laws work in every situation.

FELDMAN: How important are choices when it comes to leadership?

FELDMAN: What law do you remind yourself of everyday?

MAXWELL: It’s always a choice. Some blame the economy, but the economy is a fact of life. What happens to people is something they can’t always change, but what happens in them, they can always control. It’s attitude and how they approach things.

I was in Chicago speaking to Wells Fargo right after the financial collapse and the housing market went in the toi-

MAXWELL: I have to remind myself of the law of reflection every day, which basically says reflection lets growth catch up with us. The reason I do that is because I think most leaders have a bias to action. They love to have something happening. If something’s not happening, they go kick it over.

So every day I have to say, “John, action is not the key. The key is reflection,”

InsuranceNewsNet Magazine » November 2012

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November 2012 » InsuranceNewsNet Magazine

13

FEATURE

THE UNBREAKABLE LAWS OF LEADERSHIP

FELDMAN: In your book, The 15 Invaluable Laws of Growth, you used the quote, “The wise man questions himself, the fool others.” This is really a powerful statement, because a lot of people quickly go to question others rather than themselves.

MAXWELL: That’s very common. In earlier years, when I was less mature, I thought because I was a leader I had to have answers, so I was kind of like an answer man. But then as I matured I realized I really didn’t have answers. I was just faking it until I made it.

So I began to ask more questions as I became confident and secure. Secure people question themselves and ask questions. It doesn’t rob them of their security.

They just know that that’s the only way they’re going to learn. Insecure people only want answers and want to provide answers. They don’t want the questions.

FELDMAN: What is the most important thing a leader can do?

MAXWELL: That’s very simple. You have to add value to people. Leadership is influence. And how do you gain influence? By adding value to people. The more people you add value to, the greater your influence. That’s a fact. So I tell people: don’t try to be a leader. Just try to add value to people. If you add value to people, you’ll gain influence with them.

If you gain influence with them you’ll be leading them, whether you think you are 14

“Evaluated experience is the best teacher. Having the experience and then reflecting on it, thinking about it and evaluating it, that’s where you learn.” or not. So intentionally adding value to people is huge.

As Max Depree says, the leader is the servant who removes the obstacles that prevent people from doing their jobs.

What a great description. That kind of mind-set requires maturity. It means coming to work every day placing other people first in our thoughts and actions.

It means asking, who can I add value to today and what can I do for others? That is not the mindset of an immature leader.

It is the mindset of a People Developer.

FELDMAN: In going through your 5 Levels of Leadership book as the leader of my organization, I find myself at different levels in my own company. With certain people I’m a level five. With some people I’m a level four, and others I’m level three.

How do you do it on a consistent basis?

MAXWELL: You don’t. On The 5 Levels of Leadership it’s very simple: You’re not on the same level with everybody.

So what people do is, they try to get to one level and say, “That’s the level I’m on with everybody,” and that’s not true at all.

You have to have people that you lead.

The only place you’re on the same level with everybody is level one, position level.

You have the title, position, that’s the only place you’re the same.

As you go up those levels, you lose people. Not everybody is relational, so not everybody is going to go to level two with you. You’ve got people that work for you who probably don’t even like you. So you’re not going to take all of them to level two. If you take eight to level two, you’re not going to take all those people up to level three.

You have to set yourself. You cannot help somebody until you know what level you’re on with them and then you develop strategy to get to the next level.

InsuranceNewsNet Magazine » November 2012

We all rise together.

FELDMAN: What are some of the choices you have made in life that have a material impact on your success?

MAXWELL: When I was 16 and an underclassman, I was named captain of my high school basketball team. I wasn’t even the best player. I was probably the second, maybe even the third best player.

The coach looked at the other players and said, “The reason John is the captain is because he has the best attitude on the team.” I’m a 16-year-old kid sitting on a hardwood basketball floor thinking, “My attitude is going to determine a lot about my success.” So I made a choice that I’d always have a good attitude and that stuck with me.

At 51, when I had a heart attack, I said, “Wait a minute. This is too young to die.”

I made a choice. I’m going to eat better and exercise more, lose some weight, do what I need to do to get my health back to where it was. That’s a choice. A fact of life is that I had a heart attack. The choice is I decided to do everything I can to prevent it from happening again.

FELDMAN: What is the greatest enemy of leadership?

MAXWELL: I think its insecurity. I think people that are insecure in leadership do great damage to themselves and the people that they lead. The greatest hindrance to great leaders is people who have leadership positions, but they’re highly insecure, because instead of adding value to people they want people to add value to them because they’re insecure.

So they’re always detracting. They’re a minus in people’s lives instead of a plus.

A leader should be a plus in people’s lives, not a minus.

Used by permission from The John Maxwell Company, www.johnmaxwell.com

because experience is not the best teacher, even though people say it is. It’s the most expensive teacher, but it’s not the best teacher. If experience were the best teacher, as people got older they’d get better. I think most people getting older are not getting any better.

Evaluated experience is the best teacher. In other words, having the experience and then reflecting on it, thinking about it and evaluating it, that’s where you learn. You don’t learn from the experience. You learn from taking time to reflect. So it’s a great law. It just reminds me every day that no matter how much I love the action, I’ve got to slow down and do some reflection, make sure that I’m thinking correctly and learning from what I’m experiencing.

THE UNBREAKABLE LAWS OF LEADERSHIP

FEATURE

THE FIVE LEVELS OF LEADERSHIP

BY JOHN MAXWELL LEVEL 5 – PINNACLE The highest and most difficult level of leadership is the pinnacle. While most people can learn to climb to Levels 1 through 4, Level 5 requires not only effort, skill and intentionality, but also a high level of talent. Only naturally gifted leaders ever make it to this highest level. What do leaders do on Level 5? They develop people to become Level 4 leaders.

Developing leaders to the point where they are able and willing to develop other leaders is the most difficult leadership task of all. But here are the payoffs: Level 5 leaders develop Level 5 organizations. They create opportunities that other leaders don’t. They create legacy in what they do. People follow them because of who they are and what they represent. In other words, their leadership gains a positive reputation. As a result, Level 5 leaders often transcend their position, their organization and sometimes their industry.

LEVEL 4 – PEOPLE DEVELOPMENT Leaders become great not because of their power, but because of their ability to empower others. That is what leaders do on Level 4. They use their position, relationships and productivity to invest in their followers and develop them until those followers become leaders in their own right. The result is reproduction; Level 4 leaders reproduce themselves.

Production may win games, but people development wins championships. Two things always happen on Level 4. First, teamwork goes to a very high level.

Why? Because the high investment in people deepens relationships, helps people to know one another better and strengthens loyalty. Second, performance increases. Why? Because there are more leaders on the team, and they help to improve everybody’s performance. Level 4 leaders change the lives of the people they lead. Accordingly, their people follow them because of what their leaders have done for them personally. And their relationships are often lifelong.

LEVEL 3 – PRODUCTION One of the dangers of getting to the permission level is that a leader will stop there. But good leaders don’t just create a pleasant working environment.

They get things done! That’s why they must move up to Level 3, which is based on results. On the production level leaders gain influence and credibility, and people begin to follow them because of what they have done for the organization.

Many positive things begin happening when leaders get to Level 3. Work gets done, morale improves, profits go up, turnover goes down and goals are achieved. It is also on Level 3 that momentum kicks in. Leading and influencing others becomes fun on this level. Success and productivity have been known to solve a lot of problems.

LEVEL 2 – PERMISSION Level 2 is based entirely on relationships. On the permission level, people follow because they want to. When you like people and treat them like individuals who have value, you begin to develop influence with them. You develop trust. The environment becomes much more positive—whether at home, on the job, at play or while volunteering.

The agenda for leaders on Level 2 isn’t preserving their position. It’s getting to know their people and figuring out how to get along with them. Leaders find out who their people are. Followers find out who their leaders are. People build solid, lasting relationships. You can like people without leading them, but you cannot lead people well without liking them. That’s what Level 2 is about.

LEVEL 1 – POSITION Position is the lowest level of leadership — the entry level. The only influence a positional leader has is that which comes with the job title. People follow because they have to. Positional leadership is based on the rights granted by the position and title. Nothing is wrong with having a leadership position.

Everything is wrong with using position to get people to follow. Position is a poor substitute for influence.

People who make it only to Level 1 may be bosses, but they are never leaders. They have subordinates, not team members. They rely on rules, regulations, policies and organizational charts to control their people. Their people will only follow them within the stated boundaries of their authority. And their people will usually do only what is required of them. When positional leaders ask for extra effort or time, they rarely get it.

Positional leaders usually have difficulty working with volunteers, younger people and the highly educated. Why? Because positional leaders have no influence, and these types of people tend to be more independent. Position is the only level that does not require ability and effort to achieve. Anyone can be appointed to a position.

November 2012 » InsuranceNewsNet Magazine

15

[NEWSWIRES]

THE NEW AMERICAN FAMILY: The MetLife Study of Family Structure and Financial Well-Being Planning Tips For Every Family Type. bitly.com/MetLifeTips

What Keeps Annuity Holders Up at Night

REASONS FOR EXPENSE CONCERN

39% tax increases Reductions in pensions and annuities are among the reasons families say they are 30% changing interest rates concerned about their ability to pay living s and medical expenses. That’s according to a 29% stock market fluctuation survey of 2,500 adults ages 45-80 published by the Society of Actuaries and the MetLife Mature Market Institute.

The surveyed families pointed to several external factors for their concern about expenses which include the commonly mentioned bad boys of: 1) tax increases (39 percent); 2) changing interest rates (30 percent); and 3) stock market fluctuations (29 percent). But what pension and annuity professionals may not have expected to see in a consumer survey of this kind is that 20 percent of the adults also blame “reductions in a pension or annuity due to the insolvency of an employer or an insurance company from which an annuity was purchased.”

An answer such as this signals that some people are definitely thinking about how insolvencies can affect payout rates from retirement products. But if they are thinking in the dark, so to speak, they might trip up on misunderstandings and never get to solutions.

Researchers to the rescue: They have made several recommendations, two of them especially apropos to the points above. Two suggestions are families should become “educated on retirement planning and risk management options.” and “get help from a trusted professional financial adviser.” Freely translated for advisors: Help families become educated – and be their trusted advisor.

NAIC ADOPTS AG38 NO-LAPSE RESERVE RULES

The National Association of Insurance Commissioners adopted the long-awaited revisions to Actuarial Guideline 38.

The action came during a joint call of the NAIC Executive Committee/Plenary and follows a boatload of study and committee work.

The final version lays out the statutory reserves that life insurers must hold to support universal life policies with no-lapse guarantees. The revisions represent a resolution to issues surrounding AG38 that “ensures adequate reserves to protect consumers while maintaining a level playing field and competitive markets for companies issuing these products,” said NAIC President and Florida Kevin M. McCarty

Insurance Commissioner Kevin M. McCarty in the official announcement.

16

Advisors are likely to feel relief over this development, because the resolution should help secure a viable market for the affected life insurance products that advisors want to sell.

LIFE, ANNUITY OUTLOOK ‘STABLE’

The rating outlook on the U.S. life insurance and annuity sector remains stable through mid-2012, says A.M. Best. That is so despite the continued pressure of the low-interest rate environment on earnings.

The news should be of interest to advisors whose markets and products have been affected by changes that carriers are making to adjust to interest rates.

Insurers are “strategically de-risking” their legacy product portfolios, Best points out in a statement. Advisors are acutely aware of some of those strategies – i.e., exiting, repricing or de-emphasizing certain business lines, par-

InsuranceNewsNet Magazine » November 2012

ticularly interest-sensitive businesses.

In response, advisors have been hard at work – though not always cheerfully – trying to find alternative markets, products and strategies.

Best’s point is that the moves are being made to counteract the impact of low interest rates on spread compression and earnings volatility. Perhaps the stable outlook rating will help smooth some of the advisors’ ruffled feathers.

“Asset-liability matching is critical for insurers,” Best maintains.

The companies need that in order to “match long duration liabilities, particularly in the interest-sensitive business – such as fixed and variable

annuities, universal life with secondary guarantees, pre-need products, longterm disability and long-term care – with assets that will generate positive spreads, minimize reinvestment risk and achieve their investment income targets.”

HUNTING FOR AGGRESSIVE SAVERS

Advisors looking for clients who like to save, and feel compelled to save, might want to check out clients who partic-

ipate in stock options, stock purchase and restricted stock plans. Those are folks who tend to be “aggressive savers,” according to results of a Fideli-

ty Investments survey of nearly 2,000 stock plan participants.

The Boston firm says it found that these workers are saving, on average, 18 percent of their annual household

QUOTABLE

As employers struggle to address unsustainable increases in health-care spending, they can no longer rely on traditional methods of tweaking plan designs like increasing copays and deductibles or increasing employee payroll contributions for medical coverage.

— Maureen Fay, senior vice president and head of CDHP working group, Aon Hewitt.

[NEWSWIRES] income. Fifty-one percent of those savings are going into a 401(k) type of plan, the researchers found. The rest is spread between personal savings (17 percent), company stock plans (14 percent), brokerage accounts (8 percent), IRA accounts (8 percent), and “other vehicles” (2 percent). Who knows, these workers might be receptive to learning other ways to save, as well – say, with annuities, perhaps?

THE SHRINKING TRADITIONAL FAMILY MARKET

Time was that advisors who were learning about life and annuity products spent considerable time boning up on the needs and risks of traditional two-parent households. They did that because those family structures were the norm and the majority – and the target market for many types of life and annuity products.

But now, advisors should probably become well-versed in the needs and risks of single-person households, too, because the ranks of single-person households are rising. For instance,

48%

there were 31 million single-person households in the United States in 2010, according to U.S. Census figures

cited by MetLife Mature Market Institute. That’s up 15 percent since 2000 and four times more than in 1960 when the number was 7 million, MetLife says.

Meanwhile, married couples now represent only 48 percent of households, according to the Census data.

This is the first time the married figure has been less than half since data collection on families began in 1940, the researchers point out. What’s more, only 20 percent of all households in the U.S. are married with children.

ADVISORS FOR THE SUPER-RICH MAKE HEADWAY

The tide is turning for advisors of the super-rich who have at least $25 million in net worth. Time was, before the economic downturn in 2007, this elite fleet of advisors drew kudos from a majority of clients (61 percent) but not the large majority.

Mid-Americans Fess Up to Bad Financial Decisions If advisors ever get to doubting whether their work is needed, these survey results should clear that up in an instant: In July, 67 percent of middle class Americans told researchers for ORC International, a Princeton, N.J., market research firm, that they have made at least one “really bad financial decision” in the past, and nearly half of those folks (47 percent) acknowledged making more than one bad decision. The numbers get downright scary when considering the cost of those bad decisions. The typical (median) cost was $5,000, but the average cost was a lot more – $23,000 – according to analysis of the ORC data

by Consumer Federation of America and Primerica. Incidentally, The ORC survey group included 2015 adults, nearly half of them considered to be middle class with reported household incomes of $30,000 to $100,000 – the very same market that many insurance advisors serve.

According to Spectrem Group, things improved a bit by 2010, when 66 percent of these well-heeled clients expressed overall satisfaction with their financial advisors. But now, in 2012,

Spectrum has found that fully 81 percent of the very wealthy say they are satisfied with their advisors.

Which advisors, pray tell? Full-service brokers, says the Lake Forest, Ill. researcher. Their satisfaction level has jumped to 23 percent today from just 13 percent two years ago, the firm says.

Independent financial planners are second, with 2012 satisfaction levels of 18 percent, up from 13 percent two years ago. Accountants are third, with an 11 percent satisfaction level today, up from 8 percent in 2010.

This is not a world where one advisor rules the client’s roost, however. While 27 percent of super-rich investors use just one financial advisor, 41 percent use three or more, points out Spectrem.

In addition, more than 66 percent of the super-rich say they are actively involved with the day-to-day management and decisions about their investments.

DID YOU

KNOW

?

HE DID THE CRIME BUT CAUGHT A BREAK Former Ohio insurance agent Cecil Young of Cincinnati should be thanking his lucky stars.

He was found guilty for stealing more than $39,000 from nine clients, but although the Hamilton County Court of Common Pleas sentenced him to an 18-month jail term, the court suspended that part of the sentence.

Then again, the court also sentenced Young to community control plus 400 hours of community service, making the time-honored lesson one more time that crime doesn’t pay.

According to the Ohio Department of Insurance, the errant former agent had forged his clients’ signatures and, without the clients’ request, made loans against their life policies in 2009 and 2010. The money went for Young’s personal use.

The carriers backing the affected policies – Illinois Mutual Life and Motorists Life – have since made Young’s victims whole, says the department. Young’s license was revoked by the department in December.

AN ESTIMATED 72 MILLION PEOPLE are in “participant-directed plans,” such as employer-sponsored 401(k) retirement plans, and those plans contain nearly $3 trillion in assets. Source: The Employee Benefits Security Administration

November 2012 » InsuranceNewsNet Magazine

17

New 2013 tax hikes & spending cuts could cost families millions

BY LINDA KOCO

NOW THAT’S A CLIFF

M

any advisors are in full rescue mode as they warn their clients about an even deeper peril than the dreaded fiscal cliff. It’s the estate tax cliff and could cost families millions of dollars unless they protect themselves.

The estate cliff refers to the steep precipice of estate tax liability that will emerge under laws that take effect in 2013. This is but one component of the much-talked-about fiscal cliff, which is the burst of tax hikes and spending cuts scheduled for start-up in 2013 unless Congress intercedes.

Relatively few public figures have been talking about the estate tax cliff during this year’s election season. Perhaps they believe the topic is not of broad enough interest to the general population, since estate taxes are often seen as a subject of most concern to the super-wealthy. If that is the case, they could be seriously mistaken.

According to calculations from LIMRA, 14.5 million U.S. households, or 12.5 percent, could become subject to estate tax liability under the estate tax law that goes into effect on Jan. 1. By comparison, just 2.4 million, or roughly 2 percent, face potential estate tax liability under today’s estate tax law, the researcher says.

That’s a sizeable jump in exposure – a little more than 504 percent to be exact.

That single tax change could sweep higher income mid-market Americans into a world of estate taxes and estate tax planning that may have seemed as far away as the sky. It would increase the tax liability of the wealthy as well.

That gaping exposure represents an estate planning opportunity for advisors, but it also represents potential professional liability issues if advisors do not inform clients that the exposure exists. To say that advisors are both interested and concerned is an understatement.

Some interested parties in Washington have been hoping Congress would pass new legislation that is less taxing, so to speak. Proposals range from a temporary extension of the current estate tax law during this year’s lame-duck session to enactment of retroactive legislation early next year. But to date, no such luck. That is why advisors are making a last-minute effort to reach out to Amer-

FEATURE

The Big Jump: Estate Tax Levels for Individuals

Year

Exclusion Amount

Top Marginal Tax Rate

2011*

$5 million

35%

2012*

$5.12 million

35%

2013**

$1 million

55%

* Established by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010; it will sunset at the end of 2012. ** Scheduled to take effect unless Congress enacts new estate tax laws.

icans who could be affected by the 2013 law as it now stands.

The Trigger

The trigger for all of this is the pending sunset of current estate tax law on Dec. 31. The next day, federal estate tax levels will revert back to those in effect in 2001.

This means that estates of individuals who die on or after Jan. 1 can exclude only $1 million from federal estate taxes ($2 million for married couples), and they will be subject to a 55 percent top marginal tax rate for values over this exclusion amount (also called the exemption amount). That’s a far cry from today’s very generous exclusion amount of $5.12 million and a much lower top tax rate of 35 percent.

In everyday terms, an estate of a person who dies in 2013 with, say, a net estate value of $2 million could have $1 million excluded from the estate taxes, but then see the remaining $1 million reduced by up to 55 percent. Larger estates would have to pay even more in estate taxes, of course.

By comparison, that same estate, if the person dies in 2012, would pay no estate taxes at all. Today, that person’s estate would have to be valued at more than $5.12 million before estate taxes kick in at all, and the top tax rate would be 35 percent, not 55 percent.

People who today cannot imagine themselves as having an estate worth more than $1 million might shrug off this tax shift as “not-important-to-me.”

That is a problem, say advisors, because many people may be underestimating the value of their estates.

An estate includes not only the value of one’s financial assets (banking, brokerage, etc.), they point out, but also the value of other assets such as real estate, a small business, group life insurance, and individual life insurance.

Add it all up and you don’t have to be wealthy to have an estate of over $1 million, says Bernard R. Wolfe, an advisor and financial planner at Bernard R. Wolfe & Associates, Chevy Chase, Md. Some people are getting three to four times their annual salary in group life insurance, he points out, and they have individual life insurance, too. “But they don’t know that the insurance will be included in their estates.”

Likewise with clients who live in parts of the country where property values are high, such as California and New York City. “In many of those locations, even small homes sell for $700,000 to $800,000,”says John Azodi, a certified professional accountant in Kansas City, Mo. The home value combined with other assets could put their estate value well over the $1 million exclusion amount for individuals ($2 million for couples).

November 2012 » InsuranceNewsNet Magazine 19

FEATURE

NOW THAT’S A CLIFF

Ka-Boom!

How a mass affluent couple might go over the ESTATE TAX CLIFF starting in 2013.

Assume two dentists, married to each other, are each 57 and living in Columbus, Ohio. One is a dentist in private practice and the other works in research for a dental corporation.

They have put three children through college, live a comfortable mid-market lifestyle and have perfectly-aligned teeth. Here is how the couple’s assets could easily surpass the $2 million exclusion amount on estate taxes ($1 million for individuals) that will go into effect in 2013, unless Congress intervenes. This example assumes the couple does what many couples do: They name each other as beneficiaries and title all their property jointly.

Financial Assets: Brokerage: Banking: 401(k) at the researcher’s employer:

$200,000 $100,000 $175,000

Life insurance: Individual life insurance* on the private practitioner: Individual life insurance** on the corporate researcher: Group life insurance on the corporate researcher: Value of the private practice:

$1,000,000 $1,000,000 $500,000 $700,000

Personal real estate holdings, paid up: House: Summer cottage:

$300,000 $100,000

TOTAL ESTATE VALUE: $4,075,000 Exclusion amount: $2,000,000

Potential estate tax exposure starting in 2013:***

$1,521,250

Potential estate tax exposure in 2012:

$0

* Owned by the practitioner ** Owned by the researcher *** The 2013 estate tax rates will be graded (by estate amount bands), as in 2001, points out Leon LaBrecque, CEO at LJPR. The grading starts at 41 percent, goes up to 60 percent, and drops back to 55 percent. Thus, he says, the taxes for this couple’s estate would be slightly lower than the maximum rate of 55 percent.

Many people just do not understand the cost of dying, surmises Curtis V. Cloke, president of Thrive Income Distribution System and an advisor with Two Rivers Financial Group, both of Burlington, Iowa.

In particular, “a lot of people misunderstand how the estate tax works and is applied,” adds Michael Fisher Jennings, a financial consultant with Cambridge Wealth Strategies, Troy, Mich. “It is critically important that they understand 20

current laws and what tax opportunities expire this year and will impact their estates starting in 2013.”

Education is Critical

“We (advisors) don’t want to seem pushy, but it’s important that people who might be affected by next year’s estate tax laws understand the gravity of the situation,” Cloke says. “It behooves us to educate them and to show them how to preserve their rights before the end of the year.”

InsuranceNewsNet Magazine » November 2012

Similarly, Leon LaBrecque, the chief executive officer at LJPR, LLC in Troy, Mich., says his firm has been nudging clients about their possible exposure for over a year. The company sends out communications and holds seminars.

There was a lot of foot-dragging earlier, he allows. “But finally, we are seeing a lot of clients, big and small, come in to talk about it. We are even seeing people who have no estate plan at all, including police, firefighters and teachers.

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FEATURE

NOW THAT’S A CLIFF

It’s up to all advisors to let people know about this, agrees Wolfe of Bernard R. Wolfe & Associates. “We need to tell clients that ‘there will likely be significant changes in the tax laws in 2013, so let’s sit down and talk about whether changes need to be made in your insurance, investments or other assets.’”

Wolfe believes the coming changes are so critical that “it would be negligent if you don’t reach out.”

It could be that Congress will surprise everyone and enact a temporary extension of current tax laws, he allows. But all education is still worthwhile, he contends. “We (the nation) will still have to increase income and estate taxes or reduce spending to recover from the national debt, so even with an extension, there will likely be higher taxes to pay going forward,” Wolfe explains.

Reaching Out

The methods advisors use to inform clients and prospects vary.

LaBrecque says his firm is “telling couples that, if your potential estate is more

When people hear that the estate tax on the non-exempted amount could be up to 55 percent, “that gets them interested,” LaBrecque says. than $2 million, you need to look at ways of getting some of your assets out of your estate this year.” When people hear that the estate tax on the non-exempted amount could be up to 55 percent, “that gets them interested,” he says.

Jennings says he is putting estate taxes into planning discussions with all his clients. “It’s very impactful,” he says.

That also helps mitigate what he refers to as “a new planning risk” for advisors. The risk is that some advisors may “get caught in a routine way of thinking,” he says. That is, they tend to associate estate taxes only with the

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InsuranceNewsNet Magazine » November 2012

high net worth, and so overlook the potential estate tax exposure of the mass affluent.

Because of the lower exclusion amount, the demographic for estate planning will be much wider next year, Jennings explains. So, going forward, advisors need to have that awareness in mind when meeting with all clients.

Cloke of Iowa suggests talking about estate taxes with clients who have been focusing up to now on accumulation, risk management and retirement planning.

Wolfe’s approach is to “bring them into the office to see if any of today’s tax

NOW THAT’S A CLIFF

FEATURE

The Estate Tax Toolbox

Advisors have a number of tools they can use right now to help mitigate potential estate tax liability that may arise starting in 2013. Here are just a few examples provided by advisors.

SET UP AN ESTATE PLAN IF ONE DOES NOT YET EXIST In a properly drafted plan, a couple could take advantage of today’s $10 million exclusion (for husband and wife) and up to $13 million by using special discounting strategies.

RECOMMEND GIFTING STRATEGIES This is a sure-fire way of moving assets out of the estate, say advisors. For instance, consider gifting highly or under-appreciated assets. There is no way to retain the rights to the asset, and the assets could end up being worth a lot more later on. But the assets will be out of the estate and won’t be taxed when the client dies.

Under the 2012 gift and estate tax laws, the couple could gift, say, $7 million (or more, up to current allowable limits) into an irrevocable trust, reducing their estate tax liability next year. The couple needs to understand that this opportunity ends on Dec. 31.

REVIEW AND RECOMMEND LIFE INSURANCE If the tax law changes take effect on Jan. 1, as scheduled, more people are likely to be buying life insurance to cover their estate tax exposure. Policies being written today are to cover the estate tax exposure on large estates, such as couples with combined estates valued at more than $10 million. But with the lower exclusion amounts around the corner, producers are alerting people with smaller estates that they might need to buy more life insurance as well.

Congress usually grandfathers existing contracts written under previous laws, but there is no guarantee that the government would include that provision, particularly if a deal is not reached.

HELP THE YOUNGER COUPLES Some young couples in their 20s and 30s may have $1 million or more in individual life insurance and group life insurance. The advisor will need to discuss how that affects their estate, especially when the couple has other assets that will take their estate value over next year’s combined exclusion amount for couples of $2 million. Bringing estate tax exposure to the attention of younger clients, and helping to put them in the best position possible, increases advisors’ value.

CONSIDER VARIOUS TYPES OF TRUSTS Two of the trusts advisors mention most often when speaking about last minute strategies for this year are the irrevocable life insurance trust (ILIT) and the A-B trust.

ILITs: Advisors can use an ILIT to carve out the life insurance from the estate. The advantage is that life insurance is a leveraged asset because dollars paid today will be worth five to 10 times more when the person passes away and it will be income-tax free.

Each spouse can fund the trust in advance, in 2012, with assets valued up to this year’s exclusion amount of $5 million per individual.

Setting these up won’t happen with a snap of the fingers. Some people have never heard of ILITs, so they don’t know how they could help for estate tax planning.

And some don’t know how life policies are taxed.

AB trusts: These irrevocable trusts have been recommended for some married couples in today’s environment. After the first spouse dies, the trustee can utilize the unused portion of the exception amount, but if this portion of the estate could potentially end up being taxed.

Note: Current tax law has an exclusion portability provision that can be used in lieu of the AB trust for years 2011 and 2012. Here, if the first spouse dies without using up his or her estate tax exclusion amount, the deceased’s remaining exclusion amount can be transferred to the survivor’s exclusion amount.

UPDATE THE STRATEGY FOR WEALTHY CLIENTS Estate planning for the wealthy is no longer just a matter of setting up the estate plan documents and then revisiting for updates. Now, advisors need to have ongoing dialogue with the client and to be sure the client’s different advisors are on the same page. That includes estate planning for what exists, the foreseeable future and beyond the foreseeable future.

FACTOR IN STATE ESTATE TAXES AND STATE INHERITANCE TAXES, TOO November 2012 » InsuranceNewsNet Magazine

23

FEATURE

NOW THAT’S A CLIFF

What Might Congress Do With the Estate Tax? Three proposals Congress is most likely to consider are: Let the estate tax law REVERT back to $1 million and 55 percent maximum tax Enact a COMPROMISE of $3.5 million exemption and 45 percent maximum tax

EXTEND the current law with $5 million exemption and 35 percent maximum tax

Some People Don’t Care

Advisors are the first to admit that the estate tax discussion does not always go down easily. Not only are some clients uniformed about the potential impact on their estates, some are also completely indifferent.

As Azodi puts it, “most clients with estates valued at $1 million to $5 million don’t do estate planning. And when asked about it, some will say, ‘I don’t care.’ Others say their families are ‘getting plenty anyway. If they have to pay taxes, so what?’ ” Still others have told Azodi that “I worked hard for this and I’m going to enjoy it. If there is anything left for them [beneficiaries], they can have it.”

It’s a different mindset than with people who want to create a legacy for the family and extend it over the generations, he concludes. In view of that, when he runs into such thinking, he says he tries to talk with the person and hope that they will listen.

Azodi says he documents that we did have the discussion. After all, he says, “the advisor can get blamed for not doing anything.”

Some people who do not take steps now regarding their estate tax situation are “going to be stuck,” predicts Scott Cramer, president and certified public accountant of Cramer & Rauchegger, Maitland, Fla.

Wonderful Spot

Source: LIMRA

provisions should be taken advantage of before the end of the year.”

This does take time, he allows, “but we’re down to the wire now.” He says he lets clients know that “we’re trying to preserve as many benefits from current law as we can before year end.”

Often, Wolfe says he asks probing questions or raises points about next year’s estate tax picture as it is now known. He says he points out that this is really going to happen. It’s not a scare tactic. Assuming the advisory relationship is one of trust, “the chances are 24

good that the client will take the letter, phone call or discussion very seriously,” he adds.

Wolfe also suggests that advisors be sure they are staffed to handle the response from clients who want to come in to discuss the matter further. He says his firm is expecting a 30 to 40 percent response rate on fourth-quarter letters they are sending out. If the response rate is even higher, “we will do our best to handle it, because these changes will affect almost every one of our clients.”

InsuranceNewsNet Magazine » November 2012

“Still, this is a wonderful spot for estate planning right now,” says LaBrecque of Michigan. “That is provided you can communicate that there is a problem, and make it simple.”

Sometimes if a client doesn’t want to make any plans, LaBrecque says he responds with a deal. “I will say, ‘If you give the money to me so that I can to gift it to two organizations that I like, I’ll do your estate plan for free.’” That opens up their eyes, he laughs. “Soon they start asking about how they can arrange for that money go to someone that they like, such as their own lineage.”

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

Linda can be reached at Linda.Koco@ innfeedback.com.

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... a different experience November 2012 » InsuranceNewsNet Magazine 25

[LIFEWIRES] Advisors Still Important For Life Insurance Info

Tips For Advisors For Business Growth bitly.com/Advisor_Tips

Consumers’ Most Important Information Source INTERNET

18% 2006 25% 2012

INSURANCE PROFESSIONAL

43% 2006

37% 2012

A LIMRA study finds that 61 percent of consumers who researched individual insurance did so via the Internet, a big increase over the 38 percent who did so just six years ago.

“However, despite the popularity of online sources, more consumers (69 percent) sought information from agents, brokers and advisors, who are often viewed as the most valuable and influential information sources,” said Mary Art, research director, LIMRA technology research.

In 2006, only 18 percent of recent researchers considered Internet sources to be their most valuable sources, significantly less than the 25 percent found in 2012. In contrast, 37 percent of consumers rate insurance professionals as most valuable in 2012, eight percentage points lower than those who did in 2006. It’s noteworthy that 16 percent of consumers say the workplace is their most valuable information sources.

“Companies need to understand that one size does not fit all when it comes to educating consumers about products and services,” noted Art. “Using a multi-channel approach will reach a broader audience in the ways they want to collect information and will most likely lead to more sales.”

The study indicates that 65 percent of men used the Internet for research, compared with just 58 percent of women, and 67 percent of consumers without children were far more likely to seek information online compared to 58 percent of consumers with children.

More Gen Ys (73 percent) seek information online than Gen X (61 percent) and baby boomers (56 percent).

ATTENTION WALMART SHOPPERS: LIFE INSURANCE IN A BOX

MetLife, the largest U.S. life insurer, began offering prepaid life policies at about 200 Walmart stores in South Carolina and Georgia in September.

Walmart shoppers can buy a policy in a box complete with an image of the MetLife’s mascot Snoopy that provides up to $25,000 of coverage for one year.

MetLife wants to increase the number of policies sold directly to consumers to add to its client base while at the same time cut out the middleman, with a goal of cutting expenses by $600 million by 2016.

A one-year policy with a $10,000 death benefit has a price tag of $69 for people ages 18 to 44, and $429 for $25,000 of coverage DID YOU

KNOW

?

26

for customers 60 to 65 years of age. After purchasing a prepaid card for the policy, the consumer then calls a MetLife representative who asks a series of health questions and then activates the coverage.

THE $1 BILLION PROBE

Unclaimed property probes by states have escalated to include mid-sized insurance companies in search of what could be as much as $1 billion in unclaimed life insurance policies.

The probes are mostly being initiated by the states and auditors and some state attorneys general. It is estimated that more than 35 states are involved in the initiative to force insurance companies to turn over money from insurance policies where the

ONLINE SOURCES PROMPT ONLY 5% OF CONSUMERS to seek additional information about individual insurance products. In contrast, 25% of consumers who recently considered these products were first led to consider them by insurance professionals. Source: LIMRA

InsuranceNewsNet Magazine » November 2012

QUOTABLE (MetLife) has been working with regulators to develop industry best practices and is pleased to announce new processes that will provide an even stronger safety net for the limited number of beneficiaries who do not submit a claim to the company in the normal course of business.

— MetLife settlement statement

beneficiaries have not come forward to claim the proceeds.

MetLife recently settled with 22 state regulators for $40 million after allegations that the company used more aggressive methods to find the owners of variable annuity with living benefits than it did to find beneficiaries of life insurance policies after the policyholder had died. More than 25 insurance companies have become subject to market conduct exams and unclaimed property audits by states.

The largest settlements have been with John Hancock and Prudential Insurance.

LIFE INSURANCE ACTIVITY UP 1.5% IN SEPTEMBER

Activity of U.S. applications for individually underwritten life insurance was up 1.5 percent in September, according to the MIB Life Index. A summer lull is apparent, however, in third quarter year-over-year results, showing applications down 0.8 percent.

There were positive numbers in six of the last nine months with an unprecedented 1.7 percent growth year-to-date. September’s activity increased 8.9 percent over August.

Two of three age groups showed the greatest overall expansion: up 2.1 percent for ages 0-44, and down 0.4 percent for ages 45-59; and ages 60+, up 2.8 percent, in yearto-year numbers. Year to date, ages 0-44 are up 1 percent; ages 45-59 are up 0.7 percent; and ages 60+ are up 5.4 percent at the end of the third quarter compared to the same period in 2011.

For ages 59 and under, the 2012 Life Index has shown great strides. Growth in the 0-44 group is particularly significant given the last positive numbers for this market occurred in 2003.

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November 2012 » InsuranceNewsNet Magazine 27

LIFE

How Whole Life Outshines the Shiny Objects W hole life has been a bright spot in life insurance sales, leading sales growth in the sector and making it a good ingredient for overall strategies.

By Allan D. Gersten

T

he most successful life insurance agents recognize that product changes over the years are a direct reflection of prevailing economic conditions, as well as the way the public perceives them. In other words, life insurance, just like so many other products, is a child of its times.

Understanding the marketplace dynamics – and how they can change – helps those in life insurance sales to work more effectively with clients.

Whole life (WL) had been the staple product for permanent life insurance sales for more than 100 years. But that changed in 1979, when a revolutionary product was introduced to the marketplace that would shake the industry’s foundation.

Universal life (UL) was presented as a low-cost flexible premium product that allowed permanent insurance buyers to divert substantial funds, which previ28

ously were allocated to pay for a whole life policy to investments.

As the market for UL grew, more and more companies began offering lower cost plans with more bells and whistles, adding greater flexibility to an already flexible product.

That was only the beginning. Variable universal life (VUL) was the next exciting product to grab the attention of both life agents and consumers, providing additional competition for WL. Its unique combination of tax-advantages, combined with the ability to access and trade from a basket of successful money managers who had well-published successes as mutual fund managers, gave this product a strong appeal. In most cases, it was used as a vehicle for taxfree cash accumulation, tax-free access and a stepped-up basis at death, which means the proceeds are paid income tax-free.

The roaring stock market propelled the sales of VUL through the 1980s and 1990s with many of the major life insurance companies adopting this product as an important component of their product portfolios.

At the same time, a number of life in-

InsuranceNewsNet Magazine » November 2012

surance companies demutualized and became stock companies, either shedding or diminishing their captive field forces, and the success of the equity markets, consumers moved away from the historically more conservative life insurance products.

With buyers more comfortable with risk and a life insurance sales force in transition from captive to independent, agents were in a somewhat weakened position and had less motivation to make the case for the merits of WL. Over the past 15 years or so, the original generations of UL have come back to the industry to give it a black eye, as interest rates steadily declined and plans failed to perform as expected. In some cases, clients expected their premiums to vanish in a limited number of years, while others assumed that their “low premiums” would be sufficient to carry coverage beyond their life expectancy.

In most cases, clients were disappointed when these expectations were not met. With increasing life expectancies, policyholders were concerned about outliving their life insurance.

Guaranteed universal life (GUL) was designed to allay these fears. It offered

HOW WHOLE LIFE OUTSHINES THE SHINY OBJECTS guaranteed premiums and a guaranteed death benefit at the expense of cash value accumulation and access.

Over time, GUL has become an increasingly expensive product since life insurance companies are unable to invest the premium dollars at a sufficient return in the current low interest rate environment. To protect themselves, many companies have either imposed premium restrictions or dropped out of the marketplace. However, some companies are able to compete and deliver a product that can serve the needs for the right client.

The story continues with indexed universal life (IUL), the latest UL product to take the market by storm. It has an appeal with life agents because they are not required to have securities licenses to sell it. How long that will last is a question, since some in the financial industry are seeking more control through legislation.

It appears UL’s popularity as the industry’s product of choice has peaked in favor of the conservative security of

WL, a result of a sideways stock market since the dotcom bubble burst of 2000 to the present.

Many consumers are still either in a weakened financial condition or in a state of shock after the flash crashes,

As buyers recover from the financial meltdown, they are drawn to the guarantees and financial foundation offered by whole life. the stock market meltdown of 2008, a very deep recession and its drawn-out, tepid recovery. It has had an immense

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impact on the public’s investment and insurance buying behavior.

Consumers want to protect their families, as always, but now they seem to embrace and better understand the unique ability of the life insurance industry to serve them in ways not otherwise available to them.

Buyers still want guarantees, and recognize that the returns offered by a WL policy represent a compelling and appropriate foundation for their future financial security.

Many have become risk-averse and are now focused on true savings with a guaranteed return and are less willing to gamble with the volatile markets.

From the buyer’s perspective, it is more prudent to purchase a product that offers a guaranteed return, as well as liquidity. WL makes it possible to use the plan as collateral, borrow from the cash values, surrender dividends or receive them each year in cash. With its access to the cash values, this plan gives the buyer greater flexibility and is another reason for the renewed interest in WL.

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29

LIFE

HOW WHOLE LIFE OUTSHINES THE SHINY OBJECTS

They know that the premiums are part of their balance sheet and that they can extricate themselves from the insurance/investment with their money entirely intact without market risk.

Access to the principal gives WL a revitalized appeal. The resurgence of this product stands in stark contrast to the recent past when it was entirely unfashionable to buy a product with a lower expected return than what the stock market and even real estate investing were offering.

WL, once again, has become a product that should be included in the mix when considering clients’ life insurance needs. Planners should become familiar with the product, its improved chassis and riders, as well as its advantages over Universal Life for a large segment of the insurance buying market.

If WL has the ability to meet the needs and expectations of many consumers, here are six common situations where it can be used effectively: Create a guaranteed universal life alternative with a blend of whole life and term life. A blend of permanent life insurance and a supplemental term rider can be a competitive alternative to purchasing universal life. A common approach would be to combine 50 percent whole life with a specifically designed rider for the balance. Dividends can then be available to fund the term policy and gradually convert it to permanent life.

The term premium can be guaranteed to maintain its price projections until well into a person’s 80s. The coverage level can be maintained, while developing large cash values as the guaranteed universal life’s cash values dissipate to zero.

Retirement supplement using whole life to increase income while providing a pre-retirement death benefit.

This strategy works well for clients 3555 who are concerned with their retirement, have available disposable income, are maximum funding their qualified retirement plans and are conservative investors. The solution can come in a 10-payment plan, a 20-payment plan or with other designs that fit specific circumstances.

The whole life plan provides guaranteed 30

cash value and a guaranteed death benefit, while dividends can increase the death benefit. There is access to cash values that can be used for retirement needs, starting a business or to take advantage of other opportunities. The death benefit can pass to the family on a tax-free basis.

Section 162 Bonus Plan with leverage, using the business checkbook for executives. This sales idea comes in handy when the business owner wants to retain and reward a key person. The plan allows for a current tax deduction and there’s little or no set-up cost. Life insurance protection is provided before and after retirement for the key per-

Whole life’s improved chassis and riders make it an excellent vehicle for strategies. son’s family. The employee, who generally pays the tax liability on the bonus premium, can access the cash values during service before age 59½ without a 10 percent penalty.

The leverage comes into play when the employer loans the employee the yearly tax liability, which would accrue and can be forgiven if the employee completes an agreed upon period of service.

Legacy or education planning, leveraging a gift from grandparents.

The objective is to ease the cost of a college education and to leave a lasting legacy for the grandchild. The grandparents can use a 10-pay whole life policy, which is on the life of the child, by making gifts of the premiums to the grandchild’s parents.

The grandchild benefits from a growing amount of life insurance and cash values accumulating tax-free. Lastly, the policy can provide a lifetime income for the benefit of the grandchild – a truly lasting legacy. The grandparents can utilize their yearly gift tax deductions,

InsuranceNewsNet Magazine » November 2012

allowing for gifts from each grandparent to each grandchild.

Private split dollar as a solution to allow for minimizing gift taxes. This option is for large estates for which the insurance solution has premium solutions in the range of $100,000 to $1 million, and, therefore, the potential for large gift tax liabilities in transferring the premium to a trust. Whole life is recommended when access to the cash values in the future may become important.

The private split dollar allows a client to maintain a much larger policy due to the minimization of the gift tax liability.

The client pays the premiums, but not as gifts to the trust. They are made as payment for the interest in the cash value of the insurance policy. The client, as grantors of the trust, annually gifts an amount sufficient to pay the trust’s share of the life insurance premium, equal to the value of the current year’s death benefit protection. This is usually a very small portion of the premium initially.

Be your own banker: use permanent life insurance as a nest egg and a source of liquidity as opposed to tapping a 401K account. This strategy is appropriate for both business owners and individuals who have a need for permanent life insurance and are concerned about the safety of guaranteed cash in their contract. The plan can be structured to have a good percentage of outlay available as needed for business or personal needs. There is ultimate flexibility in establishing a repayment plan. If the owner is unable to repay, the loan interest expense continues and the loan balance reduces the death benefit.

In the case of life insurance, what goes around comes around. And what comes around is a product that serves the enduring needs of consumers, one that they can count on to meet their expectations – and that’s whole life.

Allan D. Gersten, CLU, CFP, ChFC, is chairman of First American Insurance Underwriters and has been in life insurance sales since 1969. Allan can be reached at Allan.Gersten@ innfeedback.com.

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LIFE

When Clients ‘Check Out’ A supermarket analogy helps advisors and clients understand how estate and transfer taxes work.

By Channing Schmidt

Y

ou’ve worked hard to help your clients create sizable estates and now they need your help to pass their wealth along to their heirs in the most tax-efficient manner possible.

That’s why it is critical to have a basic understanding of the transfer tax system, which includes the estate and gift taxes.

As the transfer tax stands now, each individual has a $5.12 million exemption for estate and gift taxes through the end of 2012. The maximum tax rate on gifts and inheritances that exceed the exemption is 35 percent. At the end of this year, this tax law expires and the exemption amounts for estate and gift taxes go down to $1 million. In addition, the top tax rate goes up to 55 percent if Congress and the president don’t take action and change the law.

The Supermarket of Life

The analogy I like to use to describe estate and gift taxation is a trip to the Supermarket of Life. It is meant to be a concept with a wink – a play on words carrying a serious message.

When clients enter the supermarket they get a shopping cart. This shopping cart represents the estate. During their lifetimes, they walk through different aisles, placing things in the cart. Most end up with a variety of items, such as real estate, investments, life insurance and proceeds from qualified retirement savings plans such as 401(k)s and IRAs. When the client “checks out” of the Supermarket of Life, the transfer tax is triggered. The check out can occur either at death or during their lifetime.

The Estate Tax – “Checking Out” at Death

When your client “checks out” at death, the estate tax applies. At this time, your client’s beneficiary takes the cart to the cashier, aka the IRS, and empties it. The 32

When the client “checks out” of the Supermarket of Life, the transfer tax is triggered. The check out can occur either at death or during their lifetime. value of each item, or asset, is rung up at the fair market value of the asset at the time of death. So if the client bought stock 10 years ago for $100 and the value of the stock at the time of death is $1 million, the value used for federal estate tax purposes is $1 million.

After the assets are rung up, the client’s beneficiary gets the grand total.

This is where coupons come into play.

For this transaction, they have an estate tax exemption coupon. If the grand total of assets at checkout exceeds the coupon (exemption) amount, the remainder is taxed. For example, if the grand total of the estate is $8.12 million and the estate tax exemption is $5.12 million, the remainder – $3 million – is subject to estate taxes.

As with most coupons, some exceptions apply. The first exception is the unlimited marital deduction. This exception allows the client to transfer unlimited amounts to the surviving spouse without incurring estate taxes. If the cli-

InsuranceNewsNet Magazine » November 2012

ent dies with a $10 billion dollar estate and names her husband as beneficiary, there will be no estate taxes at her death.

This is because everything goes to the surviving spouse. But when the surviving spouse dies a few years later, he only has his coupon, or exemption, to use.

His estate will pay taxes on the remaining amount. Typically, the unlimited marital deduction only allows clients to plan to pay estate taxes at the death of the second spouse.

The second exception may apply only to deaths in 2012. This is because the 2010 tax law allowed for the concept of portability. Portability allows the client to transfer any unused portion of his or her exemption to the surviving spouse only if the client dies in 2012. So if the client only uses $1 million of his $5.12 million coupon, he can pass the remaining $4.12 million to his surviving spouse when he dies. When the surviving spouse dies, she has a $9.12 million exemption amount to use.

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WHEN CLIENTS ‘CHECK OUT’

Federal Estate and Gift Tax Summary

Once you understand the transfer tax system, you can see similarities from one type of tax exemption to another. Here is a simple chart that will help you remember how the exemptions are used.

2011 Estate Tax - Exemption

2012

2013 & beyond

$5 million

$5.12 million

$1 million

Indexed for inflation?

No

2012 only

No

Maximum ratio

35% - no election made

35%

55%

Portable between spouses­

Yes

Yes

No

Step-up in basis at death?

Yes

Yes

Yes

$5 million

$5.12 million

$1 million

Indexed for inflation?

No

2012 only

No

Maximum rate

35%

35%

55%

Portable between spouses­1

Yes

Yes

No

$5 million

$5.12 million

$1 million

Indexed for inflation?

No

2012 only

Yes

Maximum rate

35%

35%

55%

Portable between spousese­1

N/A

No

No

GRATs2

No change

No change

No change

Discounts

No change

No change

No change

1

Gift Tax - Exemption

GST Tax - Exemption

1. Applies if no election to opt out of the estate tax for the 2010 tax year is made. If taxpayer elects to opt out of the estate tax, then the estate tax is zero; however, limited income tax step-up in basis is available.

2. The unused exemption is available to a surviving spouse only if an election is made on a timely-filed estate tax return (including extensions) with the computed amount available for portability.

The Gift Tax – “Checking Out” During Lifetime

Most life insurance companies see policies.

Unlike the estate tax, the gift tax applies only to gifts given during your client’s lifetime. In 2012, there is a $5.12 million gift tax exemption for transferring assets to another person while the client is living. A gift is defined as the transfer of an asset with no payment or other compensation received in return.

Gift and estate taxes are based on the same exemption (coupon) amount: Therefore, if your client uses part of the exemption during his or her lifetime, that amount is subtracted from the estate tax amount. If your client makes a gift of $2 million to his daughter during his life, he has a $3 million exemption to use at his death.

Keep in mind the one important distinction between the estate and gift tax: stepup in basis. Remember when the value of an asset is “rung up” for estate tax purposes the cashier uses the fair market value at the time of death. Since the asset is included in the estate, the basis of the asset is “steppedup” when the inheriting individual receives it. But gifts don’t receive a step-up in basis.

Let’s say your client gives her son real estate she purchased for $50,000 and the value of that asset is now $200,000. At checkout, the cashier (the IRS) allows

a gift tax exemption of $50,000. This amount counts against her $5 million exemption (or coupon). Her son receives the real estate tax-free at his mother’s cost basis of $50,000 rather than the $200,000 market value. If he sells the real estate for more than his mother paid for it, he pays capital gains tax on the difference.

There are some exceptions to the gift tax. Similar to the estate tax, your client can give unlimited amounts to the spouse without paying any kind of transfer tax.

In addition, the IRS doesn’t want to keep track of all the birthday and Christmas gifts an individual makes, so they allow a minimal amount to be given without being counted for gift tax purposes. This amount is known as the “annual exclusion” and an individual can give away up to $13,000 in assets a year in 2012 without affecting the value of the $5.12 million coupon (exemption). Finally, any direct payments for qualified medical expenses or tuition are not considered taxable gifts.

Channing Schmidt, J.D., CFP, is an advanced marketing attorney for Minnesota Life Insurance Company, a subsidiary of Securian Financial Group. Channing can be reached at Channing.

Schmidt@innfeedback.com.

34 InsuranceNewsNet Magazine » November 2012

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November 2012 » InsuranceNewsNet Magazine

35

[ANNUITYWIRES]

ANNUITY BUYERS EYE INFLATION

Advisors Search For Big Ticket Income Annuities In the third quarter, advisors made over 121,600 searches for income annuities on the CANNEX (U.S.) database, a resource that advisors use to learn about single premium income annuity (SPIA) rates and products.

A lot of those searches were for policies of substantial size, according to the CANNEX report. For instance, the average premium plugged into the system was nearly $228,000, up from third quarter 2011 average of $215,800.

The search data provide a window into the profiles of potential SPIA buyers, too. Almost 58 percent of third quarter searches involved male buyers, for instance. The average age for male buyers was 68, and for women, 70.5.

As for the source of funds that these buyers would probably use, it appears to be non-qualified money based on the fact that 77 percent of the third quarter searches involved nonqualified funds.

Given the size of the premiums being searched, one might think that the potential buyers are strongly interested in the safety of the issuing company, and therefore might want to see the ratings of the carrier. However, a surprising 40 percent of third quarter searches did not include a request for ratings on the carrier.

ANNUITY SERVICE EXPANDING

Even though the annuity market continues to ruminate about carrier retrenchments and even exits, Depository Trust & Clearing Corporation (DTCC) is one third-party support firm that is actually expanding its annuity services .

Specifically, DTCC data service is expanding its online Analytic Reporting for Annuities service, which offers data and analytical tools for identifying key trends in the annuities market. Lots of

annuity carriers use the service to keep tabs on annuity transaction trends and identify opportunities and enable them to get more robust data than in the past.

That development should interest advisors, because it’s a subtle sign that the annuity infrastructure is continuing to grow, despite the economy-related market dislocations of recent times. Could new opportunities be far behind?

DID YOU

KNOW

?

36

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BROKERAGE TAKES UP ANNUITY/ RIA MATCHMAKING

The TD Ameritrade, Inc. brokerage has decided to help registered investment advisors (RIAs) get hooked up with annuities that might meet a client’s need.

RIAs are not typically “annuity-first” producers since they tend to use a range of solutions.

But when a TD survey revealed that ‘securing a steady source of income in retirement’ is the top financial goal of more than two-thirds of investors, TD beefed up its annuity services for RIAs and now offers a “select list” of non-proprietary fixed, variable and deferred income annuities. It also of-

fers RIAs access to a dedicated team of insurance-licensed, non-commissioned annuity specialists, and – through those specialists – access to a cost/benefit comparison tool from Morningstar.

73 PERCENT OF ANNUITY OWNERS POLLED IN 2012 and 17 percent of

non-owners say annuities are an important part of retirement strategy, up from 55 percent and 8 percent, respectively, in 2011.

Source: The Insured Retirement Institute and Cogent Research

InsuranceNewsNet Magazine » November 2012

Guaranteed income, advisor recommendation, and tax deferral continue to be the top reasons consumers purchase annuities, according to a 2012 study from The Insured Retirement Institute (IRI) and Cogent Research. Also on the buyers’ radar – inflation.

Six percent of surveyed investors said inflation protection is a reason to buy an annuity, up from just 1 percent of investors who gave the same answer in 2011, the researchers say. The shift is

worth noting, given that the Consumer Price Index (CPI), a common measure of inflation, has been quite low compared to historic averages. In August 2012, the average inflation rate for the 12 preceding months, based on the CPI, was 1.7 percent or half of the 3.4 percent average for years 1914-2012.

GIVING FROM THE GRAVE

Rupert Malchisky tried to pull the wool over the eyes of an annuity company, but the plot eventually came to light.

According to an Associated Press story, the Rumford, Maine resident recently pled guilty for collecting more than $12,000 in annuity checks written out to – get this – his deceased mother. Malchisky’s ex-wife was reportedly

the person who cashed the checks. It’s hard to believe, but the theft and forgery went on for more than three years after the mother’s death in 2008. An insurance company investigator for the annuity carrier – Allstate Insurance Company – did uncover the scheme, according to AP.

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November 2012 » InsuranceNewsNet Magazine

ANNUITY

Annuities Suit Up for Retirement Game N ew annuity products emphasize safety over glitz.

By Linda Koco

I

n the past few months, a number of annuity carriers have brought out new annuity contracts or features that are geared toward meeting the needs of retirement-minded customers.

This is happening in the fixed and the variable markets.

Gone is the glittering talk about better-than-CD interest rates and tantalizing retirement income rollup provisions.

The new products offer detailing that is conservatively modern in a post-recessionary kind of way, but the focus on retirement is unmistakable.

Frankly speaking, the carriers want to score retirement touchdowns.

Leon LaBrecque, who is CEO at LJPR in Troy, Mich., believes thinking is changing on product-focused transactional sales. “The old annuity approaches won’t work anymore,” he explains.

As a registered investment advisor, his firm is treating annuities as an asset class, particularly for those seeking retirement solutions, particularly guarantees and income.

“We recommend annuities when the client wants something that stabilizes retirement income, or that guarantees interest for accumulation purposes,” LaBrecque says. “We treat annuities as part of the solution, not just a product to sell.”

38

The work is advisory-focused, not sales-focused, he adds, and the annuity advice his firm provides is geared toward retirement needs rather than accumulation.

The new annuities that are coming out seem to reflect that. Even though the carriers are different, and the product types are different, the group-think is just going in that direction. A few examples follow.

Fixed Products

One example is ATHENE Benefit 10, fixed indexed annuity from Athene Annuity & Life Assurance that has an enhanced benefit rider offering up to five benefits, all funded by a benefit base account.

Here’s the point: five benefits are keyed to retirement concerns. They include a guaranteed lifetime withdrawal benefit for a retirement income stream; a 50 percent enhancement on income in the event of inability to perform two of six activities of daily living on a permanent basis; a five-year payout of the rider’s benefit base if the client experiences long-term care confinement or terminal illness diagnosis; and a death benefit if money remains in the benefit base account at the time of the annuitant’s death.

Because it’s an indexed annuity, the contract does include two indexed accounts. Both link their interest crediting to the S&P 500. But it also offers a fixed account with a five-year guaranteed rate, a nod to those who want both retirement

InsuranceNewsNet Magazine » November 2012

benefits and guaranteed growth. There’s a 6 percent premium bonus too, which vests over 10 years, and the enhanced benefit rider includes early income bonus of up to 10 percent if the person begins lifetime withdrawals before the eighth contract anniversary.

Another example is a deferred income annuity (DIA) from Massachusetts Mutual Life called MassMutual RetireEase Choice. The policy is a flexible premium contract that guarantees a specific amount of future income.

The payouts can start as soon as 13 months after issue. But the carrier says the policy is really designed to help meet the predictable income needs several years hence. In other words, this is a product for the advanced retirement years.

Unlike traditional deferred annuities, this annuity provides no contract value or withdrawal provisions. But in return, the policy can guarantee a higher income amount at time of purchase payments than can traditional deferreds, the company says.

That’s a trade-off some consumers are apparently willing to make. Sales of DIA products were up about $47.3 million, or 30.4 percent, from first to second quarters of this year alone, reports the Fixed Annuity Premium Study from Beacon Research.

The carriers reporting to Beacon produced more than $202.6 million in second quarter sales compared to $155.3

ANNUITIES SUIT UP FOR RETIREMENT GAME million in first quarter, says Judith Alexander, director of sales and marketing at Beacon. Those numbers do not represent total DIA sales in the United States, she adds, because not all DIA issuers are yet reporting DIA sales separately from income annuity sales.

New York Life has reported that its own DIA, the Guaranteed Future Income Annuity, has taken in more than $500 million in premium in the first 12 months since the product’s introduction in July 2011.

Incidentally, at least eight carriers offer such a product, according to Beacon.

That’s up from four last year.

As this was being written, Northwestern Mutual unveiled a DIA called the Select Portfolio Deferred Income Annuity.

It offers growth potential through dividends, the Milwaukee carrier says, adding that the product address three retirement challenges – running out of savings due to longevity, the impact of inflation on purchasing power, and market changes that can reduce the value of a nest egg.

“I wouldn’t be surprised to see more companies introduce a DIA,” comments Alexander. “They are a lower risk way to capitalize on the demand for guaranteed retirement income than variable annuities or fixed indexed annuities with guaranteed living benefits.”

Variable Products

A sampling from product initiatives on the variable side of the industry shows a similar retirement focus.

For example, Lincoln Financial Group just added Risk Portfolio Management Funds for its Lincoln ChoicePlus Assurance variable annuity products.

The purpose is to complement portfolios and provide “a less risky approach to investing, while potentially enhancing variable annuity guarantees and seeking to maximize income,” says John Kennedy, head of retirement solutions distribution for Lincoln Financial Distributors.

That should help “reinforce the goal of meeting specific retirement needs,” he adds.

Meanwhile, Allianz Life says it is offering a new variable annuity through the Wells Fargo Advisors’ Asset Advisor Program. It, too, is a retirement focused contract, starting with the name – the Allianz

Retirement Advantage Variable Annuity – and going on through the options.

The account choices have varying levels of protection, guarantees, and investment options all designed to complement a retirement portfolio, the Minneapolis carrier says.

Worth noting: According to the company, the policy is designed exclusively for professionals working in the advisory services market. That message resonates with LaBrecque’s comment earlier, about how annuity approaches and thinking are changing toward providing retirement advice, not product sales.

The Wells Fargo program has a minimum account size of $75,000 and is not designed for excessively traded or inactive accounts.

Prudential Annuities is in the new rollout group, too. Some might not think so, because the Newark, N.J. carrier recently made news for suspending sales of various living benefit features in its variable annuities. But what got lost in the hub-bub is that the company also introduced a new variable annuity benefit, the Highest Daily Lifetime Income 2.0, around the same time as it was suspending sales of the other benefits.

Like earlier versions of this optional living benefit, this version allows policyholders to lock in the highest daily value of their annuity contract for retirement income purposes each day the market is open. But it also includes a new death benefit that locks in account highs daily.

The dual focus makes it a feature suited to people interested in legacy planning as well as retirement income, the company says.

Then there is New York Life again.

The company recently launched a variable annuity called the New York Life Income Plus Variable Annuity. The contract is retirement-and-guarantees driven too, in that it offers an optional rider that guarantees a future lifetime income stream. The payments under the rider can begin on a date of the client’s choosing.

If that sounds familiar, it is. The optional rider – called the Guaranteed Future Income Benefit Rider – is an echo of the company’s aforementioned DIA, the Guaranteed Future Income Annuity, which, as noted above, has been selling at a fast clip since its debut last year.

ANNUITY

But the variable annuity rider has some differences. For instance, those who buy it will get a minimum level of guaranteed lifetime income payments in the future, as with the DIA, but unlike the DIA, the income payments can be increased if markets perform well.

By the way, the company says the income payments under the rider will never decrease due to negative market performance. (That makes the rider sound a bit like a fixed indexed annuity, with its upside potential and downside guarantee. It’s not an indexed annuity, of course, but it could be positioned as an alternative by an enterprising competitor.)

Another difference: The carrier says its DIA product is for pre-retirees with guaranteed income later. Meanwhile, the new VA with rider is designed for pre-retirees who want guaranteed income and the pursuit of more through participation in the market.

Give it Some Time

It will take advisors a while to sort through the new offerings that are coming out. The products mentioned here have a number of features that may be new or altered from one-time industry standards. In other products, there may be new forms of complexity, with different limits and conditions from years past.

And while some new products are replacements for older versions, now withdrawn, others are new designs built with today’s strained economy in mind.

Sometimes there will be distribution surprises too, as with the announcement from TD Ameritrade Institutional, a brokerage and custody service for fee-based, independent registered investment advisors, that it is now offering access to a full range of competitively priced fixed and variable annuities from several national insurers.

But advisors can at least take comfort in knowing that the annuity market is not shriveling into pieces. It’s changing but it’s still active and the carriers are still offering products.

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

Linda can be reached at Linda.Koco@ innfeedback.com.

November 2012 » InsuranceNewsNet Magazine

39

ANNUITY

Annuity Clients Getting Divorced? Step Carefully A greater percentage of older couples are getting divorced and are at an age when they are more likely to have annuities.

How do they split that baby?

By Linda Koco

W

hen people buy annuities, they rarely question how their annuities will be handled in event of divorce. Their advisors may not mention it either when discussing annuities, given that divorce is a sensitive topic, not usually anticipated, and subject to much complexity.

But even though divorce is a delicate subject, more advisors are broaching the topic because they are increasingly seeing the disasters that can happen without planning.

The approach can be a tricky, allows Morris Armstrong, principal of Armstrong Financial Strategies, a registered investment advisory firm in Danbury, Conn.

For one thing, the advisor needs to determine what type of annuity is involved, he says. “Is it an income annuity? A deferred annuity? Is it qualified or non-qualified?

The approach will be different depending on such things, as well as the ownership.”

If it’s an IRA annuity, then the IRA rules take precedence. “But the client will need to know that the asset can be divided if stipulated by the divorce decree, and that the tax-free consequence is important,” Armstrong says.

Advisors also need to keep in mind that the account custodians – brokerage firms, mutual funds or insurance companies – may have differing requirements, he says.

For example, one firm may only want a letter from the divorcing husband and wife, while another firm may want to see the final papers from the divorce decree.

Some clients want the agent to provide guidance on how to split an annuity or to meet documentation requirements.

“In that case, if you are the agent of record, you would probably be able to 40

speak to the insurance company on the client’s behalf,” Armstrong says. “But if you’re not the agent of record – say, the divorcing couple has come to you for assistance but they are unknown to you – the insurance company won’t speak with you.”

An advisor might consider getting authorization to act on the customers’ behalf, he concedes, “but that can be cumbersome.” In that case, the agent will most likely want to advise the policyholder to contact the company directly.

Regardless, he stresses, “Someone must understand how to divide the contract, whether it’s qualified or non-qualified.”

Listen to the Client

Steven J. Oshins of the Oshins & Associates law firm points out that “in a solid marriage, there is no reason to have a discussion about what happens to the annuity or any asset in event of divorce.

But if the marriage appears to be rocky, or have the potential for becoming rocky, it

OW? N K U O Y D DI The divorce rate among adults 50 and older doubled between 1990 and 2009, according to a Bowling Green State University study.

might be good to have the discussion. It’s too late (after the fact).”

Oshins, a Las Vegas attorney who works on trusts with high-net-worth clients, agrees that it’s not always easy for an insurance and financial advisor to know whether a marriage or relationship is strong or rocky. But advisors can sometimes get a hint about this by listening to

InsuranceNewsNet Magazine » November 2012

what the client says about the spouse or prospective spouse.

For instance, if the advisor notices that one spouse is muttering unkind things about the other, that could be a sign that it might be time to bring up the subject of divorce.

Make sure to document all discussions with the home office and the client, suggests Anthony R. Bartlett. He is a financial advisor and registered representative with Baystate Financial, Worcester, Mass.

Also “make sure you document the discussion with the client about any changes that affect riders, surrender charges, fees etc.,” Bartlett says. “But remember that any discussion with a spouse about the other spouse’s assets should not occur, and that any information gathered during the divorce process with the advisor is not subject to client-attorney privilege and could be brought into discovery.”

Asset disparity could be another reason for having a divorce discussion.

For instance, if one person is older and wealthier than a much younger spouse, how to handle the assets will be on the table. In those cases, he says, the wealthier spouse might call to ask what happens in event of divorce.

If divorce is imminent, and the advisor knows about it, the advisor should make a point asking questions that might elicit details that could help with the planning.

But knowing in advance doesn’t always happen. Oshins tells of one businessman for a startup company who decided, with the wife, to do a do-ityourself divorce, because it was cheaper.

“He was in my office signing some papers that would cut the wife out of some of his assets. When he started talking about splitting a qualified retirement plan, I asked him if he had a Qualified Domestic Relations Order.” (A QDRO is a divorce court document that details the splitting between divorcing spouses

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41

ANNUITY

ANNUITY CLIENTS GETTING DIVORCED? STEP CAREFULLY

of tax-deferred employee benefit or pension plans that are subject to the Employee Retirement Income Security Act. The order helps the clients avoid a taxable event upon the split.)

It turned out that the businessman did not know about QDROs, so Oshins advised the man to go to a family practice attorney for help. “He did go to an attorney, and ended up saving $100,000,” says Oshins, who specializes in estate planning, not family practice.

Similar disclosures can and do occur in the offices of financial advisors, he points out. “For instance, a financial planner would have picked up the QDRO problem.” So a good strategy for advisors is to start asking questions if they get wind of a divorce.

Sticky Situations

There are flies in the ointment that could make this advising juncture difficult, however.

For instance, Bartlett points out that benefits of the specific annuity may only be available to the owner or annuitant, and that riders on the contract are, many times, not transferable and thus lost when owners or annuitants are divorcing.

In addition, he says, changing the beneficiary of an account from the spouse while the divorce is in process could present issues. “If the client dies and you have changed the beneficiary, then that could lead to legal problems.”

Advisors should also keep in mind that annuity riders are based on either the owner of the contract or annuitant.

In the case of a non-qualified annuity, “the divorce decree may award money to a spouse that is not the owner or annuitant,” Bartlett says. “That could potentially cancel the annuity’s rider benefit.

If either of those change, the riders and guarantees could be changed.”

Another problem is that not all attorneys and judges are aware of how annuities and IRA annuities work. Oshins says he has seen them split up assets that legally can’t be split or make other changes to ownership that will cause problems later on.

Although input from an annuity advisor could make a lot of difference in some of these cases, insurance and financial advisors are not always consulted.

Many times, says Armstrong, the

THE DIVORCE PIC TURE FOR BOOME RS

1 3

BABY BOOMERS were unmarried in 2009, and the vast majority of these were divorced or never married.

UNMARRIED BOOMERS faced greater

economic, health, and social vulnerabilities compared to married boomers.

DIVORCED BOOMERS had more economic resources and better health than widowed and never-married boomers.

spouses come to the insurance advisor after they are already divorced. “They may have $250,000 to $500,000 in their annuity, 401(k) or group annuity, but they have already made poor decisions that have financial ramifications about which they or their attorneys did not know.”

For instance, some don’t realize that, if there is a QDRO related to an employer-based retirement plan, a spouse can take money out of that plan with no premature distribution penalty. However, if that same spouse first rolls the money into an IRA, any withdrawals from that IRA will be subject to the penalty.

“So, if a younger client needs cash right away, make sure the client takes the money out of the retirement plan under the QDRO before putting it into an IRA or IRA annuity,” Armstrong says.

Opportunities

The various ins and outs of divorce and annuities do not mean there are no opportunities for advisors. For one thing, Armstrong says that “doing a good job for the client, say, when dividing an annuity, always helps cement the relationship with the clients.” The advisor may not make a new sale at that time, he allows, but the advisor is keeping the customer.

In addition, the divorce might bring forward assets that may be appropriate to recommend placing in an annuity.

The population of people age 50 and up is increasingly having divorces, he points out. (A study by Bowling Green

42 InsuranceNewsNet Magazine » November 2012

Source: “Unmarried Boomers Face Old Age: A National Portrait,” Department of Sociology, Bowling Green State University, 2012

State University says post-50 couples are twice as likely to divorce today as they did in 1990.) But due to the age, risk tolerance and income needs of this population, he says it might make sense to recommend that some of these individuals take some of the assets from the divorce settlement and put them into an annuity.

“There is plenty of opportunity for the advisor, and there are plenty of tools from the carriers to help with this,” Armstrong says.

Oshins believes another approach might also help, at least for wealthy clients, which is heading off some of the asset-related issues before a divorce ever occurs.

One vehicle for doing this is a domestic asset protection trust (DAPT), he said during a presentation of the recent annual meeting of National Association of Insurance and Financial Advisors (NAIFA) in Las Vegas. The DAPT is an irrevocable trust into which a client (in this case, a spouse) deposits money that the trustee can later distribute back to the client (again, in this case, a spouse).

After a stipulated period of time, those assets are insulated from claims of creditors, including a spouse in a divorce action, Oshins says.

It’s not for everybody, but in certain cases, those trusts create a wall around the assets, he says.

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

Linda can be reached at Linda.Koco@ innfeedback.com.

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November 2012 Âť InsuranceNewsNet Magazine

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[HEALTHWIRES]

Study: Health Reform Can Reduce Costs, Improve Quality bitly.com/Health_Study

QUOTABLE

Health Overhaul May Offer Billions To Insurers Health care consultant PwC reports that health care reform has the potential to pour billions of dollars into the health insurance industry.

The health care consultant reveals in its recent report, “Health Insurance Exchanges: Long on Options, Short on Time,” that much of this money will be new, but some will represent premiums shifted from other parts of the insurance market, such as those who had coverage through their place of employment but then purchased a policy through an exchange.

Starting in 2014, as part of the Affordable Care Act, the government will issue tax credits that will help many consumers buy health coverage through state health exchanges. PwC estimates that 12 million people will use the exchanges and pay a total of $55 billion in premiums. By 2021, PwC projects those totals could rise to 29 million consumers and premiums of $205 billion.

The actual numbers also will depend on how many states opt to expand Medicaid coverage as the new law allows but does not require. As of now, 13 states and the District of Columbia will run their own exchanges, and the report projects that most of the remaining 37 states will involve the federal government to run their exchanges.

The exchanges and tax credits will offer an unprecedented market opportunity for health insurers, but will not be without its challenges, PwC warns in its report. Exchange insurers will likely compete for premiums based on price, and will need to differentiate themselves from competitors to maintain existing clients and expand their base.

PLAIN LANGUAGE IN HEALTH INSURANCE ACT IN EFFECT

The Plain Language in Health Insurance Act requires health insurers to write health-care documents in simple, easy-to-understand language. The goal of the act is to lower costs and avoid confusion for insurance consumers as documents written in plain language result in sizable cost savings for organizations and are easier for everyone to understand.

The bill, which went into effect in late September, was introduced on June 2009 as part of the Affordable Care Act and requires that publicly distributed material issued by health insurance providers must be written in plain language. Health insurers must provide consumers with an easy-to-understand standard DID YOU

KNOW

?

template outlining benefits and costs. The Federal Plain Language Guidelines provide an outline for these best practices including the directive that plain language documents should use short, simple words, “you” and other pronouns to speak directly to reader, short sentences and paragraphs, and avoid the inclusion of legal, foreign, and technical jargon and double negatives.

HEALTH CARE BOG-DOWN: PREVIEW OF WHAT’S TO COME?

Massachusetts Medical Society’s Patients Access to Care Studies survey found that

nearly a third of the state’s residents said that insurance companies are most responsible for their problems accessing health care.

EMPLOYMENT STATUS REMAINS THE MOST IMPORTANT DETERMINANT of health insurance coverage. Just over 58 percent of the non-elderly population had employment-based health benefits in 2011, either directly through their employer, union, or previous employer, or indirectly through an employed person in one’s family.

Source: Employee Benefit Research Institute, September 2012 analysis

44 InsuranceNewsNet Magazine » November 2012

Serving a less educated, ethnically-diverse population that is more likely to cycle on and off government support will require creative outreach programs, more targeted products and stronger ongoing customer support.

— Ceci Connolly, managing director, PwC Health Research Institute

Government was the second most named barrier to health care at 13 percent, and the economy ranked third. The blame fell on physicians 4 percent of the time. Thirty percent of those surveyed reported no difficulty in accessing care. According to the society’s findings, 56 percent of residents who saw a primary care physician in 2011 waited less than two weeks for an appointment. Since the survey was conducted in 2005, the numbers have decreased about 9 percent.

FEWER INSURED VIA PRIVATE HEALTH CARE

Employment-based health coverage is the dominant source of health insurance, but it has been steadily shrinking over the past 12 years, according to an analysis by the Employee Benefit Research Institute in Washington, D.C. The study found that 82 percent of the non-elderly population 65 and under had health insurance coverage in 2011, an increase of about one-half a percent from 2010. Studies have demonstrated an increase in health insurance coverage just five times since 1994. Within the non-

elderly population, employment-based coverage is decreasing. More than 58 percent had employment-based benefits in 2011, down from the peak of more than 69 percent in 2000.

Publicly funded health coverage has increased, accounting for 22 percent of the non-elderly population, up from 14 percent in 1999. Enrollment in Medicaid and the State Children’s Health Insurance Program has also seen an increase to 17.6 percent of the non-elderly population, nearly double the 10 percent covered in 1999.

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Petersen International Underwriters Disability • Life • Medical • Contingency www.piu.org • 800.345.8816 • piu@piu.org November 2012 » InsuranceNewsNet Magazine

45

HEALTH

Medicare Advantage Survives, Even Thrives, Post-ACA M any predicted that MA plans would be DOA under ACA, but they are in the pink because they lived up to their promises.

By Steven A. Morelli

M

edicare Advantage is doomed and it is doing better than ever.

These are the two seemingly contradictory points made by the vice presidential candidates about the privately administered Medicare program – and they are both true.

Although MAs were discussed during the VP debate, the program has rarely surfaced during the presidential campaign.

That is even though MAs are popular and would seem to have much to lose under the Affordable Care Act, which calls for cutting $145 billion in “overpayment” to insurance companies.

So, how can it be simultaneously dying and thriving? How can Rep. Paul Ryan be correct when he said, “7.4 million seniors are projected to lose the current Medicare Advantage coverage they have” and Vice President Joe Biden also be right when he replied, “more people signed up for Medicare Advantage after the change”?

It is what happens when projections hit reality – sometimes the guesses don’t survive. Ryan was quoting from an ACA

impact report drafted by the Centers for Medicare & Medicaid Services four months after the law was adopted in 2010.

CMS projected that enrollment would drop by half, or 7.4 million, by 2017 when the MA cuts were fully phased in. But even though CMS started cutting the program immediately after ACA was passed, enrollment has since increased.

Contrary to those earlier projections, CMS said in September that MA rolls have increased by 28 percent since 2010 and is expected to rise another 11 percent next year. Insurance companies have managed to drop premiums 10 percent while maintaining benefits.

The increase is a particular surprise because the ACA is taking the advantage out of Medicare Advantage, at least for insurers. One of the stated aims of reform was to stop “overpaying” insurance companies for MA. Insurance companies were paid more for services under Medicare Advantage to entice them into participating in the experiment to see if the private managed care model would work for Medicare. The Balanced Budget Act of 1997 allowed private insurance companies to administer Medicare plans under Part C or the Medicare+ labels – partly to offset new cuts in medical fees in traditional

46 InsuranceNewsNet Magazine » November 2012

Medicare. But the Part C fee structure did not interest insurance companies.

The 2003 Prescription Drug, Improvement and Modernization Act enhanced the option and called it Medicare Advantage, fortified with more appealing rates for insurers.

The idea slowly caught on and now 25 percent of Medicare recipients are on MA plans – recently projected to grow to 28 percent by next year, according to CMS. Under ACA, MA carriers now have four percentages they might be paid for a service ranging from 115 percent of the Medicare rate down to 95 percent, depending on their county, according to Gretchen Jacobson, principal policy analyst at Henry J. Kaiser Family Foundation. But, by 2017, MA carriers will all be paid at 95 percent of the regular Medicare rate, she said.

That cut might sound drastic, maybe even fatal, but most companies are already functioning at the 95 percent rate.

“There are Medicare Advantage plans in almost all parts of the country now but there is a lot of enrollment in the plans that are in the 95 percent category in places like Miami, Los Angeles and Brooklyn,” Jacobson, explaining that those counties are already at the highest Medicare fee-for-service level. The counties that are at a lower Medicare

MEDICARE ADVANTAGE SURVIVES, EVEN THRIVES, POST-ACA reimbursement rate have the higher MA fee-for-service adjustment, at 107.5 or 115 percent. The fourth rate is 100 percent.

Even though insurers are paid less, companies are apparently able to increase efficiency and pay medical service providers enough for them to stay in the plans, Jacobson said. Carriers attract clients interested by not only offering enticing extras, such as paid gym membership, but also by capping seniors’ out-of-pocket expenses, as required of MA plans but not of traditional Medicare.

Shifting demographics are giving MA a boost, said Alan Mittermaier, president of HealthMetrix Research in Columbus, Ohio.

“I think probably a good bit of steady growth can be attributed to boomers aging into Medicare, many of whom have had their employer or personal insurance provided through a managed care organization as opposed to indemnity commercial insurance, which has certainly been on the demise,” Mittermaier said. “I think there’s a pretty broad acceptance and understanding of how the managed care plans work.”

The HMO model also helps insurers bring efficiency to Medicare, not only driving down cost but also improving care, which was the initial attraction of, and arguments for, the MA idea.

“The impetus was that managed care would give a bigger bang for the buck for Medicare beneficiaries and for the federal government by being able to coordinate care and really be able to connect all of the various providers and services that a beneficiary would need,” Mittermaier said.

“It was particularly helpful for those who have chronic disease and see half a dozen specialists, get 12 prescriptions – trying to coordinate that and make sure that physicians seeing the same patient are kind of working off the same page.”

The higher fees paid to MA were in part an acknowledgment that applying the HMO model to Medicare was an experiment.

“The Medicare population was generally less healthy, obviously, as people age and their health deteriorates,” Mittermaier said. “But there is also the end of life issue and the concentration of expenditure for services in the last six months or a year of someone’s life. So, it presents a challenge to managed care plans versus the other healthier, younger population that

Total Medicare Private Health Plan Enrollment, 1999-2012 9.7

IN MILLIONS

6.9 6.8

10.5

11.1

HEALTH

11.9

13.1

8.4 6.2

5.6

5.3

5.3

5.6

6.8

’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10

’11

’12

18% 17% 15% 14% 13% 13% 13% 16% 19% 22% 23% 24% 25% 27% % OF MEDICARE BENEFICIARIES NOTE: Includes cost and demonstration plans, and enrollees in Special Needs Plans as well as other Medicare Advantage plans.

SOURCE: MPR/Kaiser Family Foundation analysis of CMS Medicare Advantage enrollment files, 2008-­2012, and MPR, “Tracking Medicare Health and Prescription Drug Plans Monthly Report,” 2001-­2007; enrollment numbers from March of the respective year, with the exception of 2006, which is from April.

they’ve traditionally served in the commercial insurance market. That was part of the reasoning for having a 15 percent payment over and above per capita fee for service Medicare expenditures.”

MAs are bringing another feature of the private insurance market – mergers and acquisitions, which has accelerated since ACA was passed.

“The larger Medicare players, Anthem, Aetna, United Healthcare and Humana, have been acquiring regional and local plans that have a substantial Medicare book of business,” Mittermaier said. “I think that’s probably the evidence that some of the smaller players realize they’re not going to have the same advantage in economy of scale and being able to hold down costs, both on the medical loss ratio in terms of outlays for medical expenses, as well as on the general services cost overhead programs and plans.”

The acquisitions might reduce the market to a few large players nationally – with all their positive and negative consequences. Although consumer choice would be reduced, the larger companies will be able to keep the market viable by spreading risk across a larger pool and increasing their leverage with providers.

Although the greater leverage might sound like carriers would play hardball with doctors over rates, the bargaining power is most useful with hospitals and organized health-care groups. In fact, doctors might win out if MA plans continue to grow. That’s because Medicare fees

for service have been the same for several years and might even drop if Congress gets around to cutting reimbursement rates as required by the Balanced Budget Act of 1997. That makes MAs look a whole lot better to doctors because HMOs tend to pay higher fees to medical providers, Mittermaier said.

What does it all mean for advisors? The product won’t be sold in exchanges and will probably become more of a component of an overall financial plan provided by advisors.

“Certainly I would think that becomes an extremely valuable resource for anyone planning their retirement,” Mittermaier said. “Whether it’s a certified health insurance advisor or certified financial planner, that’s an extremely important consideration as part of planning,” Mittermaier’s own experience might be an indicator of how MAs will fit into the retirement market: “I’m 63 and in the next couple of years I will be doing retirement planning with my wife and considering Medicare Advantage – once we get an opinion from a trusted advisor.”

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 agent’s association. Steve can be reached at smorelli@insurancenewsnet.com.

November 2012 » InsuranceNewsNet Magazine

47

FINANCIAL

Is Gold Still a Glittering Investment?

Despite predictions of imminent collapse, gold value just keeps on going. How should you help clients decide if it’s still worth the plunge?

By Steve Tuckey

I

f you were introduced to some fellow hailed as good as gold, worth his weight in gold and the gold standard of fine fellows, you just might think that this is someone whose acquaintance you should cultivate.

But that still does not answer the question of whether gold itself is actually the gold standard of investment vehicles in these troubled times, or should it remain in them there hills far from your portfolio.

And so with gold approaching re48

cord highs at $1,800 per ounce at press deadline in early October, the question for skittish investors more familiar with blue rather than gold chips is “Am I too late?”

There is no shortage of $5,000-perounce gurus hawking their wares these days. But even the most prominent among them, ADVFN.com CEO Clem Chambers, won’t take the plunge himself because he feels the market is too irrational.

Author and investment advisor Dean Bahniuk preaches that millions of gold-worshipping Indians and Chinese moving into the ranks of middle and upper classes, as well as its increasing number of industrial uses, is plenty evidence that the party is far from over.

And all those new industrial uses will

InsuranceNewsNet Magazine » November 2012

mean that the storied 90 percent of all the gold ever mined is still in circulation is bound to come down in years to come.

But Moneycrashers.com website coowner Andrew Schrage said such investors have reason to heed their own skittishness. “If the investor is that nervous about it, I’d say to simply take your money elsewhere. While there haven’t been too many gold crashes in history, they do occur from time to time,” he said.

In 1980, gold lost almost half of its value in a matter of a few days. “Investing in gold is not for the faint of heart, and if you can’t take the turbulence, invest somewhere else,” he said.

WB Wealth Management principal Albert Lu has an interesting take on the question.

“I would never rule out a short-term

FINANCIAL

IS GOLD STILL A GLITTERING INVESTMENT? correction in the price of gold or any other good. However, there is no theoretical limit to the upside potential of gold, or any other asset, when priced in dollars,” he said.

Gold has its passionate backers as the one material that has travelled through the ages as symbol of wealth, security and protection against the ravages of a debased paper currency.

With budget deficits as far as the eye can see and the Federal Reserve, in the eyes of some critics, “printing” money like it’s going out of style to boost a sluggish economy, the specter of inflation looms large in the investing world, although it has remained just that for the time being.

MZ Capital principal Michael Zhuang calls inflation the “silent killer of wealth.”

“Just imagine the inflation rate of 4 percent over the next ten years,” he said.

“Within a decade you would lose 40 percent of your wealth.”

But count him as naysayer when it comes to gold as the inflation slayer.

Zhuang measures assets in terms of their correlation with inflation, and at 40.3 percent, gold has one of the highest correlations. But its return volatility rating of 38 percent does not make it an attractive inflation hedge. “Using highly volatile gold to hedge inflation is like using chemotherapy to treat a common cold. I am not sure which is worse – the treatment or the disease.”

For the record, Zhuang likes short term (1 month) Treasuries as the best inflation slayer with an inflation correlation of 41 percent and return volatility of 3.27 percent.

In addition to the possibility of a crash, Schrage offers some other gold cautionary notes. “There are no tax advantages associated with physical gold investing, unlike some other avenues.

And also, you can’t use financing to invest in gold, so all of your cash needs to be on hand.”

And of course there are no dividends from gold investing and so all your profit comes when you sell out.

When Warren Buffet speaks, people listen, and on the topic of gold he has not been singing its praises as the road to wealth-building.

“What motivates most gold purchasers is their belief that the ranks of the

5-YEAR HISTORICAL DAILY CLOSING PRICES GC Z2=1[10] - GOLD (GLOBEX)

LAST: 1748.70

CHANGE:

2.40

HIGH: 1755.00

LOW: 1744.00

Oct 1, 2012 1,900 1,800 1,748 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 800

2007

2008

2009

2010

2011

2012

MONTHLY Source: CME Group website

fearful will grow,” he wrote in the February issue of Fortune. “Beyond that, the rising price has on its own generated additional buying enthusiasm.”

He likened this ardor to the Internet stocks and housing bubbles of the past couple of decades. “But bubbles blown large enough inevitably pop.”

He then imagines the entire world’s gold supply of 170,000 metric tons melded together (Pile A) fitting comfortably within a baseball infield and valued at $9.6 trillion. For that same amount, you could purchase all 400 million acres of U.S. cropland and 16 Exxon Mobils (Pile B) and end up with “about $1 trillion left over for walking around money.”

“Can you imagine an investor with $9.6 trillion selecting Pile A over Pile B?” Buffet asked.

Lu said that Buffet creates a memorable image, but without much value to the investor trying to figure out a place for gold in his investment quiver.

“In the case of Pile B, the resources are permitted to work freely by combining their productive power with those of outside economic resources,” he said, noting that cropland combines light, water, seed and fertilizer to produce food. “Yet the gold in Pile A must be held in a monolithic form with the owner only allowed to admire or fondle it.”

“How would the assets of Pile B fare with a similar restriction? Will fondling

produce farmland?” he asked.

And so, let’s say, like Lu, your clients are willing to put their own sagacity up against that of the Sage of Omaha and take the gold plunge. How do they go about doing it? Direct ownership can be through bullion, coins, or jewelry. “Have you ever tried to wear a mutual fund to a fancy dinner party?” asks Bahniuk.

But Christopher Dukes, principal of Dukes Wealth Management, notes that at prices skirting $1,800 an ounce direct ownership can be pricey. “Exchange Traded Funds allow you to buy gold at ten cents on the dollar, and you can sell them with a click of a button or a call to your broker,” he said.

Another popular route, gold mining stocks, can be dicey as poor management can lead to poor returns, even when the price of gold is soaring.

In summary, it seems clear that investing in physical gold is not for the timid. Is it too late to invest? Of course it’s an option, and perhaps it has a place in certain portfolios. The final word: All that glitters is not gold, and that just may apply to the metal itself.

Steve Tuckey has been a financial services journalist for more than a decade with a specialty in insurance. Contact Steve at Steve.Tuckey@ innfeedback.com

November 2012 » InsuranceNewsNet Magazine

49

BUSINESS

Raising your visibility can be as simple as wearing tasteful workout gear with your company logo in discrete lettering.

Generating Business at the Gym Without Being ‘The Creep’ You can generate business while getting a work-out but the key is subtle hints and relationship-building.

By Bryce Sanders

Y

ou asked for help in landing new accounts – I’m going to give it to you. I’m going to put you in a room with business owners, property developers, attorneys and other professionals three times a week for 90 minutes. Everyone is relaxed and being themselves. Now, what will you do with the opportunity?

Wow, you say. That sounds great!

Sign me up.

You already have. It’s called going to the gym. Most people who work out regularly go to the gym at a set time several times a week. Within the larger group there’s usually a core group.

50

You’re accepted. If you see them three times a week, how much do they know about you? What do you know about them?

But, you retort, that’s not my gym!

I don’t have property developers and attorneys all around me.

Have you taken the time to learn where your fellow gym buddies work and what they do? If you have confirmed they aren’t professionals and business owners, perhaps you belong to the wrong gym. Switch to a midtown gym near skyscrapers and professional offices nearby.

Stop right there! That’s my gym time. I have boundaries. I’m off the clock at the gym.

It’s the same for me when I’m at my son’s school when I attend sporting events. Ditto my golf club and poker circle. You must be open to opportunities

InsuranceNewsNet Magazine » November 2012

wherever they occur. It’s difficult to grow your business when you specify where you are not going to look for business.

In both dating and business, none of us wants to be seen as pushy or desperate. If you are seen as not being pushy, people assume you are successful. But at what? You need to raise your visibility. People need to know Who you are, What you do and Why you are good.

You want to learn Who they are, Where they work and What they do.

Raise Your Visibility

You go to the gym to work out, not mingle. Raising your visibility can be as simple as wearing tasteful workout gear with your company logo in discrete lettering on your t-shirt. Does that sound too pushy? How about a luggage tag with the firm’s logo on your gym bag? Circling an article or two while reading the Wall

GENERATING BUSINESS AT THE GYM WITHOUT BEING ‘THE CREEP’ Street Journal while on the Stairmaster gets the message across.

What to do: Get them asking questions. Mention that you like working out because you work in an intense business and this helps you relax. Stop talking. It’s likely they will ask: “What do you do?” If not, move onto the next exercise machine.

What not to do: Don’t say, “Working out excessively can be bad for you. You’re lucky I’m in the insurance business…”

Learn About What They Do

Understand the rhythm of exercise. You use a machine for a set, rest for a few moments and do the same for another two sets. Then you move to another machine. This provides plenty of intervals for short conversations.

Start by reading their t-shirts. They often promote an event, resort, store, product or company name. If the shirt features multiple logos, ask about the event. Which company is theirs? If you know something about the company, be complimentary.

What to do: Ask about vacation, holiday plans. Transition into the best time in your own business to get away. Does their business have busy and slow periods, too?

What not to do: Ask probing questions, interrogate. “Do you have a 401K plan at work? Who chooses the plan administrator?”

Establish Your Competency

Most gyms have several flatscreen TVs tuned to sports, financial and local news stations. You work in the financial services business. Demonstrate a good grasp of the financial news. During those down times or cooling-off periods, often a few people are watching the financial news and talking among themselves. Often, the gym has at least one gloom and doom pessimist sharing his or her views and depressing everyone. Bring up one or two positive points they may not have considered. Mention America has been through very difficult economic times before and things have worked out. People like optimists.

What to do: Mention articles you’ve read in The Economist, WSJ or other serious financial publications. It shows you read serious news and take your role of advising clients seriously.

DO THIS: Take the long term view – Finding clients at the gym is an added benefit.

Wear loose, comfortable clothing – you’ll blend in.

Have short conversations while prospects are between sets or resting.

Smile and have a positive attitude.

NOT THIS: Stare – Look people in the eye instead.

If that’s tough, focus on their nose.

Interrupt when they are using a trainer – they are paying for time.

Appear to be “coming on” or be too curious. Alarm bells go off.

What not to do: “Forget the financial news. Who watched Dancing With the Stars last night?”

Explore and Deepen Relationships

Gather small bits and pieces of information over time. You know where they work and what they do. You know their industry. When at home or back in the office, stay on top of news and economic developments in their industry. You don’t need to know a lot. Stories about government regulation or health care costs are applicable to many fields.

When their company has a positive news story or reports good earnings, mention it to them in a complimentary tone. If you’ve gotten to know them well ask about challenges their industry or firm face going forward. Give information to get information. “Rising health care costs are an issue for our industry. How are they being addressed in yours…?”

My gym does regular “parents’ nights out.” The gym serves as babysitter while parents enjoy date night. This brings gym buddies and spouses together. It’s an opportunity for you to introduce your spouse or partner to those people you’ve told him or her about. Now the spouses know each other, too.

What to say: “Heard your firm is sponsoring the 4th of July fireworks in the park. You give a lot back to the community…”

BUSINESS

What not to say: “Just heard you were indicted in that bribery scandal.

Glad I’m not in your shoes…”

Let Opportunities Come to You

In many cases, the business will come to you. If people know what you do and you come across as successful and competent, you will probably be approached from time to time. Because this works on its own timetable you need a wide universe of people to get the numbers working in your favor.

Is your firm doing an event open to clients and guests? Many firms sponsor concerts, sporting events and museum receptions. Consider public service seminars like “Identity Theft” and “Understanding Social Security.”

Invite a few gym buddies along. They now see you in business attire in a professional setting. They hear the message from the podium like the rest of the audience.

Layoffs are still taking place across the country. “Worker Adjustment and Retraining Act” notices (known as WARN) often appear in the local business journal announcing upcoming layoffs at specific firms. Keep on top of this news. When you hear about layoffs at a gym buddy’s firm, mention it and ask if they were affected. Hopefully, the answer is no. Ask, “Were any of your friends affected? When you leave a company there’s lots you need to know about moving retirement assets. I’ve helped other people…” You friend is now your person on the inside dropping your name.

What to do: Wait for it. Tell short anonymous stories about how you’ve helped other people. It positions you as a problem-solver. They start to think about who they know in the same situation.

What not to do: Push for business.

“We’ve known each other for months.

You’ve never asked what I do…”

Bryce Sanders is president of Perceptive Business Solutions Inc. His book Captivating the Wealthy Investor is available on Amazon.com.

Bryce can be contacted at Bryce.Sanders@ innfeedback.com.

November 2012 » InsuranceNewsNet Magazine

51

MDRT INSIGHTS

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

Don’t Blow it with Social Media Avoiding common pitfalls of social media will make your business communications welcome and profitable.

By Ryan J. Pinney

T

here’s no way to avoid tweeting, posting and blogging. It’s how our clients share and get their information. In this digital era, we as financial advisors need to stay current with the latest social media trends and tools to leverage our business.

What to Share

Today, people tend to share details of their every move, which can be ineffective and push people away from interacting with them. Two proficient methods to apply to the way you and your business share information on social networks is with the 90/10 and 10/4/1 rules.

These will keep your audience engaged and help you create a positive presence on social media.

90/10 Rule

The natural inclination is to talk about yourself, but no one wants to hear what you have to say all the time. They want to know what’s interesting to them. The 90/10 rule is 90 percent of what you share should come from third parties or sources other than yourself. You should share someone else’s information and include a little additional insight, kernel of truth or knowledge relevant to the topic. Only 10 percent should be specifically about you, from you and focused on you.

10/4/1 Rule

The 10/4/1 rule works similarly to the 90/10 rule, except 10 shared items should be from third-party sources, four of them can be written by or about you but should be non-product or sales specific topics.

One communication can be about you or talking about what you can do in relation to the things you’ve previously shared. This rule is typically helpful if you are a blogger, have a lot of self-generated content or regularly contribute to third-party publications. A good example would be sharing an article that contains 52

information about you, or highlights or recognizes you but from a third party.

How Often to Post

There is often an overload of information coming through from tweets and posts, and sending out multiple things all at once can overwhelm the audience interacting with you. An online tool called Buffer is an efficient solution to handle sharing articles, pictures, videos, etc.

This tool automatically allocates content you choose through the day or week.

Most financial advisors and professionals in the industry get their information from online sources. Through the course of your normal day, you can build up content you find that is applicable to clients or the industry as a whole and have it sent out in a natural format.

The Buffer tool also allows you to make an additional comment or two and saves it to send it out later or right at that moment. Buffer gives you a consistent and authentic social media presence.

What about Compliance?

Broker/dealers vary, but rarely is there one who isn’t willing to let you have personal social media accounts. You may not be able to state that you work for a specific firm or company, or you are a financial or investment advisor or be able to solicit business, but that doesn’t mean you cannot use it for another solid purpose: social intelligence. Social media gives you insight into the people you want to target as a sales professional, allowing you to identify their interests, concerns

InsuranceNewsNet Magazine » November 2012

and personalities ahead of time. Even if it’s just prep before an initial meeting with a client, it’s a good thing to do.

Create a Blog or Website

Social media is similar to a cocktail party.

At a social gathering you try to gain interest and background about what’s current and get people curious about what you do.

This should resemble your presence on Facebook, Twitter, LinkedIn, Google+, etc.

You shouldn’t be giving any type of sales pitch on these platforms, but instead providing enough interest to have readers want to visit your website or blog. On a website or blog is where you can share information about what you do, your company and products. In reputable social media and blog usage, the main focus shouldn’t be calling out attention to the services you provide. It should be somewhat implicit in the communication itself and understood by those who are already reading or visiting your blog, and focus on why a consumer would want to work or interact with you, based on the service you can provide.

Social media has fundamentally changed how individuals and businesses communicate. As financial advisors, it is the core element of our marketing efforts and it is critical to establish a positive presence on every social network profile.

Ryan J. Pinney is the vice president of brokerage sales for Pinney Insurance Center and a four-time Million Dollar Round Table (MDRT) Top of the Table qualifier. Contact Ryan at Ryan.Pinney@innfeedback.com.

Every year, new tax proposals threaten your products and your business.

Only NAIFA protects both.

Find out more at www.NAIFA.org/ItPays

November 2012 Âť InsuranceNewsNet Magazine

53

Over 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

Estate Taxamegeddon Equals Opportunity L IMRA’s research confirms Taxamegeddon could be around the corner, and it’s time for advisors to act.

By Robert Kerzner

T

here has been a lot of talk about “taxamegeddon” – the potential one-year $494 billion tax increase that will occur if Congress fails to act before Jan. 1. In the meantime, this unprecedented potential is an opportunity for advisors to reach out to their clients to help them secure their families’ futures.

According to LIMRA’s research, possible changes to the current estate tax, which has been in limbo over the past decade, have ramifications for a lot more Americans than many believe.

Recently, LIMRA examined the number of Americans who would be affected if the estate tax law is not addressed by Congress. According to our analysis, 14.7 million U.S. households (12.5 percent) would have a potential tax liability if Congress fails to act and the estate tax reverts back to a $1 million exclusion with a 55 percent tax on the excess. As a result, many of your clients may be affected.

Because there has been no clarity for so long, most Americans have not taken any action to plan for the possibility of changes to the estate tax law, and the results could be devastating for their families and loved ones. That’s why it’s vital that agents and advisors reach out to their clients to plan for the possible changes in tax law, and take advantage of the planning techniques available within the current rules that could change.

Let’s take a look at the three probable proposals Congress is most likely to consider and the implications of each: Allow the estate tax law to revert back 55 percent tax rate with a $1 million exemption.

Extend the current law with 35 percent tax rate and a $5 million exemption.

54

Taxamegeddon is Upon Us If Congress fails to act, the average tax due for those nearly 15 million families would be $1.4 million.

Agents and advisors need to ensure that their clients are prepared for the potential changes now.

Enact a compromise of 45 percent tax rate with a $3.5 million exemption.

If Congress fails to act, the average tax due for those nearly 15 million families would be $1.4 million. While households may use life insurance proceeds on a deceased person to pay the estate tax, LIMRA analysis indicates that only 45 percent of these households have enough coverage to pay the tax.

If Congress extends the existing law, 2.4 million households (slightly higher than two percent) would have a potential estate tax liability. At a 35 percent tax rate, the average tax would be $2.4 million. LIMRA’s analysis shows that 43 percent of these households do not have enough coverage to pay the tax.

If Congress agrees to the compromise of $3.5 million exemption and 45 percent tax rate, 3.6 million households (slightly higher than three percent)

InsuranceNewsNet Magazine » November 2012

would have a potential estate tax liability. The average tax owed for these families would be $2.6 million. According to LIMRA’s analysis, only 47 percent of these households have enough life insurance coverage to pay the tax.

Most experts do not expect the current law to be extended in December when Congress reconvenes, and it is unclear if the law is another stop-gap measure or a long-term resolution. What is clear, however, is agents and advisors need to ensure that their clients are prepared for the potential changes now so that they may plan for a reasonable transition of their assets to the ones they love and to charity for the greater good.

Robert Kerzner is president and CEO of LIMRA, LOMA and their parent organization, LL Global. Contact him at Robert.Kerzner@ innfeedback.com

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M&O Marketing

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Minnesota Life

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5

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Sagicor

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Security Benefit

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Wealth Financial Group

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13

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November 2012 Âť InsuranceNewsNet Magazine

55

THE LAST WORD

WITH LARRY BARTON

Ride the Social Media Tsunami Compliance departments might not like social media, but everyone else does.

By Larry Barton

W

hen financial services providers were young, business was a matter of trust. Company representatives and their clients worked together to reduce risk, protect livelihoods and ensure the financial well-being of families – sometimes starting off their business relationships with nothing more than a handshake.

But times changed and business relationships became more litigious. It became necessary to spell out every detail associated with a financial transaction. Failure to clearly articulate specifics resulted in expensive lawsuits that damaged company reputations and threatened the businesses of those who managed risk. To defend themselves, financial services organizations created compliance departments.

Financial professionals have a love/ hate relationship with compliance departments. Compliance prevents financial professionals from being inundated with practice-killing lawsuits from loophole-exploiting attorneys seeking to make a fast buck. But as the influence of this department has grown over time, financial professionals can no longer communicate in writing with their clients without having the communication “compliance reviewed and approved.”

Today, it seems as if there isn’t a single letter, brochure or piece of web content that doesn’t need to have a compliance stamp of approval before it can be shared with a prospect or existing customer.

Now a new series of communication vehicles has arrived, collectively known as social media. And like a great storm, they have grown into a tsunami that threatens the carefully constructed and controlled communication structures created by compliance departments.

When social media began to spread, compliance officials must have turned to one another and said, “All this written communication must be controlled. We must review and approve each message 56

or else surely some financial practitioner will inadvertently trigger an expensive lawsuit that will be the end of us all.”

But when compliance departments looked at the volume of social media communication taking place, they quickly realized they could not review every posting. The situation strikes fear in the heart of every compliance officer.

As of 2011, there are 500 million active Facebook users. That is approximately one in every 13 people on earth. And half of them are logged in on any given day.

In the United States, 71.2 percent of all Internet users are on Facebook, this according to digitalbuzzblog.com.

LinkedIn has more than 131 million members and the site is averaging 87.6 million unique visitors per month.

Twitter now has 500 million registered users and 250 million Tweets being sent every day.

Social media has become fully integrated into our culture as an accepted method of communication. With the addition of Smartphones and iPads, our American way of life as well as how we connect and communicate with one another has forever changed.

But from a compliance professional’s perspective, it’s all too much. No company department could possibly review and approve this volume of written communication.

Feeling threatened and doomed, compliance professionals did the only thing they thought they could. They banned financial practitioners from using social media.

There are two major problems with this. First, the public does not care about the concerns of compliance departments.

Consumers want to communicate with their financial representatives through social media. Clients expect to be able to send text messages to their agents and financial advisors through their iPhones and Blackberrys, and get timely answers 24 hours a day, seven days a week. When financial professionals are unable to meet this expectation due to compliance department concerns, clients are dissatisfied.

That brings us to the second major problem – your competitors. While

InsuranceNewsNet Magazine » November 2012

your company’s compliance department debates what their social media policy should be, your competitors have probably already begun to maximize foursquare – a tool with powerful appeal to Generation X and Y clients. Social media is much more than connecting with friends on Facebook. Think of it as marketing on steroids.

I have no gripe with compliance folks – their job is to protect your backside. But you and I both know that smart advisors are using personal blogs, social media accounts and email to circumvent company prohibitions that are outrageously out of date. Memo to compliance: Are you listening?

As I see it, it comes down to this.

Compliance departments and companies need to come to the realization that they cannot control social media communication. They must either embrace this communication tsunami or get left behind. Prepared statements created to answer consumer questions with official language lack the authenticity necessary to build and sustain successful client relationships.

To any compliance professional reading this, I say, loosen the reins of control that tether financial services professionals. Instead of being a gatekeeper, become a facilitator. Educate financial professionals on how to communicate appropriately with their clients and hold them responsible for their actions. Allow financial advisors to communicate directly with company customers.

If you think you can stand against the Tsunami, think again. Any business that tries will be swept away by the forces of change.

Do you agree? I invite you to write me at InsuranceNewsNet and share your perspectives. Let’s get a thoughtful dialogue started.

Larry Barton, Ph.D., CAP, is president, CEO and holder of the O. Alfred Granum Chair in Management at The American College, based in Bryn Mawr, PA. Contact Larry Barton at Larry.Barton@innfeedback.com.

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