InsuranceNewsNet Magazine - September 2012 by InsuranceNewsNet

Life

Annuities

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September 2012

ALSO INSIDE: Jim Collins: The Hedgehog and the Flywheel Effect PAGE 12 The Generational Battle Between Veteran Advisors and Young Recruits PAGE 24 Special Life Insurance Awareness Month Guide PAGE 34

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SEPTEMBER 2012 » VOLUME 5, NUMBER 9

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46 ANNUITY 44 N ew Contenders Emerge in $7.3 Trillion Retirement Market

24 INFRONT

24 G enerational Disconnect

8 Variable Annuity Volatility Doesn’t Shake Advisors By Linda Koco Cogent Research finds that not only are advisors selling VAs, they expect to increase their offerings of this alternative option to manage risk and deliver absolute return.

By Linda Koco The Generation Gap is not unique to financial advisors but addressing inherent problems with specific strategies can help build the bridge.

By Linda Koco Massive assets held in qualified retirement plans managed by life and annuity insurers may not stay in those coffers much longer unless advisors act – and quickly.

46 G lobal Shakeup Could Rattle Money Out of U.S. Annuity Market By Linda Koco Globalization is a problem most advisors aren’t addressing. But take note, because the growth of international carriers will affect your bottom line.

52 HEALTH LIFE 36 A Tax-Free Future

FEATURES 12 T he Hedgehog & Flywheel Effect

An interview with Jim Collins Author and co-author of six New York Times best-selling books, Jim Collins discusses the concepts that innovative entrepreneurs employ for a consistent formula of success.

By Russell E. Towers The tax-free financial leverage of using life insurance to finance Roth IRA conversions will enhance the net aftertax inheritance for your client’s heirs.

38 The New Golden Handcuffs

By Stephen O. Kroeger, Jack F. Elder and Ryan Mattern An IRS deferred compensation rule offers a relatively inexpensive technique for small to mid-sized firms to compete with larger corporations and retain key employees.

InsuranceNewsNet Magazine » September 2012

52 W ill Employers Push Workers into Health Exchanges? By Thom Mangan Thanks to health care reform, small and midsize businesses face tough decisions that may radically change how they offer health benefits to employees.

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ALSO IN THIS ISSUE SEPTEMBER 2012 » VOLUME 5, NUMBER 9

BUSINESS 58 Don’t Pucker Up

By Mike Watts You’re a good sales person, but sooner or later, a call will go badly. A director of sales offers tips on how to keep the conversation from hitting a sour note.

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61 L IMRA: Life Insurance Awareness Month: Shine A Light For Clients By Robert A. Kerzner The need for life insurance has never been greater – or less utilized by American families. Life Insurance Awareness Month offers an opportunity for illumination of the critical importance of protecting loved ones.

62 NAILBA: Pay It Forward – Again: Mentoring Still Works Best

By Dexter Umekubo The challenges of insurance sales don’t change, only the sales players do. The gift of mentoring a less experienced agent can be a rewarding experience for both of you.

64 C ourage And Medicare: It’s Time

By Larry Barton In our new feature, Larry Barton, president of The American College, offers insights and invites readers to join the conversation on the ongoing debate and political football that is Medicare.

EVERY ISSUE 6 Editor’s Letter 22 NewsWires

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INN _ FP_ a2A _ 0912-0398 Allianz PreferredSM production is not included. Restrictions may apply, contact us for more details. New York production does not qualify. Registered September Representative participationMagazine is subject 2012 Âť InsuranceNewsNet 5 to Broker/Dealer approval.

WELCOME

LETTER FROM THE EDITOR

I’m a What? BY STEVEN A. MORELLI, EDITOR-IN-CHIEF Have you ever thought of what your spirit animal would be? Odds are good you never thought of what animal would best represent you and your qualities. I hadn’t either until our publisher, Paul Feldman, interviewed Jim Collins to feature in the magazine. He is the author of Good to Great and other works that have become business management textbooks. One of his concepts centers on the fable of the hedgehog and the fox. I won’t go into the details and spoil the fun of reading that feature, but the short of it is that the hedgehog always wins because it does one thing really well, which is curl up in a spiny ball that the fox cannot penetrate. The legend was passed down from the Greeks, who probably heard it around campfires for some thousands of years before they wrote it down. But you can think of it as the coyote and roadrunner fable, too. Many of us learned those lessons around the campfire of the TV. The roadrunner did one thing really well, running, and the coyote had many wiles and Acme products but always lost. Jim got me thinking about this. The coyote and the fox are always searching for sneaky ways to take and the roadrunner and hedgehog are always just doing their thing, basically oblivious to their predator’s wily bumbles. I realized I had learned some of this along the way. When I was a younger manager and editor I paid a bit of attention to office politics and the struggle as to who was where on the ladder. I have a few scars from being knocked off that ladder by people far better at that game than I. I realized I got into the journalism business in the first place because I like to write and help craft other people’s work. I also recognized that when I focused on what I was good at I did work I was proud of and positive things happened. It’s a little tough on the ego, though. Wouldn’t you picture yourself as a more noble or exciting animal, like maybe even a fox? But then again, think about all the 6

conniving and dramatic people that you have known – you know, the “exciting” animals. Who really needs more of that in their lives? I even took an online test to divine what my spirit animal might be. In the interest of science, of course. Turns out that I am even a few pegs below a hedgehog on the excitement scale – I am an otter. OK, that was not easy for me to admit, but there you have it. I’ll leave you with a quote from Jim’s Good to Great: “A hedgehog concept is not a goal to be the best, a strategy to be the best, an intention to be the best, a plan to be the best. It is an understanding of what you can be the best at. The distinction is absolutely crucial.” Go forth in hedgehoggery! Steven A. Morelli Editor-in-Chief

Starting this month!

We are honored to be featuring a monthly column from Larry Barton, the president of The American College. Larry is not only an influential figure in our industry, but he is also a particularly engaging communicator. See for yourself on Page 64.

InsuranceNewsNet Magazine » September 2012

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September 2012 » InsuranceNewsNet Magazine

INFRONT

TIMELY ISSUES THAT MATTER TO YOU

Variable Annuity Volatility Doesn’t Shake Advisors E ven with some companies pulling out of variable annuities, producers remain committed, survey finds.

Some Carriers Backing Out of Guarantees

By Linda Koco

The Hartford Financial is one of the latest. The company had already announced its shift to its property and casualty side of the business and away from the life side of things, especially annuities, at the urging of big investors, such as John Paulson. So it should come as little surprise that The Hartford is considering offering lump sums to get out of VAs.

dvisor interest in selling variable annuity products appears to be continuing, despite predictions that advisor interest would wane due to the volatility and scale-backs the market has seen in recent times. That’s the take from Cogent Research. The Cambridge, Mass., researcher has found that 77 percent of advisors surveyed in 2012 expect to continue selling variable annuities and to allocate 11 percent of their assets under management toward the products in the coming year. Those are the same percentages that Cogent found in 2011, says Meredith Rice, senior research director. In fact, the percentage of those expecting to continue selling variable annuities is even slightly higher than in 2010 (75 percent) and in 2009, (76 percent), says Rice, who is senior project director at Cogent. The data comes from the firm’s annual Advisor Brandscape survey of advisor perceptions on brands that offer various financial products.

The Surprise

The fact that advisor intentions regarding selling variable annuities are holding steady, and not declining, may surprise some market watchers. After all, many insurers have been scaling back on variable annuity offerings (especially guaranteed income benefits), and a few have even exited the market altogether, in response to the challenge of managing books of guarantee-rich annuities in a prolonged low-interest rate environment. As the scale-backs and exits have taken hold, expectations have risen that many advisors would decide to walk from the remaining products rather than sell products with features that are “less-than” before. 8

By Steven A. Morelli While financial advisors are becoming more interested in selling variable annuities, a few carriers are backing out of the products.

But it does follow a few other announcements along the same lines. According to a few reports, AXA and Transamerica have been sending notices to VA owners offering a lump sum in exchange for their guarantees. It’s part of a long process of pulling out of the quicksand that these carriers fell into during the 2008 economic collapse when their generous guarantees came back to bite their reserves. The Hartford, you may recall, needed to grab a stick extended by TARP to get out of trouble, largely blamed on VAs. It’s been a four-year ripple since the crash with the most aggressive VA carriers slipping down the sales charts, while others have climbed. The climbers are, not surprisingly, among the same companies that Cogent identified as ones that advisors are favoring, such as MetLife, Prudential Financial and Jackson National.

That apparently hasn’t happened. The 2012 Brandscape survey found that not only is advisor intention to sell variable annuities holding firm, but that advisors “seem to be really committed to certain carriers,” Rice says. In particular, the survey found that Jackson National and Prudential increased their penetration among VA sellers by 12 percent and 7 percent, respectively. In addition, both firms are leaders in Advisor Investment Momentum, a Cogent measure of advisor intent to increase or decrease use of existing providers in the coming year, she says. Other carriers that increased penetration among VA users in the past year include MetLife, Aegon/Transamerica and RiverSource, the survey found. The penetration increases vary by channel. For instance, the survey found that RiverSource improved its penetration among independent advisors (in part due to cross-selling with Ameriprise Financial advisors). Meanwhile, Prudential appears to have made inroads in the regional channel, and Jackson National experienced a “significant

InsuranceNewsNet Magazine » September 2012

increase” in the national wirehouse channel, Cogent says.

An Attractive Alternative

Rice speculates that advisors are continuing to offer variable annuities because “there doesn’t appear to be another attractive alternative to meet the particular need” of clients. That need is for products that can protect principal and provide guaranteed income, she says, citing results of other Cogent surveys. These surveys found that both advisors and investors are “flocking to low-risk investments.” Even Generation X and Y investors want low-risk investments, Rice says. In fact, “the risk profile of today’s younger investors looks much the same as that for older investors – the baby boomers – before the meltdown occurred in 2008.” Before the downturn, baby boomers where already up in age, and nearing retirement, so they were had begun shifting their investment mix more toward low-risk options, she points out. Now, in 2012, younger people are doing the same thing.

Do MEDICAL Advisors are responding to that shift. In fact, they are not only responding; they are shifting their investment philosophy, Rice contends. For instance, according to Cogent data, more than 50 percent of advisors now say their primary philosophy is “managing risk or delivering absolute return,” whereas only 31 percent say it is “wealth preservation” and 13 percent say it is “exceeding a benchmark.” By comparison, before the 2008 meltdown, “exceeding a benchmark” was important to a larger percentage of advisors. That doesn’t mean people are moving more money into cash, Rice points out, noting that the cash part of investor portfolios has remained pretty steady – at about 5 percent – back to 2010. (In 2009, the cash portion jumped to 8 percent, but Rice views that as a reaction to the downturn, not as part of the general philosophical shift to risk management.) Rather, the focus now among advisors is to increase allocation to “low-risk investments,” she says. That is the case among clients with at least one million in investable assets as well as those with a smaller asset base. In late 2011, for example, Cogent found that advisors had 38 percent of their millionaire clients’ money invested in low-risk investments, up from 34 percent in 2009. “That’s a statistically significant increase,” comments Rice. And yes, those low-risk investments include variable annuities with guarantees. All in all, Rice says, “there is a really high level of interest and demand for products that provide some protection.” Combine that with advisors’ increased risk management philosophy – and as a result, greater use of low-risk investments – and a “huge opportunity” emerges, she says. That opportunity is for variable annuity carriers to step forward so, when the market recovers, they will be well-positioned to gain stronghold in the market. Based on the survey, it looks as if variable annuity advisors are willing to help that happen. 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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Part two of an exclusive interview with Jim Collins.

InsuranceNewsNet Magazine Âť September 2012

THE HEDGEHOG & FLYWHEEL EFFECT

last month’s issue, we featured a discussion with Jim Collins about concepts in his new book, Great by Choice. But we had also spoken to him about the concepts he made famous in one of his best-known books, Good to Great, which has become required reading in business schools. For that seminal book, Jim and a group of researchers looked into how companies made the transition from just a regular company to a standout organization that perpetuated success. They came to understand some common traits that seemed counterintuitive. For example, the charismatic, white knight CEO rarely saves the day, but more often sinks the company. It is, in essence, the plodding tortoise that wins these races, or as they put it, the hedgehog that wins the fight. Jim published these ideas in 2001, but as InsuranceNewsNet Publisher Paul Feldman found out in an interview, Jim still loves to discuss them and believes they are even more useful in this economy and with our ever-changing technology. FELDMAN: My favorite concepts of yours are the flywheel and the hedgehog ideas. You explored those in Good to Great. How have they evolved in your new book? COLLINS: I feel very passionate about the hedgehog and the flywheel. Basically to review the ideas, what we found in Good to Great is that the successful companies had disciplined people engaged in disciplined thought and disciplined action. That was the journey that they went on. The companies began with disciplined leaders who then surrounded themselves with the right people. Then they went to disciplined thought, which had two components. First, you confront them with the facts – just constant, obsessive confronting of the brutal facts. But the second is they gained clarity of the direction that they would march in. They tended to simplify the

FEATURE

The Hedgehog and the Fox In his famous essay, The Hedgehog and the Fox, Isaiah Berlin divided the world into hedgehogs and foxes, based upon an ancient Greek parable: “The fox knows many things, but the hedgehog knows one big thing.” The fox is a cunning creature, able to devise a myriad of complex strategies for sneak attacks upon the hedgehog. Day in and day out, the fox circles around the hedgehog’s den, waiting for the perfect moment to pounce. Fast, sleek, beautiful, fleet of foot and crafty – the fox looks like the sure winner. The hedgehog, on the other hand, is a dowdier creature, looking like a genetic mix-up between a porcupine and a small armadillo. He waddles along, going about his simple day, searching for lunch and taking care of his home. The fox waits in cunning silence at the juncture in the trail. The hedgehog, minding his own business, wanders right into the path of the fox. “Aha, I’ve got you, now!” thinks the fox. He leaps out, bounding across the ground, lightning fast. The little hedgehog, sensing danger, looks up and thinks, “Here we go again. Will he ever learn?” Rolling up into a perfect little ball, the hedgehog becomes a sphere of sharp spikes, pointing outward in all directions. The fox, bounding toward his prey, sees the hedgehog defense and calls off the attack. Retreating back to the forest, the fox begins to calculate a new line of attack. Each day, some version of this battle between the hedgehog and the fox takes place, and despite the greater cunning of the fox, the hedgehog always wins. Foxes pursue many ends at the same time and see the world in all its complexity. Hedgehogs simplify a complex world into a single organizing idea, a basic principle or concept that unifies and guides everything. – Good to Great

September 2012 » InsuranceNewsNet Magazine

FEATURE

THE HEDGEHOG & FLYWHEEL EFFECT

The Hedgehog Concept

WHAT YOU ARE DEEPLY PASSIONATE ABOUT

To go from good to great requires transcending the curse of competence. Just because something is your core business – just because you’ve been doing it for years or perhaps even decades – does not necessarily mean you can be the best in the world at it. And if you cannot be the best in the world at your core business, then your core business absolutely cannot form the basis of a great company. It must be replaced with a simple concept that reflects deep understanding of three intersecting circles. – Good to Great world. Instead of saying, “I’m going to try to do 10 things,” they said, “I’m going to try to do one big thing really, really well.” That was the idea of the hedgehog. The hedgehog knows one big thing. The fox knows many things. And the hedgehog tends to win. FELDMAN: Can you discuss how the hedgehog concept works with the three circles? COLLINS: We found that at the good-togreat companies, in the inflection time, the leaders tended to simplify down to a hedgehog concept – a fundamental thing that they focused on. But what is that thing? That thing is kind of an intersection of three circles. It’s doing what you’re really passionate about, refined by what you can truly be the best at. The best means that distinctive impact. It’s like that restaurant can be the best in its community at doing whatever. It doesn’t mean you have 14

WHAT YOU CAN BE THE BEST IN THE WORLD AT

WHAT DRIVES YOUR ECONOMIC ENGINE

THREE CIRCLES OF THE HEDGEHOG CONCEPT to be the biggest to be the best, and you can be the best at serving your particular community. Then the third component is that you have an economic engine. I mean you can actually earn the return doing it. Now if you have those three things you have a hedgehog concept, and if you stay focused and say, “We’re not going to do things for which we lack passion. We’re going to focus on the things where we can be distinctively the best in the community that we serve, and we’re going to do things that make economic sense that tie into our economic engine. That’s our hedgehog concept.”

a giant, heavy f lywheel, which built momentum over time. But you would never find the one big moment. It was a whole series of pushes that added up to the breakthrough momentum. That idea still holds. FELDMAN: How do you find out what your hedgehog is?

FELDMAN: How does that relate to the flywheel?

COLLINS: Sometimes you find it by empirical testing. Firing bullets to cannon balls is one way of beginning to figure out what your hedgehog actually is. If you can fire a bullet and find you’re really good at something and that you really have passion for it and it actually makes money, you’re getting an empirical test of your hedgehog concept, and then firing the cannonball is really effective.

COLLINS: We found that by really focusing and making a series of good decisions related to the hedgehog concept over time, it was like pushing

FELDMAN: I understand that “firing bullets first” means doing the small tests to determine if an effort is worth a major investment – or “firing the cannonball.”

InsuranceNewsNet Magazine » September 2012

GOOD TO GREAT – HOW ADVISORS CAN MAKE THE LEAP

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But could firing bullets miss that cannonball opportunity? Is there ever a time where you should just fire that cannonball? COLLINS: We found that every once in a while people did just fire a cannonball without firing bullets first or without copying somebody else’s cannonball, but it was highly correlated with disastrous outcomes. You can fire a cannonball without firing bullets by looking at what somebody else has done successfully and then firing a cannonball that they’ve already calibrated. Southwest Airlines copied Pacific Southwest Airlines. They copied their model and they fired a cannonball right at the beginning, but it wasn’t an un-calibrated cannonball because PSA had already calibrated that it would work. So by copying it, they already had their empirical validation. So you can either copy it or invent it as long as you’ve got validation. If you fire a big cannonball, but you don’t have empirical validation, you might get lucky, sure, and it might hit. That does sometimes happen. But I don’t like to depend on luck for things to work out, and that’s the downside to that. FELDMAN: In your newest book, you relate the hedgehog and flywheel to the SMaC concept. Would you describe what that is? COLLINS: SMaC is a recipe of Specific, Methodical and Consistent operating practices that create a replicable and consistent success formula. The SMaC recipe is a form of discipline to really bring your particular approach to the world very much to life. Flying only 737s is a specific part of Southwest’s recipe, along with their unique seating process resulting in 20-minute turns [the aircraft’s turnaround time]. These are all part of a recipe. What happens is you take the broad idea of the hedgehog concept and then you translate it into these very specific things that allow you to be able to say, “So what does it mean? How do we be the best? How does that actually work? What’s the underlying transcription code that makes it work?” The hedgehog 16

The Flywheel The good-to-great companies understood a simple truth: Tremendous power exists in the fact of continued improvement and the delivery of results. Point to tangible accomplishments – however incremental at first – and show how these steps fit into the context of an overall concept the will work. When you do this in such a way that people see and feel the buildup of momentum, they will line up with enthusiasm. Steps Forward, Consistent With Hedgehog Concept

Flywheel Builds Momentum

Accumulation of Visible Results

People Line Up, Energized by Results

Signs that you’re on The Flywheel • Follow a pattern of buildup leading to breakthrough. Reach breakthrough by an accumulation of steps, one after the other, turn by turn of the flywheel. • Confront the brutal facts to see clearly what steps must be taken to build momentum. • Attain consistency with a clear Hedgehog Concept, resolutely staying within the three circles. • Follow the pattern of disciplined people (“first who”), disciplined thought, disciplined action. • Harness appropriate technologies to your Hedgehog Concept, to accelerate momentum. • Make major acquisitions after breakthrough (if at all) to accelerate momentum. • Spend little energy trying to motivate or align people; the momentum of the flywheel is infectious. concept gets translated into a set of very specific practices that allow you to make good on them. FELDMAN: I have used your flywheel analogy with some of our clients. It is simply momentum that people can build with advertising and marketing, but it

InsuranceNewsNet Magazine » September 2012

takes investment and time. There is a direct correlation to the amount of effective marketing that a company performs as to how much business it achieves . It sounds simple but it always bears out. COLLINS: What I find very powerful about the f lywheel idea is that once

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September 2012 » InsuranceNewsNet Magazine

FEATURE

THE HEDGEHOG & FLYWHEEL EFFECT

people understand that it’s always a cumulative process, a building process, it works. It ’s never a sing le moment, but rather a consecutive series of moments and decisions and they add up over time. And if you think that you can shortcut that process, you’re never going to get there. You will be in the doom loop. There has to be a consistency about brands. How does a great brand get built? By cumulative consistency over time. You don’t build a great brand overnight. You build a great brand over a very long time by making a whole series of very good decisions that are consistent with that. The same with relationships. The business you serve, insurance, is all relationship business.

The Doom Loop Instead of a quiet, deliberate process of figuring out what needed to be done and then simply doing it, the comparison companies frequently launched new programs – often with great fanfare and hoopla aimed at “motivating the troops” – only to see the programs fail to produce sustained results. They sought the single defining action... that would allow them to skip the arduous build-up stage and jump right to breakthrough. They would push the flywheel in one direction and then they would stop, change course, and throw it into yet another direction. Disappointing Results

Reaction, Without Understanding

FELDMAN: Why do people lose momentum and go into what you describe as the doom loop? COLLINS: I think if you’re going to sustain yourself over a very long time, which all of us struggle with, how do you keep yourself renewed? How will we keep ourselves going and keep the energy really vibrant? All of our great leaders were very much in service to something. It might have been in service to what software could do for people. It might be in service to what biotechnology products could do for people. It might be in service to a culture that they are trying to build, as they did at Southwest Airlines, to serve customers and employees and do it very well. But whatever it was, they were in service to it. So when they woke up in the morning the question wasn’t, “How do I make myself more successful?” The question was, “How can I be of better service? And how can I be of better service to the cause that I’m engaged in?” I think one of the things that’s very interesting about great entrepreneurs over time is you think about four phases of an entrepreneurial thing. One is you have an idea, that’s phase one. Phase two is you convert that idea into a business. So now you have a business. Then you might actually convert that from a business to a company. It doesn’t have to be a big company, but it’s a company. Then finally, you might actually 18

No Buildup; No Accumulation Momentum

New Direction, Program, Leader, Event, Fad or Acquisition

Signs that you’re in the Doom Loop • Skip buildup and jump right to breakthrough. Implement big programs, radical change efforts, dramatic revolutions; chronic restructuring – always looking for a miracle moment or new savior. • Embrace fads and engage in management hoopla, rather than confront the brutal facts. • Demonstrate chronic inconsistency – lurching back and forth and straying far outside the three circles. • Jump right into action, without disciplined thought and without first getting the right people on the bus. • Run about like Chicken Little in reaction to technology change, fearful of being left behind. • Make major acquisitions before breakthrough, in a doomed attempt to create momentum. • Spend a lot of energy trying to align and motivate people, rallying them around new visions. create a movement. That’s the idea of, “Hey, there are a lot of people who need what we do.” That’s a movement. Or, “The world will be better off because of what we do.” That’s a movement. I think that when you have that orientation it just allows you to be self-propelled for a very, very, very long time.

InsuranceNewsNet Magazine » September 2012

That’s essentially how these entrepreneurs were different. FELDMAN: People who aren’t familiar with your work might pick up one of your books and assume it’s all about big corporations, but there is quite a bit that entrepreneurs can get out of your work.

GOOD TO GREAT – HOW ADVISORS CAN MAKE THE LEAP

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September 2012 » InsuranceNewsNet Magazine

FEATURE

THE HEDGEHOG & FLYWHEEL EFFECT

COLLINS: Exactly. I have great passion for the entrepreneur and the small business person. FELDMAN: Well you’re a fantastic entrepreneur yourself. You’ve created a great company and a great brand for yourself as a very well-respected expert. And you don’t have 800 people working for you. How do you do that? COLLINS: For the past 25 years I deliberately remained small. My end goal is impact and service to those who will benefit from our ideas. Impact isn’t the same as big. You can have impact and not necessarily be big. Also, when you think about the idea of having a distinctive impact, that doesn’t mean that you have to have a really large company. That’s one of the things I would really pass along to your readers, “What does it mean for us to have distinctive impact? If my agency went away, who would really miss me? Who would really miss us? Who would miss what we do and why?” That answer could be that maybe other people could offer the same products as you, but maybe they can’t offer the same distinctive service that you do or the same feel that you do or the same broader horizon that you bring. That’s the question of what distinctive contribution are you making to your customers? Truly, if you went away they could still get insurance products somewhere, but they couldn’t get what you provide them. That’s what distinctive for us means. It’s like a great restaurant in your town. You can go to another restaurant, but if that restaurant went away, it’s irreplaceable because it’s so distinct in what it does. I would challenge every one of your readers to say, “How am I like that restaurant? If it went away, sure, people could get food. But they couldn’t have the experience of that restaurant and that’s what they would really miss.” That’s an achievable kind of distinctive impact that has nothing to do with being big. I think people confuse big and great all the time. There are a lot of big things that aren’t great, and there are a lot of small things that are. 20

The SMaC Recipe SMaC stands for Specific, Methodical and Consistent. The more uncertain, fast-changing and unforgiving your environment, the more SMaC you need to be. A SMaC recipe is a set of durable operating practices that create a replicable and consistent success formula; it is clear and concrete, enabling the entire enterprise to unify and organize its efforts, giving clear guidance regarding what to do and what not to do. A SMaC recipe reflects empirical validation and insight about what actually works and why. Developing a SMaC recipe, adhering to it, and amending it (rarely) when conditions merit correlate with 10X success. This requires the three 10X behaviors: empirical creativity (for developing and evolving it); fanatic discipline (for sticking to it); and productive paranoia (for sensing necessary changes). Amendments to a SMaC recipe can be made to one element or ingredient while leaving the rest of the recipe intact. Like making amendments to an enduring constitution, this approach allows you to facilitate dramatic change and maintain extraordinary consistency. Far more difficult than implementing change is figuring out what works, understanding why it works, grasping when to change, and knowing when not to. What is your SMaC recipe? Is it still valid, or does it need amending? Continually question and challenge your recipe, but change it rarely. – Great by Choice

InsuranceNewsNet Magazine » September 2012

Jim Collins utilizes many of the core ingredients of the SMaC Recipe to scale El Capitan in Yosemite National Park.

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September 2012 » InsuranceNewsNet Magazine

[NEWSWIRES]

HCA’s Success Secret: More Revenue From Private Insurers bitly.com/HCASecrets

Source: Milliman

DOWN $120 BILLION

Defined Benefit Plans Setting the Wrong Records

Funding in 100 of the nation’s largest defined benefit pension plans decreased by $120 billion DEFINED BENEFIT PENSION in July, according to Milliman. PLANS AT A RECORD LOW That news pushes the pension deficit to a reOF $533 BILLION IN JULY 2012 cord $533 billion, the worst decrease in 12 years, says the Seattle researcher, surpassing the previous record set on Aug. 31, 2010. “I realize that record-breaking is in vogue with the Olympics in full swing, but these are not the kinds of records we want to see broken,” says John Ehrhardt, the study’s co-author. “Record low discount rate, record high liabilities, record high deficit. When it comes to pension funding, we can do without any more records.” That’s definitely somber news. But from another perspective, things could be worse. That is the case for people who have no defined benefit pension plan at all. According to a report just out from the National Institute on Retirement Security, poverty rates among older households where there is no defined benefit pension income were approximately nine times greater than poverty rates among older households that did have such an income in 2010. That is up from six times greater in 2006, the Institute says.

BIG MOVES

Three big moves occurred in insurancedom in the past month or so. That’s what typically happens when recessions come to a close – i.e., the players disassemble and reassemble. In these cases, two of the deals bring new players together. The third development brings an end to a line of business. First, as expected, American International Group signed an agreement to acquire Woodbury Financial Services, an independent broker-dealer with about 1,400 financial advisors, from The Hartford Financial Services Group. The move follows Hartford’s March announcement that it is scaling back on its annuity and life business and refocusing on its property-casualty business. Once the deal is finalized, Woodbury will become part of the SunAmerica Financial Group’s Advisor Group, so industry distribution networks will shift a bit. The next move brings a Bermuda company together with a domestic company, in a deal that will likely affect distribution in the U.S. fixed annuity market. According 22

to the agreement, Athene Annuity & Life Assurance (a subsidiary of Athene Holding Ltd, a Bermuda-based holding company) will acquire Presidential Life Corporation for $14 a share in cash, $415 million total. A Delaware corporation with main offices in Nyack, N.Y., Presidential markets and sells fixed annuity, life insurance and accident and health insurance products through its Presidential Life Insurance subsidiary. Athene Annuity, also a Delaware-domiciled company, focuses on retail fixed and indexed annuities and reinsurance. The third move comes from Prudential Insurance Group. The Newark, N.J., business unit of Prudential Financial, says it is discontinuing sales of new group long-term care insurance policies in all but a few states. This has already gone into effect. The market exit follows the departure of several other carriers from one part of the long-term care market or another in the past few years – Unum Group, Guardian Life of American, MetLife and Allianz, among others.

InsuranceNewsNet Magazine » September 2012

COLLEGE PLANNING CONNUNDRUM

College planning is not always high on the financial advisor to-do lists for clients. Maybe it should be. Legg Mason has found out that even affluent Americans with investable assets of $250,000 or more are not always gung-ho about advanced planning for their children’s college education. Legg Mason says a vast majority of parents – from 83 percent to 92 percent, depending on whether their children were pre- through post-college – have used or plan to use current income or withdrawals from other savings and (non-qualified) investment accounts to pay for college expenses. That is an indication that parents are leaving money on the table – in the sense that they are not using tax-advantaged savings programs, such as the tax-favored 529 college funding plans, to the extent they could, Legg-Mason says. If that is the case, then independent advisors have a case to make with their clients – about why using current income for college funding might not be such a good idea.

ROOTS OF THE NEW RECRUITS

In announcing that it recruited 446 new financial representatives in the first half of 2012, Guardian Life Insurance Company of America happened to mention something about those recruits that may interest independent advisors. “A significant number” of the recruits came from the fields of law, sales, finance, technology, education and corporate America, the New York-based career agency company said.

QUOTABLE The fact is women live longer than men, which means they will spend more time in retirement, and that places women at a greater risk of outliving their retirement assets. — John Carter, president of sales and distribution, Nationwide Financial

[NEWSWIRES] The takeaway for independent agents is three-fold: 1) the recruits are probably not newbies just out of school so they’ve probably got their work ethic down pat; 2) they have backgrounds that make them suited to serving business clients, so they may become worthy competitors; and 3) should they become disenchanted with the career agency model later on, some of those might decide to go into business for themselves, thus becoming a possible source of future independent agency recruits. As the saying goes, what goes around comes around.

VAUGHAN TO STEP DOWN AS NAIC CEO

Mixed Bag on the 401(K) Front Employees who invest in those fairly new “inplan guaranteed retirement income options” that some defined contribution plans now offer are contributing 38 percent more to their 401(k) than participants who are not so invested, reports Prudential Retirement. In addition, those employees’ investments are better diversified, the company says. More good news comes from Lincoln FiSource: nancial Group, which is reporting that 94 perPrudential Retirement cent of plan sponsors surveyed have recognized that automatic enrollment features have helped them address plan-related goals and drive higher participation and deferral rates along with better investment performance. In fact, Lincoln Financial says it found that plans with automatic escalation saw deferral rates at 8 percent or higher. That’s at least double the average deferral rates of 4 percent or less for the majority of plans in the United States, the company says, citing data from Plan Sponsor Council of America. But trends in the defined contribution plan market are not always so optimistic. When Diversified did a survey of 3,370 plan participants earlier this year, it found that more than one-third (34 percent) had either guessed or made up estimates for the income they will need in retirement; and only 30 percent had consulted with a professional for help in setting goals. That gap in information and expertise could put a lot of people at financial risk when it comes time to retire. After all, guessing is not the best roadmap for reaching goals. This makes a case for advisors to step up their retirement income counseling efforts whenever possible. IN-PLAN GUARANTEED RETIREMENT INCOME OPTION CONTRIBUTIONS

38%

Therese M. Vaughan plans to step down as chief executive officer of National Association of Insurance Commissioners (NAIC) in first quarter 2013. She cited family obligations and the desire to revise a textbook as reasons for leaving the post, according to a NAIC statement. Vaughan has held the post since February 2009. In addition to overseeing NAIC operations, she serves as the association’s primary representative and chief spokesperson in Washington, the Chair of the Joint Forum, a Basel-based group of banking, insurance and securities supervisors, and a member of the Executive Committee of the International Association of Insurance Supervisors. Before joining NAIC, Vaughan was a professor of insurance and actuarial science at Drake University. The rumor is that former Pennsylvania Insurance Commissioner Diane Koken will fill the slot, although the association is saying that the board will be making a decision toward the end of the year.

0.14 percent of the industry, and both fell due to inadequate pricing or deficient loss reserves, Best says. The other part of the story is that the low number of impairments occurred even as the industry faced ongoing economic and market challenges, as did many other industries. Advisors who are thinking of leaving or entering the business might want to factor all that into their deliberations.

BRIGHT SPOT FOR LIFE/ HEALTH COMPANIES

REACH OUT AND TOUCH A MILLIONAIRE

Where financial impairments are concerned, U.S. life and health insurers appear to have reached their lowest point in 50 years in terms of both number and frequency in 2011, reports A.M. Best. There were only two known impairments last year. One involved an accident and health insurer and the other, a burial insurer. Together, they represented just

A growing contingent of older millionaire investors are using smart phones, tablets and e-readers for talking, texting, emailing, paying bills and checkDID YOU

KNOW

ing financial accounts, reports Spectrem Group. For instance, among those with at least $1 million in net worth, 33 percent who are 65 and up and 53 percent of those who are 55 to 64 have smart phones, researcher says. In addition, 49 percent of millionaire investors ages 65 and up, and 59 percent ages 55 to 65, use Facebook. Those findings blow to smithereens the oft-cited notion that older wealthy people just won’t communicate using the newer technologies. Could be that some of them would even look askance at an advisor who doesn’t do the same.

SIXTY-FIVE PERCENT OF WOMEN SAY they have discussed their retirement with a financial advisor, but only one in 10 talked about how much they should expect to pay in health care costs apart from Medicare. Source: Prudential Financial

September 2012 » InsuranceNewsNet Magazine

HOW VETERAN ADVISORS AND YOUNG RECRUITS

KEEP ON TRACK By Linda Koco

here comes a day when veteran independent advisors look away from their desks and sense a yawning gap in the middle of the office. Across it they see a young advisor and then admit to themselves, “how fresh, energetic, bright – and clueless.” That young recruit looks back, no doubt thinking how fuddy-duddy the older advisors are with their “how-areya” sales demeanor. How very analog the old school is – calling on the telephone, visiting prospects in person and carrying actual paper. That generational divide has always 24

been there. But cultural differences, especially with social media, and more immediate expectations in pay and results, have deepened and widened that gulf. Older producers are dealing with younger people they have little in common with and think of as utterly disconnected from the attitude and aptitude required for the long game of selling insurance. Given all that, how can independent advisors find and integrate young recruits into their life insurance business and help them succeed? Every agency will face this challenge for its future, whether it is handed off to the next generation or sold to someone else expecting that the agency will continue to grow

InsuranceNewsNet Magazine » September 2012

its business. Of course, the challenge radiates throughout the independent distribution channel, full of 50-somethings dreaming of retirement. This means that senior practitioners need to not only attract the young but also retain them – a not so easy task when the older and younger are decades apart and sometimes seem to speak a different language. InsuranceNewsNet went to some veterans to find out how they handle the assimilation. These advisors hail from independent firms, not from career and captive agencies which get a lot of assistance from their carriers. Most independents are flying solo in this area even

GENERATIONAL DISCONNECT though outside resources are becoming increasingly available (see page 26). Quite a few tell of frustrating moments when they have sat at their desk, looking at a clueless young rookie, and wondered “how in the world are we going to make this work?” The good news is, even though they’ve had their share of defeats, they’ve had successes, too.

Getting Them Interested

One problem is a lot of young people are not even looking at joining an agency, let alone selling life insurance, points out Debra L. Stein, owner of Comprehensive Financial Planning, a registered investment advisory firm in Wisconsin. “For instance, one young university gal came in here through an internship program. We got her licensed – and then she moved away! She isn’t in the industry anymore.” Stein’s own daughter, who does work in the firm, refuses to make calls or sell insurance, she adds. “A lot of younger people just don’t want to do that,” she says. Guy Baker, founder and managing director of BTA Advisory Group, Irvine, Calif., and a 42-year member of Million Dollar Round Table (MDRT) encountered a somewhat similar experience with his grandson, who had been licensed at 18, earned a college degree, and attended a training program with a major carrier. The grandson is now 25 and works in Baker’s firm, but “he doesn’t want to go out and have interviews with clients or sell,” Baker says. So Baker is now focusing on “teaching him from the inside” – for instance, on how to manage administration and paperwork. Baker plans to add other aspects later on. It may turn out that the grandson will leave the agency, Baker allows, explaining that “he says he wants to go to seminary so he can be a pastor.” He also has a daughter working in the agency, but he says she is in limbo over what she wants to do in life. She is interested in an acting career, he adds, but “she’s working here while she explores.” That’s part of the problem that advisors are having today with bringing younger people along. “We don’t know if we will have the solidity we’d like in our staff,” Baker says, “and we can’t sit around and wait to see how it will all play out.”

FEATURE

It is extremely hard to get younger advisors to stick with an independent agency when they are working on 100 percent commissions. Another problem is that the time-lag between joining the agency and bringing in commission-generating business discourages young agents from sticking with it. Of course, brief trial periods of employment are nothing new. Young people in other eras have also tried agency work and then left in a matter of months or redirected to duties other than sales and advising. But with fewer young people showing interest in the business today, plus the high proportion of older advisors and the growing complexity of the business, advisors are saying they are feeling a lot of pressure about what to do. The areas of frustration are many. Here are a few that get frequent mentions – plus some solutions that the senior advisors have implemented or are considering. The commission problem. It is extremely hard to get younger advisors to stick with an independent agency when they are working on 100 percent commissions, Stein says. And many of the smaller agencies don’t have the employee benefits and other perks that larger companies offer, points out Varsha Grogan, principal of General Agents Insurance Network, a Texas brokerage general agency and an 18-year member of National Association of Independent Life Brokerage Agencies (NAILBA). Even bringing in a young advisor on an assets-under-management compensation basis doesn’t provide much help, “because most of them do not have many assets under management to bring with them,” says Stein. Strategy: New recruits to the independent agency system should probably have a spouse who is earning a steady income or some other means of regular financial support, Stein concludes. Grogan says she has seen that work. Of five younger independent agents licensed through her firm, only one stayed in the business, she explains. “The one who stayed is a woman who also had at a part-time job and a spouse with a very good job.” Strategy: Start out the recruit on a sala-

ry, suggests Wayne D. Minich, founder and president of Applied Financial Concepts, Ohio, and a 37-year MDRT member. He says he did that with a university graduate who started with his firm as a full-time salaried staffer, doing back office work while getting licensed. Then, Minich developed a bonus structure for the agent. The bonus arrangement enabled Minich to pay the agent more when times were good without being locked into a fixed amount – an essential element when times aren’t so good. The agent’s income “rose and fell with the success of the business,” Minich says. The result? That agent had originally wanted to stay in the background, but Minich began bringing him along on appointments and as he learned more, he built up expertise. He stayed with the firm for five years, leaving only when it became clear that he might not be the agency successor. (Minich’s son is heir apparent.) “That agent is still in the business after 17 years, and he is also a member of MDRT,” Minich adds. The approach worked so well that Minich also started his own sons on salary plus bonus. “For us, this has been a very good model.” Slow start to sales. Another problem is that the time-lag between joining the agency and bringing in commission-generating business discourages young agents from sticking with it. Grogan of Texas has seen that happen. In her own firm, she says she has brought younger people in but they mostly do marketing or running quotes. “Even though they are licensed, few become full-fledged agents. I think part of the reason is they see no direct reward from being an independent agent, due to the time it takes for agents to have results.” She sees the same frustration in agents she works with as a brokerage general agent.

September 2012 » InsuranceNewsNet Magazine

FEATURE

GENERATIONAL DISCONNECT

Strategy: Educate the recruit, suggests Grogan. That is what she does with the young advisors she has worked with as a brokerage general agent. “My theory is that they need to be confident in their own knowledge before they can start to see results,” Grogan says. So she works with them, teaches them why they should do the things she suggests – for instance, ask health questions, find out the client’s earnings, quote appropriate rates (rather than automatically quoting the cheapest rate), find the product that fits the need, etc. If they don’t learn what they should do and why, she cautions, customers will probably end up with the wrong products and not receive the service promised. “Word will get around, and that that will drive other customers away.” The education approach can be time consuming and it doesn’t always work. For instance, one young agent who signed up with Grogan after a stint at a captive agency left a couple of months later. “She went back because she wanted the structure and support that she used to have,” Grogan recalls. Then again, she adds, the agent she mentioned earlier – the woman with the part-time job and employed husband – has become a successful producer in the independent agency system. So sometimes this kind of education does work. “You have to refine your process so you can find the person with the most promise, and then take the leap,” she suggests. “Make it an individualized process, not cookie-cutter.” If it doesn’t work out, move on. Lack of experience. Today’s life insurance business has so much complexity, compliance, regulation, product change, and other details, that lack of experience definitely makes things difficult for young advisors, says Adam Sherman, CEO of Firstrust Financial Resources, Philadelphia, and a member of National Association of Insurance and Financial Advisors (NAIFA) for more than 25 years. “A 45-year-old client is not going to take financial advice from a 25-year-old,” he says. “And no one is going to take advice by texting and email!” He feels so strongly about this that he says lack of experience is “the biggest 26

Where to Find Help Independent life insurance advisors are not without resources that can help younger advisors grow and prosper and/or can help experienced advisors mentor, encourage, and assist their younger advisors. For instance: • National Association of Insurance and Financial Advisors, Falls Church, Va., has its Young Advisors Team, which seeks to help new and young advisor members survive in their early years and to thrive in the industry and the association. •M illion Dollar Round Table, Park Ridge, Ill., has its Young Lions Committee and also a Mentoring program that brings experienced advisors together with those wanting to learn and grow. •N ational Association of Independent Life Brokerage Agencies, Fairfax, Va., has its Agency Successor Networking Group that works to facilitate dialogue with next generation principals of its member firms. •S ociety of Financial Service Professionals, Newtown Square, Pa., has its Top Leaders 40 and Under program to recognize young financial professionals age 40 and under who volunteer with the Society or with local community programs. • Some brokerages and independent marketing organizations offer assistance to help older independent agents integrate young advisors into their firms. •P rofessional designation programs and third-party agent support firms address young agent issues as part of their offerings.

problem that young people face when they join an independent firm.” A related problem is that some young advisors also have a “lack of people skills,” he says. Strategy: Mentor the young agent for 24 to 36 months, Sherman suggests. Do client reviews together, case design work, marketing and related things. It will be a unique opportunity for the junior to learn the business and to gain that much-needed experience. Mentoring is “a huge commitment,” he concedes. But since independent advisors don’t have the same level of support that career shops have, they may have to “do it all” or risk losing their young recruit. As for the people skills problem, Sherman believes a lot of that will be taken care of by the maturation process. “Heck,” he laughs, “I don’t know how good I was in this area when I was in my 20s!” Strategy: Phase younger people into the firm’s various business activities gradually, suggests Baker, the California agent. That is what he is doing with his grand-

InsuranceNewsNet Magazine » September 2012

son, as described earlier. But also build up a team of advisors who specialize in one area or another of the practice, whether the areas focus on business succession, estate planning, retirement planning or some other. The business model for financial advisors is changing, Baker explains. For instance, in 1970, an advisor could work as a life insurance agent, period. But today’s advisors work not only with life insurance but also disability, long-term care insurance, annuities, investments, managed money and more. They are not selling products so much as selling services, he says, and they are dealing with greater amounts of money at risk – sometimes $50 million versus maybe $2 million max in 1970. “It’s too much to expect a young person to learn all of those skills in a short time frame,” he says. The phase-in approach allows enough time, and the specialists on staff enable the firm to respond to the complex needs of the clients. Strategy: Try handing off some existing clients to the younger agent early on,

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FEATURE

GENERATIONAL DISCONNECT

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Mary Kay, the skin care and cosmetics sales company, is reporting that more than 36 percent of its new “independent beauty consultants” in 2012 are from Generation Y (ages 18 to 30). The Dallas firm uses a direct-to-customer sales model. Could some of those consultants become a source of young recruits to insurance sales? suggests Juli McNeely, vice president of McNeely Financial Services in Wisconsin, and a member of the NAIFA board of trustees. McNeely did that with one younger advisor. The recruit started with two years’ experience at a career shop and had some sales skills, she recalls. Early on, McNeely gave that advisor some of her own clients. “It wasn’t easy to do, and in some cases it was painful to give them up,” she recalls. “But I couldn’t expect her to come here and start selling with no salary.”

The outcome? Turning over those clients helped the younger agent “get going in our independent firm,” McNeely says. “At some point, there has to be give and take. It’s a tough industry to come into, so you need to give them something that will help build their confidence.” Lack of sales know-how. When McNeely herself was a young agent starting out, she says she lacked sales skills as well as industry knowledge. Her agency principal was her father, and he was “old school and traditional” about things. “I was not allowed to provide in-

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InsuranceNewsNet Magazine » September 2012

put or make decisions,” she recalls of her early days. However, he did coach her and support her desire for training and resources. He also took her out on calls, discussed cases with her and provided other hands-on training. But there was a lot of stress, since she had little formal training other than pre-licensing courses. Strategy: One of the things that helped was attending the Life Underwriter Training Council Fellow (LUTCF) program. The sales training it provided was “an incredibly good base for me,” says McNeely. That was important because, as she puts it, “my father had been in the business for 30 years, so for him, selling was like tying his shoes. But at LUTCF, I was with others who were in the same boat, so I didn’t feel alone.” The impact was life-changing. As McNeely puts it, her father began to see that she was growing and, although she did things differently than he did, she was gaining expertise. In time, she recalls, “My father began to see that I was bringing a different perspective to the table,” to the point that the two began to work with

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GENERATIONAL DISCONNECT

“a blended approach, using our differences in style to our advantage.” Training was so instrumental in her ability to succeed in the business that McNeely has since added the CFP and CLU designations to her profile and is now working on her ChFC. The technology divide. So much has been said and written about how young people outclass their elders in the technology department that the topic barely merits repeating here. But it is worth noting that most veteran advisors have experienced the technology divide first hand. Some even call it the modern-day version of the generation gap, a vintage term for the cultural, informational and lifestyle gulf that can make it difficult for elders and the young to get along. Strategy: Take a lemons-to-lemonade approach to dealing with recruits who know far more than the senior advisor does about computers, social media, texting, databases and the like, say several advisors. That is, instead of limiting talk of technology only to what already exists in the firm, allow and encourage the younger advisors to take over various technology functions.

“I find the younger people to be more savvy and sophisticated about technology than I am,” says Sherman of Firstrust, who has done exactly that. “They can teach me about databases, social networking and the other things.” Minich of Applied Financial says the younger advisors “have been tremendously helpful” with the technology and they have helped the agency grow its database and computer systems, for instance. “In addition, their influence has helped me grow, phenomenally, even from five years ago.” Even McNeely’s father came around. As she tells it, “he had initially resisted my request to spend $6,000 on a new server that had greater capacity, to set up a VPN network that would allow access from anywhere, and to take the agency paperless. It just wasn’t his vision.” But in time, he began to trust her and he did allow the changes while he was still active in the agency. The result: The technology improvements helped the firm grow, she says, “and now we are paperless and can see our documents from wherever we are.” “I was the next generation, the future,” McNeely says of the transition.

Universal Theme

Dexter S. Umekubo, senior managing partner with Producers XL in Kansas, and the 2012 chairman of NAILBA, sees a universal theme in how successful producers are dealing with the young advisors they bring on board. Even though many recruits are members of the family, often adult children, their elders are not “giving” the business to the next generation. Instead, he says, they are “giving them a chance to succeed on their own.” In many respects, he adds, that “is not much different than when I was a young person working at my father’s liquor store during the summer sweeping the floor, making sure the coolers were full of product and that the shelves were adequately stocked with merchandise.” Going forward, Umekubo says, “It is incumbent on the industry to plan for the future by mentoring and encouraging our successors, and providing the tools and resources they need to continue to be successful.” Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.

Where to Find Young Recruits

Surprisingly, independent advisors rarely mention several other possible sources for recruits: Employment agencies, By Linda Koco It is common knowledge that independent agencies sometimes professional association contacts, help have to look very hard to find qualified younger people who want to come into the wanted ads, job fairs, local employment agency to work. This is so, despite reports that many college graduates are said networks, job boards, email feelers, soto be sitting at home, unemployed in the difficult economy. Researchers point the cial media postings, searches via social finger at a common belief among many college educated people that the insurmedia for professionals, and general ance agency business is dull, dry, inflexible, non-entrepreneurial and/or non-tech. computer searches. In previous eras—before the last two recessions, in particular—independent advisors often found willing recruits among agents in captive or career agencies who were seeking greener pastures. But that supply has dwindled along with the decade-long decline in insurance salespeople nationwide. So where are independent agents finding their new blood? Here are some sources frequently mentioned by advisors interviewed by InsuranceNewsNet: •F amily members — not just sons and daughters but also nieces, nephews and relatives of in-laws. • Allied financial advisors such as accountants. • Children of friends, and friends of those children. •W ord of mouth from local community and professional groups.

InsuranceNewsNet Magazine » September 2012

It may be that advisors don’t think to mention the other options because the “family, friends and professional networks” approach generally gets the job done. But it could also be that the other approaches [ 1 ] may involve more time/expense than advisors desire and/ or [ 2 ] involve technology skills that the advisor does not possess. The good news is, when independent advisors are looking to grow staff, they aren’t looking for a herd of advisors. They typically look for one recruit at a time. So they can afford to be selective about the approaches they use and let a little trial-and-error take its course.

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Applications for individual life fell by 1.5 percent in July 2012, compared to July last year, according to the MIB Life Index, which tallies searches that MIB’s life member company underwriters perform on its database. The July number is down 6.2 percent from Source: MIB Life Index June, which had been particularly active, up 2.2 percent over the previous year. The index percentage is based on all ages combined year-over-year. The July decline may sound discouraging to industry professionals who have been working hard to bring in more apps. However, MIB does not see it that way, saying that the July number is typical of the summer doldrums. Considering this July’s heat wave, it’s easy to see the point. Overall, MIB adds, the life insurance market has been “encouragingly strong this year” with the Life Index up 2.2 percent year to date. The July report has one metric that should raise some eyebrows, however. Even though the age category with the most life insurance apps continues to be the 60 and up group, the pace of applications in this age group has gradually slowed to levels that MIB says it has not observed since 2008. For instance, it dropped from January’s yearly high of 15.7 percent to 6.6 percent in July. This bears watching.

LOW INTEREST RATES HURTING LIFE INSURERS

Low interest rates were a major drag on life insurer earnings in the first and second quarters of this year, says Fitch Ratings. That has resulted in reduced net investment income and interest margins on spread-based products that incorporate minimum rate guarantees. Worse, Fitch foresees the continuing strain going forward, this being based on Federal Reserve indications that it will not bump rates up until at least 2014. “The impact of sustained low interest rates will limit the ability of U.S. life insurers to materially improve earnings and debt service metrics over the next two years,” the ratings firm predicts, adding this will begin to have a “meaningful impact on statutory capital should the long-term low interest rate last more than three to five years.” Fitch sees the ongoing pressure on net investment income as a possible source of concern. Life insurers may use certain DID YOU

KNOW

strategies to “reach for additional yield that could make them vulnerable to credit losses or disintermediation and asset/liability mismatches in a rapidly rising interest-rate scenario,” the firm cautions. However, over the past year, Fitch adds, “the industry’s exposure to riskier assets has not changed in any meaningful way.” That, at least, may be a positive sign amid the clouds.

LIFE INSURANCE PRICE INCENTIVE

New approaches to life underwriting keep evolving. Aviva USA has joined the trend by taking what may be called an incentives approach to setting life insurance premiums. Under its Wellness for Life rider, the carrier will discount the policy’s cost of insurance charge if the insured visits the doctor at least every other year for physical exams. Premium costs can only go down, and will never increase as a result of doctor visits, the carrier says. In addition, the cost savings are greater if the insured maintains his or her weight within a range

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InsuranceNewsNet Magazine » September 2012

established at policy issue. There is an education component also, in that the policyholder receives access to wellness resources from the Mayo Clinic. The program is somewhat similar to the smoking cessation incentives, where a life carrier agrees to charge lower non-smoker rates for the first few policy years if the policy owner quits smoking. However, this particular program is broader and wellness-based.

BUYING LIFE INSURANCE IN A BANK

The bank life insurance market could become the domain of the young. After all, the majority of consumers in gen-

erations X and Y recently told LIMRA that they would buy a life policy from their bank. That should be a useful piece of competitive information for life insurance advisors—especially since the same survey found that many younger consumers have no existing relationship with a life insurance agent or financial advisor. Perhaps younger buyers are just gravitating to the financial source they know? Incidentally, LIMRA found that only 33 percent of baby boomers said they would consider buying life insurance from a bank, so there does seem to be a gener-

ational divide on the where-to-buy issue. What type of insurance are people receptive to buying from a bank? Simple life insurance products, according to 70 percent of the consumers that LIMRA surveyed. Even among more affluent or high-net-worth consumers, only one-third would consider buying more complex life insurance policies from their bank, LIMRA says. That’s a heads up for life insurance advisors—that they may have the market cornered for the more complex life policies, at least for now.

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LIFE

SPECIAL LIFE INSURANCE AWARENESS MONTH SECTION

How to be an Awareness Advocate Each Life Insurance Awareness Month comes with the important message that coverage in many ways keeps families safe and successful. But now that headline competes with others declaring the lowest policy ownership in a half century and the underinsurance of those who do have coverage. Obviously, a big need exists and is only growing larger. Why aren’t consumers getting it? It is because we aren’t telling them, according to LIMRA research.

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They do not think they can afford it. That is the top reason consumers don’t buy, along with competing financial priorities, which is another way of saying they don’t think they can afford it.

They know they need it. Forty-one percent of life insurance shoppers said life events – getting married, having or adopting a child or buying a home – prompted them to shop for life insurance.

They do not know how much (or how little) insurance costs. Consumers overestimate the cost of life insurance by as much as three-fold. And even when producers met prospects, 35 percent of the salespeople did not follow up with the prospects.

They were contacted by an advisor. A quarter of life insurance shoppers considered life insurance because their financial advisor or sales rep initiated contact or suggested the need for life insurance.

They were not asked. Six in 10 consumers don’t recall being approached to buy life insurance in the past two years.

They heard it through the grapevine. One in eight life insurance shoppers said a friend or family member recommended a sales rep or financial advisor, prompting them to shop for life insurance.

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InsuranceNewsNet Magazine » September 2012

PREVIOUS RELATIONSHIPS WITH SALES REP BOUGHT LIFE INSURANCE

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LIFE

A Tax-Free Future How to finance Roth IRA conversions with life insurance. By Russell E. Towers

he repeal of the $100,000 adjusted gross income (AGI) eligibility limit to convert from a taxable IRA to a Roth IRA served as a landmark event for high-income taxpayers who want the perpetual tax-free income streams that a Roth IRA can provide. More clients in their 60s or 70s with large IRA balances will be looking to convert and for ways to finance the payment of large income taxes due upon the conversion. Is there a method where a Roth IRA conversion can be financed that will allow clients to achieve this dream of unlimited tax free income for their family over an extended period of time? The answer is yes, and life insurance provides the key to unlock this golden door to a tax-free future.

Basic Roth IRA Conversion Rules in 2010 and Beyond

For those who converted in 2010 only, 50 percent of the income on the conversion 36

could have been reported in 2011, and the other 50 percent of the income could have been reported in 2012. For those who convert in 2011 and beyond, 100 percent of the tax is due in the same tax year the conversion takes place. Part or all of a traditional IRA may be converted to a Roth IRA.

Step by Step Procedure for a Married Couple to Achieve Conversion to a Tax-Free Roth IRA [ 1 ] IRA owner names spouse as IRA beneficiary. Owner must take required minimum distributions (RMD) from the IRA upon reaching age 70½ until death. [ 2 ] IRA owner buys a no-lapse Universal Life (UL) policy on his/her life and names the spouse as the beneficiary. If desired, the IRA owner may allocate any after-tax RMD for premium payments. [ 3] At IRA owner’s death, the surviving spouse first executes an IRA to IRA spousal rollover. This rollover is accomplished with no tax consequences.

InsuranceNewsNet Magazine » September 2012

[ 4] Then, the surviving spouse converts all or part of the spousal rollover IRA to a Roth IRA. The spouse names the children/grandchildren, or trusts for their benefit, as beneficiary of the new Roth IRA account(s). [ 5] Spouse receives the life insurance death proceeds income tax free. The proceeds paid to the spouse qualify for the federal estate tax marital deduction [ 6] Spouse uses all or part of the taxfree insurance death proceeds to pay the income taxes on the Roth IRA conversion. [ 7] Spouse is now the owner of a Roth IRA and, if needed, may take income tax-free distributions from the account. There are no RMDs required from the Roth IRA for the remaining lifetime of the spouse. [ 8] At the spouse’s death, the balance in the Roth IRA is included in the gross estate. Of course, with proper planning while both spouses were alive, a no-lapse, survivorship universal life

A TAX-FREE FUTURE

More clients in their 60s or 70s with large IRA balances will be looking to convert and for ways to finance the payment of large income taxes. (SUL) survivorship policy owned by an irrevocable life insurance trust (ILIT) could be purchased and allocated to pay any second death estate taxes. [ 9] The beneficiaries of the Roth IRA (children, grandchildren or trusts for their benefit) have two distribution choices to receive the “inherited Roth IRA.” The first choice is the so-called five-year rule – that is, the Roth IRA account must be completely distributed within five years of death of the Roth IRA owner. The second choice is the “life expectancy rule” – the account can be paid out annually over the life

expectancy of the beneficiary if required minimum distributions (RMD) start no later than Dec. 31 of the year following the death of the Roth IRA owner. Where a trust is the beneficiary of the Roth IRA, the trust beneficiary with the shortest life expectancy will be the measuring life for RMD distributions to the trust.

The Three Phases of IRA and Roth IRA Account Management [ Phase 1] Curing lifetime of IRA owner, required minimum distributions (RMD) are distributed according to the Uniform Distribution Table [ Phase 2] At death of IRA owner, surviving spouse completes the Roth IRA conversion process (see above) using the life insurance proceeds to pay income taxes due upon the conversion. No RMD from the Roth IRA is required for the remaining lifetime of the spouse. [ Phase 3] Roth IRA beneficiaries receive income-tax free distributions

LIFE

either according to the “five-year rule” or the “life expectancy rule.” If the life expectancy method is chosen, the Single Life Table will determine the length of the RMD payout based on the life expectancy of the beneficiary. Children could easily have a life expectancy of 25 to 40 years and grandchildren could easily have a life expectancy of 50 to 70 years depending on the facts of the case. One hundred percent of the “inherited Roth IRA” required minimum distributions (RMD) over that extended time period will be income-tax free! The tax-free financial leverage of using life insurance to finance the Roth IRA conversion plan will enhance the net after-tax inheritance for your client’s heirs. Russell E. Towers, JD, CLU, ChFC, is vice president, business and estate planning, Brokers’ Service Marketing Group. He can be reached at Russell.Towers@ innfeedback.com.

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September 2012 » InsuranceNewsNet Magazine

LIFE

The New Golden Handcuffs H ow a split-dollar strategy allows deferred compensation for small- to mid-sized companies By Stephen O. Kroeger, Jack F. Elder and Ryan Mattern

ith all the changes to executive benefit arrangements in the past decade, can a smallto medium-sized employer on a budget provide a meaningful benefit to key employees to ensure loyalty and compete with larger corporations? The answer is a resounding “yes.” The passage of the American Jobs Creation Act and subsequent codification of significantly more substantial deferred compensation rules under Internal Revenue Code Section 409A (hereinafter Section 409A) added a great deal of complexity to the establishment and administration of nonqualified supplemental retirement plans. The compliance costs associated with installing a deferred compensation arrangement, ongoing Section 409A annual requirements and the draconian penalties for failure to comply requires employers to invest in either upgrading internal compliance resources or contracting with a third party administrator. Small- to medium-sized firms often do not have the budget for these additional costs. However, despite these hurdles, deferred compensation plans remain popular methods for rewarding senior management and an attractive tool for recruiting top talent because management can be discriminatory. The costs of Section 409A compliance are most onerous on those small-to-medium but rapidly growing businesses where the need to attract and maintain major revenue drivers is greatest. It is these organizations, heavily dependent on a top salesperson or a critical intellectual employee, where the loss to a competitor can be devastating. The necessity for a “Golden Handcuff ”-type plan is crucial to their survival, but the expense of administering such a plan in addition to the informal funding of the promise can put it out of reach. Like38

wise, this strain on resources is accentuated in smaller and intermediate-sized nonprofits that want to retain their chief rainmakers who bring in the majority of donations. In order to level the playing field with larger corporations, these employers need an alternative to traditional deferred compensation plans that fall outside of the scope of Section 409A that allows them the opportunity to compete for and retain personnel with large corporations with nonqualified executive benefits budget. The ability to create such a program may be found within Section 409A itself. It is the “short-term deferral” (Section 409A, Reg. 1.409A-1(b)(4)) exception which, when combined with an endorsement split-dollar plan, has the potential to be a very lucrative benefit with strings attached. The “short-term deferral” exception refers to the timing of the distribution of plan assets upon plan termination. That is the key to escaping the Section 409A umbrella. The employee must receive the policy used

in the split-dollar arrangement within two and half months of the end of the corporate tax year in which the service requirement was completed (20 years, age 65, etc.). This rule has to be adhered to strictly but, as long as it is, Section 409A does not apply. Now that we’re outside of Section 409A, it is the endorsement split-dollar that adds the golden handcuff. Before the completion of the service requirement, the business owns a life insurance contract on the desired employee and is beneficiary to premiums paid or policy cash value, whichever is greater. (Section 101(j) requirements must be met in order for the death benefit to remain tax free.) The employee’s bene-

BEFORE SERVICE REQUIREMENT SATISFIED

Employer pays premium for policy

EMPLOYER

Executive has a portion of death benefit

PERMANENT POLICY

InsuranceNewsNet Magazine » September 2012

EXECUTIVE Executive names his beneficiaries

Employer has key person protection and golden handcuffs

Executive pays tax on economic benefit

WHEN SERVICE REQUIREMENT SATISFIED

Employer transfers policy; takes an income tax deduction

EMPLOYER

Ownership change form completed

Executive pays tax on value of policy

EXECUTIVE PERMANENT POLICY Executive supplements retirement with cash values

ARTICLE

LIFE

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FOR PRODUCER USE ONLY – NOT FOR PUBLIC DISTRIBUTION September 2012 » InsuranceNewsNet Magazine

LIFE

THE NEW GOLDEN HANDCUFFS

ficiaries will receive the balance of the death benefit income tax-free, provided that the employee recognizes as income the economic benefit charges on the net amount at risk as measured by Table 2001 (or a carrier’s alternative term rates if published and regularly sold). The policy is transferred to the employee as compensation for its Fair Market Value. (See Revenue Procedure 2005-25.) The business enjoys a deduction for the fair market value at that time. The employee can take a withdrawal from the policy to pay the income tax or the employer can make a bonus to pay the tax. The annual tax on the economic benefit may be added to the employee’s salary as an annual bonus making it tax neutral to the employee.

Case Study

Most life insurance companies see policies.

An actual placed case will help to illustrate the power of this concept. ABC Co. is a small business with a key employee who is vital to its success. The business was growing dramatically and assets were being reinvested in order to sustain that growth. We discussed the idea of combining an endorsement split-dollar plan with the “short-term deferral” exception. The owner was pleased that the approach provided golden handcuffs, the potential for cost recovery in the form of key person protection during the employment years, and was inexpensive relative to other executive benefit programs they explored. The key employee was a male, age 43, in good health. The business applied for a policy on the key employee for $500,000 of coverage with an annual premium of $10,000 to age 65. In year one, the business retained $10,000 of the death benefit (greater of premiums paid or cash value) with the balance endorsed to the key employee. Based on IRS Table 2001, the employee paid tax on an imputed income of $632. If the key employee dies, then his beneficiaries will receive the net benefit income tax-free. If and when the key employee satisfies the predetermined service requirement, the policy will be distributed to him within two and half months of the end of the calendar year in which this requirement is met. Again, this will avoid 409A compliance concerns altogether. 40

At that time, the business will enjoy a tax deduction equal to the fair market value of the policy. The key employee will be taxed on the same amount, which in our example is projected to be $314,598. A withdrawal from the policy of $94,379 could cover the tax liability (assuming a 30 percent tax bracket). At this point, the key employee could surrender the policy out for the cash, use it for estate planning or take loans in order to supplement his retirement. Life insurance represents an excellent vehicle for funding a nonqualified executive benefit for two primary reasons: first, the cash values grow on a tax-deferred basis; second, if the employee passes away before completion of the plan, the employer recoups its costs income tax-free. The “Golden Rule” of business accounting is that if you can’t get a tax deduction, make sure you get cost recovery. The company is guaranteed cost recovery in the event of premature death of the employee, the contract is cash if the employee departs prematurely, and there is a tax deduction at plan termination. Executive compensation arrangements such as split-dollar and deferred compensation have gone through substantial regulatory changes over the past decade, but nonqualified executive benefit plans, thanks to the short-term deferral rule, represent an inexpensive technique for small to mid-sized firms to compete with larger corporations for top talent and maintain employee loyalty. The authors would like to thank Meredith Garcia-Tunon, CLU, FLMI, ACS, for her comments on and invaluable contributions to this article. Stephen O. Kroeger, CLU, HIA, MBA, is a senior director of advanced sales at Crump Life Insurance Services and he serves on the Business Insurance and Estate Planning Committee, BGA Task Force, and the Issues Alliance. He may be reached at stephen. kroeger@innfeedback.com. Jack F. Elder, JD, LL.M (taxation), is a senior director of advanced sales at Crump Life Insurance Services where he is a member of the Estate Planning and Taxation Sections. He may be reached at jack.elder@ innfeedback.com. Ryan Mattern (advanced sales), Crump Life Insurance Services, can be reached at ryan. mattern@innfeedback.com.

InsuranceNewsNet Magazine » September 2012

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September 2012 » InsuranceNewsNet Magazine

[ANNUITYWIRES] Indexed Annuities Nearly Hit Record

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While many other annuity products struggle for traction, indexed annuities have been booming. In fact, IAs did so well they nearly Source: AnnuitySpecs.com broke the sales record in the second quarter. Sales were $8.7 billion, up more than 8 percent from the previous quarter, and they increased 6 percent over the same quarter last year, according to Moore Market Intelligence, which owns AnnuitySpecs.com. But it was also kind of a crazy quarter, according to CEO Sheryl Moore. “Nine different companies made changes to their products on 14 different occasions during this quarter! Yet once again, agents selling indexed annuities pushed-through the challenge and focused on informing their clients on the guarantees of indexed annuities … looks like it worked!,” Moore says in her press release. Allianz Life remained No. 1 with a 16 percent market share. Aviva USA (which is being shopped around by its British parent) is No. 2, followed by American Equity, Security Benefit Life and Great American (GAFRI). Security Benefit Life’s Secure Income Annuity was the top selling indexed annuity for the quarter. “An impressive feat (coupled with the company’s sales ranking), given that the carrier entered the indexed annuity market for the first time less than one year ago,” Moore says.

BANK FEE 1Q INCOME HITS RECORD – WITH A CAVEAT

Banking companies did see positive annuity results in first quarter 2012, but it wasn’t an all-industry kind of thing. Their 2012 first quarter total was $781.7 million – the highest quarterly amount of annuity fee income ever reported, says Michael White Associates. The Washington firm compiles quarterly annuity fee income reports for American Bankers Insurance Association (ABIA). In

terms of percentages, first quarter was up 4.5 percent compared to first quarter last year, when the total came to $748.2 million.

But the increase wasn’t across the board. According to the Michael White-ABIA Bank Annuity Fee Income Report, bank annuity fee income would have come in 9.8 percent below DID YOU

KNOW

first quarter last year, had it not been for two developments. One, the first quarter data includes a new bank holding company (Raymond James Financial, Inc.); and two, thrifts began reporting for the first time in first quarter 2012. Raymond James contributed $61 million to the industry total, and the thrifts contributed $15.6 million.

ANNUITY INFLOWS INCH UP

The Depository Trust & Clearing Corporation (DTCC) Insurance & Retirement Services (I&RS) says that the annuity inflows it processed in May reached $7.5 billion, up by just over 1 percent from $7.4 billion in April. (Inflows reflect the annuity transactions that the New York firm processes daily for the industry through its online reporting service.) An increase of 1 percent is not a huge jump

SEVENTY-ONE PERCENT OF VARIABLE ANNUITY BUYERS, and 68 percent

of indexed and traditional fixed annuity buyers, say that the financial strength of the insurance company is very important when purchasing an annuity. Source: LIMRA

InsuranceNewsNet Magazine » September 2012

but it’s worth a mention since the overall trend in activity recorded by DTCC has been down in the past 13 months.

The 13-month high occurred in August 2011, when inflows were over $8.6 billion, so the business has a ways to go before anyone shouts “going gangbusters.”

ANNUITY ISSUE ACROSS THE POND

While U.S. advisors are concerned with how to position annuities that have lower interest rate guarantees or less generous guaranteed living benefit provisions than in years past, their counterparts in the United Kingdom are looking at another challenge. That is, what to do when new gender legislation takes effect later this year?

The gender legislation will prevent annuity providers from offering different rates and incomes based on gender. This will likely lead carriers to reduce income levels to those offered to men, predicts Tim Gosden, head of

annuity product development at British insurer Legal & General. That could ultimately accelerate the move towards individual pricing for pension annuities (products people buy with their pension savings) via “enhanced annuities.” The enhanced contracts pay out extra income if the annuitant has certain lifestyle health risks or medical conditions (much as underwritten annuities do in the U.S.). How are advisors responding? According to Gosden, it is already becoming “more commonplace” for advisors to ask all customers to complete medical questionnaires for the purposes of purchasing an annuity.

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September 2012 » InsuranceNewsNet Magazine

ANNUITY

MUTUAL FUNDS THE BIGGEST FOES FOR ANNUITY PRODUCERS

New Contenders Emerge in $ Trillion Retirement Market $7.3 I nsiders say the annuity industry can’t be complacent in this huge opportunity. By Linda Koco

onning Research and Consulting included a warning in a report issued in July about the future of the retirement income market. The massive assets now held in qualified retirement plans managed by life and annuity insurers are being eyed by competitors, the Hartford researcher said, so insurers need to respond to the competition. That’s a good message for life and annuity advisors to hear as well. In fact, annuity advisors “should be licking their chops over the potential opportunities,” contends John J. Heck, founder and president of Adagio Capital Advisors, a registered investment advisor in Ft. Myers, Fla. He has a point. At the end of 2011, individual and group annuities held 46 percent of all defined contribution plan assets, according to Conning. Beyond annuities, $7.3 trillion is in combined IRA and defined contribution plan assets. Conning analyst Scott Hawkins says this represents a growing opportunity for life and annuity insurers to help individuals turn those assets into retirement income. It’s also an opportunity for advisors, adds Heck. He refers in particular to annuity advisors, who can help clients establish and manage the retirement savings and income plans they create using plan assets. But there’s a catch. The life and annui44

ty assets that Conning identified may not necessarily stay in the insurance coffers unless the industry acts to conserve this business. As Hawkins pointed out, these assets are attracting other competitors, primarily mutual funds, who’ve also helped investors accumulate retirement assets.

A New Program

Prescient words, those. Just a few days after the Conning report came out, John Hancock Funds announced it has a new program to help retirement plan advisors demonstrate their value. That is, the fund company will be providing tools – a guidebook, a wholesaler PowerPoint, and a plan sponsor toolkit – to help its advisors strengthen relationships with retirement plan clients. This is an interesting development, in light of Hawkins’ comments. As readers will recall, John Hancock Funds is the Boston-based mutual fund business of John Hancock Financial, which in turn is a business unit of Manulife Financial Corporation of Canada. Hancock has other advisor support programs for insurance professionals, but this particular program is from the investment side of the Hancock house, not the insurance side. The fund company is clearly moving to support advisor-based TLC to retirement plan clients. In a sense, it is a protective measure, in that lots of TLC will likely help dissuade plan sponsors from developing a case of roving eyes. But the initiative can also be seen as a

InsuranceNewsNet Magazine » September 2012

competitive move, especially by other advisors who are trying to grab that business for themselves. They would see the TLC effort as a defensive move that functions as a serious offense.

Contenders

By the way, there will be contenders as the year plays out, for all types of employer-based retirement plans no matter who holds the money now. The contenders will include not only retirement benefits plan experts but also advisors who specialize in plan rollovers to IRAs and qualified annuities. Always hovering in the wings, these contenders will likely step up their efforts to win over accounts once the new Department of Labor regulations on disclosure of investment expenses and fees take effect this year. Their target prospects will be plan sponsors – and participants – who are not happy with the numbers they see as a result of the new regulations. Annuity and life advisors are not without resources for the retirement scramble that is sure to result. This year and last, many insurance companies and third party providers have been rolling out a wide assortment of websites, calculators, educational videos and software, retirement readiness programs, and other supports for retirement plan advisors and clients. So, even if an advisor is not part of the Hancock organization, they will have options for preparing themselves to compete if they care to do so.

NEW CONTENDERS EMERGE IN $7.3 TRILLION RETIREMENT MARKET The big question is will advisors take advantage of the opportunity to go after the retirement plan and retirement income business that could unfold? And will they take steps to protect the retirement accounts they already have?

Seeing For The First Time

Heck says he thinks this will happen, thanks to the disclosure regulations regarding 401(k)s. The disclosure will enable a lot of plan sponsors, and plan participants, to see for the first time what their plans are actually costing them, he explains. Up to now, the costs were “buried in the prospectuses” and the broker-dealer and fund companies in the plans were not eager to talk about them, he continues. “But now, sponsors and participants will see – and if they don’t like what they see, that creates an opportunity for the dually-licensed annuity advisor to offer other options.” One thing annuity advisors can do to compete is to sell the client on the value they provide, Heck says. “They can show

why it’s better to go with them than to go with a cheaper plan. It’s like selling the perceived value of driving a Mercedes versus a Chevy. They can show why they are the greatest thing since sliced bread.” Alternatively, advisors can work with the plan providers to find ways to come down on costs. That may mean an advisor might have to take a haircut on compensation, he allows, but it’s an option that might come into play. If the advisor is independent, not captive to any provider, the advisor can also shop around for other markets for the plan, he adds. Heck says another approach advisors can use is to offer plan sponsors other strategies, which he calls “safe money strategies.” An example is “to point out that the plan can start allowing employees to take an in-service hardship distribution of their vested assets. The Internal Revenue Service allows such withdrawals but a lot of plan sponsors don’t know about the option.” The advantages are that the option is

ANNUITY

simple to set up and, if employees take the distributions, this will reduce the plan’s account value and thus the fees charged by the plan, Heck says. “Meanwhile, the employee can roll the money into a qualified product – such as a self-directed IRA where the employee can now have control over both risks and expenses, and where the employee can move money to various types of assets.” There are other approaches that advisors can use as well, he says. But the point is, advisors do need to act on the opportunity, Heck says. He is practicing what he preaches. Right now, his own firm is setting up an event to meet with clients of a local estate planning attorney to discuss this topic, among others. “I’m bringing them the message of safe money planning and how that fits into the fee and expense disclosure that is coming soon.” 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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ANNUITY

Global Shakeup Could Rattle Money out of U.S. Annuity Market H ow the increasingly international profile of the insurance business could affect the U.S. annuity market. By Linda Koco

nsurance agents doing business in towns across the country may assume that international insurance developments don’t have much impact on everyday work. But forces are afoot that suggest they could be way off the mark. In fact, “as bad as agents think things may be now (with cuts in various annuity areas), it could get worse,” says Stan Haithcock, an annuity specialist based in Ponte Vedra Beach, Fla., who routine46

ly goes by his business name, Stan The Annuity Man. Advisors aren’t talking much about globalization, Haithcock allows. But they should be, because the increasingly international profile of the insurance business is likely to impact the U.S. annuity market. For instance, the Solvency II Directive in the European Union will likely “trickle over here,” he says.

Eye-Popping Data

Haithcock made the comments in an interview just a day after a meeting in Washington where two representatives of McKinsey & Co., the consulting firm, presented eye-popping data

InsuranceNewsNet Magazine » September 2012

about changes in the international insurance scene. The McKinsey presentation was part of a meeting on international issues held at the Federal Advisory Committee on Insurance (FACI), which also ran simultaneously via webcast. The committee is charged with providing input to Treasury’s Federal Insurance Office, which was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. FACI members include major insurance industry participants and academics, consumer advocates and state regulators. Between 2006 and 2011, the global life and annuity market, as well as the

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ANNUITY

GLOBAL SHAKEUP COULD RATTLE MONEY OUT OF U.S. ANNUITY MARKET

global property and casualty market each showed 2 percent overall growth in premiums, the McKinsey data show. But during that time, the global insurance markets became increasingly driven by Asia-Pacific and Latin America, said Mike Pritula, a director from McKinsey’s New York office. In fact, between 2008 and 2011, life and annuity premiums actually shrank in North America, Western Europe and Japan, said Frederic “Fritz” Nauck, a director in McKinsey’s Charlotte, N.C., office. Meanwhile, Emerging Asia (excluding Japan) and Latin America markets together drove 85 percent of the international life insurance industry’s growth, Nauck said. That marks a “stark reversal” from the 2000 to 2007 period, when North America and Western Europe drove three-fourths of life insurance premium growth, Nauck pointed out. Not incidentally, the big shifts in life insurance premiums parallel changes that occurred on the property/casualty side of the industry during the same period, the McKinsey consultants said, with North America and Western Europe shrinking and Asia and Latin American growing. Looking ahead, McKinsey is projecting this trend will likely continue to 2020. Nauck showed a slide projecting Asia (excluding Japan) and Latin America nearly doubling their market share in that period – from roughly 20 percent in 2010 to nearly 40 percent 2020. What about the United States? The U.S. position in the global insurance markets will continue to shrink, Nauck predicted. In addition, he said, the global insurance market is evolving in such a way that “the large international carriers are becoming more important, increasing their share of the overall global market.” The trend is likely to continue, he added.

Impact on U.S. Annuities

The growth of the international carriers will affect the U.S. annuity business, reiterates Haithcock, pointing out that that several of those carriers also operate in the U.S. A key impact will likely come from implementation of Solvency II Directive, he predicts. Scheduled for implementation in 2013, the directive aims to harmonize European insurance regulation and it is 48

expected to affect capital levels that insurance companies will be required to hold. “As a result, the European insurance companies will need more money on hand to back up their guarantees,” Haithcock says. That will likely “be reflected here (in the U.S.), even though it is not a law (here),” he continues. If that happens, advisors could see annuities paying lower commissions, having reduced benefits, offering fewer or more limited riders, and using reduced actuarial payouts on the back end, Haithcock says. The continuing low interest rates on 10-year Treasury bonds and the hedges that carriers buy to support annuity guarantees will play a role, too, he predicts. The global companies doing business here are affected by those factors as are domestic companies, he indicates. The record low for 10-year Treasuries was 1.43 percent on July 25, 2011, according to the Department of Treasury. As of August 7, the rate was up a bit, to nearly 1.66 percent, but that’s still way below the long term average in the range of 6.6 percent. The decline in Treasury rates in recent years has already played a key role in reductions in annuity commissions, guaranteed rates on riders, and actuarial payouts on the back-end that advisors have already seen. Should that rate drop even lower, things could get even worse, Haithcock predicts. No one knows for sure what will happen, he says. For instance, if Treasury rates were to rise, that would help increase the annuity guarantees. “But if that happens, equities will go down, so returns on accumulation values in annuities would likely be affected,” Haithcock says. He points to not only variable annuities but also fixed indexed annuities that key their interest crediting to growth in an equity index such as the S&P 500. “In addition, as soon as people see that they can get more money from interest than equities,” he says, “they would flock to interest-paying products. In the annuity market, that means straight-rate products like multi-year guaranteed annuities. We saw that happen five years ago, when rates were acceptable and when markets were volatile.”

InsuranceNewsNet Magazine » September 2012

The global insurance market is evolving in such a way that “the large international carriers are becoming more important, increasing their share of the overall global market.” What To Do

Annuity advisors need to be thinking about those possibilities as they counsel clients today, he says. Here are a few of his suggestions: Sell the best contractual guarantee, not hypotheticals. Hypothetical annuity presentations at the “bad chicken seminars” will go away, because consumers will get smart, predicts Haithcock. “They will ask, what does that mean?” He believes the customer demand will be for products where everything is guaranteed. Show the realities. People who are at retirement need to find a way to create an income stream right now, he says. “They can’t wait.” So provide them with solutions that have guarantees that they can rely upon, regardless of what happens in the future. “You can’t straddle that line by putting a dream into their heads that might not happen.” Point out that annuities are contracts. Use them to put in a foundation for retirement income and lifestyle, one that is guaranteed even if interest rates and equities markets keep shifting. Inform the customer. Let retirement-minded customers know that there are transfer-of-risk strategies they can use that make sense, Haithcock suggests. As examples, he points to the “stacking” or laddering of immediate annuities to build an income stream, perhaps in combination with longevity annuities. 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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September 2012 » InsuranceNewsNet Magazine

[HEALTHWIRES]

First Quarter 2012 Results Mixed for Top Health Plans, Study Finds bitly.com/HealthPlanStudy

Health Insurance Policies Reward Healthy Workers

EMPLOYEE HEALTH INSURANCE REDUCTIONS FOR HEALTHY HABITS

27%

61%

Employers all over the country, big and small, 2012 increasingly are offering health insurance 2014 policies that reward or penalize employees Businesses offering Projected to incentives for progress on personal health goals. offer incentives It’s a trend that is expected to grow by 2014 because of a provision in the health reform act that will allow insurance plans to increase penalties for unhealthy habits such as smoking.

Twenty-seven percent of 536 mid-size Michigan businesses surveyed tied incentives, such as lower monthly premiums, to health goals, according to McGraw Wentworth, a benefits analysis firm. The average worker got a $329 reduction on monthly premiums, or $687 for a family, the survey found. The average extra monthly charge for smokers was $41. Within the next two years, 61 percent of the companies surveyed said that they would or were highly likely to tie incentives to health goals. Employers spend $5,000-$7,000 a year on health expenses for overweight employees, compared with $3,900 for those of average weight, according to the International Foundation of Employee Benefit Plans. At the same a time, health costs for mid-size Michigan employers continued to rise an average of 6 percent this year, compared with 5.7 percent nationwide, the McGraw Wentworth survey reveals.

SURVEY: HEALTH-CARE EXECS ON HEALTH REFORM IMPACT

A survey of 249 California-based senior health-care executives by Adaptive Business Leaders (ABL) Organization, an executive networking and peeradvisory organization for health care, asked executives how their organizations had been impacted by the first two years of the health reform law’s enactment. The group was asked, “What impact do you believe the Affordable Care Act has already had on your health-care business,” 38 percent reported that the law had already provided at least some opportunity for growth; 45 percent had found it to be neutral, and 17 percent had found it to have a negative impact. The survey also asked the group’s perspective (positive or negative) on three DID YOU

KNOW

of the commonly discussed outcomes anticipated from the law: more consolidation within the industry, greater transparency (particularly of quality and cost data), and value-pricing and cost-cutting. The surveyed executives could select multiple outcomes of the Act. Of the 249 respondents, 68 percent believed that consolidation would be an outcome, 66 percent anticipated greater transparency, and 75 percent expected a greater focus on value-pricing and cost-cutting.

In addition to the above responses, 42 of the respondents included their own expectations of the Act. Overall, 18 of these comments cast the impact of the Affordable Care Act as favorable, 16 reflected negative concerns, and eight were neutral.

EMPLOYERS SPEND $5,000-$7,000 A YEAR on health expenses for overweight employees, compared with $3,900 for those of average weight. Source: International Foundation of Employee Benefit Plans

InsuranceNewsNet Magazine » September 2012

BABY BOOMERS’ HEALTHCARE CHALLENGE

Demand for home health-care workers is soaring as baby boomers – the 78 million Americans born between 1946 and 1964 – get older and states try to save money by moving people out of more costly nursing homes. But filling more than one million new home-care positions over the next decade will be a challenge. Most home health aides are paid about the same as maids and manicurists and don’t get sick days or health insurance themselves. Many who are self-employed must pay for their own gas for driving to appointments and cover their own medical bills if they’re hurt on the job. The U.S. Labor Department projects that home health and personal care aides will be among the fastest-growing jobs over the next decade, adding 1.3 mil-

lion positions and increasing at a rate higher than any other occupation. If those jobs can’t be filled, many older Americans are likely to face living with relatives or in nursing homes, which will only cost families and taxpayers more money. Nearly half of all home care workers live at or below the poverty level, and

many receive government benefits such as food stamps, unions and advocacy groups say. The median pay a year ago was $9.70 per hour – four cents less than fast-food workers and short-order cooks, according to the most recent statistics from the Labor Department.

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It’s n with and neve hap

HEALTH

Will Employers Push Workers into Health Exchanges? A lthough many details of the Patient Protection and Affordable Care Act remain murky even after the Supreme Court decision, one thing is certain… By Thom Mangan

mall and midsize businesses now face some tough decisions that may radically change how they offer health benefits to their workforce. At some point, smaller employers will have to decide whether to continue coverage through a small-employer exchange, drop coverage or essentially stay where they are now. An employer’s ultimate decision to “play or pay” – whether an employer continues to provide health coverage or drops coverage and pays a possible penalty under the law – likely will depend on a myriad of factors, not just its size. We estimate that nine out of 10 employers could opt to send their employees to the state exchange to purchase coverage on their own and pay the extremely low penalty. This strategy may work well for some employers who have a large number of seasonal or many part-time employees. It might also work if the employer competes in an environment that does not need to provide a competitive benefits package in order to attract and recruit employees. It’s a good idea for employers 52

to consult benefits advisors in their local market who are going to understand the pros and cons of either option and have the expertise to make the right decisions. The state health-care exchanges will significantly alter the landscape of employer-sponsored benefits. Smaller employers (below 50 or 100 employees, depending on the state) will be able to access the exchanges directly starting in 2014. It’s too soon, though, to know how affordable or how valuable the plans in the exchanges will be. Regardless of the size, all employers will need to be familiar with their state’s exchanges. Employers will be required to provide data needed by the exchanges to determine an employee’s eligibility for any premium and cost-sharing subsidies. Employees also will be looking for help in understanding their options. For now, the lack of specifics on the exchanges and other provisions in the law makes it impossible for employers to make any long-term decisions. The Supreme Court’s ruling in no way eliminates the challenges associated with the law. Businesses – particularly small and midsize employers who stand to be the most affected – are very unclear about the changes they need to make. Because the exchanges and other main provisions of the law aren’t slated to take

InsuranceNewsNet Magazine » September 2012

effect until 2014 and beyond, small and midsize employers should concentrate on more immediate issues. All employers – no matter what size – must: Distribute a summary of benefits and coverage to all health plan participants. Insurance providers are to provide materials for fully-insured employers, but self-insured companies must create the SBCs on their own. The summaries must be provided starting at the first open enrollment and/or plan year beginning on or after Sept. 23, 2014. Place an annual cap of $2,500 for health flexible spending accounts beginning with the 2013 plan year. Pay the patient-centered outcomes fee (also called the comparative effectiveness fee), which is due for many plans on July 31, 2013. Small and midsize employers in fully insured plans won’t have to handle the administrative part of this fee, ($1 per covered life for the 2012 year) because health insurers simply will remit the fee on their plans. Self-funded employers, however, must pay the fee directly. Also, employers that issued 250 or more W-2s in 2011 must report the total value of each employee’s medical cover-

WILL EMPLOYERS PUSH WORKERS INTO HEALTH EXCHANGES? age on their 2012 W-2 (which is to be issued in January 2013). The real crunch time for employers will arrive in 2014. Significant reporting will be required for employers with 50 or more employees once the employer shared-responsibility penalties are implemented in 2014. Additionally, those employers will need to provide coverage that meets the requirements for affordability and minimum coverage, or they must pay penalties. For employers that are not currently covering most of their employees who work 30 or more hours per week, this may be very expensive. Some employers may be tempted to jump ahead and try to reduce the number of full-time employees on their payroll to avoid some of the future requirements, although the rules on how hours will be calculated are vague right now. Many employers will consider making changes to employees’ hours starting Jan. 1, 2013, so a 12-month look-back would establish them below the 30-hour limit, making employees benefits-ineligible in 2014. While financially this can help

employers burdened by the health care costs, reporting costs and the impending excise taxes, careful attention should be paid to this trend – especially how it impacts an employer’s ability to attract and retain employees. Despite the compliance and administrative headaches that PPACA is causing, the recruiting and retaining power of employee benefits remains. Because employers have little control over the final rules, it’s essential to rely on local benchmarking data to ensure that their benefit choices are in line for their size, industry and location. As employers make decisions about their plan designs, they need to benchmark their plan designs and costs more carefully than ever before. Small and midsize employers should not rely on national data to do this. The localized data, such as that provided in the UBA 2012 Health Plan Survey, makes a big difference. Here is an example: A midsize technical design firm in California competing with other private-sector companies in the state for quality employees wants to

HEALTH

demonstrate the value of its PPO plan, which costs $489 per month. If you use national numbers to compare your rate, you’d be $50 per month more than the national average. But when compared with other PPO plans in California, your cost is actually $24 per month less than the average. This knowledge is crucial to manage the costs of health care properly. A health plan crafted with local benchmarks is especially vital under PPACA because they can help employers aggressively manage costs, which gives companies a chance of continuing to offer better benefits than their competitors. This data is critical when negotiating your rates and communicating the value of your plans to employees. Thom Mangan is CEO of United Benefit Advisors (UBA), a member-owned alliance of the nation’s leading independent employee benefit advisors. He can be reached at Thom.Mangan@ innfeedback.com.

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September 2012 » InsuranceNewsNet Magazine

FINANCIAL

What Advisors Want: Integrity, Intelligence, Insight, Instantly R esearch reveals big gaps between behaviors and objectives.

FIGURE 1: Wholesaler Influce in Decision-Making

By Ken Cochrane

t always comes as a surprise and is a bit troubling that retirement plan wholesalers receive poor ratings from advisors. Perhaps it’s personal. I was recruited out of school to be a retirement plan wholesaler and spent most of my career either wholesaling or managing wholesalers. Maybe it’s an inherent belief that an advisor won’t sell a product until a wholesaler shows up. Regardless, our advisor research has consistently demonstrated advisors not only give poor marks to wholesalers, but also report they have little influence on the sales process. Wholesaling is a very expensive way to distribute products and services. It’s one of the largest components of a company’s overhead and its success is crucial to the enterprise. Having unearthed data giving wholesalers poor marks, we set out to learn not only why advisors feel as they do, but to understand how we can benchmark wholesalers and improve the advisor’s experience when working with wholesalers. We began by interviewing advisors to gain an understanding of how they are evaluating wholesalers. We identified specific wholesaler attributes important to advisors or frequently displayed by wholesalers. These attributes fell into four basic groupings – quality of character, knowledge, foster skills and social skills – and were broken down as follows: Quality of character: integrity, follow-up and fulfilling commitments. Knowledge: product, industry, competitor and regulatory acumen. oster skills: being a resource to the F business, appreciation of the business, supporting the brand and demonstrating an interest in the business’ goals. 54

ocial skills (otherwise known as S “wholesaler DNA”): charisma, presentation abilities, listening and being mindful of the advisor’s time. Next, we developed and distributed an online survey to understand wholesaler influence and the role these attributes play. We sent invitations to more than 2,000 advisors and received more than 400 qualified survey completions. The respondents proved to be an outstanding sampling of plan advisors. The majority reported managing in excess of 10 retirement plans and at least $10 million in qualified plan assets. Once we had established the validity of the sampling, we looked at how advisors gauge wholesaler influence in crucial decisions during the sales process. Specifically, they rated wholesaler influence at three stages using a range of 1 to 5, where 1 represented significant influence and 5 indicated no influence. Key milestones in the sales process included the advisor determining products to present, the client’s product selection and the determination of investment options available to plan participants. Answers of 1 (significant influence) or 5 (no influence) indicate the strongest advisor convictions. In each portion of the sales process, a minimum of 55 percent of survey re-

InsuranceNewsNet Magazine » September 2012

spondents recorded answers demonstrating an exceedingly strong opinion (1 or 5). By comparing these answers at opposite ends of the spectrum, we’re able to determine polarity ratios. In each of the three crucial moments of decisions, the ratio of no influence to significant influence was a minimum of 2 to 1, and at times significantly higher, indicating a very strong advisor bias toward no wholesaler influence throughout the sales process, as shown in Figure 1. Our next step was to gain advisors’ assessment of wholesaler attributes industry wide. Figure 2 reports advisors’ answers when asked to rate wholesalers on a scale of 1 to 5, where 1 indicated failure to meet expectations and 5 demonstrated successfully exceeding expectations for each attribute. Focusing again on the polarity responses, we don’t see the level of conviction referenced under influence, but the ratios of failure to success are significantly greater indicating strong advisor bias. To bring each attribute into perspective, our next step was to ask advisors to rank the importance of each when evaluating wholesalers. As you’ll see in Figure 3, the attributes of personal character clearly rank most important followed by knowledge and foster attributes. Surprisingly, the characteristics

WHAT ADVISORS WANT: INTEGRITY, INTELLIGENCE, INSIGHT, INSTANTLY

FINANCIAL

FIGURE 2: Advisor Assessment of Wholesaler Attributes

FIGURE 3: Importance of Wholesaler Attributes

frequently used in hiring wholesalers (i.e. wholesaler DNA) ranked last in importance among the four groupings. Next we wanted to see advisors profile their best wholesalers. We asked advisors to rate the attributes of the two best wholesalers with whom they’ve placed business. Consistent with prior results, character attributes ranked the highest followed by knowledge, foster and social, as shown in Figure 4. To gain additional perspective, we looked at the gap between the whole-

saler industry results and the attributes advisors reported as important to doing business. In Figure 5, attributes with negative scores demonstrate where importance exceeded the industry, while a positive score indicates the industry exceeded advisors’ importance ranking. This gap analysis demonstrates advisor dissatisfaction with wholesalers’ personal character and a general satisfaction with presentation skills and charisma, the primary attributes of the least important grouping.

The gap analysis between the best wholesalers and the industry continued to reveal valuable insights. Figure 6 demonstrates the consistency of our results. Positive scores indicate where the best wholesalers exceeded the industry, and negative bars show where the industry exceeds the best wholesalers. Validating prior results, the best wholesalers scored much higher in the most important attribute groupings of character and knowledge.

September 2012 » InsuranceNewsNet Magazine

FINANCIAL

WHAT ADVISORS WANT: INTEGRITY, INTELLIGENCE, INSIGHT, INSTANTLY

Advisors disclose increasing frustration, citing clear alignment gaps between wholesaler behaviors and practice objectives. Leading to more than 60 percent limiting wholesaler access to their practices, advisors are now reporting a growing portion of their business going to firms with minimal or no wholesaler interaction. While this data reveals advisor dissatisfaction, it also clearly demonstrates several transcendent qualities that advisors demand from their wholesalers:

FIGURE 4: Advisor Ratings of Top 2 Wholesalers

I ntegrity. Advisors want to work with people they trust and who execute what they say they will do. Intelligence. First, wholesalers must know their product and services cold, and stay current. Second, they must know the industry and competitors. Advisors repeatedly site wholesalers not knowing their product or what’s going on in their industry to be a major irritant.

FIGURE 5: Gap - Wholesaler Industry Results vs. What Advisors Report as Important

Active Listener. The best wholesalers clearly demonstrate an interest in their advisors’ practices. They listen, learn and then demonstrate how their product or service will help the advisor meet their goals. If these behaviors are not present and accounted for, there may be a need for sales management to rethink hiring, training and evaluation of those wholesalers who may not be adapting to the rapidly changing advisor paradigm.

FIGURE 6: Gap - Best Wholesalers vs. Industry

Ken Cochrane is the managing director of Pulse Logic. In addition to his market research, he also works with companies to help them grow by identifying and implementing their brand strategy. He can be reached at Ken.Cochrane@innfeedback.com. This article was courtesy of The Wealth Channel Magazine.

InsuranceNewsNet Magazine » September 2012

NAIFA provides the unique training, education and networking opportunities independent advisors need to grow their business. Find out more at www.NAIFA.org/ItPays

September 2012 Âť InsuranceNewsNet Magazine

BUSINESS

Don’t Pucker Up T hrow out the sales script and follow your prospects’ lead. By Mike Watts

o matter how good a salesperson you are, at some point you will have a sales call go sour. Maybe a warm lead went cold, or maybe a promising client simply walked away. You can turn a sour sales call around and perhaps even salvage it by following a few practices: knowing when to divert from your talking points; having multiple methods for delivering your information; preparing alternative educational techniques; and asking open-ended questions. But in the end, sometimes it’s just a matter of knowing when to give up.

Tip 1 – Get Away from Your Script

In all seriousness, a script does not help you on a sales call. Writing out a few talking points beforehand is fine, but scripted calls make your prospect feel 58

HOW TO TURN SOUR SALES CALLS INTO LEMONADE

like just another number on a list. The person on the other end of the line can tell you are reading from a script. If you like using talking points, know when to step away from them. Fall back on open-ended questions, or better yet, be creative. If you continue to rely on the same talking points or script, your sales approach will become stale. By stepping away from a script, you will learn to let things happen organically. You should also find your sales approach becomes much sharper.

Tip 2 – Provide Alternative Information Methods

You may catch someone having a bad day, or they might simply be too busy to talk to you. If you sense your potential customer is hurrying you or attempting to get you off the phone, offer to send information on your products via an alternative method for your potential customer to review at his or her convenience.

InsuranceNewsNet Magazine » September 2012

This could be as simple as an email. Some people still prefer to receive hard-copy flyers in the mail. Do what you are most comfortable with, but also ask your customer’s preference. If you typically send hard-copy information through the mail, but are under the impression this customer might spend more time online checking email than reading regular mail, cater to the customer and send information electronically.

Tip 3 – It is All About the Customer

Before you even start a call, you should do some research. If you can help it, never blindly call a prospect. Have you interacted with the customer before? If so, you should have notes on any previous conversations. What do you know about the customer, or what can you find out? What time is it where they are located? By knowing as much as possible about the person you are calling before even picking up the phone, you are

DON’T PUCKER UP removing a significant amount of risk from the call. If you are really passionate about your product (and you should be if you are selling it!), it can be easy to get caught up in talking about it. There is nothing wrong with sharing the love of your product with your customers, but remember this universal truth: making a sale is all about your customer. The reason you are trying to sell your product is to enhance your customer’s life. If you find yourself rambling on and on, you might be boring the person on the other end of the line. Make sure you are applying any information you are sharing to what you know about the customer. Make sure your lead understands how your product benefits them specifically. Think of a sales call as an opportunity to educate your customers, instead of as an opportunity to sell them something.

Tip 4 – Use Open-Ended Questions

What if you do your research on the person you are calling, but quickly realize your notes and the person on the phone do not match up? Maybe you

simply read the wrong line on your computer screen, or maybe you called the wrong person. If you realize your research is bad, fall back on open-ended questions. You should never give your potential customer an opportunity to simply say “no,” and end the conversation. Take this opportunity to learn about the person you are calling, and be organic. If you try to force questions, your customer will pick up on it. Be genuine. At the same time, be concise. Do not waste your customer’s time. Ask about what you need to learn in order to help you help your customer.

Tip 5 – Know When to Give Up

At some point, a sales call can become unsalvageable. If you fight it and let it drag on, you will only annoy your potential customer and likely lose the sale. If you can end the call before you reach the point of no return, then the sale itself may not be lost. Try to make an appointment to call the person back after you have an opportunity to regroup. Following up with an email is another option.

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If a sales call goes bad, it does not mean defeat. It is just an opportunity to learn and try again The most important thing to remember on a sales call is not to give up if you experience something negative. If you can approach every call with these tips in mind, a healthy amount of persistence will often be rewarded. As you make calls, take notes. Use those notes if you make follow up calls to the same leads, and look at every interaction with a potential buyer as a chance to improve your sales strategy. Remember, making even a single sale is a learning process requiring a personal touch and the ability to sympathize with your leads. The more calls you make and the more experience you earn, the easier it will become. Mike Watts is the director of sales for HCC Medical Insurance Services, a provider of international and travel health insurance plans and holds licenses to sell life and health, as well as property and casualty insurance. He can be reached at Mike.Watts@innfeedback.com.

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September 2012 » InsuranceNewsNet Magazine

MDRT INSIGHTS

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

Cautionary Tales Illustrate Life Insurance Value L ife insurance remains the most sought after financial tool for creating a financial cushion. By Philip E. Harriman

n a market full of diverse financial tools, life insurance continues to be the most enduring financial product devised. As advisors, we can help clients understand its importance by sharing our experiences and cautionary scenarios that can convince them of the value of this critical financial investment. Life insurance is the most sought-after financial tool for many reasons, yet the most prominent is the fact that its investors will more than likely always need to fund expenses for those left behind after their death. While most people don’t like to spend time thinking about their last days, many times I find they are motivated to talk to their advisor about life insurance in order to provide this financial cushion to avoid financial detriment for their loved ones in the event of a tragedy. Many times, the conversation turns mathematical and transactional when dealing with allocating money to an investment. One thing to remember is behind every discussion surrounding the life insurance product, there is a message of love to the people who will benefit from the policy. Advisors must always keep an up-todate understanding of our clients’ various policies. I once worked with a woman who didn’t fully understand her husband’s life insurance policy, and when we sat down to discuss her options, we found out she had been paying premiums she legally didn’t have to. After her husband was diagnosed with brain cancer, she was struggling to keep up with her life insurance premium payments because their disability income was paying only basic household expenses. Her life insurance policy contained a prevision that stated in the event a policy-holder becomes completely disabled, they were longer required to pay the pre60

“Life insurance is not a belief, but rather a unique financial tool that performs better than any other.”

miums. Not only was she relieved of paying the life insurance monthly payments, but she was also to receive about $12,000 in return of premiums. The woman’s husband passed away, and she is grieving; however, the life insurance has made the difference between an uncertain yet financially dignified future and a completely emotionally and financially wiped-out family. While it is important not to persuade our clients to purchase a life insurance policy with fear, we must also remember to inform them of the risks they may face if they forgo life insurance. I currently am working with a 40-year-old professional who makes a large income and also has inherited some family money through legacy planning. Because of his large net worth, he decided he didn’t need his life insurance policy, which was set to provide his beneficiaries with millions of dollars. One month after he cancelled his life insurance policy, he suffered a severe heart attack, causing permanent damage

InsuranceNewsNet Magazine » September 2012

to his heart. This client now is without life insurance and has been deemed uninsurable for the foreseeable future. His family’s lifestyle will be altered dramatically if something happens to him. Remind your clients that life insurance is unlike any other investment, in that you must qualify in order to purchase a policy. Creating scenarios or sharing stories with your clients can help them fully comprehend the importance of this critical financial investment. Life insurance is not a belief, but rather a unique financial tool that performs better than any other. It creates cash when it is needed and provides a safety net for clients’ loved ones. If our clients can grasp the value of a good life insurance policy, we will have done our jobs as advisors. Philip E. Harriman is president of MDRT and a member since 1983. A partner in Lebel & Harriman, LLP, Harriman’s firm specializes in retirement, investment and estate planning. Philip can be reached at Philip.Harriman@innfeedback.com.

LIMRA INSIGHTS

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

Life Insurance Awareness Month: Shine A Light For Clients A study shows that advisors themselves are the largest influence on whether people buy life insurance or not. By Robert A. Kerzner

or nearly two years, LIMRA has been citing ominous life insurance statistics such as:

Three in 10 American households (35 million) are uninsured, and half of all U.S. households (58 million) say they need more life insurance. Over half of Gen X and Gen Y households – representing more than 30 million people – need more life insurance. The middle market (annual income between $35K and $100K) represents the largest segment of uninsured households, with half (36 million) admitting they need more life insurance. See a trend? The truth is the need for life insurance has never been greater. Yet our consumer research shows that these messages are not prompting people to act. A recent study shows Americans are more concerned with meeting basic obligations – being able to pay their mortgage and other bills – than they were a year ago. For many, purchasing life insurance coverage is not a priority and beyond that, many believe it is beyond their reach. But in today’s difficult economic environment where protracted high unemployment levels have taken their toll on American families, many households are living paycheck to paycheck. In these times – when families don’t have savings to withstand the loss of an income – the need for life insurance is even more critical to protect families against unexpected death. So how do we get consumers to take the steps to protect their loved ones and create a financially secure future?

LIMRA Research Shows That Advisors Can Make the Difference

LIMRA data shows that six in 10 consumers shopping for life insurance prefer to rely most on trusted sources such as financial advisors or life insurance agents. In addition, those who worked with an advisor or sales rep were more likely to buy life insurance than those who went online or used other distribution channels. Time and time again, LIMRA’s research has shown that people want to deal with people! They have specific questions they want answered and they want reassurance they are doing the right thing. Advisors and sales agents provide the information, recommendations and guidance that consumers say they want and need. Recently, there have been a lot of rumblings from legislators and regulators to pass laws and implement rules that would make it harder for retail producers to give advice to help people save systematically and protect their love ones against life’s risks. It is likely these regulations will undermine industry efforts to attract the best and the brightest to become sales reps or advisors because the compliance requirements may seem too burdensome. These new rules also may drive the shrinking pool of existing producers to exit the business. In the end, it is consumers – partic-

ularly middle market consumers who cannot afford fee-based advisors and have the greatest need for guidance – who will suffer. Honestly, this keeps me up at night. Many Americans not only lack the life insurance coverage they need, but also the knowledge or confidence to make the financial decisions necessary to protect themselves. Wouldn’t it be in the best interests of consumers and our society if our regulatory and legislative bodies developed rules and regulations that help, rather than hinder, welltrained, professional advisors connect with the consumers who so desperately need guidance? September is Life Insurance Awareness Month (LIAM). Sponsored by the nonprofit LIFE Foundation and more than 100 of the nation’s leading insurance companies and industry groups, including LIMRA, LIAM’s goal is to make sure Americans understand the importance and need to include life insurance in their financial plans. I encourage all sales reps and advisors to take advantage of this awareness campaign to connect with your customers and their families to ensure they are protected against the risk of premature death, outliving monetary resources, or becoming disabled. As advisors or sales reps, our research has proven that you can bring value-added expertise to those families who are not yet protected, provide information that can help them reduce the perceived risk of purchase and help them make an informed decision – converting prospects into appreciative buyers with financial peace of mind. Robert A. Kerzner, CLU, ChFC, is President and CEO of LIMRA, LOMA and their parent organization, LL Global. the world’s largest association of life insurance and financial services companies. Bob can be reached at Bob.Kerzner@ innfeedback.com.

September 2012 » InsuranceNewsNet Magazine

NAILBA INSIGHTS

The National Association of Independent Life Brokerage Agencies (NAILBA) is a nonprofit trade association with over 350 member agencies in the U.S. and Canada.

Pay It Forward – Again: Mentoring Still Works Best P ass on, or learn, valuable and timeless life insurance sales techniques and lessons. By Dexter Umekubo

am often asked how one gets into the business and advanced life insurance markets. The first thing I want to stress: it doesn’t happen overnight. Like many older insurance producers (I started in the fall of 1978), I had a sales manager and a few key mentors in the business that would take me out on sales calls. That was where I learned to listen and watch how these old pros would have a conversation with the prospect, not about insurance but about their businesses and concerns. Specifically I learned a lot about buy – sell agreements, and key employees and how life insurance could be used as a financial tool for their business needs. This was my entry into the spectrum of advanced life insurance sales. I think first and foremost, life insurance selling is NOT about the products we have to sell, but more importantly, the problems of the prospect or client that we are trying to solve. The life insurance policy more than likely just becomes the logical funding solution to the problem. That was true more than 30 years ago when I started in the business and it is still true today. Once I help uncover the business prospect’s potential problems or concerns, whether it is how to do a buy – sell agreement between the partners or how to retain a key employee or perhaps how to provide a discretionary incentive or bonus plan for someone within their business, there are usually only a few ways to fund the solution. I go through the same conversation today that I was taught more than 30 years ago. It goes like this, “Mr. Business Prospect, you have a few ways of funding your problem (buy – sell). Let’s say the problem is one million dollars. One, you can have the money, cash on hand, sitting in an ac62

If you really want to learn more about the advanced life markets, find a mentor. Take them out and learn from them. count, ready for the time when you need to buy out your partner’s spouse. That would mean each of you would have to have two separate buckets of money, each filled with one million dollars, so you could pay cash on demand to buy out the decedent’s partner’s spouse. Most people don’t have that kind of money sitting around and if they did, they would have it working in their business. Two, you could set up a sinking fund and start saving for it right now. That would mean saving $50,000 a year for the next 20 years (less the interest the money could earn) hoping that nothing happens between now and the next 20 years. Third, you could borrow the money at the time you need it. Let’s say you borrow the one million at 5 percent on a 15-year loan. Your monthly loan payment will be $7,907.94 and your total interest paid over the 15 years will be $423,428 to cover the one million dollar loan. The fourth option if you both can qualify for it would be to purchase a life insurance contract on each other for $X,XXX a year if you want to “rent” the insurance for 20 years or $X,XXX if you want to

InsuranceNewsNet Magazine » September 2012

“own” the insurance for a lifetime. Go to any insurance company, see what one million dollars of 20-year term would cost for a 50-year-old male and what the same amount would be for an extended guaranteed universal life policy and do your own analysis. Life insurance is almost always the best choice, of course. What is interesting is that this same presentation works for estate planning, business succession, executive benefits or any other advanced life insurance sales concept and presentation. So, how does one learn the concepts, strategies and designs to work in the advanced life insurance area? It takes an investment of time and money and a willingness to learn about these life insurance planning strategies. Many insurance carriers today have great materials to help you learn about these techniques. Also, by participating in the various industry associations you can learn to become better at your craft. Association for Advanced Life Underwriting (AALU), Financial Planning Association (FPA), Million Dollar Round Table (MDRT), National Association of Independent

ADVERTISER INDEX Life Brokerage Agencies (NAILBA) and Society of Financial Service Professionals (SFSP) all have programs, conferences and meetings (both online and live) that are available for you to learn and grow your skills. If you really want to learn more about the advanced life markets, find a mentor. Take them out and learn from them. Split the commissions that you will make by working with an experienced professional that can show you how to do it by watching them at work. I have always said, “50% of something is always better than 100% of nothing.” As a member of NAILBA, many of my peers are in a position to be a mentor and facilitator in helping you learn more about selling in the advanced marketplace. Most BGAs have the experience and expertise not just in product and merchandise, but also know how to actually apply the products they wholesale to actual case application. In addition to serving as NAILBA’s Chairman, I am a member of AALU and a longtime member of SFSP. Both are great venues to learn and grow in the advanced life insurance selling area. I attend the SFSP’s Annual Arizona Institute where I am exposed to new and innovative planning techniques and strategies. It also gives me a chance to reconnect with many friends I have in the business that have the same passion for the advanced life insurance selling strategies and opportunities that exist. And if you are an older, experienced professional reading this, please consider offering yourself as a mentor to a junior partner or a less experienced agent and helping them grow. I am willing to bet YOU had a mentor that made a difference in your career and it is time for you to pass it along. I have found myself in that role today and am blessed for the chance to help others along the way, just like I had help when I first started this wonderful and rewarding career as a life insurance professional. Dexter (Dex) Umekubo, CLU, ChFC is the Senior Managing Partner of Salina, Kansas-based Producers XL and the 2012 NAILBA Chairman of the Board. Contact Dexter at Dexter.Umekubo@ innfeedback.com.

For more details on an advertiser, use the contact information below or visit www.InsuranceNewsNetMagazine.com/spotlight Advertiser Website Phone Page 3 Mark Financial www.underwritingmiracles.com 888-533-6275 37 American College theamericancollege.edu/ricp 888-263-7265 53 American Equity www.american-equity.com 888-647-1371 3 American General Life Companies estation.americangeneral.com 800-677-3311 7 American National img.anicony.com 877-755-2667 33 Annuix www.annuix.com 734.622.7500 IBC Aviva www.avivausa.com/joinaviva 800-800-9882 40-41 Brokers Alliance www.iulsalesmachine.com 800-290-7226 ext. 161 1 Eugene Cohen Insurance Agency, Inc. www.cohenagency.com 800-333-4340 9 Executive Recruiters Online www.careershopbenefits.com 888-843-4962 45 Fairlane Financial www.888fairlane.com 800-327-1460 43 Financial Independence Group www.figmarketing.com 800-527-1155 47 Foresters www.foresters.com 866-466-7166 opt. 1 27 Genworth genworth.com/lifesalescenter 866-498-7151 IFC, 35 Gradient Financial Group www.gradientib.com 800-407-4137 BC Great Lakes Financial Marketing glfm.usa@gmail.com 877-200-2262 59 Imeriti www.fundcollege.net 866-871-0964 15 Kansas City Life www.kclife.com 800-258-4525 31 Life Sales, LLC www.joetheproducer.com 877-762-3824 5 M&O Marketing www.comfortzonereport.com 800-228-5964 28 NAIFA www.naifa.org/itpays 877-866-2432 57 NetQuote www.netquote.com/sep15 877-415-5153 4 Ohlson Group www.ohlsongroup.com 877-844-0900 17 Pacific Life Insurance Company www.defendretirementnow.com 855-584-0661 19 Petersen International Underwriters www.piu.org 800-345-8816 51 Prudential www.prudential.com/advantageul 800-292-0054 10-11 Sagicor Life Insurance Company www.sagicorelifeusa.com 888-724-4267 opt. 2 39 Sentinel Security Life www.sslco.com 866-235-1892 29 Wealth Financial Group www.powerplayersconference.com 888-333-7771 21

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September 2012 » InsuranceNewsNet Magazine

THE LAST WORD

WITH LARRY BARTON

Courage and Medicare: It’s Time P repare for unprecedented challenges for the health care and insurance system. By Larry Barton

ay what you want about Rep. Paul Ryan, the vice presidential candidate for the Republican Party. An experienced legislator regarded as capable and thought-provoking by members of both parties, he has put a flag in the ground on Medicare. Regardless of whether you are a Democrat or a Republican, let’s give credit where credit is due. It is his addition to the ticket that has moved Medicare to a meaningful place for November. It took guts for someone to actually create a “cut point” for Medicare beneficiaries. By stating that those who are over 55 years old would be eligible for the current system, he did not indicate that Medicare would end. Rather, he says that a new model, funded differently, must be created. But you also need to listen to him, along with the CATO Institute and the non-partisan General Accounting Office (GAO) and others: we must act because the current system is simply not sustainable. In fact, it places our country at considerable financial risk. Saving Medicare will not happen without pain and sacrifice. I’m 56 years old. Under Ryan’s current proposal, I will still be eligible for Medicare, but my wife, who is younger, would not be eligible. It might take years to fully understand how this process will evolve, but it is a beginning. David Walker, Founder and CEO of the Comeback America Initiative and former United States Comptroller General visited The American College’s campus a few years ago and offered the following common-sense prescription for our troubled Medicare program: “Ultimately, we may need to define a set of basic and essential health-care services that would be guaranteed to every American. Individuals wanting additional coverage might be required to allocate resources to pay for it. Clearly, 64

such a dramatic change would require an appropriate transition period.” “For now we need to take interim steps to establish uniform standards of practice, promote cost-effective care for people with chronic illnesses, modify existing cost-sharing arrangements, better leverage the government’s purchasing power, increase transparency on the costs and quality of health care, introduce reconsideration triggers to help contain growth in health-care costs, and rethink the existing tax exclusion for employer-provided and employer-paid health care insurance.” Although Walker’s outline lacks specificity, he brings ideas to the table. That’s why I appreciate what Paul Ryan represents. Whether you like the Ryan plan or another, at least he articulates specific ideas that can be the basis for debate that leads to policy – and real decisions – in 2013. We cannot keep deferring decisions for political expediency. As David Walker has noted, “Ultimate success is essential. Nothing less than the fiscal future of the country, the global competitiveness of American business and the health security of Americans is at stake.” I couldn’t agree more.

InsuranceNewsNet Magazine » September 2012

The health care and insurance system will face unprecedented challenges in the next decade. Several major companies have exited the long-term-care business because their products, and pricing, were not sustainable. Seventy-six million baby boomers have yet to hit the hospitals and nursing homes, triggering the most massive demand for care in U.S. history. Hospitals are closing and consolidating in anticipation of fiscal challenges. The health companies are under siege from many fronts. If we make just one major decision in the next weeks ahead, let’s pledge to listen to how the Medicare debate pans out and vote for the party, and leaders, who make the most sense – not for us personally, but for the generations ahead. 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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