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Recent Commission Changes
Over the past several months the Annuity Industry has been evolving rapidly as carriers react to economic pressures. Changes in product offerings, commissions, and company practices have shifted to meet the various needs of the carriers in order to adjust their business model to fit their overall objectives. Some carriers have even exited the business for the time being.
Most recently Allianz announced a change to their Master Dex X commission. The commission changes makes way for a positive increase to the bonus offered to the customer. While they are not the first carrier to reduce commissions or make changes to how they pay their commission, they are the most recent in a string of carriers making such changes.
While we individually communicated each of the following changes to a field distribution partners, AMZ Financial Insurance Service thought that it may be prudent to recap the changes that have occurred in the past 60 days regarding insurance carrier commission changes. The carrier’s formal announcements (where available) have been compiled as well so that you have all of the most current information at your finger tips regarding this important topic.
| Carrier | Product | Recent Changes |
|---|---|---|
| Allianz | Master Dex X | Lowering first year commissions by 1% effective July 21st to make room for product improvements |
| ING | Secure Opportunities Plus | Lowered first year commissions by 1% on June 1st |
| American Equity | All Products | Began paying Commission over 3 years on June 1st |
| Forethought | Most Products | 50 Bps decrease on most products effective July 7th |
We understand that you have many choices when placing your annuity and life insurance business, and we thank you for giving us the opportunity to earn it.
For any questions, please contact Mark Triplett at (866) 204-7712 x106.
Tough Love
Tough Love for Insurance Companies
by Jim CramerFebruary is supposed to be a romantic month, but for the big insurance companies, it was particularly harsh. The ratings agency Standard & Poor’s downgraded 10—count ’em—10 insurance companies last week. That means that the people who study such things are worried about how much cash your annuity insurer has on hand to pay you.
Now, I’m no alarmist and I think you’ll be fine, if you’re one of those annuity holders. But it pays to be prudent, so knowing your insurer’s financial picture is a smart move.
Hey, after all, Cramer Nation is all about smart financial moves.
So what’s with the down grades? Here’s what we know:
On February 26, Standard & Poor’s slashed its ratings on a slew of U.S. life insurance companies, inferring that the insurers had taken a beating in the financial markets and were hemorrhaging cash at an alarming rate. In insurance speak, S & P lowered its counterparty credit and financial strength ratings on 10 groups of U.S. life insurers, and its counterparty credit ratings on seven U.S. life insurance holding companies.
“The pressures within the life sector have been building,” S&P said in a statement. “Given the disarray in the credit and capital markets, most insurers’ financial flexibility has decreased in the past six months.”
Like I said, even S&P didn’t want to alarm the public and scare consumers. The ratings agent took pains not to paint too negative a picture, saying, "Although today's rating actions reflect our opinion of a general decline in the overall credit worthiness of the U.S. life insurance sector, we continue to believe the credit fundamentals of the life insurance industry are strong."
Here’s a list of the insurance companies downgraded by S& P:
- Conseco Inc. (Stock Quote: CNO)
- Genworth Financial Inc. (Stock Quote: GNW)
- MetLife Inc. (Stock Quote: MET)
- Prudential (Stock Quote: PRU)
- Hartford Financial Services Group (Stock Quote: HIG)
- Lincoln National (Stock Quote: LNC)
- Protective Life Corp. (Stock Quote: PL)
- Midland National Life Insurance
- Pacific Life Corp
- Security Mutual Life Insurance
Which companies represent the most risk to insurance customers?
MetLife is on the list. S&P cut the insurer’s rating to “A-minus,” the seventh-highest investment grade, according to S&P. Hartford might be another, as S&P cut its rating to “BBB-plus”, S&P’s third-lowest investment grade. Genworth saw its rating slashed by two notches to “BBB”, S&P’s second-lowest investment grade. Prudential didn’t really fare any better, it merited an “A" rating, S&P’s sixth-highest investment grade.
As I said, I’m confident that these companies have enough cash to pay off on their annuities, but not if it costs them more to borrow cash. So life is getting harder for the life insurance industry. Still, I am taking no prisoners. A few years ago, my original life insurance company merged with one of the companies on the S&P list, Genworth. I was not happy about it, but insurance companies have their own rules and I was basically sent a bill by Genworth. I was horrified to see them downgraded and even though the CEO personally assured me not to worry, I recently took out a second policy for half the money of the first one with an insurance outfit I vetted personally (Minnesota Life). I did that because I didn't want my kids thinking, "What the heck was Dad doing? He was supposed to be so smart!" So, should you do the same thing if you have a policy with an insurer on this list? Better to be safe than sorry. I still pay my Genworth bill though, primarily because I believe the government won't let them default.
A disturbing pattern. The life industry has been slashing dividends, laying off tens of thousands of staffers and lining up in Washington for some big-time bailout relief. The lousy economy has also done a number on insurance company assets, as the quality of corporate debt and mortgage-backed bonds has been reduced dramatically.
That goes beyond just the “Tough Luck 10” that S&P cited. For example, AIG’s problems are well documented (Stock Quote: AIG). On Monday, AIG announced a staggering $61.7 billion loss that prompted the insurance giant to ask for a $30 billion cash infusion from Uncle Sam. Traders are starting to call AIG a “black hole” and I can see why. Basically, the U.S. government, via the American taxpayer, pretty much owns AIG in the form of its interest and dividend liabilities and that’s not a pretty picture.
The worst part? Somehow I don’t think that we’ve seen the last of an AIG bailout. They’ll be back again, looking for more TARP money, unless AIG bondholders agree to take a big financial hit. Up to now, though, AIG bondholders haven’t had to because we’ve been tapped again and again to bail them out. So why would the bondholders change their tune now?
Back to the life insurance downgrades.
If you think you want to get your money out of an annuity, your best move is to get on the phone with your provider and hash it out. Historically, it hasn’t been easy for annuity holders to get good deals on flexible cash out options once they’re “locked in.” Often you’re staring big cash out fees in the face if you decide to liquidate. There is some good news here, though. A decent secondary market has sprung up for liquidating annuity payments. Ask your provider about options in the secondary market, and see if any work for you.
Guaranteed living benefits or guaranteed lawsuits?
By Mark Triplett
The tidal wave of lifetime income riders introduced to the fixed-indexed annuity marketplace should overwhelm even the most seasoned insurance professional. With carriers introducing or working on their latest generation of lifetime income riders, it’s no wonder producers are drowning in information and, to some extent, misinformation. Today’s producers need to understand when these riders are beneficial, and when they simply waste your client’s money. When used appropriately, living benefit riders offer great value to consumers. However, it is only suitable for a niche market and, unfortunately, these beneficial product enhancements are being misinterpreted and therefore misused by agents. As a result, their clients will be on the losing end—and our industry doesn’t need another black eye.
Let’s break down these riders
A variety of living benefit riders exist in the market today. Most of these optional riders provide additional benefits at an additional cost. With regard to fixed-indexed annuities, all of the basic contractual obligations of the chosen product remain intact. The account value (premium + any applicable bonus + interest earned), death benefit, accumulation of real interest, minimum guarantees and penalty-free withdrawals are all benefits that the client owns when he purchases the “product.”
However, the addition of an income rider creates additional benefits that a client may enjoy while he or she is living. With guaranteed lifetime withdrawal benefit (GLWB) riders, a secondary value used for the calculation of lifetime withdrawal benefits is created at the issue of the contract. This value (income account value) is used to determine the maximum lifetime withdrawal amount. By applying the age-based “lifetime withdrawal percentage” to the lifetime income account value, you can determine the withdrawal payment for the client’s lifetime. The key word in all of these discussions with your clients is lifetime.
The income account value, in most situations, receives a specific percentage of growth every year, even if the index crediting strategies yield nothing. The guaranteed “roll-up” percentage may vary from company to company and some reach as high as 8 percent. This growth assures that the income account value will experience positive and rapid growth—assuming the client isn’t taking income. If you include a bonus on the paid premium, you now have an income account value growing every year at a rapid pace.
The benefits are great… so what’s the catch?
Almost every rider costs something and this additional expense is deducted from the account value (in most cases, it’s not deducted from the income account value—pushing that value even higher). It seems like a small price to pay for the benefit received; however, there are three pitfalls when considering a lifetime income benefit rider. First, the income account value may not be accessed in a lump sum. Second, a penalty-free withdrawal may adversely impact the income rider and future income payments. And, most importantly, the client may never live long enough (or stay in the contract long enough) to see the benefit of the rider.
No lump-sum access
While we all know how quickly the “income” value grows, most of these riders also allow the income value to “step up” to meet the account value. This usually happens when the actual index interest credits exceeds the income value. Have you ever considered what annual return an indexed product would need to beat an 8 percent compounded growth over the long term? How about 15 percent or more? Have you ever seen an indexed product that can produce—let alone exceed—15 percent returns over the long-term? I didn’t think so. Year after year, there will be a growing disparity between the modest account value growth and the awe-inspiring income value growth.
So, since there will be a great disparity between lump-sum access and what can be withdrawn over time, the client is less likely to terminate the contract because he will have to give up the much larger income value. Because of this disparity, and the fact that the client can’t access the income account in a lump-sum, all products with an income benefit—if you really look at how the rider actually works—could be considered “two-tiered” products. Scary.
No penalty-free withdrawals
The second pitfall involves the penalty-free withdrawal provisions and excess withdrawal stipulations of the income benefit riders. Usually, a product allows for penalty-free withdrawals of 10 percent. The client has the right to access this withdrawal, but doing so may adversely impact the income rider. Income riders reward the client for delaying withdrawals. Oftentimes, the first withdrawal, no matter how small, will stop future income value growth and trigger the lifetime withdrawal percentage. This is true even if the client does not intend to take another withdrawal for years. Some carriers have remedied this by allowing the client to elect when the lifetime withdrawals begin, but taking any penalty-free withdrawal oftentimes dramatically and significantly reduces future income.
Client life expectancy
Stated so eloquently by of one of my colleagues, “If the words for life do not spill out of your client’s mouth when answering the question, ‘How long do I expect to hold this contract?’ you should not be selling it.” If you are unsure if an income rider should even be considered an appropriate fit for your customer, you need to ask yourself that exact question. If you answer “for life,” then you must proceed with caution. Why? In order for the client to truly benefit from an income rider, he needs to have a really long life and consume this money over that time horizon because as all of these riders are structured, the client is actually just having their account value and earnings paid back to them over a very long period of time. Only once the actual account value is completely depleted does the client even receive any benefit from the insurance company. Once the account value vanishes, so does the hope of passing anything on to beneficiaries. Frightening.
What else should be considered?
So, you determine the client wants income for the rest of their life, but you still need to know the client’s objectives before you submit an application with an income rider attached. You may want to consider how long the client can defer withdrawals, at what age he or she expects to begin withdrawals and whether your client will have a long enough life expectancy to reasonably assume he or she will benefit from the rider’s features.
How long the client can defer withdrawals
The longer the client can defer withdrawals, the more the income account value will grow and, therefore, a higher annual withdrawal for life. Because a younger client should wait longer for income, these riders may look more attractive.
For example, a 40 year old with $100,000 of qualified money and a 25-year time horizon (retiring at age 65) will have a very healthy income account value. A 60 year old with $100,000 of qualified money and a five-year time horizon will have a much smaller account value and will need to hold the contract longer to see real value from the rider.
| Age | Years of deferral | Guaranteed income value at retirement | Guaranteed annual income at retirement |
|---|---|---|---|
| 40 | 25 | $685,000 | $37,675.00 |
| 60 | 5 | $146,932 | $8,081.00 |
Both clients will have the same lifetime withdrawal percentage of 5.5 percent when they begin withdrawals at age 65, but the younger client will have a much great annual lifetime withdrawal payment relative to the amount of money they placed in the product. For the client who purchased the product at age 40, by age 68 they will have received back all of the initial premium they placed in the product and, probably in a few short years after that, they will have consumed most, if not all of the account’s earnings and should see great value from the inclusion of the rider. For the older client, it will take 12 years just to get back their initial premium, and a few years after that they should have consumed all their earnings. Is it more likely that a person age 65 will live to age 70 or age 80? Sure, people are living longer, but odds are that more 65 year olds will live to age 70 than 80.
What age does you client expects to begin withdrawals?
What age your client begins taking withdrawals is another important consideration. A 65-year-old client has a much longer life expectancy than a 75-year-old client. Statistically, the 65 year old will make withdrawals for a longer period of time than the 75 year old. The longer your client consumes annual withdrawals, the greater the benefit to the client. Remember, the client is consuming his or her own money until the account value is exhausted. Then and only then is the client withdrawing the “benefit” from this income rider.
In order to determine if the client will benefit from a rider you need to do some simple math:
- Determine the client’s minimum deferral period and the guaranteed value of the income account value at the end of the deferral period. With the positioning of these riders, we want the absolute highest minimum guaranteed values, not some hypothetical number.
- Determine the age at which withdrawals are desired and, therefore, the lifetime percentage. This will tell you how much your client can withdrawal per year—guaranteed.
- Finally, determine what percentage, in relation to the original deposit, the annual withdrawal will be. If the customer has enough time to consume their original deposit and thereafter consume the insurer’s money you may have a need for the rider. If the client’s life expectancy is less than the number of years it will take to consume the entire original deposit, you are wasting the client’s time and money on a living benefit rider.
Alternatives to a living benefit rider
If the client will not be holding the account for life, has a short deferral period before withdrawals will begin, is in poor health, or is too old to benefit from the rider’s features, then you should consider alternative solutions.
A simple bucket or laddering strategy might be a better alternative for your older clients and clients with major health concerns. By creating systematic streams of income using single-premium annuities (period certain five to 10 years) and deferred money (e.g., fixed or indexed annuities), you can formulate an income stream that will often be superior to that of an income benefit rider and potentially leave more money to heirs.
In addition, a lifetime immediate annuity with an option to commute the remaining balance and a cash-refund death benefit will provide a higher income payout than an indexed annuity with a living benefit rider. It will also offer similar liquidity that is enjoyed with an indexed annuity combined with a living benefit rider.
A slippery marketing slope
The love affair with these riders has been fueled by pitches from marketing companies and insurance carriers. There is a competitive advantage to telling a prospect that your product can double their money and provide lifetime income in less than 10 years, or that they will receive a guaranteed growth of 6 percent, 7 percent, or 8 percent each year they do not take withdrawals.
However, explaining the guaranteed roll-up feature on an income rider as a guaranteed return, or those who explain the bonuses offered on the income account value as real interest earned, are walking a very slippery slope. These “features” are only enhancements to the income value and will only be enjoyed if the customers takes withdrawals for life, then lives long enough to exhaust his own money therefore living of the insurer’s money thereafter. What do you want to hear, the marketing fluff or the unvarnished truth? Which one do you think clients want to hear?
Note from the author: If you would like a second opinion on this topic from a respected resource in the index products arena, please visit www.indexannuity.org. Jack Marrion has dedicated most of his July issue of his Index Compendium to the open discussion of guaranteed living withdrawal benefits.
Using software to see more prospects and convert more clients
By Jon Salomon
Over the years, agents have tried a myriad of systems to get the clients to say, “Yes.” There’s Missed Fortune, LEAP, Infinite Banking and the Circle of Wealth systems, along with various college funding, equity management and buy/sell arrangements. However, in today’s economic state, the client still can’t find enough money for your plan. Sound familiar?
Out of control consumer debt, declining real estate prices and the mortgage mess create plenty of reasons for prospects to put off implementing your well thought out and suitable strategy. Who hasn’t had a prospect use these tough economic conditions to rationalize why they can’t afford to change their current situation?
While many producers want to revive their business, they continually try the same old approaches and expect different results. A better way to generate new leads and convert them into clients is to try new models, technology and concepts. Even with all the doom and gloom in the insurance industry, some agents are generating significant life premiums. How are they doing it? The shift from equity management—which recently imploded—to debt management has generated the new sales opportunities. Agents who focus on time-tested principles like restructuring debts to free up cash for retirement planning are seeing dramatic improvement and sustained sales. But this concept can be difficult to illustrate and communicate, which has created a market for technology and software programs specifically focused on this concept.
Lead by example
Most people learn best through examples or storytelling. Imagine being able to show clients how to implement—and more importantly maintain—a plan you designed that entitles them to pay off all of their debts—including their mortgage—in eight to 12 years and still have money left over at the end of the month for your insurance products. You can then position yourself as the one individual that helped them address their two biggest financial hurdles—paying off their home and being adequately prepared for retirement. Hundreds of agents have been creating these exact plans for their clients over the past five years—even as real estate prices dropped and credit issues exploded.
The perfect storm
On average, Americans carry more debt than any other civilized nation, which is what makes the concept of debt management appealing to so many. With this approach, as an industry we’re no longer focusing our efforts on the top 10 percent of wage-earners. The producers that are seeing the biggest gains in this market are those that are working with the middle to upper middle classes.
Many Americans feel pain due to poor decisions and know they haven’t been as frugal as they should have been in the past. Those seeing the greatest success with the strategy are working within a proven system, but not every system will be the right fit for you. What’s important is finding a company you trust that offers debt elimination and wealth creation software.
For the concept to really pay off for your clients, they need to see the benefits of eliminating all debts and building wealth at the same time. Clients who engage in this strategy will appreciate the advice, education and support and it will result in more referrals than you can imagine—especially as you teach them strategies that will put dollars back in their pockets. With the right timing and the right system you can clearly illustrate important concepts, earning your client’s confidence and creating insurance or annuity solutions as well.
The power of expanding your practice
Some of the results of adding debt-elimination software to your practice include:
- Seeing more prospects: Debt elimination is a hot button right now and will open more doors—even with the wealthy. Your elevator pitch evolves into “I help people pay off all their debts—including their mortgage—in less than 12 years, enhance their retirement and all with little or no change to their current lifestyle.” People are eager to speak with you if you can help them where it hurts today. Retirement is a long way away for most, so start where it hurts.
- Creating comprehensive plans: Show your clients a financial solution that addresses virtually every facet of their financial situation. Demonstrate the financial drag created by lost interest charges, taxes, consumer purchases, etc. Create a plan that assists them in eliminating debt and recapturing lost interest charges. Utilize software that shows the financial benefit of minimizing interest charges and redirecting those savings toward retirement. A sound software system will deliver a visual graph along with data information for the client to dissect.
- Teaching comparative analysis: Demonstrate the economic “cost” of paying off debts versus saving for retirement. For example, the first option a client sees could demonstrate paying off their debts, including their mortgage in 10 years and saving $150,000 in bank interest. Now, illustrate how, if they decide to put $1,000 a month into insurance (which is the average premium these agents have been writing), instead of toward debt, they may save only $130,000 in interest and be debt free in 12 years instead of 10. The question you can answer is whether it’s worth the additional $20,000 in interest charges to begin a retirement plan today that could generate a significant projected income at retirement.
Do your homework
While you can search the internet for debt management software systems and find dozens of available options, of all the companies we’ve researched, only one has designed their software and a packaged sales system specifically for life insurance agents. That company is WeXL Financial. The offering from WeXL is a true turnkey package. Agents using their MCA system follow a simple process where clients can see how to pay down debts and recapture lost interest dollars. Agents like the fact that they don’t have to “sell” the system. Instead, the agent simply shows a video explaining how the system works along with a sample of a completed plan. The agent then enters their monthly budget into the software.
With the introduction complete, the agent schedules a webinar with the WeXL corporate office to explain all the details of the system and close the sale. As part of the process, the WeXL rep will show the client the value of adding some of their reorganized budget into the retirement section of the software, where a visual graph illustrates the benefits of each financial option. The client can compare their current strategy and the new strategy under a “scenarios” tab in the software. The WeXL rep then refers the client back to the referring life agent to assist in creating a solution for the found retirement dollars.
WeXL has been using the system with its own life agents for a few years and have now opened it up to agents around the country. It appears to be the most turnkey system of its kind and agents using the program have been writing larger than average life premiums.
The next steps
Breaking into a new market doesn’t need to be a lesson in trial and error. If you take the time to learn more about the available software systems that can assist you in uncovering new opportunities, you should find great success. Your clients will appreciate the extra tools you provide and will be more likely to refer friends your way.
At the end of the day, if you decide to incorporate debt management tools into your practice you should see more qualified prospects, convert more prospects into clients and enjoy a stream of ongoing sales. It’s all up to you. You can either be an early adapter and one of the first to market debt management solutions in your market, or be left behind, wondering why you aren’t seeing more prospects and closing more cases. The least you can do is explore the debt management systems out there to see if they can work in your practice.
Cure the mid-life crisis: Stop funding qualified plans
By Jeff Janes
Time to be honest here—mid-life comes around 40, maybe 45 at the latest. By the time you reach 50, you’re way past prime-time. Sure, I’d love to live to 100, but I don’t think that’s going to happen. Average life expectancy is 87 (by the way, we’re all pretty average). Considering that most financial professionals have saturated the baby boomer market, isn’t it about time we start looking at the next retirement catastrophe—those approaching their mid-life crisis?
As I hit middle age, I fondly remember when retirement seemed personally unattainable. Now, with each birthday, I wonder, “Am I adequately prepared for retirement?” Then, the government likes to spoil your birthday party, too. Have you ever read page two of your annual Social Security statement, right below “Your Estimated Benefits”? How’s this for a birthday spanking, as the bold-print disclaimer reads:
Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because by 2041, the payroll taxes collected will be enough to pay only about 78 percent of scheduled benefits.
Today, not many people younger than age 40 are even counting on Social Security as a retirement income supplement. Many of your clients also face this frightening fact: With a perfect storm brewing, why would we even consider recommending stopping qualified plan funding? Well, through some recent product innovations, you can honestly recommend stopping qualified plan funding and provide your clients with a comfortable retirement, all while creating a stronger overall financial plan. It’s quite simple, really.
Why stop funding qualified plans?
According to the 2008 Retirement Confidence Survey, 47 percent of workers say they have tried to calculate how much money they will need for a comfortable retirement. In addition, the percentage of workers confident about having enough money to enjoy a comfortable retirement sits at a lowly 18 percent. With so few Americans adequately prepared, and most worried; again, why would we even suggest stopping qualified plan funding? It comes down to flawed assumptions and inefficient vehicles.
First, for a qualified plan to work efficiently, the theory goes that you defer taxes during your peak working years and then consume the money and pay taxes in retirement—where hopefully you will be in a lower tax bracket. That’s a great theory, but with the massive explosion of baby boomers now moving through the system and starting to rely on and use government programs, where will the money come from to fund those benefits and taxes?
I don’t know a single person who’s age 45 or younger who really believes their tax rates will be lower when they retire. Throughout the past century, the U.S. marginal tax rate ranged from below 10 percent to more than 90 percent. Today, the marginal tax rate hovers at around 35 percent. And, almost every economic expert agrees that tax rates will most likely be higher—perhaps significantly—one or two decades from now.
Second, the U.S. Department of Labor shows that a worker between the ages of 18 and 38 changes jobs an average of 10 times. With frequent job switching going on, most individuals younger than age 45 probably left behind a few 401(k) plans along the way—orphaned and not rolled over to the new employer. Client portability should have a strong appeal, as well as consolidation and control over all the retirement assets.
Finally, qualified money—by law—must be consumed at some point in retirement, but definitely no later than age 70.5. So, you can only defer those taxes for so long, then the government steps in and says, “You owe us blank. Now start consuming so we can collect our taxes,” regardless of what the tax rate actually is when you turn 70.5.
A new retirement revolution
For this strategy to work, you need to reach the right market with the right situation and the right mindset. It’s not going to work for everyone, but if you can focus your efforts on those younger than age 50, it makes the most sense.
First, roll over all the orphaned 401(k) plans and other qualified accounts into one individual retirement account (IRA)—but not just any IRA, an IRA annuity with a guaranteed lifetime withdrawal benefit (GLWB). In addition, your client can convert that 401(k) to a Roth IRA and, from a tax perspective, it may make more sense, as all future distributions will be tax-free—however, converting today creates an immediate tax liability. For this article, let’s assume the client doesn’t convert to a Roth, as they don’t want to come up with the funds to pay the taxes today.
By moving to an IRA annuity, your clients don’t obtain any additional tax benefit—but you do have other valuable benefits not found in most other IRAs; namely the guaranteed lifetime withdrawal benefit. But should you go with an indexed or variable annuity? Specifically, we’re looking for a lifetime withdrawal benefit with the absolute highest guaranteed growth possible and the biggest up-front bonus and, today, those are only found in indexed annuities. Here’s an example:
Justin Case, age 45
- Ex-employer No. 1: 401(k) balance = $41,000
- Ex-employer No. 2: 401(k) balance = $36,000
- Ex-employer No. 3: 401(k) balance = $23,000
Roll over the entire $100,000 into a 10 percent up-front bonus contract with an 8 percent guaranteed growth factor. By age 65, that annuity with the lifetime withdrawal rider has a benefit value—not contract value—of $753,332. Then, at age 65, the client can start a guaranteed annual lifetime income of about $41,433, regardless of how long they live—without ever annuitizing the contract. How’s that for a guaranteed retirement income and not putting an additional penny into a qualified plan after age 45? But, if we maintained the qualified nature of this money and didn’t convert it to a Roth, all of the money consumed from the annuity will be taxed as ordinary income. Let’s now consider lessening the impact of taxes and offsetting the risk of premature death.
Not a one product solution
The second step involves making a change with the qualified plan funding. Let’s assume the client was putting $1,000 a month into the qualified plan. Well, that $1,000 was pre-tax money, so after-tax we’re looking at approximately $650. Suppose the client uses those dollars to purchase an indexed universal life insurance policy. Why life insurance? Because the client receives tax treatment similar to a Roth, but without the funding, distribution or income-limit restrictions.
With cash-valued life insurance your clients receive tax-deferred growth coupled with tax-free income. I can’t tell you how often I hear from younger people that they wish they could put more money into a Roth. Try this quick little question on your prospects and watch in amazement by the results, “If you could contribute more than the maximum amount to a Roth, how much would you contribute on an annual basis?” Chances are clients will say they’d put in more than the maximum. Then hit them with your follow-up question, “If I could show you a product that has similar tax advantages as a Roth without the funding restrictions (or income limitations), how interested would you be in purchasing that product?”
Again, clients will likely show interest; then hit them with the logical alternative—life insurance—yes, life insurance. Don’t be ashamed to offer the right product for the right need. If we stopped funding the qualified plan, most people could stuff $8,000 or more annually into the policy. Why IUL? Because some carriers offer 15-percent caps without market risk and, over the long-term, an IUL can outpace every variable universal life (VUL) product in the market today.
Justin Case, age 45, preferred non-smoker
- IUL monthly premium: $650 to age 65
- Cumulative premium to age 65: $163,800
- Initial death benefit: $376,471
- Age 66 projected cash value: $346,242
- Age 66 projected annual income: $49,472
When you combine the guaranteed lifetime annual withdrawal from the annuity ($41,453), with the projected income from the IUL ($49,472), you’ve just created an annual income for your client of more than $90,000. About 46 percent of this money will be taxed at ordinary income and 54 percent paid to the client without the impact of income taxes when structured properly. Again, clients generate all this retirement income without contributing one penny to qualified plans after making the switch. However, if the client’s employer provides matching funds, you could keep contributing a small amount of money to the 401(k) to take advantage of the matching funds. But, even if you didn’t, what average client wouldn’t like an annual retirement income of $90,000?
The power of the GLWB creates the income base so the client can rest easy at age 65, knowing that regardless of market performance, terrorist attempts, natural disasters, etc., they have a specific and guaranteed lifetime income. The beauty of the life insurance contract is it works much like a super-powered Roth. The client can contribute as much as they’d like to the policy—receive tax-free income at retirement and offset the risk of premature death. If you have clients reaching the mid-life crisis, offer them a new approach to retirement income. This new powerful combination provides a guaranteed income regardless of future performance from the annuity, with an additional tax-free income from the life policy. It’s really quite simple.
The best income planning tool
By Jason Konopik
Income planning has been the talk of the town in the insurance industry for the last decade. This is due to the more than 75 million baby boomers transitioning over the next 15 years from income accumulators to income harvesters. Combine that with the 60 million people already looking to harvest wealth and you have nearly $3.5 trillion in total wealth - and it is easy to generate a lot of excitement about this wealth distribution opportunity. However, the income solutions currently being promoted to clients don’t offer a lot of excitement.
The life insurance industry offers more tools and suitable solutions for these clients than any other industry. So why haven’t more insurance producers been focusing on this opportunity? It all comes down to education and, unfortunately, we have only been educated on some of the tools available.
Indexed universal life (IUL) is one of the most stable accumulation and income generation tools available. Traditionally, the words “life insurance” conjure visions of mutual insurance companies peddling participating whole life with very limited upside potential, or other companies pushing variable universal life (VUL) with no downside protection. Indexed life, however, provides significantly greater upside potential than traditional fixed life insurance does. Additionally, indexed life exposes the client to far less risk than a VUL product. Finally, IUL still offers all the tax benefits and flexibility of cash-value life insurance, but on a much more efficient model.
Major risks and simple solutions
The four major risks facing clients who wish to develop a “harvesting” plan include growth, safety, flexibility and taxes.
No. 1: Growth
Even though senior clients interested in generating income may have a shorter accumulation period, they still desire an attractive return. The key to reaching this goal involves setting the right expectations for the definition of attractive. When setting expectations, several factors need to be taken into account, but the biggest factor is the incremental return over inflation, even as a client takes distributions.
No. 2: Safety
This is perhaps the most significant risk facing an income-oriented client. Safety can be defined many different ways, but generally, clients want a vehicle that offers returns regardless of the economic environment. As Will Rogers once said, “It’s not the return on your money - it’s the return of your money.”
No. 3: Flexibility
I see many bumper stickers that read “‘Blank’ Happens”—you can fill in the blank. Whether it is Murphy’s Law or just impossible to predict all needs while developing a strategy, a plan is only as good as its ability to adapt. The absence of flexibility forces a client to live his or her life by a rigid plan. As advisors, our job involves developing a plan that evolves with your clients’ lives so they can live freely without worry.
No. 4: Taxes
Throughout the past 100 years the U.S. marginal tax rate ranged from below 10 percent to more than 90 percent. Today, the marginal tax rate hovers around 35 percent. Almost every economic expert agrees that tax rates will most likely be higher - perhaps significantly - one decade from now. Think about millions of boomers reaching retirement age and qualifying for government benefits and programs. Where is all the money going to come from to support those programs? The answer? Taxes. However, years ago many financial professionals advised clients that their average tax rates will go down in the future, specifically during retirement. Now that assumption gets turned upside down as experts start to assume that tax rates will most likely be higher - even if clients are in a lower tax bracket. This ultimately leads to client uncertainly. It is relatively impossible to take an instrument for which taxes are paid on accumulation - or harvesting or both - and be able to project the impact taxes will have on the ultimate return.
Harvesting with the right tools
These four risk factors all determine whether a harvesting plan ends up meeting a client’s expectation or falls dramatically short. The simplest answer involves finding a tool that offers the best answer for each risk. That leads to a fairly simple scoring sheet, which enables us to show clients their options along with the positives and negatives of each choice.
The tools traditionally used in income planning (highlighted below) offer both benefits and drawbacks.
Tax-qualified account
As the primary tool for growing wealth to be consumed in the future, a tax-qualified account certainly meets the first objective of potential growth. However, even with diversification, this tool can never meet the best definition of safety without significantly reducing its growth potential. Plus, due to the tax-favored nature of qualified plans, flexibility is significantly reduced. Then, the limitations on contributions and withdrawals make adaptation difficult for clients - not to mention that every cent coming out of the qualified plan will be subject to taxes at the current tax rate. When it comes to qualified plans, the only one that makes sense when you take into consideration higher future tax rates is probably the Roth IRA. But, the low contribution rates make them less attractive to those looking to harvest in the immediate future.
Nonqualified account
The growth and safety risks of this tool mirror qualified accounts. The biggest differences involve flexibility and taxes. As one of the most flexible tools for income, distributions can be increased or decreased as needed - as long as the returns warrant the change. But, many experts agree that you should limit the income you take out of your accounts to no more than 4 percent annually. The most significant drawback under a nonqualified plan involves being taxed on the gains each year; you receive no tax-deferred growth as you would under a qualified account, and definitely no tax-free income. Of all the options discussed to this point, the nonqualified account is the least tax-efficient tool.
Single-premium immediate annuity (SPIA)
Perhaps the only tool available designed exclusively for generating income, a SPIA clearly addresses safety in providing clients the assurance of an income down to the penny. Unfortunately, in today’s economic environment, the inherent growth in this tool is unlikely to beat inflation. For example, while a client might receive $2,000 a month for life, the amount of goods they can purchase down the road decreases as inflation erodes purchasing power. In addition, this tool is relatively inflexible (although some designs have somewhat increased flexibility). For example, if your client needed emergency funds, you just can’t get them out of a SPIA; those funds would need to come from other sources. Additionally, if death occurs early in the payout stream - depending on how the payment duration was structured - there may be limited, if any, benefits paid. Finally, from a taxation perspective, there is limited tax benefit to this tool as taxes are paid in proportion to the benefits being paid out.
Annuitizing a deferred annuity
Deferred annuities have been used as a retirement accumulation tool for decades. Deferred annuities accumulate wealth on a tax-deferred basis until those funds are needed, at which time the policy is annuitized. While this concept looks great on paper, the statistics on how few of these funds actually have been annuitized in retirement can be mind boggling. The suspected reason for this has to do with the same shortcomings of purchasing a SPIA: The limited flexibility and growth potential, coupled with the taxation of all contract earnings while the annuitization benefit that generates income leads to a less than attractive means of providing income. In addition, I strongly suspect that annuitization interest rates on deferred annuities are typically lower than equivalent rates on newly purchased single-premium immediate annuities.
Withdrawing funds from a deferred annuity
Recently designed to overcome the inflexible nature of annuitization, a deferred annuity can offer lifetime withdrawal features to provide sustained income. While these riders look attractive, they often generate more questions than answers, such as:
- How will the lifetime withdrawal income be taxed?
- How will the actual product perform? Will the account value ever come close to the benefit value?
- What limitations exist in taking income?
- How much do these riders cost and is it really worth it in the end?
- What happens if I need emergency funds, and how will that impact future lifetime income?
At the end of the day, these riders can help clients sleep better at night, but in reality, accomplish nothing more than providing a simple guarantee on a future income benefit. Another way of putting it is that you can guarantee a future SPIA-like income with today’s dollars.
Indexed universal life
IUL is the only product that addresses all four harvesting concerns. First, it offers very good growth potential with no downside exposure. The high cap rates (as high as 15 percent), the lower internal expenses of newer IULs, and the valuable loan provisions enable these products to offer a realistic chance at significantly beating inflation and keeping pace with the overall market. Second, the minimum guarantees associated with any IUL product provide the safety needed for income-oriented clients. Third, the flexibility of IUL allows clients to stop and start income at any time and provides significant additional benefits through the death benefit. Finally, and probably most importantly, the tax-free nature of cash-value life insurance provides a safe haven from paying future taxes on any income taken when the policy is structured properly.
If you’ve ever heard the old adage, “There are only two certainties in life: death and taxes,” I believe the expression should be updated to, “There are two certainties protected with life insurance: death and taxes.” First, only cash-value life insurance addresses the biggest impact on harvesting future income - taxes. Not only do all values accumulate tax-deferred but, when structured properly, only life insurance provides a tax-favored income stream. Second, every single person on this planet is going to die, the only uncertainty is when that death is going to occur. At least with cash-value life insurance, you can protect against premature death with a tax-free death benefit, which most likely will be greater than the amount of premium you placed in the contract - no other product can make that claim. If the death occurs later in life, you just enjoyed a tax-free income throughout retirement - again, only available through life insurance. In my humble opinion, the IUL is the best income planning tool today.
The failure formula: A strategy for connecting with your prospects
By Jeff Janes
Want to connect quickly with prospects and clients? Ask them about their biggest financial mistakes. That’s right, go ahead and ask them what financial advice, guidance, purchases or strategies they really regret. You’re probably going to get a peculiar look, but eventually the client will open up and provide a wide range of responses.
Very rarely will a client say, “I can’t think of anything that I regret,” but if they do, simply turn it around and say, “What was the best financial advice, guidance, purchases or strategies you acted on?” I think the client will be stumped to provide you with something that really worked for them. If they did act on some advice, congratulate them on their successes.
Regardless of whether it’s a success or failure, you’re getting them talking. Every word gives you another piece of the puzzle toward helping them with long-term financial strategies. Then ask the prospect, “Who helped you in making the decision or purchase?” You’re looking for another advisor or maybe an attorney or accountant. Sounds simple, but these few questions give you a wealth of information that can quickly position you as a financial advisor that cares. Plus, you’ll be able to identify potential products to avoid, key influencers for future buying decision, and identify risk tolerance and performance expectations.
For example, if they say they regretted buying Microsoft at the IPO because the price ultimately went through the roof, and now they don’t want to sell the stock because of all the capital gains, you’ll need to address different issues than if they say they regret buying three-year CDs at the bank because they’re now locked into a fixed-interest bearing account while the market outperforms fixed rates. Or maybe they regret buying term insurance because they now have a chronic illness and don’t want to go back through underwriting for a cash-value policy or pay one-year ART rates on that old policy.
Feel, felt, found
Once the client starts filling in the details, the strategy can help you make good connections using the “feel, felt, found” formula. By saying, “I understand how you feel. I’ve worked with other clients that have felt the same way, however, what they found in working with me is…,” you can fill in the gaps with an appropriate response to address their wants and needs.
Failure is always an option—Or is it?
This approach completely changes the paradigm most people use when it comes to working with a financial professional. Instead of trying to push a product, this approach gets the client talking and thinking about decisions or paths they’ve made.
This approach works on a psychological level too, as more people remember things they’ve done than things they’ve done right. It is human nature and it’s wired into our brains—this is ultimately how we learn. As the saying goes, “Experience is simply the word we give our mistakes.” As an advisor, you’ve worked with plenty of people, and probably seen a few client mistakes along the way, which gives you a tremendous amount of experience.
When Thomas Edison was working to perfect the light bulb, he tried thousands of different filaments before he found one that worked. Later, when asked about the thousands of failures, he said, “I have not failed. I’ve just found 10,000 ways that won’t work.” This is a great attitude, and your clients have probably found many different financial strategies that won’t work for them.
Consume or be consumed
Now is one of the best times to be in the financial services industry. Today, most, if not all, financial service providers can provide just about any financial product. As a full-service provider, you should want to be a single point-of-contact for all clients. Plus, as the baby boomer generation ages and moves into retirement, it makes perfect sense that these prospects and clients want a single point-of-contact. They’ve seen the insurance agent come and go, along with the stockbroker and banker. Too few financial professionals stay in this industry long enough to see success. Over time, the parade of people through the prospect’s door is long, which means, at a minimum, they’ve experienced failure vicariously through previous advisors. The professionals who are in this business for the long term will wind up fighting for the orphaned clients.
So, you can be the consolidator or you can be the consolidate. The choice is yours. In today’s financial landscape you need to address all of the client’s financial issues, or someone else with more desire, drive, knowledge, experience, or designations will. You just can’t focus on selling one product, service or investment. You need to focus on a comprehensive strategy—even if that means farming out some areas in which you are not fully experienced.
Clients have wants, needs and desires. Most want success and a bountiful retirement. Without proper planning, they may reach retirement unprepared. Retirement comes whether you’re ready or not. By focusing on past failures, you’re not guaranteeing future successes. You’ve learned what didn’t work for the client, now your job involves putting the pieces for future success together. Failure gives us the opportunity to know where to improve, to know what not to do and to know we’re closer to consistent success. Hopefully, it also shows clients they shouldn’t approach financial services as a do-it-yourself strategy, as that approach almost always leads to a regrettable decision.