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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
4025$685,000$37,675.00
605$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:

  1. 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.
  2. 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.
  3. 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.

    4. 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.

The lessons of life

By Allie Miller

The lessons of life:

  • Work hard—a good day’s work for an honest wage.
  • Save for tomorrow—there will be good times, but also tough times.
  • Things of the past often repeat themselves.
  • Be honest.
  • Treat others fairly.
  • Your legacy won’t be measured in material things.

How can selling life insurance help you live the lessons of life? All of us have heard these phrases, but how do they apply to our business? How do they apply to today’s consumer?

I believe the future for this industry can be seen by looking to the past. There has been a major shift in consumer thinking, but old fashion ideas are making a comeback. There is now a perfect product for that consumer: indexed life.

Ask yourself, of all your appointments in the last year, how many of your clients were fundamentally worried about protecting their money? Were they more afraid of the financial burdens of their death, or about not having sufficient funds for their retirement? There is a significant older-aged market, concerned about the financial burdens of their death, but I think there is a far greater number trying to just get through life and protect their earnings.

Are your clients asking for ideas on investments that could yield 15 percent to 20 percent, or more? Do you know anyone that has bought an individual stock recently? What happened to all those stock “tips” we used to hear about? Done any day trading lately? Oh, you learned that lesson? Well, so did your clients. Let’s face it, the average consumer today is more conservative.

Remember that awful day when you first heard about universal life (UL)? We heard it all, “It will never last,” “UL will ruin our business!” Slightly more than 20 years ago, that was the mind set of many agents and insurance companies. Remember how fast universal life sales grew? In a three year span, it went from $110 million in sales to more than $1 billion, and has since grown to almost $5 billion a year! Were you an early believer or a skeptic? The early believers made a fortune - not to mention a name for themselves. At the same time, they offered clients higher rates of returns then they were used to from their whole life policies. The product also stirred the agents. It gave them something fresh and new to share with their clients. Just like with anything new, agents had to be trained and it took time to embrace the UL product and to get comfortable with telling the story. Well, it’s training time again.

This article is not really directed at those of you who are currently selling indexed life, but rather those of you who have heard about indexed life but have not yet embraced it. Remember your client and apply what indexed life has to offer and you will get very excited! This product is about to experience the same fast track as the traditional UL, potentially an even faster track, as it is a far better product for today’s consumer.

If you are a traditional fixed UL agent that uses universal life for asset accumulation, think about this question: Would your client give up 2 percent to 3 percent in their guaranteed return column for the potential to earn 7 percent to 9 percent long term? If the answer is yes, then stop selling UL and get on board to sell the fastest growing product line our industry has to offer. Indexed UL offers your clients the security they want and the reasonable return they are looking for. Still not convinced? Just illustrate the best performing cash accumulation fixed UL product you know of. Now illustrate the worst performing cash accumulation indexed UL product. The IUL will win. As an actuary will tell you, the details are in the math. If history is our guide, then the future of IUL looks very bright. As history has shown over time, earning an additional 1 percent to 2 percent on your cash values really does make the case for IUL.

On the flipside, if you are a VUL agent, think about this question: Would your client give up the ability to direct premiums to specific funds in order to significantly reduce their risk without having a dramatic impact on their returns? We all saw what happened to VUL policies issued prior to 2000. Not only was there a significant reduction in cash values, but many policies blew up due to a flawed design with no built-in protection. Last year, there were almost $2 billion of VUL sales. In my opinion, the IUL would have been more suitable for a large portion of that $2 billion. The first reaction is that VUL offers much higher upside potential. However, looking historically, the best IUL products would have performed as well or better than the best VUL products.

In conclusion, work hard, but smarter. Purchase what you sell and be passionate about your business. Be honest; offer solutions. The lessons in regard to life insurance are often the same as lessons of life.

SPIA or GMWB—An income dilemma

By Jeff Janes

Producers often ask which product makes more sense for retirement income: the single- premium immediate annuity (SPIA) or the indexed annuity with the guaranteed minimum withdrawal benefit (GMWB). When you look at these two products, you might immediately conclude that one product is better than the other for solving clients’ retirement income needs. However, before we jump to conclusions, we must first dig into the details.

The SPIA

If you ask the general population, “What is an annuity,” oftentimes they’ll tell you it’s a guaranteed stream of income from an insurance company. Or, in other words, an immediate payout in which the income stream starts right away. Now, while those of us in the industry would have provided a much longer and detailed answer to that question, what’s interesting is that the general population typically provides a definition of a SPIA. So, most people are familiar with the concept of giving a sum of money to an insurance company and receiving an immediate income. Why is it then that so few people actually purchase SPIAs? That’s another story altogether.

The SPIA product does one thing—and it does it very well—it provides a guaranteed income stream. Oftentimes what it doesn’t do well is take into account the biggest killer of retirement income—inflation. So, companies decided to add a feature called a cost-of-living-adjustment to their SPIAs to make them more attractive and keep up with inflation. By providing this adjustment, payments drop in the first year, then increase by a set percentage, often at 3 percent.

Potential pitfalls

A problem that potentially arises with SPIA contracts comes when the client makes an irrevocable decision and converts their asset into an income stream. Once payments begin, essentially the client loses all control of the asset—the company now controls the income. But why would a client fear giving up control? Recent studies indicate that as people age, they are more willing to adjust their lifestyle than give up control of their finances, even if that means a better long-term financial reward. So, a client may be more willing to give up some of the potential upside in an SPIA contract to retain control of the asset.

Picking the right duration

If your clients are looking for retirement income, how long do you think they will be retired? If you ask the so-called retirement experts, many claim that people are projected to spend about 20–30 years in retirement. However, based on the National Vital Statistics Reports in 2004, a person aged 65 in 2002 has a projected life expectancy of 16.6 years for a male and 19.5 years for a female. So, to average those two out, we’re looking at about an average 18-year life expectancy.

In this case, should you choose the 10-year period certain with life, or the 20-year period certain and life? Let’s look at both below.

Based on a projected $300,000 dump-in of qualified premium, in the 20-year period certain and life, we’re looking at an annual income of about $19,500, while the 10-year period certain and life generates $21,275. As you can see above, neither of these income streams account for the fact that a dollar today and a dollar 10 or 20 years from now won’t have the same value. So then you add on a modest 3 percent inflation-adjusted income, and while your income stream starts considerably lower—$14,400 and $15,850 respectively—over a 20-year period they both provide for a bigger income stream than the SPIA without the cost-of-living-adjustment. Just in case the client does live beyond the 10- or 20-year period, I’ve run this out to age 97, to show the dramatic increase in income in later years.

The indexed annuity with a GMWB

In recent years, variable and indexed annuity products introduced a rider called a guaranteed minimum withdrawal benefit (GMWB), which provides for a guaranteed stream of income without annuitization. The products often provide a lifetime income of about 5 percent regardless of how the product performs. Some companies have even developed features that increase the income during distributions while there is still a positive account value, but once the account value drops to 0, the built-in distribution growth stops.

The comparison

Most indexed annuities with the GMWB rider require the client to wait one contract year before taking income. So, from the $300,000 balance we used in the SPIA examples, we took out $17,000 for the first-year income. Then, we placed the remaining $283,000 in a product that also offered a 5 percent premium bonus and a 4 percent growth to the “benefit base,” which is the value used to determine the income stream. In this example we assumed no index gains credited to the account in any year. After the first contract year, the account value grew to$309,036, which in year two generated an income of $16,977, or 5.5 percent. Because of the rider, the income grows by 1.5 percent annually, up through year 15, at which point the account value reached zero. Even though the account value was completely exhausted, the client would continue to receive an annual income of $20,936 for the remainder of their life, even though the account value was zero.

The conclusions

It’s clear that a SPIA with a cost-of-living adjustment feature can make sense, but only if the client believes they will live long enough to enjoy the benefits. Over a shorter duration, the client doesn’t see as much benefit, as it takes about 12 years to break through and cross over the non-cost-of-living adjusted payout.

The indexed annuity might make sense, but companies built these products for accumulation over a period of time. While the contracts do allow for exercising the rider early, in doing so you don’t allow the contract value to increase dramatically, and this impacts the potential income because the company still determines the withdrawal rate. On the plus side, with an indexed annuity the client still retains control of the asset, and should they need additional liquidity they could access it from the contract. Of course, taking out more income than what the rider allows would recalculate the rider, and doing so could really impact the annual income stream for the client.

In the end it all comes down to client suitability. If the client understands the benefits of the SPIA with a cost-of-living adjustment, and can live long enough to reap the benefits, it appears to make the most sense. Don’t throw out the indexed annuity, though. If you can position these products with clients who can wait 7–10 years, you can really increase the benefit base amount, even in down or sideways markets, which then can produce solid income without giving up control. For the client who needs immediate income, use the product most people know—the humble SPIA.

Show me the money

By Jason Konopik

College funding, retirement planning, deferred bonus plans, ESOPs, home equity management—these are just a few needs clients are asking agents to meet. They all have one thing in common—accumulating assets to be used in the future on a tax-efficient basis. More and more, agents are using life insurance as a tool to meet those needs, and indexed life has become the product of choice.

There is little argument that indexed life has become one of the most efficient cash-value accumulation vehicles in the insurance industry today. This is due to a combination of 1) the upside potential of having credited rates tied to a stock market index—with cap rates now as high as 16 percent; 2) the downside protection of the strong minimum floors—with minimum guarantees as high as 3.0 percent on all premiums allocated to the index; 3) the low internal cost structures relative to VUL; and 4) the tax-deferred growth and tax-free distributions available within a life insurance product.

When using indexed life as an income generation tool, there are three main phases of the policy’s lifecycle:

  1. Funding phase. Getting premiums into the policy as efficiently as possible without jeopardizing the taxation benefits inherent to life insurance
  2. Accumulation phase. Choosing the product that matches the clients needs in terms of features, accumulation potential, and safety
  3. Harvesting phase. Maximizing the after-tax returns of the life insurance distributions

Each phase is extremely important in the overall case design. However, it is the “harvesting phase” that is least understood, yet has the biggest impact on income that can be illustrated. I have seen hundreds of illustrations where agents aggressively set variables within indexed life illustrations and set expectations for clients that are unrealistic at best. Most often this is due to ultra-high credited rate assumptions coupled with ultra-aggressive loan assumptions—usually using the least competitive indexed life products.

Indexed life generally has several options for illustrating income within a contract. First, the agent has a choice between showing withdrawals to basis and then loans on the residual, or loans only. Keep in mind that any withdrawals over basis are considered taxable income whereas loans in general are considered tax free as long as the policy remains in force until the death of the insured (when the loan is paid back to the insurance company out of the death benefit).

For most products there is also a choice in loan structures that can be used, and these come in two primary forms—fixed loans and variable loans. They both have their benefits, but variable loans will generally provide the more aggressive illustrated income. However, this more aggressive income comes with a risk. The following describes the differences between these two loan structures:

Fixed loans

  • Loaned policy values are pulled out of the policy (i.e., no index credits) and are credited at a fixed rate. The loan owed to the insurance company grows at a fixed rate.
  • Cost is equal to the difference in loan rate and credited rate
  • Most products have some sort of guaranteed wash loan (no cost) available after year 10

Variable loans

  • Loaned policy values remain in the policy and are credited based on the index growth. The loan owed to the insurance company grows at a variable rate based on Moody’s Corporate Bond Yield.
  • Cost is equal to the difference in average credited rate and average loan rate (loan spread)
  • Chance for arbitrage is equal to the upside potential
  • Chance to get upside-down is equal to the risk

The key difference between the two loan structures is the cost of the loans. The cost of the fixed loan is known and often guaranteed. The cost of the variable loan is unknown, but often illustrated as a negative net cost (i.e., the assumed credited rate is higher than the assumed loan rate). In fact, there are some illustrations that allow an agent to assume the average credited rate is almost 4 percent higher than the average loan rate! In my opinion, that is far too aggressive and agents are setting themselves up for failure by forming unrealistic expectations for clients.

To give you a sense for the impact of these assumptions, the following summarizes a sample illustration from a leading indexed life carrier assuming a 45-year-old, paying a $20,000 annual premium for five years, solving for maximum income ages 65–99.

Loan type Illustrated income Internal rate of return
Fixed loan $31,557 7.7%
Variable loan: 4.0% loan spread $56,485 9.9%
Variable loan: 2.0% loan spread $45,347 9.0%
Variable loan: 0.0% loan spread $29,270 7.4%
Variable loan: −2.0% loan spread $12,593 4.5%

As you can see, the loan spread assumed has a dramatic impact on the illustrated income. So the key question is, “What should I assume as a loan spread?” The difficulty is that even though the assumed credited rate and the assumed loan rate is determined based on today’s information, the real cost won’t be known until the client starts withdrawing income—and that may be 25 years from now!

When agents call me with that question, I rely on historical analysis and give them some parameters to get comfortable in determining an assumed loan spread. Ultimately, this historical loan spread has to do with the cap rates, participation rates and crediting structures used in the indexed life product being illustrated.

In a very detailed actuarial analysis comparing the historical Moody’s yields with the actual performance of the index under cap rates that would have been available historically, I have come up with several rules of thumb to follow:

  1. Using a 12 percent cap product, the loan spread used should only be around 0.5 percent
  2. Using a 14 percent cap product, the loan spread used should only be around 1.5 percent
  3. Using a 16 percent cap product, the loan spread used should only be around 2.5 percent

The biggest recommendation is to make sure you fully disclose the future possibilities of the product. First off, the client never needs to make a decision of which loan structure to use until their first loan. At that time they will obviously choose the structure that looks the best. For example, if interest rates (and therefore variable loan rates) are very low, they would be best served choosing a variable loan. Conversely, if interest rates (and therefore loan rates) are very high, they would be best served choosing a fixed loan. If a product does not have a guaranteed fixed loan option available, then don’t use it.

The best approach to use with clients is to first choose a realistic variable loan spread based on the above guidelines and then use it in the illustration. Also, run a fixed loan illustration and use those as boundaries when setting expectations. Remember, insurance companies need to stand by the technical validity of their illustration software; however, it is up to agents to stand by the assumptions used in those illustrations.

Indexed life: Today and beyond

By John V. Scheer

Indexed Life Sales Up Ninety-One Percent. That was the title of a news release that hit the presses in March 2006. The release goes on to explain that there are now 20 carriers offering indexed life products (65 percent more than just a year ago). Industry experts expect similar growth throughout 2006 and beyond - in both premiums and the number of products being offered.

Now, a year later we know the numbers - Indexed life sales are up more than 85 percent in 2007!

Indexed universal life (IUL) has been one of the fasting growing products in the history of life insurance. Last year the life insurance industry saw total IUL sales approach the 350 million mark. Currently there are approximately 25 carriers that have entered the IUL market, with additional carriers expected to emerge in 2007. In fact, industry experts project that IUL sales are positioned to grow to a billion-dollar industry over the next three to five years.

This is a huge step as it seems life insurance companies finally understand what Jason Konopik, CFO AMZ Financial Services, LLC, has been saying for years - there is no better opportunity in the industry than indexed life!

The first generation of IUL products has fueled growth over the past three to four years. The second generation of IUL products is entering the market in the 2nd quarter of this year. These second generation IULs are posed to be one of the major catalysts of expected future sales in the coming years, making IUL one of the fastest growing segments ever in the insurance industry.

Some of the features that the second generation products will have in 2007 are enhanced income options, new and improved living benefits, more flexible agent options to tailor the product to the end consumer, up to 3 percent minimum guarantees, 16 percent rate caps, six or more index strategies, higher target premiums and other unique features embedded in the product. Jason Konopik, CFO of AMZ financial, says “…this new generation of IUL products will help propel IUL sales to the billion dollar mark.” It is just a matter of time until indexed life surpasses VUL in sales and becomes the primary vehicle to use for accumulation/income generation.

While more choice leads to more opportunity, it also places the onus on the agent to ensure he or she can dissect the market, find the best product and sell it appropriately to clients. In addition to developing indexed products, AMZ has spent a significant amount of time dissecting the products available to find their strengths and weaknesses in order to determine which products fit different sales concepts, and to determine which products will most likely perform as expected in the long-term.

When we review products, there are four main areas that are focused on: 1) projected product performance, 2) unique features/product niches, 3) product integrity, and 4) compensation.

I’m sure many of you are asking, “How can I get the knowledge needed to determine the best company/product to use with my client?” Well, the answer is very simple - not very easily.

The best advice I give to agents is:

  • Don’t always take the insurance company’s word for it.
  • Don’t do it by yourself.

There are several very reputable organizations that provide you the training you need in order to take full advantage of the indexed life marketplace.

If you haven’t sold indexed life yet, now is the time to get on board. If not, the train may just pass you by! But if you have sold indexed life in the past and continue to sell last year’s product, you are missing out on some amazing new products your competition is now using against you.

Does anyone need living benefits in an indexed annuity?

By Jeff Janes

The buzz word for the past five years has been living benefit guarantees. These riders pushed variable product sales to higher levels in 2006, and not wanting to miss out on the action, the indexed annuity market has now jumped on to the living benefits bandwagon. Yet, while living benefits in indexed annuities gain momentum, are these riders really all they’re cracked up to be? Does a client in an indexed annuity need another guarantee? And, do the producers out there know exactly what they’re selling?

From a psychological standpoint, in a product where the client bears all the investment risk, such as a variable annuity, having some sort of guarantee makes sense so you can sleep at night. As a client in an indexed annuity, as a client, what risk are you taking? The answer is none. The insurance company bears all the investment risk, so the only risk you take is earning zero returns in any given year. And, clients in indexed annuities shouldn’t worry about dramatic market swings, as the product itself is a fixed annuity with built-in guarantees.

Since the client bears no investment risk in an indexed annuity, producers often say that you can’t lose money in an indexed annuity. But that’s not an accurate statement if you add in living benefits. In this case, our clients can lose money in an indexed annuity.

What living benefit guarantees do

Regardless of the carrier, guaranteed minimum withdrawal benefits typically provide a lifetime income stream without annuitization. Usually, the company claims the client doesn’t give up control. While that’s true—when you annuitize you give up all control—but with these riders, the client retains some control, although the company still calls plenty of the shots.

When it comes time to start taking withdrawals, the company determines how much money will be paid out through the rider annually. The client simply determines when to start taking the withdrawals. So, to help determine if a prospect really needs the rider I ask, “What do you plan to do with this money, and are you comfortable with the company restricting how much you can take out without impacting the guarantees?” If the answer to both questions is yes, then adding a living benefit may make sense. If they don’t plan to use this money to supplement retirement, but instead they’re just going to pass it on to heirs, then the rider really doesn’t add up for the client. And oftentimes, these riders come with some significant expenses.

What they cost

The cost for these riders varies, but unlike variable annuity products, we have no prospectus to dig into to really get to know what these products will cost over the life of the contract. Then, other companies don’t disclose costs at all, but they simply will reduce crediting rates or lower caps to ensure their costs are covered. I don’t think I could sell that concept to a client: “Yes you’re buying insurance to help fund your retirement, but the costs are completely hidden from you.”

In today’s environment of full disclosure, I’d recommend that you stay away from the companies that don’t fully disclose the costs or keep the costs consistent from year to year. Plus, some carriers base the cost of the rider on the always increasing benefit base, so each year your clients pay more for the rider regardless of contract performance. Other carriers have the option to charge more for the rider, should the client want to “step-up” the contract.

What they don’t do

The buzz word for the past five years has been living benefit guarantees. These riders pushed variable product sales to higher levels in 2006, and not wanting to miss out on the action, the indexed annuity market has now jumped on to the living benefits bandwagon. Yet, while living benefits in indexed annuities gain momentum, are these riders really all they’re cracked up to be? Does a client in an indexed annuity need another guarantee? And, do the producers out there know exactly what they’re selling?

From a psychological standpoint, in a product where the client bears all the investment risk, such as a variable annuity, having some sort of guarantee makes sense so you can sleep at night. As a client in an indexed annuity, as a client, what risk are you taking? The answer is none. The insurance company bears all the investment risk, so the only risk you take is earning zero returns in any given year. And, clients in indexed annuities shouldn’t worry about dramatic market swings, as the product itself is a fixed annuity with built-in guarantees.

Since the client bears no investment risk in an indexed annuity, producers often say that you can’t lose money in an indexed annuity. But that’s not an accurate statement if you add in living benefits. In this case, our clients can lose money in an indexed annuity.

What living benefit guarantees do

Regardless of the carrier, guaranteed minimum withdrawal benefits typically provide a lifetime income stream without annuitization. Usually, the company claims the client doesn’t give up control. While that’s true—when you annuitize you give up all control—but with these riders, the client retains some control, although the company still calls plenty of the shots.

When it comes time to start taking withdrawals, the company determines how much money will be paid out through the rider annually. The client simply determines when to start taking the withdrawals. So, to help determine if a prospect really needs the rider I ask, “What do you plan to do with this money, and are you comfortable with the company restricting how much you can take out without impacting the guarantees?” If the answer to both questions is yes, then adding a living benefit may make sense. If they don’t plan to use this money to supplement retirement, but instead they’re just going to pass it on to heirs, then the rider really doesn’t add up for the client. And oftentimes, these riders come with some significant expenses.

What they cost

The cost for these riders varies, but unlike variable annuity products, we have no prospectus to dig into to really get to know what these products will cost over the life of the contract. Then, other companies don’t disclose costs at all, but they simply will reduce crediting rates or lower caps to ensure their costs are covered. I don’t think I could sell that concept to a client: “Yes you’re buying insurance to help fund your retirement, but the costs are completely hidden from you.”

In today’s environment of full disclosure, I’d recommend that you stay away from the companies that don’t fully disclose the costs or keep the costs consistent from year to year. Plus, some carriers base the cost of the rider on the always increasing benefit base, so each year your clients pay more for the rider regardless of contract performance. Other carriers have the option to charge more for the rider, should the client want to “step-up” the contract.

What they don’t do

I saw it five years ago in variable annuity sales and now it’s happening in the index market. For example, producers who don’t understand how these riders work are out there promoting “a 4-percent annual increase” and clients think they are getting a guaranteed 4 percent annual return. These riders are not designed to guarantee any increase in the accumulation value, nor will they allow for lump-sum withdrawals of the “benefit” value.

If there is some internal crediting associated with the rider, it is to a “benefit base,” which is not the same as an increase to the accumulated value. The benefit base is a ledger account where the company is simply keeping track of a future payable benefit. The client only gets that annual increase if they decide to withdraw the money at the percentage dictated by the company. Again, the company completely controls how the client accesses that benefit base, so if the client wants to walk away with a lump sum, they completely give up any difference between the benefit base and the accumulated value.

When does it make sense?

It often makes sense in an indexed annuity to add a living benefit, specifically when the client wants to use the annuity to help fund retirement. Some clients may need a living benefit, so be sure you fully understand how these riders work before you position one for your client.