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Life: This Is Only My First Time

Charlie Gipple, CFP, CLU, ChFC
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Life: This Is Only My First Time

I recently had a friend that came back from a top agent conference a little depressed because this conference was a few days of recognizing him and his peers for their great success. I thought, “What is wrong with that?” He told me that hearing all of the stories from his peers of money, success, etc., made him feel a little “inadequate” in his own life and personal production. My conversation with him prompted this article.

I’m sure, like many of you, when I was a little kid I would look at grown-ups and think that they all had it all figured out. They had all been there and done that and had everything firmly established and planted into the ground. My parents and grandparents always seemed to have the answers to the questions that I thought were complex at the time. They had so much knowledge. They would talk about “10 years ago this“ and “20 years ago that“ and I could not comprehend thinking back that far. Ten or twenty years ago seemed like a lifetime at the time. It also “seemed” like they had very little stress.

Well, once I got into my early twenties, got married, had bills coming in, and we started building our own lives, I started to realize that there is no roadmap to life, no roadmap to career success, and no roadmap to financial independence. You don’t graduate with a college degree and automatically find yourself in the corner office making $1 million per year and everything is fine at work and fine at home.

For all of us—me, you, our parents—this is our first time at life. Breaking news, I know! And because it is all of our “first times,” nobody has the playbook! My parents didn’t have it all “figured out” and they were probably stressed at times, they just didn’t tell us kids! I am now at the age that my parents were when I thought they had everything on cruise control. I even grunt like my dad did when I get up off the couch!

A very vivid realization of the “randomness” in life came when I was 23. At the time, I worked at one of the big “career” insurance companies and on one beautiful fall day I was going about my morning and carrying my coffee into the office in time to make the 8:30 CST stock market open. As I walked by one of the offices of another agent in that building, he said, “Dude, check this out!” Then he pointed at the TV that showed the world trade center in flames. I remember it like it was yesterday. It was that moment when many of our foundational beliefs changed. For the younger folks reading this article, believe it or not, there was a time when getting attacked on our own soil was so far outside of the realm of possibilities. Not just in my 23-year-old eyes, but in the eyes of those wiser than me. In other words, it was the first time any of us had ever experienced this new post 9/11 world. That is something your parents never prepared you for!

Then came COVID. Who would have ever thought that a global pandemic would completely cannibalize all of our lives in the 21st century? That was a first for all of us, whether you were 20 years of age or 70.

If you fast forward to today, I have been married for 23 years now and raising two smart, happy, and athletic kids. I would like to think that my kids have it a little better than I had it, although I had a good childhood. However, now that I am the age that my parents were when I thought they had it all figured out, I realize that they didn’t have it figured out and they were doing the best that they could!

I recently had a conversation with my 16-year-old kid that was a “first” for me. His girlfriend had just broken up with him, and he was very upset. My wife told me I needed to speak with him and make him feel better. I was scared. It was indeed an awkward conversation, because I am not a real warm and fuzzy person. As I was having that conversation I thought, “I probably sound like an idiot.” It worked though. By the end of the conversation, his ex-girlfriend was a dirtbag who would regret it, I was his hero, and my kid felt better. A little sarcasm there. I’m 45-years-old and that conversation was a first for me. To my son, he probably thought that this is what Dads naturally do without thinking about it.

What on earth does this have to do with business? It has everything to do with business because this is all of our first time at life and business. Yes, some of us may have opened multiple businesses, etc., but when you pan out, it is our first time, period. My main message here is, if you ever feel overwhelmed or feel “inadequate” compared to your competition, just know that they probably feel the same way. As soon as you realize that everybody else is in the same position as you, your confidence will go up.

As I told my friend that I mentioned at the beginning, like with social media, in this business there can be people that make it sound like things are perfect in their world, they make a gazillion dollars, and everything is good. That may be the case sometimes but many times they have similar challenges and insecurities as you might have.

Have you ever heard that motivational speaker talk about their three divorces, their previous bankruptcy, the fact that they are in debt up to their eyeballs, etc.? Of course not! According to that person everything is perfect, they have it figured out, and you should buy their book. Although I’m being facetious here, nobody has it all figured out. This is one of the reasons why I tend to not “idolize” celebrities. This is their first time at life as well and they clearly do not have it figured out.

I would even argue that the more driven you are, the less you feel that you have it figured out. However, sometimes you just have to sit back and understand that we are all brothers and sisters in this game, and nobody has it figured out. Once you understand that nobody has it figured out, it makes you a heck of a lot less nervous in life. That will also lead to more confidence.

Yes, there are folks that have more experience and “wisdom” than you because they have already blazed the trail that you are attempting. Thus, it is important to mop up as much information from them as possible, as I did with my mentors, parents, etc. over the years. However, don’t assume that they felt confident as they were doing it. This is all of our first time.

An Interview With Eugene Cohen—May Is Disability Awareness Month, A Time To Help Your Client Become Aware Of The Need For DI

Eugene Cohen and Michael Cohen
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An Interview With Eugene Cohen—May Is Disability Awareness Month, A Time To Help Your Client Become Aware Of The Need For DI

With the help of Victor Cohen, this is part of our ongoing series with Eugene Cohen, founder of the Eugene Cohen Insurance Agency, Inc., 2009 Honoree International DI Society W. Harold Petersen Lifetime Achievement Award, 2015 Honoree of NAILBA’s Douglas Mooers Award for Excellence.

From time to time we will feature an interview with Eugene, who has dedicated over 60 years of his life to learning, teaching, and supporting brokers in the agency’s quest to help consumers protect their incomes from the tragic effects of a disability.

Disability insurance (DI) is one of those products that can change the trajectory of an individual and a family’s life and is crucial for every financial planner and insurance professional to learn about and offer to clients.

Victor: May is a very important month.

Eugene: That’s right. It’s Disability Insurance Awareness Month, which is a great time for advisors to review their clients’ disability insurance needs.

Disability income protection insurance is the best kept secret. Most clients know that life insurance is very important. Car insurance is mandated in almost all the states and is extremely important. In order to get a mortgage, most lenders require that the house is insured. Even without a mortgage, insuring the home is also a must.

I have been involved in the offering of disability insurance for many years. I’ve served clients as a producer, a general agent and regional manager for a company and eventually as an MGA/wholesaler. I’ve never felt more strongly about the importance of a product and have made it my life’s work.

When a client makes the decision to buy an individual disability insurance policy, it’s like hiring a silent business partner. When a client’s income is shattered due to an extended sickness or attempt to recover from an accident and they qualify for a claim, it’s amazing to see how these policies work.

As a producer, I felt so strongly about the product that I carried a lot of disability income protection insurance myself. The reason was that in my own mind, having a DI policy was like having a parachute. I always felt that it was better to have it and not need it…than to need it and not have it.

Victor: I really appreciate how you see disability insurance protection as a vital component of asset protection.

Eugene: It’s so true…imagine one’s future earnings as the most valuable asset your client owns. Let’s say you have an executive who is 45 years old. They have a major accident or are diagnosed with a slowly disabling disease like MS or ALS. They may not be able to work for the next 20 years. If their disability lasts for 20 plus years and this individual was earning $250,000 per year with no raises, then that individual’s disability could cost the client and family potentially over $4,000,000.

The producer needs to recognize this and show the client how to insure a portion of that income. Depending on this individual’s occupation class, they may be able to obtain an individual DI policy with a monthly benefit of approximately $11,000. If that policy premium is paid with after tax dollars, the benefits may be tax free.

Some producers recognize that inflation can really play havoc for those on a fixed income or on a long term disability claim. The planner may recommend that the individual’s DI policy have a special rider called a “Cost of Living Adjustment Rider” (COLA). After this person’s first year of being disabled, their policy’s COLA rider should allow their monthly benefit for the second year to increase. Usually, these riders will use the previous year’s consumer price index and have a cap, but policies may vary. Let’s say the rider continues to allow for increases in future years, also based on the consumer price index. If we experience more inflation, like we have in the past few years, then the total benefit over those twenty years could be significantly higher.

Victor: So, let’s talk about the best way a producer may help their client see the need for disability insurance.

Eugene: When reviewing your client’s insurance needs, ask your client probing questions. They need to start thinking about how they would plan for themselves and their family that’s relying on their income.

Ask, “If you had a money machine that was producing $100,000 per year or $200,000, $300,000 per year, you would want to insure that money machine, right?”

Victor: Definitely.

Eugene: Here’s another question to ask your client to help them discover the need for DI. “How long did it take you to accumulate the assets you have put away? How long has it taken to accumulate your savings?”

After the client answers, then ask, “Walk me through how your finances would work if you had a disability that prevented you from working? Everyone takes sick days here and there. If your sick days never stopped, and if you were disabled for a long period of time, say five, ten years, or even permanently, all the way to 65, how long would it take for your assets to slowly dissipate?” Disability income protection can help protect your assets.

Have you ever looked at a medical dictionary? It’s filled with descriptions of sicknesses that can potentially disable an individual. Multiple Sclerosis, Parkinsons, heart problems, muscular skeletal issues, and of course there are those unexpected accidents…we don’t’ plan on getting seriously ill or having an accident. But we can certainly plan on how we would take care of ourselves financially if something were to happen.

Victor: I know that it’s very important for producers to help clients become aware of the need for individual disability insurance—even if they have Group DI from work.

Eugene: Group Long Term Disability (LTD) insurance is often a great start, but the way that most LTD policies are built, they have limitations that clients may not even know existed. Your clients with higher incomes can usually afford to supplement with an individual policy that they own and is portable.

As an advisor, let’s say you’re reviewing your client’s DI. You see the client has Group LTD and the client says, “The Group LTD is all I need. I’m taken care of. I’m good.” That may not be true.

Take a client of yours that earns $300,000 per year or $25,000 per month. In this example, the client’s Group LTD policy states that 60 percent of the client’s monthly income is covered up to a $10,000 per month cap. If the employer is paying the premium and doesn’t include the cost of coverage in the employee’s income, the benefits may be taxable. After taxes, the client may actually be receiving a true net after taxes monthly benefit of $7,000 or perhaps $8,000. In addition, group contracts are usually built with language in order to protect the insurance company but can create limitations in the policy that most clients don’t know exist.

Taking into account the client’s income and their Group LTD benefits, this client may be financially eligible to add a new individual disability insurance policy on top of their existing Group LTD policy.

That new policy may perhaps pay an additional $9,000 per month disability benefit in addition to their group benefit, assuming the disability qualified for both policies. In some cases, the individual policy may pay a claim or pay a claim for a longer period of time than the Group LTD. The amount of additional coverage will depend on the individual disability insurance company’s issue and participation limits for that client’s occupational class. Also, don’t forget, the client’s individual disability policy should be paid with after tax dollars, so that benefit may perhaps even be tax free.

Victor: You had recommended that a producer watch Real Life Stories from Life Happens. I was really moved watching those videos of real people talking about real claims. Such a valuable tool for a producer.

Eugene: Those videos are so incredibly impactful and another reason why I think lifehappens.org is a fantastic website. This is a consumer website that points out the need for many insurance products—disability income protection insurance, life insurance, long term care insurance, annuities.

The videos on the site allow stories to be heard and felt. You can see and feel the value of disability insurance with these videos.
You’ll find Travis Guthman’s story on lifehappens.org. Have you seen Travis’ video?

Victor: Yes, I have. It’s very powerful.

Eugene: Travis and his wife, Wendy, moved their family and their six young kids to a small town where Travis grew up. Travis and Wendy had the opportunity to buy Travis’ grandparents’ farmhouse and made that their home.

Travis opened up a pizzeria in town as he loved making pizza and making people happy. His new business was doing well. His financial advisor recommended to Travis that he should have disability income protection insurance and Travis luckily followed the advice and bought a policy.

One day Travis was driving through town and somebody sent him a text. Though he knew better, he became distracted and Travis took his eyes off the road and the next thing you know, he crashed into the concrete footing of a narrow bridge.

The accident was just horrific. The injuries were so bad that it has taken Travis almost two years and multiple surgeries to regain the ability to walk again, and that’s with the support of a leg brace.

During this time, Travis hasn’t been able to work. Travis says his family would have lost the pizzeria if it hadn’t been for his disability insurance.

That disability insurance has allowed Travis and Wendy to continue paying their ongoing household bills and business expenses.
Travis says, “I didn’t have to pull money out of the restaurant to live on; instead, I could continue paying the employees and keep things running.” Travis shares, “Without disability insurance we would have been in a world of hurt. You think it will never happen to you, until it does. Disability insurance has been a huge blessing for our family.”

Victor: Travis’ story really shows the need for DI.

Eugene: It’s so impactful and, at the end of the day, it all started with the producer. Without that producer making Travis aware of disability insurance and how important it was for him to have, as you can imagine, Travis’ story would have been much different.

Travis’ experience has also given him a new purpose in life, in which he visits high schools and shows students his accident and all of the trauma he went through. Travis also gives students tools to stay off their phone when they drive.

Victor: Before we wrap up our conversation here, let’s talk about Scott Rider’s story, as his video is also on lifehappens.org.

Eugene: Every producer and their clients also need to see Scott’s video. Scott loved running and was extremely good at it. In college he was a three-time Big Ten champion and a two-time All American.

At 47, Scott noticed one day when he was running that his toes started to restrict. He went to the doctor and it didn’t take long for them to diagnose Scott with Parkinson’s Disease.

Before Parkinson’s Disease, Scott worked 30 years as a financial advisor to individuals and small business owners.

The day Scott was diagnosed with Parkinson’s Disease, Scott says in the video, “I knew right there my life was going to change forever.”

Scott says, “I understood early on that my income was my most valuable asset and I wanted to protect it through disability insurance. It’s expensive to live and those bills just keep coming.”

Being a planner himself, Scott had practiced what he preaches. Scott had group disability insurance provided by his employer and Scott knew that his group disability insurance would not be enough. So, he also acquired individual disability insurance. Again, he was aware of what it would financially take to keep his life going if he were to become disabled.

Scott says that thanks to disability insurance, he and his family did not have to financially suffer. He says, “And without disability insurance, I don’t think I could have afforded my daughter’s wedding. I wouldn’t have money saved for retirement.” He goes on to say, “I am so incredibly grateful that my income continues and makes life possible for my family. It would look so different without disability insurance.”

Victor: Eugene, as always, thank you for sharing your insights and decades of experience in the DI world.

Eugene: Thank you, Victor. During Disability Insurance Awareness Month, we encourage producers to make clients aware of these disability insurance products that are designed to protect their income. The small business owner, the executive, blue collar workers…the need is there. The producer just needs to make the client aware.

I ask the producers reading this: If your client were to become disabled, what story would your client be telling? As a producer, you get to help write the story.

A Flood Is Coming: It’s Time To Prepare

Don Levin, JD, MPA, CLF, CSA, LTCP, CLTC
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A Flood Is Coming: It’s Time To Prepare

I have a grandson who is both mildly autistic and a weather aficionado. As a result, I must wait for my daily call from him to hear about the weather where I am located, where he is located, and any unusual weather occurrences in the country or even across the world. “Cyclone bombs” and “atmospheric rivers” were foreign to me when I was a child, but they easily flowed off his tongue. As recently as February of this year, they were genuine terms to the residents of Los Angeles and the surrounding area as heavy storms pummeled the region with high amounts of rain that, in turn, caused mudslides and other disasters that toppled trees, crushed homes, washed away roads, and caused mountains to slide down with tons of mud and debris. Images of people being rescued from the tops of their cars and out of their homes, and of remote pieces of land that were newly created islands, dominated the news cycle as the weather changed the topography around them.

This severe weather also reminded me that life as we know it can change just as quickly. Our lives can be turned upside-down and inside-out with a change in our health or that of a loved one. I was shocked once again on Sunday when I went to church and observed one of our older members, now in a wheelchair, as his Parkinson’s disease has continued to advance. While he experienced a gradual decline, for others it can be as quick as flipping a switch. This reminded me of a story:

Once upon a time, a gentleman was sleeping soundly in his bed; in the middle of the night, he was awakened by a sharp knock on the door.

He opens the door downstairs and there stands his very agitated neighbor, who says, “Get dressed, and let’s get out of here. Haven’t you heard the weather report? The river is going to flow over the banks and this whole area will soon be flooded. We have to get out of here!”

And the fellow says back, “I’m not worried about any flood. I’ve lived here more than forty years and that river has never flooded. No reason for me to think it will now. I’m not leaving. I’m not worried. And besides,” he says, “I trust in the Lord.” He shuts the door, goes back upstairs, and returns to sleep.

A couple of hours later he is awakened by the sound of running water, and he goes over to his bedroom window and looks out; by golly, the river has flooded, and it is about as deep as his first story. He sees the sheriff coming toward him in a boat and the sheriff says, “Get in the boat and we’ll get you out of here. The river hasn’t crested yet and it will worsen. Get in here, and we’ll rescue you.”

But the guy says back, “Don’t worry about me. That ol’ river is not going to get any deeper than this. I’ve lived here forty years and am not about to abandon my property now. You go rescue someone else. I’m staying right here. And besides,” he says, “I trust in the Lord.”

Well, the next time we see him, he’s on the roof and clinging to the chimney and the waters are up around his knees. A National Guard helicopter flies by, hovers, and a soldier comes down on a long cable and says to him, “Here, put this vest on and we’ll lift you out of here! Hurry, the flood is getting worse.”

But the guy waves him off and says, “It couldn’t possibly get any worse than this. I’ll just take my chances right here. Besides,” he says, “I trust in the Lord.”

As you can probably guess, the next time we see him, he’s at the Pearly Gates and raising an awful fuss with Saint Peter. “I can’t understand it,” he says. “How can it be that I got swept away in that flood and drowned? Why didn’t you and the angels up here do something? Why didn’t you help me? I trusted in the Lord, but I drowned. Why didn’t you help me.”

And Saint Peter calmly replies to him, “My friend, I don’t understand why you are complaining. We did try to rescue you. We sent you your neighbor, the sheriff’s department, and the National Guard. What more did you want us to do?”

A flood is coming, and the name of the flood is long term care. There are 77 million Baby Boomers headed toward old age. Every person reading this article will be touched by the issue of long term care, either because you will need care or because you will help provide care for a loved one. As Roslyn Carter said, there are four kinds of people in this world: “Those who have been caregivers, those who are currently caregivers, those who will be caregivers, and those who will need caregivers.”

A flood is coming, and we are warning you to prepare for it.

It starts with the fact that we are each given a certain amount of time on this Earth, and then one of two things happens: We either die quickly or slowly.

I lost my dad in a matter of days. I didn’t even get to say goodbye to him in person because he died so quickly on a Friday morning out in Arizona. I had talked to him on Sunday before departing on a business trip to Chicago the next day. I had plane tickets to go out there the following Monday for a routine visit. Instead, I used the ticket to go out and bury him. It was that unexpected.

On the other hand, I watched all four of my grandparents die very slowly, some at home and some in nursing homes. For my grandmother who suffered from dementia it was a long goodbye, as she first lost her mind before her body finally wore out as well.

If you die quickly like my dad, it’s cheap. If you don’t die soon but instead go slowly or linger, it can be costly.

If you are unfamiliar with the cost of long term care in the United States, the national average is approximately $110,000 annually. The average stay in care is three years, which means we are looking at more than $300,000 in today’s dollars. And that’s if you are average! Some will linger much, much longer. I know one claimant who is only 32 years old and another who is the oldest at 103. The most extended current claim with the leader in long term care insurance has eclipsed 24 years and $1.6 million in benefits paid. Long term care can be costly. Fortunately, the insurance to guard against it is not.

Clients work with a financial advisor or estate planning attorney because they want them to protect and grow their money. There is no single more significant threat to their future financial health than the threat of long term care. The risk they face as a couple at age 65 is 90 percent that one will be in care, which means the other will provide this care. Unless this is why they have worked all their lives to accumulate wealth and have specifically earmarked this money for their long term care costs, we need to talk.

A flood is coming…

For some reading this article, I’m your neighbor. You’ve never thought about this before, and I’m here to tell you, a flood is coming.

For others, I’m the sheriff in the boat. You’ve been thinking about this but procrastinating, and I’m telling you it is time to act.

And for some of you, I’m the fellow at the end of the rope dangling from the helicopter. I am your last, best hope, because your health is going to change in the next six months and then the issue will be decided for you.

Long term care is a complex topic; one size does not fit all. I also find that most clients probably already have a host of questions pertaining to their situation. A long term care plan can be tailored to them as individuals or couples. Although long term care insurance isn’t suitable for everyone, everyone needs a plan. Let us help you determine the proper plan for you and your clients.

Time To Realize The Power

David J. Murphy
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Time To Realize The Power

Many years ago, when I first started selling life insurance, I often found myself with hours of unassigned time on late weekday afternoons. I frequently spent the time in the public library reading. (I was a little lazy in the beginning of my career.) It did not take long before my new bride, herself a hardworking first grade teacher with as many as 30 kids in her class, began innocently asking, “How was your day?”

Soon, just anticipating her question caused me to step up my game and make better, more productive use of my time. There was power in her ability to influence my behavior. Since those early days, my wife has helped me grow in innumerable ways and is responsible for my maturing in every direction possible. (She’s nowhere near done, however!)

“Anyone who thinks that they are too small to make a difference has never tried to fall asleep with a mosquito in the room.”—Christine Todd Whitman

Point: We can have an effect on other people in ways that exceed our comprehension.

Self Motivation
In his comprehensive overview of moral philosophy, The Theory of Moral Sentiments (1759), Adam Smith introduced the concept of the “impartial spectator”—an imagined third party who allows an individual to objectively judge the ethical status of his or her actions. Smith believed that we judge ourselves only by imagining what an impartial spectator would approve or disapprove of in our conduct. Underlying this idea is the fact that we have a natural desire to be loved and we dread receiving blame.

Whenever I endeavor to examine my own conduct…I divide myself as it were into two persons: and that I, the examiner and judge, represent a different character from that other I, the person whose conduct is examined into and judged of. The first is the spectator…The second is the agent… (TMS III. 1.6)

Once we grasp the idea of an indwelling impartial spectator, believing that we are capable of judging ourselves, we construct a new delineation between being praised and being praiseworthy, being blamed and being blameworthy.

There are many limitations of this notion, but primary among these is the fact that such a system, if it existed, can only be applied retrospectively. It is unwieldy and not useful for making prospective decisions.

Point: As human beings, we have a conscience, we are aware of social mores and norms, and we have a sense of what is best, or just good, as well as what is unconscionable, or just out of bounds. Nevertheless, we need others to keep us accountable.

Time to Realize the Power
An independent financial professional (IFP) has an impact on a person or family or business whether or not he or she writes any insurance, invests any funds, or earns any fees. In fact, an IFP can have incredible impact on client behavior without actually meeting regularly or in person.

According to Investopedia, “Advisors’ real value lies in managing client behavior. Their mission is to keep their clients focused on their goals, even as their short-term objectives may change.”1

On the Web Site for Michael Kitces, guest post writer Derek Tharp wrote the following: “The unique power of the human-to-human connection means clients can achieve better behavior, change outcomes, with a financial advisor than they may be able to achieve by themselves or through the use of technological tools. Because when a human is involved, we often have few options for totally avoiding the unfavorable perceptions we think others may have about us if we don’t follow through on our goals…which can be highly motivating. In the case of technology, while it may provide useful behavior change reminders…we can always just turn off the technology and feel very little guilt. But it’s far harder to just ‘turn off’ an existing relationship with another person.”2

This is noteworthy. The iPhone in the client’s hand is capable of doing innumerable things to help clients to better organize, maximize, multiply, and research nearly everything. Yet, an IFP has even more power!

“How wonderful it is that nobody need wait a single moment before starting to improve the world.”—Anne Frank

At the outset of the COVID-19 Pandemic, Harvard Business Review published an article addressing the changes that remote work would likely have on productivity. The article stressed the importance of human-to-human contact.

“Social psychologists have known for decades that people are motivated to work harder when others are watching. When they are observed, people run faster, are more creative, and think harder about problems. These effects occur for several reasons. For one, people want to impress others through their performance, and thus try harder. Anyone who has ever stayed in the office late when their boss was still around experienced this phenomenon.”3

When a client engages the services of an IFP, it is with the intention of upgrading every aspect of a financial life. Intuitively, clients know that a certain degree of accountability is necessary in order to achieve desired outcomes. They expect this accountability to come from personal interactions.

If the presence of an IFP has a fundamental effect on clients and what they do or how they behave, it also impacts how they think about their actions. Somehow, what a client does or doesn’t do magnifies in importance just because an IFP is liable to ask questions in their next meeting.

“When others are watching, people include others’ perspective into their own perspective. The dual perspective then magnifies their work, because investing time, energy, and effort into something that feels big and meaningful is much more motivating than investing in something that feels small. The magnification of one’s work increases one’s motivation to work more and harder.

People magnify what they do not only when they are observed, but even when they merely feel observed.”4 (Author’s emphasis)

A Brief Physics Lesson
We should not be surprised by any of this because this is how the world works.

In physics, there is something called “The Observer Effect.” A disturbance takes place when someone observes a closed system simply by the act of observation.

“This is often the result of utilizing instruments that, by necessity, alter the state of what they measure in some manner. A common example is checking the pressure in an automobile tire, which causes some of the air to escape, thereby changing the pressure to observe it.”5

“The Observer Effect is the fact that observing a situation or phenomenon necessarily changes it.”6

Point: Scientists make extreme efforts to eliminate the impact of their own presence on whatever they are studying. Human beings give off heat, radiation, air movement, carbon dioxide, bacterial contaminants, oils, moisture, and other factors that impact measured outcomes. Our scientific equipment similarly contaminates the objects under study.

The Hawthorne Effect
One subset of The Observer Effect, related to the study of human behavior, is The Hawthorne Effect. Many decades ago, a study was conducted at a factory named Hawthorne Works. The study analyzed the change in human behavior, especially productivity, by changing the amount of light at the Hawthorne Works and measuring its impact on working practices. Greater lighting led to temporary increases in production. Why? Greater lighting made everything and everyone more visible.

Applications of lessons drawn from The Hawthorne Effect are incorporated into many activities aimed at influencing the behavior of innumerable, randomly selected people whose actions occur simultaneously, or consecutively.

One such application is called the “Red-Light Camera Program.”

“In a Red-Light Camera Program, a camera is installed in a location where it can take photos or video of vehicles as they pass through an intersection. City employees or private contractors then review the photos. If a vehicle is in the intersection when the light is red, then a ticket is sent to the person who registered the vehicle.”7

The idea behind these programs is to reduce cross-street collisions. Theoretically, drivers should fear the possibility that they will be fined and will therefore be more likely to stop at the light, consequently lowering the number of accidents. And in fact, evidence clearly shows that Red-Light Camera Programs are effective at decreasing the number of vehicles running red lights.

Independent Financial Professionals and The Observer Effect
“You may find that making a difference for others makes the biggest difference in you.”
—Brian Williams

IFPs provide human-to-human accountability, a key value-add that will be hard for computers and AI to ever mimic.

“When a human is involved, we often have few options for totally avoiding the unfavorable perceptions we think others may have about us if we don’t follow through on our goals.”8

Application of The Observer Effect for IFPs

  1. When an IFP assigns expectations of a client, ones that are SMART (Specific, Measurable, Attainable, Relevant, and Time-based) the client can expect to later account for the results. This will change the trajectory of the client’s behavior.
  2. An IFP can consistently remind clients that each goal aligns with what the clients want to accomplish. Failure of the clients to follow through on their responsibilities will cause them to not achieve what is important to them.
  3. An IFP can help clients wisely assess their behavioral motivations by evaluating the ways in which the clients’ various social groups that they belong to influence their spending, savings, and investing habits—positively or negatively.

Practical Ideas:

  • Record and send a video of you asking the clients to remember their goals and to inquire as to what the clients have been doing.
  • Set up an online group with multiple clients to exchange their progress on their goals and to keep each other accountable.
  • Take pictures of your client meetings and share the photos with clients from time-to-time, to add the element of human observation.
  • Make a growth chart for clients of their goals that they want to improve on and ask them to share their progress.
  • Send a Post-It note with the word “Done” on it and attach it to a copy of the client’s financial goals or milestones that have been achieved.

Summary
“What you do for yourself dies with you when you leave this world, what you do for others lives on forever.”—Ken Robinson

The role of an IFP provides fantastic opportunities to demonstrate patience, humility, and some humanity. It also is a privileged position with the power to change human behavior.

The power is more potential than kinetic. To be unleashed, the power to modify the behaviors of clients must follow the normal activities of a professional advisor:

  • Preparation: Do the work beforehand. Conduct a thorough client analysis before each meeting, do the research, get a list of questions together before the appointment.
  • Client Meetings: Demonstrate care and respect for people’s time through prepared agendas, keeping the meeting on track, and ensuring action steps with responsible parties.
  • When Real Life Strikes: When a client faces a difficult personal situation (illness, child/elder care), respond quickly, stay appropriately in touch, follow-up with sensitivity.

By acting in this fashion, an IFP can be far greater than Smith’s “impartial spectator.” Indeed, the IFP can exercise astounding power to affect the clients’ behavior. The clients need this. Even if they are patently unaware of their need.

“I’ve learned that you shouldn’t go through life with a catcher’s mitt on both hands. You need to be able to throw something back.”—Maya Angelou

Here’s encouraging you to Pitch with Power!

Footnotes:

  1. Investopedia https://www.investopedia.com › ho…How Understanding Client Behavior Helps Financial Advisors.
  2. https://www.kitces.com/blog/how-financial-advisor-human-connection-positive-behavior-change-accountability-partner/.
  3. https://hbr.org/2020/05/we-work-harder-when-we-know-someones-watching.
  4. Ibid.
  5. The Observer Effect | IEEE Conference Publication – IEEE Xplore.
  6. Hawthorne effect – Catalog of Bias.
  7. Red Light Cameras May Not Make Streets Safer – Scientific American.
  8. https://www.kitces.com/blog/how-financial-advisor-human-connection-positive-behavior-change-accountability-partner/.

Is It Time To Upgrade Your Variable Annuity Policy?

Kyle Tomko
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Is It Time To Upgrade Your Variable Annuity Policy?

I love the game of blackjack. When I sit at the table, I feel optimistic and in control. However, as time goes on, I start betting larger amounts resulting in more risk. At this point greed takes over and I believe nothing can go wrong. We all know how this story ends though…

To no surprise, it’s not uncommon for blackjack winners to keep playing in the hopes of winning even more. Walking away is an important decision if you want to maximize profits and minimize losses. While investing in the stock market is fundamentally different from playing blackjack, drawing a connection between the two can provide interesting insights.

Both the stock market and blackjack involve risk and uncertainty. In blackjack you make decisions based on limited information, only seeing your own cards and the dealer’s up card. Similarly, investors in the stock market face uncertainties about future market movements, company performance, and economic conditions. Just as managing your bankroll is crucial in blackjack to extend playing time and minimize losses, investors in the stock market practice portfolio management and diversification to protect their investments and minimize risks. Further, both blackjack and the stock market exhibit variability in outcomes. In blackjack, winning or losing streaks can occur due to chance and the changing distribution of cards. Likewise, the stock market experiences periods of growth, decline, and volatility that can affect investment performance.

When it comes to variable annuities, these instruments which are directly exposed to the stock market can be a reliable asset in a retirement portfolio. However, they come with drawbacks such as excessive fees and the potential for account erosion. On average, variable annuities charge around 2.3 percent per year in fees, but this can exceed three percent depending on the policy. These fees are deducted from your balance annually. Considering recent market downturns, it is worth considering “locking in gains” to protect what you have earned and avoid potential losses.

In this article, I will explain why individuals should consider upgrading their variable annuity policy by adopting a flight-to-safety approach. This approach involves moving capital from riskier investments to safer alternatives during times of market volatility or economic uncertainty. One strategy that aligns with this approach is exchanging a variable annuity policy for a fixed indexed annuity policy. This change allows for wealth generation and lifetime income without the risk of capital loss. While variable annuities excel at generating a rate of return, they fall short in generating lifetime income compared to alternative annuity vehicles. Let’s take a look at both the benefits of switching to an indexed annuity policy and the potential drawbacks.

Benefits of Switching to an Indexed Annuity Policy:

  • Cost Reduction: Variable annuities often come with various fees, such as administrative fees, mortality/expense risk charges, income rider fees, and sub-account fees, which can average around three to four percent. On the other hand, indexed annuities typically have lower fees or even no fees, eliminating any negative impact on the account value.
  • Capital Protection: Indexed annuities safeguard your principal by mitigating the risks associated with stock market volatility. Through the use of hedging instruments, FIAs establish a floor of zero, shielding your investment from market downturns. This feature is particularly valuable for investors who have accumulated significant gains with their variable policy and are now seeking to minimize risk.
  • Increasing Income: Fixed indexed annuities offer a solution to address inflation, higher taxes, and medical expenses. These annuities provide income increases whenever the contract earns interest. In contrast, variable annuities only provide a level income that may diminish over time as the cost of goods increases during retirement.
  • Higher Cumulative Income at Life Expectancy: Indexed annuities prioritize the extraction of income from the asset by utilizing income riders, allowing the policyholder to retain the underlying asset. While the initial income may be lower due to a reduced withdrawal rate, indexed annuities can potentially provide more lifetime income at life expectancy due to the income step-up each year when the index returns are positive.
  • Enhanced Death Benefit: By exchanging your variable annuity policy for an indexed annuity, you gain the advantage of an enhanced death benefit from day one. Indexed annuities often offer premium bonuses to the income account value, enabling beneficiaries to choose between a lump-sum payment or receiving the benefit over a five-year period.

Drawbacks of Replacing Your Variable Annuity Policy:

  • Lower Income at the Beginning: Indexed annuities, with their increasing payouts, generally offer lower income during retirement. Depending on the timing of when income is needed, variable annuities may be better suited for providing level income. Factors such as current age, expected income horizon, life expectancy, and the breakeven age should be considered to assess viability.
  • Limited Growth: Indexed annuities provide the opportunity to participate in market upswings, but they can have limited returns due to caps, pars, and spreads. While this trade-off ensures that your asset is secured and protected, it also means that the focus shifts from accumulation to distribution.
  • New Surrender Schedule: When replacing a variable annuity policy, the new contract will be subject to a new surrender charge schedule. This means that surrendering the contract outright will incur significant charges. Although not an additional fee, this change in the surrender schedule should be taken into account.

It is important to note that the option to replace a policy does not automatically mean it should be done. Several factors come into play when determining the appropriate asset allocation model, including retirement timeline/age, risk tolerance, and identified goals. After reviewing the most recent quarterly statement, it is essential to conduct a year-by-year comparison to consider hurdle rates, crossover points, and income payouts. Assuming the flight to safety approach is deemed suitable, there are certain dealbreakers that need to be considered.

First, it is crucial to determine if the policy has been in effect for at least three years. Selling a policy within the first three years is unlikely to be justified, as most states mandate a three-year hold period for consumer protection purposes. Secondly, if the surrender charge exceeds three to four percent, it becomes challenging to overcome this hurdle rate, particularly if the goal is focused on income generation or accumulation. In such cases it is generally advisable to wait a year or two for the surrender charges to decrease. Lastly, it is necessary to evaluate if the new contract can provide a higher income base value from day one. Depending on the income horizon, carriers typically prefer to see the new contract start with a higher income base, often aided by the premium bonus offered. If this is not the case, a detailed letter of explanation may be required although success is not guaranteed.

In conclusion, the discussion of variable annuities in relation to blackjack and the stock market highlights the need for individuals to review their financial strategies and consider alternatives that provide more stability and protection. Upgrading from a variable annuity to a fixed indexed annuity, which offers wealth generation and lifetime income without the risk of capital loss, can be a wise decision, particularly during times of market volatility or economic uncertainty. By adopting a flight-to-safety approach and prioritizing the preservation of gains, individuals can secure their financial future and minimize potential losses. For advisors who have a book of variable annuities, now is the time to start the audit process with each client.

Pay Yourself First

Michael “Slades” Sladek
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Pay Yourself First

A Slow Start
When I was 26, I had already been married for four years to my first wife, I was expecting my first child and working at a large CPA firm in downtown Chicago. Sounds good, right?! But I also lived in a one-bedroom apartment, had too much debt and a too low credit rating. Like many young people today, I had little to no financial training. My parents never prepared me, my teachers never taught this subject in school, and I was missing a vital piece of my ability to be successful. Sure, I had attended college and achieved a double major in accounting and economics and was about to attend graduate school. But I was financially illiterate as to how to manage my own money. Sounds hopeless, right? Or, maybe for some of you, familiar?
Fortunately, I met a person who owned his own brokerage general agency and had access to other financial products besides insurance. As I lamented my inability to get ahead, get out of debt and get a house, he made one simple comment to me, “Slades, you need to pay yourself first.”

I asked him to explain what he meant because, to tell you the truth, I had no clue. “Slades, you will never have anything in savings if you don’t make a concerted effort to pay into your savings first, whatever it is, with each check, and start to save for your future.” I wasn’t sure that I could do that financially, but he set me up with a simple mutual fund for just $25 per month.

I know that does not sound like a lot but trust me it was. The $300 I saved in the first year was small, but the path it put me on was worth way more. As my pay increased and I paid off debt, I was able to boost that monthly amount and improve my savings significantly. Years later, I still have that same mutual fund account, albeit worth a lot more, as well as several other savings and investment vehicles. Also, I have taught the “pay yourself first” concept to my children.

You might be saying, “Slades, that’s a nice story, and I’m glad it worked out for you. But how exactly does this relate to me or my clients?” I’m glad you asked. I think this is a concept we can help our clients apply in their own lives and increase our depth of relationship with the client. Everyone can use some form of financial training and education. To this day I still balance my checkbook to the penny every month. I use a very popular software tool that I have had for over 22 years, but it works, and I am able to manage my money very easily.

Our HNW Clients
We may think that because they have money, our high-net-worth (HNW) clients don’t need this type of education but they do and, more importantly, so do their kids. These clients are looking for ways to get their kids off to a good start as well as transfer assets to their children and set them up for financial growth for the future. What better way than to approach your HNW clients and speak with them about setting up an IUL for the kids? Think of LIRP for children or maybe a CLIRP. Funny name and I don’t really think it will catch on, maybe C-LIRP would be better. The concept is a way to get your kids saving for retirement long before they will ever have their first job. In addition, it can provide a financial backstop should things get financially tougher for them when they get older.

The Product—How it Works
Below is an illustration on a one-year-old male for an income-focused IUL with an initial death benefit of $100,000 and an increasing death benefit. The annual premium is about $1,950 or around $165 per month.

By the time the child graduates college at age 21, the parents will have paid in about $39,000 in premiums but the policy will have over $70,000 in accumulation value on a non-guaranteed basis.

After the child graduates college and wants to purchase their first car, imagine they are able to take out their first loan at a very reasonable rate…from themselves! The payments are going back into their IUL to pay themselves back, not to a bank or auto financing company.
This IUL also has a return of premium (ROP) feature. So if the market does not perform as expected, the parents or the child can turn in the policy and get all of their money back. The only thing lost is the opportunity cost of what could have been earned in another savings or investment product.

All of us who sell IUL policies know that they should never need this feature or should ever have to use it. But what a great peace of mind to know if they do need it, it is there. In addition, what a great way to close the sales process for your agent by letting their client know that as long as they pay the target premium every year, they will always have the ability to receive their premiums back on the product in years 20-25. That’s six opportunities to take advantage of the 100 percent refund.

The Sweet Life
If there is no need to touch the money until retirement then, at age 65, after paying for 64 years at less than $2,000 per year, the child, now ready for retirement, will have over $1.3 million in non-guaranteed surrender value and over $1.6 million in death benefit. If they retire later at age 70, it would be $1.8 million in non-guaranteed surrender value that could be used to fund retirement and over $2 million in death benefit.

As you can see, the concept is pretty simple. Approach all of your current clients and show them how easy it is to transfer cash to their children and provide a way to set them up for future growth and cash accumulation.

The Objection
I know what some of you are thinking and I also know what pushback you might receive when you present this to your clients. “What if I invest the money in a mutual fund instead of buying an insurance product?” You absolutely could do that and when you run a straight future value calculation on $1,950 for 64 periods at 6.25 percent, the future value of the mutual fund, assuming you could get 6.25 percent every year, is closer to $1.5 million versus $1.3 million in the IUL.

The good news is the cost of insurance charges for your kids are extremely low in an IUL policy. In fact, in the first 20 years, they never exceed $85 per year as illustrated.

The IUL has about $1.3 million in cash surrender value and the mutual fund has about $1.5 million. However, this does not net the value of the mutual fund after taxes. Taxes would need to be paid on accumulation for investment products every year in addition to the taxes due on any withdrawals.

The IUL provides similar accumulation in a tax-favored product that also provides your client with a death benefit option for their child. So they always have a life insurance benefit, and it includes a safety net that is not available in the mutual fund with the return of premium.
I think by now you can understand how passionate I am about our industry and how much I believe in this product and the options it provides. I am also passionate about leaving a legacy for our children and wealth transfer. I hope you can use this idea in your practice as you help your clients with their long-term financial planning needs.

My First Client Meetings

Charlie Gipple, CFP, CLU, ChFC
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My First Client Meetings

My first meeting with a “rich guy”:

As I drove my 1990 Pontiac Grand Am through the gated community lined with multi-million-dollar houses, I was increasingly getting nervous as the house numbers ticked down to John’s house number. I could feel the butterflies in my stomach start to kick in as this was only my third or fourth client meeting ever. What kept going through my fresh 23-year-old brain was the opening introduction to a “good sales meeting” that my branch manager taught all of us new recruits. Beyond the introduction, I also thought that I had every scenario in my head planned out so I could pivot to a good “product” once I uncovered the opportunity during the “fact finding” process. I felt fortunate that my manager had given me this lead, and I was dead set on bringing back the sale. This was also a pleasant change from the list of family and friends I had been hammering on since I started with this captive/career company. John’s original advisor had just retired, and he was an “orphan” who accepted my meeting request once I called him from my lead cards that my branch manager had given me.

As I drove closer to John’s house, in my head I was confident that I would snag this big fish because he was already warm to our company as he already owned several large insurance policies with us. Plus, nobody knew “product” and the technicalities better than I did. Even though John had not expressed any need for any assistance from me or the company, he agreed to meet with me for some reason.

When John answered the door, he was very welcoming and joked, “You’re a tall drink of water aren’t you?” I am sure my response was not real charismatic as I was just trying to not lose my concentration on teeing up the “sales meeting.” Tunnel vision.

As we proceeded across his marble floors to the giant dining room table, I felt awkward because I didn’t know what to say to a wealthy person almost three times my age. It was about 20 seconds of silence. My manager never taught me about “breaking the ice.” But hey, I looked good in my newly purchased suit with my briefcase that had a never-read Wall Street Journal sticking out of the pocket. As we sat down he broke the ice by asking me about his old advisor who had resigned from our company. After telling him that his former advisor had retired and moved to the coast, I immediately dived into my introduction and the need for me to update our “fact-finder” on him. He agreed to give me his updated information. So, I reached into my briefcase and pulled out the sole contents of it, the “Fact-Finder.”

Just like they taught me in “training,” I went through the fact finder line by line and John told me everything I wanted to know. However, as we approached the middle of the fact-finder, I could sense that he was getting a little annoyed by the redundancy of the process and the uncertainty of exactly why I was there. But I continued to ask the “fact-finder” questions anyway.

Once I completed the fact finder, I could only identify one gaping problem that John had in his portfolio—the lack of long term care planning. After giving him the long term care “product pitch,” he was non-responsive like there was something else he would rather talk about. That is when he said, “I think right now I have a bigger fish to fry in that I just sold my construction business for $10 million. I think it would make sense for you to come back another time with your manager so we can figure out what I should do with this money that is just sitting there.” I may have been 23 years old, but I was smart enough and self-aware enough to know when I have been snubbed! I was also smart enough to know that this was an opportunity. I needed help! So, we agreed to reschedule for a different time when my manager would accompany me.

When I got to my car I was dumbfounded as to why he wouldn’t discuss the sale of the business with me, because I felt that I knew technicalities, product, etc. very well. Plus, I did exactly what they taught me in training!

As a competitive, athletic, high-octane young guy, I was slightly embarrassed to tell my boss I needed help. But I did. And he said, “Book the meeting!”

My Boss “Riding Along”
As my boss—who I will call Dave for purposes of this article—and I drove down John’s street in Dave’s BMW 740, I was getting even more nervous this time as I had my boss observing me! My boss was still the jokester that he always was, telling stupid jokes and talking about sports as we approached John’s house. I could tell that this meeting was just another day in the office for him. As we walked up to John’s house, Dave—who was much more casually dressed than I was—was pointing out that he thought he knew a couple of the neighbors. He also had some stupid story about his experience with one of the neighbors getting really drunk at a party once. I wasn’t paying attention because, again, I had tunnel vision.

As John answered the door, he was very friendly once again. I shook John’s hand again and so did Dave. Except Dave jumped into saying, “Do you know your neighbor XYZ and ABC?” Of course John knew who they were and immediately smiled and joked about them. As we walked across that marble floor, Dave had observed pictures on the wall of John and his two sons fishing in Cancun. That generated a conversation that continued to the large dining room table.

As they were conversing about Cancun and fishing, I dug into my briefcase—that still had the same WSJ in the pocket from the week before—to grab one of the three items I had in it—the fact finder. By the time I had pulled out the fact finder they were already discussing the sale of John’s business and his concerns with what to do with the money so that it grows and passes on to his kids. After Dave told a quick story about his own dad selling his business and the observations that he has had with his dad’s process, he quickly dived into the options that John can do with his money. It was a conversation! And it was natural!

Interestingly, through the course of the conversation that I was merely spectating, Dave had uncovered a significant amount of “fact-finding content” that I had not in my previous meeting with Dave. As my boss had the conversation with John, I was flipping back and forth through the “fact-finder” to fill in the gaps that my tunnel vision had not even identified previously.

Then it naturally turned to “product.” This is where Dave knew almost nothing as he was not technical. (Note: Dave was a “ready, fire, aim” type of guy, but the best salesperson I ever met. I know you know the type.) This was my chance to shine, and I did. I knew every fee, subaccount, death benefit rollup rate, surrender charge percentage, etc. that the proposed variable annuity had. I also knew every mutual fund that we had in our arsenal. We also turned to the long term care option, that Dave also tee’d up, and I knocked the product details out of the park.

In the end we walked out of that house having a new friend in John, having helped John with investing some of his business proceeds, and also making significant sales of variable annuities, fixed annuities, mutual funds, and a long term care policy.

Observations

  • Sales happen when you are yourself. People buy from people and if you hide behind the “cloak of formality” it does not matter how technically smart you are—you will not get the sale. This requires confidence and sometimes confidence takes time in the business, but be confident and be yourself. If the client does not like “yourself,” then it was never meant to be. As another manager once told me, “Why be scared? It’s not like they can kill you.”
  • Be observant: My lack of confidence and tunnel vision made me too stiff where I should have been observing the pictures on the wall and the things that are important to John. If you can connect with what is important to the client, natural conversations happen. When natural conversations happen, sales get made.
  • Listen to understand the information and block all other thoughts out: In my first meeting with John, I listened to respond (versus to understand) and missed the hidden gems in John’s words. I did not even know, until he volunteered it, that he just sold his business for $10 million! I also see this occasionally with presenters that are asked questions from the audience. They miss the actual question because they are busy thinking about a zinger response. Let the client talk. Be an elephant (big ears), not an alligator (big mouth).
  • Product is important but not the most important: It was Dave’s likeable nature and his ability for him to show the client that he understood the situation. He could not even spell “variable annuity.” My product knowledge certainly helped in the end, and built my credibility, but it was secondary. Dave would have still made the sale without me, but the client would have likely gotten bad information on the product that he now owned.
  • Stories matter: Millions of years of evolution has us humans working off our “reflexive” part of the brain that has allowed us to survive the saber-toothed tiger. Stories scratch the “reflexive” itch that we have. Some would call it the “right brain.” Notice how this entire column is a story? That is on purpose.
  • Partner with somebody that compliments your strengths: Dave and I were a good match. I was fortunate to have him as a bit of a mentor because I learned through observation how to connect with people and how to make it a conversation versus a mission to check off all of the “fact-finder” boxes. My experience with Dave fit together nicely with my technical knowledge that made me well rounded in the end.
  • Just last: Was it John Savage that said the secret to our business is, “To last?” There is truth to this. Much of what I lacked as a 23-year-old was confidence and wisdom, which takes time. Now, 21 years later, I feel that I have that. However, it took time and it took having the right mentors. This is why, if you are new to the business, if you can “last” through the first couple of years your chances of enormous success dramatically increase. Then you are much better equipped to speak with those clients like “John” than I was at age 23. If you don’t have a good mentor, partner with a veteran agent or a good IMO that has the willingness and talent to serve that role.
  • Lastly: Like Dave, just have fun!

An interview With Eugene Cohen—Inflation And Disability Insurance: A Very Timely Disability Insurance Rider For Your Client To Consider

Eugene Cohen and Michael Cohen
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An interview With Eugene Cohen—Inflation And Disability Insurance: A Very Timely Disability Insurance Rider For Your Client To Consider

With the help of Victor Cohen, this is part of our ongoing series with Eugene Cohen, founder of the Eugene Cohen Insurance Agency, Inc., 2009 Honoree International DI Society W. Harold Petersen Lifetime Achievement Award, 2015 Honoree of NAILBA’s Douglas Mooers Award for Excellence.

From time to time, we will feature an interview with Eugene, who has dedicated over 58 years of his life to learning, teaching, and supporting brokers in the agency’s quest to help consumers protect their incomes from the tragic effects of a disability.

Disability insurance (DI) is one of those products that can change the trajectory of an individual and a family’s life and is crucial for every financial planner and insurance professional to learn about and offer to clients.

Victor: Eugene, when a client is applying for disability insurance and thinking about riders to add to the policy, what is something important that you feel the client needs to think about?

Eugene: Inflation. Every time you turn on the news you hear about inflation. You hear about the cost of living going up. Everybody’s talking about it. In the past decade or so, it wasn’t really in the conversation like it is today.

Victor: So, what is a good way for a client to protect themselves against inflation when applying for income protection insurance?

Eugene: Well, let’s presume that an individual 10 years ago was applying for an income protection disability policy. At the time, the client was 30 years old and deciding if they should add a special rider to their policy that many DI companies offer—a rider that helps to offset the policyholder’s monthly benefit specifically against inflation.

The client says to their advisor, “Should I add the Index Cost of Living rider on the policy?” This rider is often referred to as a “COLA” rider.

The advisor says, “I don’t know. I don’t have a crystal ball. I can’t determine what inflation or the cost of living is going to be in the future.”

The client thinks for a minute and says, “I want to add that rider to the policy.” Remember, the client is 30 years old, in great health—with little talk about inflation at the time. So, the client gets approved for a base monthly benefit of $5,000, with a benefit period to age 67, with the COLA rider.

Then, 10 years later, all of a sudden, the individual suffers a severe disability. It could be cancer, or it could be multiple sclerosis, something that could disable them for a long period of time—let’s say all the way to age 67.

Our client’s COLA rider could offset some or all of the effects of inflation on the client’s disability benefits. After the first year of being on claim and still disabled, the rider would allow the monthly payment to be increased by a certain percentage. Many policies indicate that the percentage of increase will be based on the Consumer Price Index, up to a certain percentage.

Just a reminder, each DI company has different provisions around the COLA rider, so the advisor needs to check with the company regarding specific rules around their COLA rider.

So, take a look at what could happen to that original $5,000 monthly base benefit paid out over the years because the client bought that index cost of living rider.

Victor: How much would that $5,000 monthly benefit increase, assuming the client’s total disability began at age 40 and lasted through age 67, with a starting basic monthly benefit of $5,000 and annual increase based on a three percent rate of inflation, compounded?

Eugene: The client’s ultimate monthly benefit would have gradually increased to $10,783. Remember, in our example, every year the monthly benefit goes up three percent, compounded. This assumes that the Consumer Price Index that measures inflation was at three percent every year during the total disability.

Victor: It really is amazing. What if the Consumer Price Index increases less than three percent during the previous year after the client has been disabled?

Eugene: Many policies will use the following method: If the CPI-U increases by less than three percent the previous year, the monthly benefit increase will be less than three percent that year. So, for example, if there were a two percent increase in the CPI-U, there would be a two percent increase in the monthly benefit. Of course, it’s important to confirm how the disability policy is worded.

Victor: What if inflation were higher than three percent over any of the years our client was disabled after the first year of being disabled?

Eugene: With the three percent COLA rider that our sample client chose, the maximum monthly benefit increase they could get each year would be three percent. Some companies also give the client the option at application time to apply for a COLA rider with a six percent cap—which, of course, comes with a higher premium than the three percent COLA rider.

Victor: Let’s say the client eventually recovers from their disability and returns to work full time. What happens to the monthly benefit increases that may have been added to the policy over the years the client was disabled?

Eugene: So, let’s presume our sample client’s disability is, let’s say, only five years, and they are now 45 years old and completely recovered. At the time the client returns to work and is off of claim, the client would be offered the opportunity to retain the increased monthly benefit with no medical exam. To keep the higher benefit, the company would need to increase the premium that would support the cost of the additional monthly benefit that the policy increased to during the course of the disability.

Oh, and don’t forget, with many companies the COLA rider may also increase a policyholder’s monthly residual disability benefit as well.

Victor: Residual disability, meaning a partial disability.

Eugene: That’s right. Some companies have a COLA rider that may allow the monthly benefit to increase when the policyholder is not just totally disabled but also if they are working part time and qualify for the residual definition or partial disability benefit. The advisor should check with each DI company.

Victor: Thank you, Eugene. As always, this has been another great DI conversation, jam packed with helpful DI information.

Eugene: Thank you, Victor. Looking forward to doing it again soon.

Sometimes You Simply Cannot Fix Stupid

Don Levin, JD, MPA, CLF, CSA, LTCP, CLTC
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Sometimes You Simply Cannot Fix Stupid

I recently observed my twenty-third anniversary in the long term care insurance industry. I am not certain that the adage, “Time flies when you are having fun,” would be applicable, but it has prompted me to pause for a moment and to reflect on what has been a wonderful career in which I have genuinely helped countless people protect themselves and their families against the ravages of long term care. In some ways I was truly fortunate that my first claim occurred within the first six months that I was in the industry, thus making the “intangible promise” associated with the contract a very real thing to me as I helped the family negotiate the claims process.

One of my professional associates (not in the LTCI industry) asked me whether I still have the same “fire in the belly” that I had all those years ago, and to that query I could enthusiastically respond with a resounding “Yes!” He also wanted to know whether my attitude regarding the requisite activities at the point of sale had changed after all my years in management. And to this query I responded in the negative. Because I have “kept my hand in it” over the years, and still consider myself a Long Term Care Advocate (producer) at heart, I can honestly say that the belief system I embraced while a student in the Basic Training Seminar has remained largely intact and only the techniques and available tools have been subject to a few minor tweaks over the years.

Some of you reading this article may find this next statement shocking or even border on braggadocio, but I have always believed that the sale of traditional long term care insurance is a one-appointment sale. After about three or four months in the business of having to return to the clients’ house for a second go around where I largely had to repeat the interview and further answer questions, I discovered the importance of simply asking, “What do you need to think about?” or “Would six to eight weeks be enough to consider what you actually want this policy to provide you?” After asking one or both of those questions, I soon found myself closing about 90 percent of my appointments on the first go around. It simply made sense to do this, and so I really focused on identifying and personalizing need, creating the requisite sense of urgency that prompted the client(s) to answer the call to action in that first interview, and demonstrating the value associated with owning a policy. I have encountered producers who have made it a two-, three-, or even four-appointment process. Even after all these years, I do not know how one can make it more than a two- appointment close unless one is shifting to a different form of protection or lacks the confidence to ask for the application.

I can also remember how genuinely angry I would get at myself and how I would replay the interview in my head as I drove to my next appointment or worse, home with my tail between my legs, on those occasions when I had not closed the appointment during the initial interview. I learned that sometimes all that had prevented the sale from occurring was not asking that one additional question. That mini epiphany was enough to transform me into a long term care advocate.

Ignorance is defined as the lack of knowledge. I determined that after I had educated my clients, and they were no longer ignorant, that the decision to purchase a policy should be a no brainer. Yet I still encountered those who believed that “It won’t happen to me,” and that they “Would be in the ten percent unimpacted by long term care,” or, despite the irrefutable evidence to the contrary, they would remain in denial and unaffected by long term care. It was only after I realized that if I were conducting the interview in the same tried-and-true method, that the failure to close was not a shortcoming or worse, a failure, on my part, but the harsh reality, in the absence of ignorance, I could not fix stupid.

That may sound harsh, or even a tad egotistical, but because of the passion with which I approach each interview, I have simply come to expect to close every appointment when the client has the requisite health, wealth, and has been afforded the opportunity to become informed and aware of the risks and consequences of not purchasing a plan.

On the brighter side, more consumers surveyed say they are more likely to purchase a long term care insurance plan because of personal or family-related experiences during the COVID-19 pandemic. This has been most helpful in younger clients who have “lived the nightmare” of long term care with elderly parents.

While I long ago came to terms with the fact that we are offering a product that people do not want to consider for myriad reasons, including their own mortality and morbidity, I also realized that, like a lot of myths, it is our job to educate and make them aware of the pertinent risks and consequences and help them get out of their own way. The excuses we most commonly hear range from “It is too expensive,” “I am too young and can bank the premiums and save some cash,” “I am young and healthy,” to “Nobody in my family has ever needed it,” and “How do I know that your company will even be around if I ever need to file a claim?” Talk about an uphill putt!

Much like the specter of life insurance, which forces a potential buyer to contemplate his or her own mortality, most prefer to simply avoid the topic entirely until we peel back the onion, layer by layer, again using education and awareness to help them protect the ones they love. Overcoming this denial or reluctance is key to their accepting and planning for their mortality and building a strong financial plan for retirement and beyond.

With life insurance, when you deliver the death benefit your client is dead. The policy is for the people he or she leaves behind. With long term care insurance your client is very much alive, and thus the policy is for the living!

I also had to accept the fact that unlike a shiny new car or an exciting flat-screen television with all the bells and whistles, I was largely offering my clients a promise. A pledge, a piece of paper, based on an intangible promise that the assets and resources offered by the contract with the carrier would be there in their time of need. It is not about having a flashy animated PowerPoint presentation or glossy brochure but bringing sincerity, professionalism, and passion to every interview we conduct. The mindset that this is an interview should also dictate that the client will do more of the talking, or in a two-to-one ratio to what we are saying. Long term care insurance is all about helping them make an emotional decision to buy based on need and urgency, followed up by the logical reinforcement of this emotional decision.

So, again, it all comes back to education and awareness, and ensuring that your client is no longer ignorant or lacking in the requisite knowledge to make an informed decision.

As a “young” agent, I was taught that, after ten years in the industry I would be considered “older than dirt” and would have truly earned my spurs. Having eclipsed that milestone twice over, I can now say that the emotions that I experience when the sale does not occur have subsided from anger and frustration to those of acceptance and sadness for the client. A sale is not going to change my life, but the absence of a sale will likely impact theirs with the odds of a long term care incident very high. Tempering these emotions is the realization that while I can eliminate ignorance, it is not within my power to eliminate denial or to fix stupid. All I can do is to bring my “A” game to each interview, to be as professional and transparent (in a good way) as I can be, and to provide them with the relevant information necessary to make an informed decision.

A friend of mine who is ten years older than I and has been in the industry longer than I have, recently experienced a severe health scare (he was dead on the kitchen floor until he was revived) that I thought would prompt him to retire. When I asked him about it, he quietly said, “Only about ten percent have coverage, and we know that seventy percent need it, so I guess I will keep working until I cannot work any longer.”

He laughed when we recalled the ignorance and stupid dichotomy, and simply added that he hoped to find more of the former and less of the latter.

Pay Yourself First

Michael “Slades” Sladek
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Pay Yourself First

A Slow Start
When I was 26, I had already been married for four years to my first wife, I was expecting my first child and working at a large CPA firm in downtown Chicago. Sounds good, right?! But I also lived in a one-bedroom apartment, had too much debt and a too low credit rating. Like many young people today, I had little to no financial training. My parents never prepared me, my teachers never taught this subject in school, and I was missing a vital piece of my ability to be successful. Sure, I had attended college and achieved a double major in accounting and economics and was about to attend graduate school. But I was financially illiterate as to how to manage my own money. Sounds hopeless, right? Or, maybe for some of you, familiar?
Fortunately, I met a person who owned his own brokerage general agency and had access to other financial products besides insurance. As I lamented my inability to get ahead, get out of debt and get a house, he made one simple comment to me, “Slades, you need to pay yourself first.”

I asked him to explain what he meant because, to tell you the truth, I had no clue. “Slades, you will never have anything in savings if you don’t make a concerted effort to pay into your savings first, whatever it is, with each check, and start to save for your future.” I wasn’t sure that I could do that financially, but he set me up with a simple mutual fund for just $25 per month.

I know that does not sound like a lot but trust me it was. The $300 I saved in the first year was small, but the path it put me on was worth way more. As my pay increased and I paid off debt, I was able to boost that monthly amount and improve my savings significantly. Years later, I still have that same mutual fund account, albeit worth a lot more, as well as several other savings and investment vehicles. Also, I have taught the “pay yourself first” concept to my children.

You might be saying, “Slades, that’s a nice story, and I’m glad it worked out for you. But how exactly does this relate to me or my clients?” I’m glad you asked. I think this is a concept we can help our clients apply in their own lives and increase our depth of relationship with the client. Everyone can use some form of financial training and education. To this day I still balance my checkbook to the penny every month. I use a very popular software tool that I have had for over 22 years, but it works, and I am able to manage my money very easily.

Our HNW Clients
We may think that because they have money, our high-net-worth (HNW) clients don’t need this type of education but they do and, more importantly, so do their kids. These clients are looking for ways to get their kids off to a good start as well as transfer assets to their children and set them up for financial growth for the future. What better way than to approach your HNW clients and speak with them about setting up an IUL for the kids? Think of LIRP for children or maybe a CLIRP. Funny name and I don’t really think it will catch on, maybe C-LIRP would be better. The concept is a way to get your kids saving for retirement long before they will ever have their first job. In addition, it can provide a financial backstop should things get financially tougher for them when they get older.

The Product—How it Works
Below is an illustration on a one-year-old male for an income-focused IUL with an initial death benefit of $100,000 and an increasing death benefit. The annual premium is about $1,950 or around $165 per month.

By the time the child graduates college at age 21, the parents will have paid in about $39,000 in premiums but the policy will have over $70,000 in accumulation value on a non-guaranteed basis.

After the child graduates college and wants to purchase their first car, imagine they are able to take out their first loan at a very reasonable rate…from themselves! The payments are going back into their IUL to pay themselves back, not to a bank or auto financing company.
This IUL also has a return of premium (ROP) feature. So if the market does not perform as expected, the parents or the child can turn in the policy and get all of their money back. The only thing lost is the opportunity cost of what could have been earned in another savings or investment product.

All of us who sell IUL policies know that they should never need this feature or should ever have to use it. But what a great peace of mind to know if they do need it, it is there. In addition, what a great way to close the sales process for your agent by letting their client know that as long as they pay the target premium every year, they will always have the ability to receive their premiums back on the product in years 20-25. That’s six opportunities to take advantage of the 100 percent refund.

The Sweet Life
If there is no need to touch the money until retirement then, at age 65, after paying for 64 years at less than $2,000 per year, the child, now ready for retirement, will have over $1.3 million in non-guaranteed surrender value and over $1.6 million in death benefit. If they retire later at age 70, it would be $1.8 million in non-guaranteed surrender value that could be used to fund retirement and over $2 million in death benefit.

As you can see, the concept is pretty simple. Approach all of your current clients and show them how easy it is to transfer cash to their children and provide a way to set them up for future growth and cash accumulation.

The Objection
I know what some of you are thinking and I also know what pushback you might receive when you present this to your clients. “What if I invest the money in a mutual fund instead of buying an insurance product?” You absolutely could do that and when you run a straight future value calculation on $1,950 for 64 periods at 6.25 percent, the future value of the mutual fund, assuming you could get 6.25 percent every year, is closer to $1.5 million versus $1.3 million in the IUL.

The good news is the cost of insurance charges for your kids are extremely low in an IUL policy. In fact, in the first 20 years, they never exceed $85 per year as illustrated.

The IUL has about $1.3 million in cash surrender value and the mutual fund has about $1.5 million. However, this does not net the value of the mutual fund after taxes. Taxes would need to be paid on accumulation for investment products every year in addition to the taxes due on any withdrawals.

The IUL provides similar accumulation in a tax-favored product that also provides your client with a death benefit option for their child. So they always have a life insurance benefit, and it includes a safety net that is not available in the mutual fund with the return of premium.
I think by now you can understand how passionate I am about our industry and how much I believe in this product and the options it provides. I am also passionate about leaving a legacy for our children and wealth transfer. I hope you can use this idea in your practice as you help your clients with their long-term financial planning needs.

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