Charlie Gipple, CFP, CLU, ChFC

Conducting presentations is one big mind-game.  I believe it is the mind-games that presenting plays on us that makes presenting the number one fear in America in study after study.  Just google “America’s #1 fear” to see my point.  I therefore believe that the mindset of the presenter is what will determine the success or failure of a seminar presentation.  A lot like the statistic that 85 percent of a person’s financial success is determined by their “soft skills” versus technical knowledge,1 I believe that 80 to 90 percent of a person’s success in delivering a seminar presentation is determined by the presenters mindset.  So, allow me to address different areas of “mindset” that are of huge importance.

Preparation: Practice How You Play
I was rehearsing an important presentation out loud in my office when my 10 year old son walked in.  He asked, “Daddy, why are you talking to yourself?”  I then told him I was preparing for an important talk that I had to give to 400 financial professionals.  He said, “But it seems stupid you are talking to yourself.”  This was one of those opportunities for me to get on my fatherly soapbox! So I did.  I said, “Seth, most of life is about preparation.  Remember how I tell you when you are practicing basketball alone that you need to quit just going through the motions slowly and instead pretend there is somebody guarding you?  And I also tell you to practice how you play?  This is the same thing.  I am practicing exactly in the same manner in which I am going to play.”  He then said, “What does talking to yourself have to do with basketball?”  He clearly missed the point!  

Per my column from last month, the PowerPoint deck should be very little of the total time you put into the “preparation” phase. To me, preparation is rehearsing.  A lot of people have this backwards-they spend more time on the PowerPoint slides than the rehearsing.  As mentioned, don’t fall victim to that.  

I joke a lot that for every new presentation I do there is that poor man or woman in the adjacent hotel room that heard my talk at least five or six times at 4:00 or 5:00 a.m. the morning of my talk.  Rehearsing out loud is crucial.  I stress out loud because even though the words and the flow may sound smooth while rehearsing silently, it can be a night and day difference when the words are actually coming out of your mouth.  Your brain works at a much different pace than your vocal cords and your tongue.  Just like a drummer works at a different pace than the singer.  Thus, the importance of rehearsing out loud; so the drummer (brain) can be in tune with the singer (vocal cords and tongue).  Do you think the members of a band rehearse separately from one another?  No way.

A very large chunk of my preparation is spent on the first five to ten minutes and the last five to ten minutes of the presentation. Why is this?  Well, this is where I would like to introduce you to two behavioral finance concepts: “Primacy Bias” and “Recency Bias.”  Primacy bias is the first impression.  This is formed in the audience’s mind within seven seconds of you opening your mouth.  This “first impression” has such a powerful effect that if you do poorly in the first five minutes of the presentation, it will likely scar much of the remaining presentation in the audience’s mind.  You need to knock it out of the park in the opening!  Conversely, what is Recency Bias?  This is our tendency to remember what happened last more so than the other parts of the presentation.  This is the ending of our presentation.  Spend a disproportionate amount of time on the opening (Primacy Bias) and also the closing (Recency Bias).  

By rehearsing (out loud) to the point where you have done one full presentation to yourself that flowed well, had the right pauses, right energy, right content, etc., you will knock it out of the park.  Most important, you will have the confidence that you cannot be phased when it is time to deliver!

“One important key to success is self-confidence.  An important key to self-confidence is preparation.” -Arthur Ashe

I don’t care how long you have been in the business and how many presentations you have done, if you believe you are good enough that you do not need to rehearse every now and then, then I would encourage you to compare your presentation to one of someone who does rehearse.  You will see a difference.

Embrace the Butterflies
I read a great book about Navy Seals (Way of the Seal, Mark Divine) that discussed the Seal mindset when approached with situations that “suck.” Divine says the Seals have a way of “Embracing the Suck,” where sometimes he would even laugh at tough situations and try to find humor in situations that would kill anybody else.  Many people view being nervous before presentations as a bad thing.  I believe that being nervous can have a positive impact on a presentation.  As a matter of fact, the positive effect of being nervous is a chemical and biological fact, not something I am speaking about theoretically.  Our Maker has given us something called adrenaline, which is a blessing!  Let’s discuss.  We have something at the base of our brain called the pituitary gland.  This gland is also known as the “master gland” which controls all of our endocrine glands, including the adrenal glands which sit on top of each of our kidneys.  When we get nervous the pituitary gland instructs the adrenal glands to secrete a hormone into our bloodstream called adrenaline.  Adrenaline actually increases our glucose levels, dilates our blood vessels, increases our heart rate, and increases blood flow to our crucial organs.  You can feel all of this happening by that “butterfly” feeling in your stomach.  Well, all of this can actually make you perform better than you would without it!  Have you ever been very nervous prior to an event and then went on to perform at a level above and beyond what you would have ever dreamed imaginable?  Whether presenting or playing sports? This is the “fight or flight” effect of adrenaline that makes us superior to our “non-nervous selves” and allowed us to survive the saber toothed tiger back in 12,000 BC.  The point is: Embrace the nerves, breathe deep breaths and channel that adrenaline in the right direction!  

As you are walking up on stage the number one thing you should have in your mind is almost a verbatim “script” of the first couple of sentences of your talk.  Once you have successfully articulated those first couple of sentences, your nervousness will have gone down significantly and your preparation/training will then kick in.  Furthermore, after the first couple of sentences that very important first impression mentioned earlier would have already been formed in the minds of the audience.  The opening determines everything!  Embrace the butterflies!

Confidence
I believe the core mindset variable that determines your success or failure in this mind-game of presenting is confidence.  If you went to a doctor and he was a little wishy washy as he was presenting a diagnosis of your illness, or they weren’t really confident as they were explaining a cure for your illness, you would likely seek a second opinion.  People sense confidence, or a lack thereof, and reflect it back to you in a positive or negative manner.  This is the case whether presenting to a large group or having a one-on-one conversation.  Thus, confidence is a self-fulfilling prophecy.  If you come across as confident to the audience (even if you aren’t confident), your audience will feel this confidence and reflect positive body language back to you which in turn creates confidence in your own mind.  Now, if for whatever reason you do not feel confident, the term “fake it till you make it” has some truth here because of that self-fulfilling prophecy. Say you are starting out dating again, your confidence may be at an all-time low, however, there are ways you can build that up and not just mentally. Using pheromones for men and women can help you attract and promote that confidence you’ve been lacking, your date will see that in you and be intrigued. 

How does one project confidence?  Well, as mentioned, the number one item that builds confidence is preparation.  Again, preparation is everything-but in addition I would like to provide a couple of thoughts to help you build your confidence or at least the projection of confidence.

The Presenter’s Edge
Lack of confidence can come because the devil in your ear is telling you that your audience knows more about the topic than you do.  It also comes from being humble.  Some of the most talented people I know normalize excellence.  Meaning if they knew that they were as great as they actually are, they would be much more confident than they are.  To that end, you always need to remember that you are presenting on the topic for a reason.  You are in this position of authority because you know this topic well.  If you have prepared adequately you should know that, if for no other reason, because you prepared more than any members of the audience did you know more about the topic at hand.  There will always be one or two people in the room that know the topic as well or better than you do and that is OK.  In short, tell yourself that you are worthy of this, you are there for a reason, and that the audience is going to like what they are about to hear.

Half-Caff
In my prior life I did a lot of “media tours,” where I would go to Wall Street and get on some of the financial shows to educate the audience on financial matters.  In preparation for this I did “PR Training” with a PR firm in New York so they could fine tune how I presented myself on camera.  Anyway, this PR firm said something that has always stuck with me.  They said, “Charlie, remember to be Half-Caff! This is the notion that in front of an audience and in front of a camera you should not speak the same as you would in a casual conversation.  You bring the volume of your voice up a little more and you slightly exaggerate your body language.  Almost where you feel you are halfway loaded up on caffeine.  And, if you feel just slightly outside of your comfort zone in speaking this way, that is probably about right.”  I took it and ran with it and it works!  If you have somebody that seems “half-caffeinated” up on stage, will you question whether he or she is lacking in confidence?  Not usually.  Conversely, somebody who talks quietly and lacks positive body language will be more likely to appear not confident.  If the audience perceives a lack of confidence the presentation goes into a death spiral, because that lack of confidence is also a self-fulfilling prophecy to the presenter. 

Reference:
1. Jensen, Keld-Contributor.  Intelligence Is Overrated: What You Really Need To Succeed. Forbes article APR 12, 2012 Web. 8 March 2017.

This material is intended for educational purposes only.  For financial professional use only.  Not to be used for consumer solicitation purposes. You should not treat any opinion expressed by Charlie Gipple as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion and experiences.

 Partners Advantage does not warrant or guarantee the accuracy or completeness of the information contained herein, and shall have no liability (including but not limited to) for any direct, indirect, special or consequential damages, loss of anticipated profits or other economic loss arising out of, in connection with or relating to the information contained herein, its use or reliance, or from the pursuit or provision of interested parties.

I have done 100-150 presentations a year for as long as I can remember.  I have done thousands of presentations.  But most important, I have also been on the receiving end of thousands of presentations and here is what I believe when it comes to the use of PowerPoints slides: I believe wholeheartedly that the purpose for PowerPoints has been lost on many presenters because of those presenters’ own shortcomings at presenting.  Let me explain.  For many that do presentations wrong, the idea of putting together a long deck of beautiful slides that are extremely wordy automatically makes them think the presentation will be well received.  Thus, the amount of time preparing for what is really important—practicing the words you use and how you use them—has gone by the wayside.  In a people business, where people want to connect with people, this is the wrong way of presenting yourself.  Creating PowerPoint slides should be secondary and should take you only a fraction of the amount of time that it takes you to think through and rehearse the delivery of your words to the audience.  If you have this backward you are simply choosing   priorities and needs over those of the audience.  There is no way that even a powerful PowerPoint could ever offset shortcomings in the presenter’s word and concept delivery.

How did everything go so wrong?  Let’s discuss.  The predecessor to the PowerPoint was the overhead projector.  For the really young folks reading this, the overhead projector allowed you to write with an erasable marker on acetate pages (transparencies), and as you wrote it would project that drawing on the same screens we use today with PowerPoint slides.  Overhead projectors used light bulbs and shadows, very similar to how I play finger shadow games with my kids on the wall.  Back in the 70’s this “technology” was great because it would allow professors or any other professional who was presenting to large audiences to display pictorial items that were visually much larger than what that presenter could do with a chalk board.  Notice:  I said “pictorial items,” not words!  Thus, if professionals were explaining something that could be easily drawn as a picture, it was displayed on as big a screen as you could buy.  People are visual and therefore the power of “chalk and talk” is huge and it has always worked!  This is why some of the best presentations you will experience will be with merely a flipchart or whiteboard. Well, things started to go sideways in the 1970s and 1980s with the proliferation of printer technology that would allow you to preprint the acetate sheets.  Now you had professionals/instructors that could very easily print a million sheets for one presentation.  Furthermore, many times those sheets had way too much information on them.  This meant that once all of those busy preprinted sheets were thrown up during a presentation in rapid succession, audiences either experienced “death by a million transparencies” or they would read ahead to the other “preprinted content” on each respective sheet.  Thus the power of the instructor’s words was greatly diminished.  Does this sound familiar?  Does this sound like presentations that our industry tends to conduct today?  Well, it evolved from there when, on May 22, 1990, Microsoft released an easier way for presenters to put their audiences to sleep—Microsoft PowerPoint.

With that as a primer, I want to share with you five quick tips that I teach people for using PowerPoint slides so they are not falling victim to the traps I just outlined.

1. Less is better.  Paradoxically you are competing for the audience’s attention when you use PowerPoint slides.  Therefore, I believe if you are going to use PowerPoint slides, there should be no more than one slide for every two minutes of speaking you do. Thus, if I’m going to speak for an hour, you will rarely see me have more than 30 slides. I will actually likely have no more than 10 slides.  And, those slides have very few words and are more “pictorial” to add to my presentation versus competing with my presentation.  As I tell the folks I have coached over the years, if you can speak to an audience for a couple of hours and keep them engaged without one PowerPoint slide you have hit the major leagues. I’m not suggesting that you not use PowerPoint slides, I’m just suggesting that you not use them as crutches.  What would happen if you were at a major conference with 1,000 people and somebody came up to you and said “Hey, one of our speakers with a two hour slot just got sick and cannot present.  The presentation is in 30 minutes and we have no time to upload PowerPoint slides.  Can you fill in?”  What would you say?  I know what I would say!  “Put me in coach!”  

One last word on this point:  Just because you want to say it does not mean it has to be in PowerPoint.  A while back I was planning a presentation with a colleague of mine and anytime we had a new item that came up to discuss, he would say “Ok, are you going to make that slide or am I?”  This mentality needs to go away unless you are teaching people how to fall asleep easier.

2. Know your transitions.  A few weeks ago I was thumbing through my PowerPoint deck at Mach speed before a presentation while a colleague was looking at me like I was crazy. What was I doing? Remembering the order of slides! The transitions are more important than anything else! This is the beauty of not having a ton of slides—the fact that you do not have to remember a million transitions from slide to slide. I do not “memorize” the content of the slides because the content is pictorial.  But, what I do memorize is knowing which slide is next before I hit the clicker. Having smooth transitions makes the presentation one cohesive message, as opposed to starting and stopping 30 times which is equivalent to Ambien.  It has always amazed me when presenters act surprised by the slide that comes up next after they hit the clicker.

 But if you must, add context to the point. For example: If I were to have agenda bullet points on a PowerPoint, as I usually do, I will read each bullet point but only while adding context to each bullet as I go. If I had an agenda item that was “The Power of Seminar Selling,” I would not just read it off and move on to the next bullet.  I would say something like, “Bullet point #2, ‘The Power of Seminar Selling.’  You know, I was at a seminar a while back that had top producers discussing how they prospected.  Of those 10 top producers that spoke, eight of them prospected by seminars.  Seminars work and that is why I want to discuss this in bullet point #2.”  This is completely different than hypnotizing the audience with the rhythm of reading the bullet points verbatim. And, again, PowerPoint content should be merely bullet points or pictorials to tee up a much broader conversation. Paragraphs in PowerPoint are deadly to a presentation. PowerPoints are points—with you elaborating on them verbally.

4. Favor stage right.  This is an interesting technique I learned from a nonverbal communications expert.  Our brains have grown accustomed to starting to observe or starting a thought on the left side and then moving to the right.  Why is this?  Because we spend our whole lives reading from left to right.  Of course, stage right is on the left-hand side for the audience.  So as you speak on the left-hand side of the projector screen, from the observer’s standpoint it is subconsciously more natural.  The audience is able to look at you on their left and then to the right to the PowerPoint.  All important thoughts start with you, not the PowerPoint. Although I like to casually walk around to mix it up, if you are to favor any side make it stage right.

5. Learn and rehearse stories and jokes.  If this were a column on presenting in general, storytelling would be number one on my list.  The power of storytelling is paramount and will be a topic of future columns.  Why do I bring storytelling and jokes up as it relates to PowerPoints?  Because PowerPoints can abandon you!  We have all been there.  That awkward moment where your computer dies, or the projector dies, in the middle of your talk.  This is awkward for the audience. Not because the audience believes you screwed up and you must be an amateur, but because the audience believes it is awkward for you and feels “embarrassed” for you.  We have all had that “embarrassed” feeling even though we were merely in the audience.  However if you, as the presenter, can show them that it is not big deal to you, the “embarrassment” doesn’t happen.  So here is what I do when something crashes.  As I am pulling everything back up I will tell a story or a joke in order to fill what otherwise would be an awkward silence.  When you do this you are showing that you are in control, not panicked, and have been there and done this before.  Now if the problem is going to take more than a couple minutes to remedy, take a five minute break!

“The highest-paid person in the first half of the next century will be the storyteller. The value of products will depend on the story they tell.” -Rolf Jenson, Director of the Copenhagen Institute for Future Studies.

In closing, I am a PowerPoint fan if it is used correctly.  The problem with this wonderful technology is that it has made our lives so much easier that it is easy to rely on this tool too much while cannibalizing the important stuff—delivery.  And good delivery is hard because it takes a ton of elbow grease.  I tell people all the time that for every new presentation I have done there was always that one person (or family) in the hotel room adjacent to mine that heard my presentation at least five or 10 times at 4:00 or 5:00 AM the morning of my talk.  Yes, I have gotten that unpleasant knock on my door!  There is no way around it.  A good presentation takes work—not more slides!

“The single biggest problem with communication is the illusion that it has taken place”—George Bernard Shaw 

I had a mentor many years back who had done very well in financial services and had made a great deal of money. While I was talking with him one day on the phone, he brought up that he had just purchased a Ferrari.  At this point, me being fairly frugal and understanding there is no worse “investment” on earth than automobiles, I said, “what are you thinking buying a $200-$300k car?  How can any car be worth this much money?”  After firing back with a couple of choice words which I cannot put in this article, he told me a phrase I will never forget.  He said “Charlie, cost is an issue only in the absence of value.  Is this car costly to me?  Yes.  However, if to me the value eclipses the cost, why would I not buy it?”  

The issue of cost is brought up very frequently during conversations around life insurance and especially permanent life insurance.  Of course this is perpetuated by the pundits such as Suze Orman and Dave Ramsey who consistently make the blanket statement that permanent insurance is too costly and one should buy term and invest the difference.  So, as I do indexed product boot camps across the country, my job is to educate the agents on why IUL is not so expensive if designed correctly and how the agents can explain this to their clients.

IUL has what I call “The Big Three” of expenses.  These are the largest and most prominent expenses which the naysayers like to probe.  Yes, there are typically additional expenses like rider charges, admin charges, etc.  However, the bulk of the expenses come from three different areas:

 • Premium Loads.  When the client puts in their premium, there is usually a premium load which comes off the top of the “gross premium” to arrive at the “net premium.”  For example five, six or seven percent.

• Per Unit/Thousand Charges.  These charges are a factor of the face amount, which is usually deducted monthly from the policy over a period of time.  The duration and severity varies by product, but a typical period on the per-thousand charges is the first 10 years.  

• Cost of Insurance (COI)/Mortality Charges.  These are usually the most significant charges over the life of the policy and are deducted monthly.  The good news is that we can affect these charges by optimizing the death benefit for low COI charges.  How? By using strategies including minimum non-Modified Endowment Contract (MEC) death benefits or option two death benefit switching to option one in the optimal year.  By doing this, one is able to compress the net amount at risk as much as possible, thus minimizing COI charges.

Now let’s take an unnamed IUL and look at a hypothetical scenario.  Let’s say we have a 45-year-old male (Bob) who is going to pay annual premiums of $10,000 to age 65.  I am assuming a minimum non-MEC death benefit in this scenario in order to reduce COI charges and thus generate as much cash value as possible.  This is because Bob is looking for maximum distributions/loans* once he retires at age 65.  This initial non-MEC death benefit is $211,000.  For purposes of the loan duration, I will assume retirement will last from age 65 until age 100.  I am illustrating only five percent on this IUL and guaranteed wash loans.  With the five percent illustrated rate, a zero-interest net “wash” loan, and loans to age 100 it is difficult to label this an inflated example. 

In solving for the loan amount Bob can take, the illustration says the annual loan amount is to the tune of $17,998.  In this scenario, a common conversation looks like the following.  If Bob lives to life expectancy (age 82), he would have gotten seventeen years of tax free income—approximately $305,966.  His beneficiaries would get approximately $275,397 of death benefit.  This is a total of more than $580,000 tax free to him and his beneficiaries.  Seems good, right?  But what were the costs?

Since diving into the itemized expense ledger which most companies have with their illustrations would be like explaining how to create an atom bomb, here are my thoughts on explaining IUL expenses.  This is where I love to use the Internal Rate of Return reports which many insurance companies have available in their illustration printouts.  With life insurance from purely an internal rate of return standpoint, what is the best case scenario for the client and/or beneficiaries?  They die young or they die old?  Again, from just an internal rate of return standpoint, it would be if they die young, right?  For example, with Bob’s life insurance policy, if he dies in year two, the internal rate of return is 330 percent ($227,953 death benefit to his heirs).  This is because of the death benefit and the leveraging power of life insurance!  As the late, great Ben Feldman would say, you are buying dollars for pennies.

So, if dying young is the best case scenario from purely an internal rate of return standpoint, what would be the worst case scenario from an IRR standpoint?  Worst case scenario—Bob dies very old.  The leverage power of life insurance burns off as the policy ages because of time (premiums paid), and the loans plus interest Bob is taking count against the death benefit.  In other words, the worst case for Bob and/or his beneficiaries from a return standpoint is that he lives so long in retirement and takes so much in distributions for his retirement needs that he spends the death benefit down to almost nothing.  Again, I usually use age 100 as the example.  In this case the policy would have behaved very similar to an investment vehicle which only gave Bob the retirement distributions of $17,998 per year and very little death benefit.  So back to the question: “How significant are those charges in this ‘worst case’ scenario?”

In this example, I look at the IRR Bob would have at age 100 after he put in $200,000 of premium (20 years times $10,000) and took out $629,930 ($17,998 times 35 years) in loans.  Because I optimized the policy’s death benefit for distributions to compress the COI charges, the internal rate of return would be 4.56 percent or a taxable equivalent of 6.81 percent assuming he was in the 33 percent tax bracket.  But, if we illustrated the policy at five percent, why is the IRR only 4.56 percent?  Because of expenses.  Therefore, what would be the total “expense drag” on this policy over the life of the policy?  It would be 44 basis points (five percent minus 4.56 percent) per year. Many would argue that this level of expense is not astronomical, especially when the average A-Share equity mutual fund in the United States charges 1.5 percent in “management fees” (ici.org).  Additionally, the expense of .44 percent was buying life insurance over Bob’s lifetime, so if he should die young in those early years, his heirs get multiples of what he put in, i.e. leverage.  But even when this leverage has burnt off, it still was not a bad proposition for Bob because it cost him only 44 basis points.

Another method for looking at expenses is to look at the cash surrender value IRR in year 20, 30, etc., and check the disparity between the IRR and the illustrated rate.  If you can get the disparity (expense drag) to one percent or lower, you have an IUL with low internal charges.

Again, these are not investments—but as you can see, if optimized correctly, the disparity between the IRR and the illustrated rate can be quite reasonable.

Remember, with IUL you are paying taxes on the seed and not the harvest.  The value of putting in $200,000 which has been taxed and taking out $629,930 which is not taxed is huge.  This cost is an issue only in the absence of value, and no one should be able to argue that there is an absence of value with IUL, even when utilizing a conservative example.

*Both loans and withdrawals from a permanent life insurance policy may be subject to penalties and fees and, along with an accrued loan interest, will reduce the policy’s account value and death benefit. Assuming a policy is not a Modified Endowment Contract (MEC), withdrawals are taxed only to the extent they exceed the policy owner’s cost basis in the policy and usually loans are free from current federal taxation. A policy loan could result in tax consequences if the policy lapses or is surrendered while a loan is outstanding. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10 percent additional tax prior to age 59½, with certain exceptions.

The information contained in this article is not intended to serve as tax or legal advice and does not address individual circumstances. Pursuant to IRS Circular 230, Partners Advantage Insurance Services and their representatives do not give tax or legal advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Encourage your clients to consult their tax advisor or attorney.

We have all been there.  I just paid $12 for the “double deluxe clear coat automatic laser” car wash.  Once finished with the washing part I quickly sped up to the giant hair dryer that gave me 45 seconds to dry my wife’s entire 20 foot long SUV.  I am stressed because I know without appropriately drying the car that the water spots that would be left over would make the car wash an exercise in futility.  I feel my nerves clenching a bit as I watch the timer, making sure that at least 50 percent of my vehicle is dry when 50 percent of the time is up, 75 percent of my car is dry when 75 percent of the time is up, etc.  Meanwhile Jack, my 12 week old Vizsla puppy, is barking wildly since he hates carwashes.  In my mind I have the ‘80s rock band Europe’s song The Final Countdown going through my head as I watch the timer tick away while I try to maximize the drying time.  Once I finish this highly methodical carwash process I am feeling stressed, sweating and ready for a nap.  Although I might be exaggerating a bit, my point is when you are facing a “set amount” of a solution to solve a problem that is variable and subjective to the situation (length of car, humidity levels, drying time, etc.) it tends to cause stress!

Imagine a bleaker situation where a client is a healthy 90 year old, having been in retirement for 25 years, and now only has $20,000 remaining in her 50 percent stocks and 50 percent bonds (50/50) retirement portfolio. Watching that $20,000 dwindle away for that retiree in her final years would be much more stressful than watching the 45-second clock on a car wash dryer.  But yet, I feel that the analogy is appropriate.

A New Take on the Four Percent Rule
With time in mind, let’s take a look at some numbers. In 1994, a “rule of thumb” for retirement income was featured in the Journal of Financial Planning entitled “Determining Withdrawal Rates Using Historical Data.” This study is what started the “Gold Standard” safe withdrawal rate of four percent. I think everyone in the financial services industry is familiar with this. Fast forward to 2013 and a study co-authored by Morningstar Inc. established that in this new world of volatile markets and low interest rates that the new safe withdrawal rate is actually 2.8 percent. 

The following hypothetical example takes a look at how a fixed indexed annuity (FIA) with a guaranteed lifetime withdrawal benefit (GLWB) rider can lead to new options.  

Napkin Idea to Demonstrate the Power of GLWB Riders
Assume Mary, a hypothetical client, is 63 years old and wants to retire in two years at age 65.  Mary has $1 million in a 50/50 portfolio.  Let’s assume what Mary would expect to take in retirement income from this 50/50 portfolio two years from now.  We want to look at that hypothetical dollar amount that she would expect from that portfolio then ultimately compare that to what can be guaranteed from an FIA with a GLWB rider. 

The first question we want to ask to get Mary’s expected retirement income number from the 50/50 portfolio is: What is a reasonable performance expectation for the portfolio between now and retirement?  As I present across the country to financial professionals, many times they will give me the example of five percent for a 63 year old considering that 50 percent of the portfolio is bonds.  So, including compounding, that means the portfolio will grow to $1,102,500.  At that point you would utilize the four percent rule.  That means that assuming the portfolio grows by five percent per year over the next two years, and assuming that the four percent is in fact safe, Mary should be able to take $44,100 per year (adjusted for inflation) for the rest of her life. 

Although the five percent growth assumption may be a reasonable assumption for Mary between now and retirement, as many consumers have found over the last 15 years expectations do not always come to fruition. Note: The S&P 500 has been chopped in half twice since 2000!   

Below is an example of a “pay cut” that Mary may experience should the market decline by 20 percent between now and age 65.

As many financial professionals know, the 5-10 year period prior to retirement is very crucial because of the example shown. Because of the developments that happened in the two years leading up to retirement, in this example Mary would be looking at a 27 percent pay cut—$32,000 instead of $44,100. 

Another very significant assumption that we used for Mary was the “post retirement assumption,”—the four percent rule.  In other words, even if the portfolio grows by five percent per year between now and retirement, it is still not guaranteed that her portfolio will be intact over a 30 year retirement using that four percent withdrawal rate.  As a matter of fact, in the Morningstar study previously mentioned it was indicated that with today’s low interest rates, market volatility, and sequence of returns risk, there is nearly a 52 percent chance of failure using the four percent rule.  Would you get on an airplane if there was a 48 percent chance of having the number of landings equal the number of takeoffs?

Hypothetical FIA with GLWB Rider
In this example I assumed that the GLWB rider on the fixed indexed annuity had a benefit base roll-up of 8 percent simple per year, then at age 65 the payout factor is five percent, not four percent!  This example is not an exaggeration of what exists in the FIA world today.  With the above graphic you can clearly see the value of GLWB riders on fixed indexed annuities.  The FIA scenario provides more retirement income than the previous “reasonable” assumption of $44,100 coming from the 50/50 portfolio, and it certainly provides more income than the second scenario of $32,000.  With an FIA with GLWB rider, there are no uncertainties about what the benefit base would be two years from now and no uncertainty that the five percent withdrawal rate would be sustainable.  The life insurance company in this example guarantees the eight percent per year on the benefit base and also guarantees the five percent per year for the life of the client.  Most important, regardless of how long Mary lives, she is not confined to a set amount of retirement dollars she can take.  Yes, she is confined to the $58,000 per year in this example, but if she was to live to age 120 she would still be taking guaranteed withdrawals.  In other words, she will not see that retirement carwash clock do the “Final Countdown” with an FIA.

There are two additional items on the comparisons that I would like to address that may be going through the reader’s mind. The first might be around the fact that we only assumed that Mary’s portfolio would increase by five percent per year between now and retirement.  As we all know, with stocks and bonds the client’s portfolio can far surpass a five percent rate of return.  Understanding this, I asked myself this question:  In order to generate the same income ($58,000) as is being guaranteed by the FIA, what would Mary’s 50/50 portfolio have to grow to between now and age 65 while utilizing the four percent rule?” The answer to that question is $1,450,000!  Over a two-year period of time this is a compound average annual growth rate of 20.42 percent that one would need that 50/50 portfolio to grow by in order to equal $58,000 in retirement income.  Is this likely to happen?  

The second item I would like to address is the inflation adjustments assumed in the four percent rule.  Some readers may be thinking that my example is an apples to oranges comparison because of the fact that by utilizing the four percent rule Mary would be able to increase her withdrawals from $44,100 each year by the inflation rate applicable in ensuing years, whereas my $58,000 GLWB rider example is assuming a flat retirement income stream forever.  This is a reasonable objection, as inflation adjustments can be crucial.   As a matter of fact, the “inflation rule of 72” says that a three percent inflation rate will chop the purchasing power of a dollar in half in only 24 years (72/3 = 24 years).   Meaning that $58,000 would only have the purchasing power of $29,000 in 24 years assuming three percent inflation.  To answer this objection about the “level income” nature of traditional GLWB riders, some carriers have responded with recent product developments.  A few carriers in the FIA world have introduced innovative riders that have increasing income options.  This is where the guaranteed income is adjusted upward during the income phase by the interest that is credited year after year.  Although there is a bit of a sacrifice in the first year guaranteed income if the increasing income option is elected on the GLWB rider, in most cases the guaranteed income is still far superior to the 50/50 assumptions we utilized with Mary.  

To wrap up, real lifespans (what really happens) are not set at the average.  If they were, the retirement puzzle would be easier to solve because that would get rid of one big “what if.” Thus, there are psychological benefits and mathematical benefits to not being confined to a “set amount” of retirement income that the client can take.  Fixed indexed annuities with GLWB riders can guarantee that The Final Countdown does not haunt retirees in their later years when they are supposed to be enjoying life. Unless, of course, they are at the carwash. 

For Financial Professional Use Only. Not for use with consumers.

Guarantees are backed by the Financial Strength and claims-paying ability of issuing company.

Annuities are designed to meet long-term needs for retirement income. They provide guarantees against the loss of premium and credited interest, and the reassurance of a death benefit for beneficiaries.

An income rider or benefit (sometimes called Guaranteed Lifetime Withdrawal benefit rider or GLWB rider) is an additional feature available with some annuities and generally optional and come with additional costs. Income benefits are designed to provide income options above and beyond the standard annuitization or free withdrawal features in annuities.

Pursuant to IRS Circular 230, Partners Advantage Insurance Services and their representatives do not give tax or legal advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Encourage your clients to consult their tax advisor or attorney.

The information contained in this article is not intended to serve as tax or legal advice and is not intended to provide financial or legal advice and does not address individual circumstances.

The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. Actual investment results may be more or less that those shown. This illustration does not represent any specific product and/or service.

During 2012, total life insurance sales increased by just one percent¹ and sales were flat in 2013.² While these were by no means banner years for the industry overall, particularly hard hit were sales of guarantee universal life (GUL) insurance products, which saw sales decline by one percent in 2012 and 26 percent in 2013.³ GUL sales nosedived further in the first quarter of 2014, with sales dropping a staggering 48 percent.⁴

While GUL sales growth has screeched to a halt, sales of index universal life (IUL) insurance have skyrocketed. Sales were up 13 percent in 2013,⁵ following a three-year average increase of more than 30 percent.⁶ In fact, IUL sales are up 177 percent since 2009,⁷ a stark contrast to the life insurance industry in general, and GUL in particular. Furthermore, IUL sales increased by 15 percent in the first quarter of 2014⁸ and the product now represents 42 percent of all UL sales.⁹ There is now more premium being sold in IUL products than there is in GUL products!

The Trend Can Be Your Friend

Let’s take a look at the forces driving these sales trends and how to develop a successful approach to tapping into the growth opportunity presented by IUL.

First, it helps to understand the two main reasons for this decline. The first is the increased cost of fully guaranteed products due to the new reserve requirements introduced by the National Association of Insurance Commissioners (NAIC) in late 2012. The continued low interest rate environment makes it difficult, if not impossible, for insurance carriers to be able to support the robust guarantees of the past for the same premium. The end result may be more expensive products as well as carriers just flat-out exiting the market.

The second reason for the GUL sales drop-off is that because of the higher premium requirements, much of the GUL sales have shifted to other product lines such as IUL and whole life. In other words, since the guarantees cost so much more than in the past, it becomes harder to justify paying such a significant premium for the same guarantee while also missing out on the flexibility that comes along with the cash value potential inherent in other types of products.

That IUL sales are up so dramatically over the past few years reflects the fact that consumers are demanding more flexibility and versatility than a GUL policy can offer. Clearly there is more flexibility and versatility that comes with greater cash value potential. This potential for greater cash value can be achieved by linking the upside (subject to a cap) to an index such as the S&P 500 Index. But if the percentage change in the index is negative in a given segment period, the interest credit is zero, not negative, and the principal is protected from the negative percentage change in the index. While equities have performed well the past few years, investors remember all too well the nearly 40 percent drubbing the S&P 500 Index took in 2008, not to mention the three consecutive years of double digit losses the index experienced in 2000, 2001 and 2002.¹⁰ This notion of providing equity-linked capped upside potential while protecting the policy cash value against potentially steep declines in the market has clearly created enthusiasm among many investors and their trusted advisors.

The Value Triangle

A compelling sales tool to leverage when talking to clients about the trade-offs inherent with selecting one product over another is expressed in the the “value triangle”.

The value triangle clearly outlines the trade-offs between three different considerations of those seeking life insurance protection: premium requirements, the length of the no-lapse guarantee, and the potential cash value between GUL and IUL.

So let’s look at a hypothetical client, Marty, age 60, who has been married to Rita for more than 40 years. They have raised a family and built a substantial nest egg for a secure future. However, recently, in anticipation of Marty’s retirement, they purchased a new home near the coast and their grandchildren. This home cost about $500,000.

While Marty and Rita are currently financially comfortable, they would like the mortgage to be paid off if Marty were to pass away, so Rita can continue to live comfortably without having the burden of the mortgage. In order to help create security and protection for Rita, the couple considered both GUL and IUL.

Marty and Rita’s insurance agent used the value triangle to help them determine an insurance solution that could fit their unique situation. Based on Marty’s age, assuming current charges as of December 8, 2013, a 7 percent illustrated rate, a cap of 14 percent, and a participation rate of 100 percent with the one-year cap base crediting strategy throughout the life of the policy, using a preferred no nicotine use underwriting class, the IUL would require a premium of $7,364 versus $8,749 on the GUL product.* Thus, the IUL product with coverage on Marty would save the couple nearly $1,400 per year on their premium. (Note: Using the same IUL assumptions and illustrated at 6 percent, the IUL would save the couple around $500 per year versus the GUL.)

Marty and Rita also prefer the upside potential that the index-linked crediting strategies offer. This equated to an estimated $150,000 of cash value on the IUL in 20 years versus only $25,000 for GUL.* Considering the fact that $150,000 in cash value can potentially be available in year 20 when they only paid $147,280 ($7364 for 20 years) in premium is a very powerful proposition. For their situation, the planned premium savings and potential to build greater cash value with index-linked crediting strategies offset the difference in the length of the death-benefit guarantee (lifetime guarantee for GUL versus to age 80 for IUL). So, in the end, Marty and Rita chose the IUL policy.

Discussing the Trade-offs…

with Ears Wide Open

Listening to your clients’ needs and discussing their available options and trade-offs (using the value triangle) can be a significant competitive advantage. Through the conversations with  Marty and Rita, their insurance professional realized that they were also concerned about the impact that long term care expenses could have on their retirement. In addition to competitive planned premiums and the opportunity to build cash value, they were also interested in hearing about insurance solutions to cover potential long term care costs.

Certain providers, including Genworth, offer riders that enable the policyowner to add federally tax-qualified long term care coverage to an IUL policy. This ability to include long term care coverage alongside an IUL policy can be the icing on the cake for the client.

Disclosures

It is important to understand if the index interest credited to the policy is less than the assumptions used, your client’s distribution strategy may have to be curtailed, as the policy would have a higher likelihood of lapsing using the current scenario of distributions. Conversely, if the index interest credited to the policy were greater than the assumptions used, your client would likely have even more flexibility with regard to his distribution strategy.

Although the policy value may be affected by the performance of an index, the policy is not a security and does not directly or indirectly participate in any stock, equity or similar investment including but not limited to any dividend payments attributed to any such investment. Market indices do not include dividends paid on the underlying stocks, and therefore do not reflect the total return of the underlying stocks. 

This article is only a summary of coverage. Policy terms and provisions will prevail.

Footnotes:

 1. LIMRA news release, “LIMRA Individual Life Insurance Sales Improve For Third Consecutive Year,” March 7, 2013.

 2. LIMRA news release, “LIMRA Reports Individual Life Insurance Sales Flat in 2013,” March 13, 2014.

 3. LIMRA, 4Q 2013.

 4. LIMRA’s U.S. Retail Individual Life Insurance Sales, First Quarter 2014.

 5. LIMRA news release, “LIMRA Reports Individual Life Insurance Sales Flat in 2013,” March 13, 2014.

 6. LIMRA, U.S. Retail Individual Life Insurance Sales, 4Q 2013.

 7. ibid.

 8. LIMRA’s U.S. Retail Individual Life Insurance Sales, First Quarter 2014.

 9. ibid.

 10. Yahoo! Finance, S&P 500 Index Charts for 2008 and 2000-2002, July 22, 2014.

Today, most of us carry around a smartphone that offers a multitude of functionality in one device. Just as the smartphone was a runaway hit for the telecommunications industry, a similarly exciting growth story is unfolding in the life insurance industry with indexed universal life insurance.

The market for indexed universal life (IUL) insurance has grown from a $330 million market in 2006 to a $1.5 billion market in 2012, and sales of IUL products increased by 36 percent from 2011 to 2012.¹ By offering a range of benefits packaged neatly in one product, insurers have hit upon a solution that is changing the way life insurance is bought and sold. In short, IUL is revolutionizing the life insurance industry, much as the smartphone has transformed the telecommunications industry.

A Better Mousetrap

With IUL, our industry may have built a better mousetrap. By offering a death benefit and tax-deferred cash accumulation with more growth potential than traditional conservative financial products and less risk (though less upside potential) than variable universal life insurance, IUL addresses many of the needs and concerns that consumers are wrestling with today. That includes stock market uncertainty, low interest rates, concerns about taxes and worries about outliving their retirement dollars.

When Genworth conducted research in 2012 among agents and their staff to better understand which features of IUL resonate most with their clients, we discovered that producers are most excited about three major advantages:

 • Flexibility to meet a number of different needs in a single product.

 • Greater cash accumulation growth potential with downside protection.

 • Tax-efficient solutions.

Let’s look at each of these potential benefits individually.

Flexibility. IUL combines death benefit protection with the potential for cash accumulation that can be used for just about any purpose, including funding education costs and medical expenses. Some IUL policies also offer an optional accelerated benefit rider for long term care services.

More Growth Potential/Less Downside Risk. Prolonged low interest rates and market volatility continue to challenge cash accumulation opportunities, which is particularly worrisome for consumers who are retired or nearing retirement. Only 32 percent of Americans currently in the work force believe they have sufficient assets to retire.²

IUL offers the potential for greater growth than many traditional conservative options such as CDs and money market accounts by linking interest crediting to an index such as the S&P 500. At the same time, an IUL policy contains a “floor” that protects any principal and accumulated cash from downturns in the market. When the actual percentage change of the index drops below the floor, the client simply does not receive any interest, unlike a variable universal life policy where the policyowner selects the underlying investments and bears all of the investment risk with no downside protection.

The beauty of IUL products is that if the market drops around 40 percent (like it did in 2008), clients would not lose a penny of their principal and accumulated interest. They would merely receive zero interest in that year. In other words, the market does not have to get back to where it was before clients experience growth—which is clearly different from a variable universal life insurance policy. For future retirees who have been shaken by earlier market turbulence, this protection can be immensely reassuring.

The flip side, of course, is if the market goes up 40 percent, owners of variable universal life insurance policies would experience the entire gain, while the IUL policyowners would have their interest capped.

Tax-Efficient Solutions. The inherent income tax advantages of life insurance make IUL a worthy complement to term life insurance, IRAs, 401(k) plans, and other components of a client’s financial strategy. With a death benefit that is generally federal income tax-free, the potential to accumulate cash on a tax-deferred basis and tax-free supplemental income for retirement, education costs or other purposes, IUL may be just the ticket. There are not many financial products available today that allow a policyholder to put in after-tax money, grow the money tax deferred, then take federal income tax-free³ distributions. I call this “paying taxes on the seed versus the harvest.”

Such a product can also be appropriate for business owners looking to fund buy/sell agreements, deferred compensation, key person arrangements or supplemental retirement income.

The Ideal Candidate

As part of our research, we asked producers already selling IUL to describe the ideal candidate for this type of insurance. In a nutshell, they said typical candidates are between the ages of 40 and 59, earning from $100,000 to $250,000. They are purchasing IUL insurance for their own use, have liquid assets between $100,000 and $500,000 and have a moderate risk tolerance.⁴

That’s not to say that an IUL would not fit a client who did not meet these parameters, but a client who has the liquid assets and the earnings listed above may be in a more favorable position to benefit from having such a policy.

For example, consider a potential client who is 40 years old and earns $150,000 a year. He is unhappy with both his current life insurance coverage and his retirement savings and wants to expand each. Yet he is also keen to have a great degree of flexibility—he’d like to access his savings prior to retirement without triggering federal income tax penalties, and he’s also wary of market downturns.

Say the client has put aside $500 a month to achieve all of these goals. This is a tough order to fill if the client allocates that sum to a low-interest-rate product like a money market account, which could provide disappointing returns, or if he buys a variable universal life insurance policy, which could expose him to market-related losses.

By contrast, an IUL policy may be ideally suited to his needs. The $500 a month would pay the planned premium for a policy that would provide the client’s beneficiaries with a generally income tax-free death benefit, helping to fill any gaps with his current life insurance policy. At the same time, he would have a policy with index-linked interest crediting, potentially providing more growth potential and he could access his cash value on a federal income tax-free⁵ basis before or during retirement.

The Opportunity

Through our research, we found that agents are very optimistic about the sales potential of these products. In fact, those currently selling IUL expect their total sales of this product to increase by 35 percent in the next five years.

An IUL policy can answer a set of what may seem like multiple, contradictory needs and concerns from a client. These policies work on both ends of a client’s needs spectrum: They provide a death benefit and assurance as well as offer the potential for interest growth and the flexibility needed to handle life’s unexpected demands.

Given prolonged low interest rates, now is a great time to speak with your clients about IUL.

If your clients do purchase an IUL policy, it’s important for you to monitor their chosen policy to make sure it is on track to help achieve their goals. That means meeting annually with them for a policy review, including current levels of premiums and index crediting strategies.

Certainly no single insurance policy will fulfill all of your clients’ needs. However, having an IUL policy as part of a prudent and diversified retirement strategy can go a long way toward stabilizing your clients’ retirement plans and giving them a sense of security in an uncertain time.

All guarantees are based on the claims-paying ability of the issuing insurance company.

Footnotes:

 1. U.S. Individual Life Insurance Sales, Fourth Quarter 2012, LIMRA.

 2. Genworth Retirement Income Consumer Study, August 2012.

 3. A withdrawal may be free of federal income tax or “tax free.” If the policy is not a modified endowment contract (MEC), then withdrawals are not taxable to the extent that they do not exceed basis, except for certain changes in the policy during the first 15 policy years and especially during the first five policy years that cause cash distributions that may be taxable even if they do not exceed investment in the contract (basis). Policy loans are free of federal income tax when taken except if the policy is or becomes a MEC.

If the policy is a MEC, a distribution (withdrawal or policy loan, including any increase in the policy loan balance because of unpaid loan interest) is taxable to the extent that policy value exceeds basis. A 10 percent penalty tax may apply to distributions from a MEC if the policyholder is under age 591/2.

Basis is premium paid minus any long term care rider charges and minus nontaxable amounts previously recovered through policy distributions. Assignment or pledge of a MEC as security for a loan would also be a taxable event. If the policy becomes a MEC, then any distribution (withdrawal or policy loan) taken in the policy year in which the policy becomes a MEC and in subsequent policy years is taxable the same as a distribution from a MEC. Any distribution taken within two years prior to the policy becoming a MEC may also be taxable the same as a MEC. Termination, other than by reason of the insured’s death, of a life insurance policy with a policy loan balance may be deemed a distribution of the outstanding policy loan balance, resulting in possible adverse tax consequences for a policy that is not a MEC. Consult a tax advisor about possible tax consequences. We are not responsible for any adverse tax consequences.

 4. Genworth IUL Research, 2011-2012.

 5. See footnote 3.