Charlie Gipple, CFP, CLU, ChFC

Last year when my seven-year-old and ten-year-old sons started hinting that they wanted dirt bikes from Santa Claus, I had mixed emotions because of the danger that can accompany these things. I knew there were so many upsides to it though, I could picture the boys really making them their own as I know it’s easy customizing your dirt bike these days. But at the same time, I wondered if they were too young still, or if I felt comfortable enough to invest in these bikes and let them ride them. However, for me growing up in a blue-collar family from rural southwest Iowa, some of my best memories involved dirt bikes. Riding dirt bikes as a kid as young as 10 years old, I not only had a blast but I also learned responsibility and how to respect the things in life that can hurt you if you are careless. Yes, I do have some scars from the times my better judgement on dirt bikes escaped me! But it made me smarter and tougher. I loved it and I grew from it! Even though I’ve done this as a child, it is always a good idea to research and pick the best dirt bike.

So after much deliberation with my wife Noelle, I did it. I bought three dirt bikes. Yes, I only have two kids so you know who the third bike was for. One thing we will need to look for is a rear stand for these motorbikes, the last thing we want is them falling over and breaking!

I bought two of the “pre-enjoyed” dirt bikes off Craigslist. If you have ever bought anything off Craigslist you know that many times the seller “forgets” to mention to you some of the item’s imperfections. You usually learn about these problems after you write the check and take the item home. I was not naive to this and in fact, expected it. But the price was right. After a couple rides with my seven-year old’s Kawasaki 110, it wouldn’t start. Now, I had never had the courage as a kid to do open heart surgery on a motorcycle, but then again we didn’t have YouTube when I was a kid. So, a couple of videos later, I diagnosed the problem and fixed the burnt out piston and rings.

Throughout the weeklong process of researching and fixing this bike, I learned a lot about the internal combustion engine. Of course, I highly doubt that I’m as well versed in the inner workings of an engine as a mechanic at Two Fingers Automotive might be, but I’m certainly not totally clueless on the subject. The most valuable lesson I learned was that an internal combustion engine only needs four things to operate:

• Fuel supply
  
• Oxygen flow-Fuel doesn’t burn without oxygen.
• A spark-To ignite the fuel and oxygen mixture.
• Compression-A fire is just a fire. However, when you compress/seal a fire, it explodes. This explosion is what creates the energy that moves the piston up and down which in turn cranks the rear wheel on the motorcycle.

Without any one of the above four things, the engine will not run optimally. It was profound to me that the engines that I thought were so complicated were conceptually quite simple! Only four things were needed!

We all know that if you have gas, oxygen, and a spark, you will get fire. We also know that if the fire is compressed or sealed, it will explode. This is a 100 percent certainty and therefore is very simple to understand. If you have these four items, the engine has no option but to operate in some way, shape or form.

What is my point with all of this? My point is that whether it is a motorcycle engine or a BGA (Brokerage General Agency), there are some things that are certain, like the pull of gravity-or that gasoline plus oxygen plus a spark equals fire. Similarly, I want to discuss the four functions that if a BGA conducts successfully, their engine has no choice but to run.

1. Recruiting-There is no problem that you cannot recruit your way out of. A little bit of hyperbole, yes, but if you have been in the business long enough you have experienced what I am talking about. You may have experienced a year where a couple large recruits made your year for you. For example, if you were a $1 million life shop and sales were down by 20 percent, then by recruiting a couple good producers that do $100,000 each with you all of the sudden you are out of the hole! Again, there is not a problem you cannot recruit your way out of.

Ideas on recruiting:

• Considering that 40 percent of independent agents have written with three or more BGAs over the last year,¹ it comes down to standing out from the pack. Make yourself different than those three BGAs that have gotten the producer’s attention already.
• Use video technology to personalize and humanize your company while recruiting. Statistics show that after watching a video, 64 percent of users are more likely to buy a product.2 Plus, the most effective type of video content is a testimonial.² Use your satisfied producers to tell your story to the producers you are recruiting. If you are emailing the videos, make sure you put “video” in the subject line. Also, when the prospects open the email, make sure it is more than just a video link they see. Have a snapshot of a frame from a video.
• Cross pollinate product lines. If you offer multiple product lines (life, annuity, LTCI, linked benefits, etc.), does the compensation model your marketers have incentivize them to make agent introductions to the marketers in the other product area? Many BGAs lose sight of the fact that they can recruit from other product areas within their own walls.
• Be persistent! I have noticed that every week my wife and I get a Jiffy Lube coupon for $10 off an oil change. One week she pulled the coupon out of the mail and said, “How ironic we received this today! How did they know my change oil light came on yesterday?” I then said, “Honey, you have been getting those coupons every week and you are just now noticing it because your change oil light came on yesterday.” Be persistent with your recruiting efforts and you will eventually catch them in their “ah ha” moment.
• If you live by product, you die by product. Just like I learned how to be a motorcycle mechanic (exaggeration), agents, and even consumers, can learn about products on their own through online resources like Google, YouTube or a product brochure. Thus, I believe that the reason 50 percent of producers say they plan to move or would consider moving business to a new BGA next year¹ is because the message many BGAs send their agents is product focused. Carrier wholesalers are most guilty of the “walking brochure” mentality. Not only can someone learn about products on their own, we also know many products (and carriers) won’t stand the test of time. So why tie your horse to that wagon? What is the value you provide that stands the test of time? What would your producers say that value is? Have you surveyed them? I believe what stands the test of time is education, sales ideas, and mentoring.
• Partner with a couple of your most respected carrier wholesalers to create a tactical plan around recruiting roadshows, webinars, content, marketing message creation, etc. The right wholesaler will have tons of ideas and resources around recruiting as well as education and sales ideas.

2. Percent of agents producing-It doesn’t matter how many agents you have recruited if none of them are producing. I have some ideas on this:

• Get recruits into production immediately. In my prior life I experienced statistics that demonstrated that if a recruit did not produce within 30 days of being recruited, the odds of them ever producing goes down substantially. Strike while they are in that “Jiffy Lube moment” and pay special attention to those first cases. That is your first date!
• Don’t let recruiting cannibalize everything. Remember my example? A couple of good recruits can make your year. Well a couple of good recruits can also mask attrition with your existing agents. Do you pay attention to your attrition year after year? If you took the top 20 percent of your producers and what their production was in 2016 versus 2017, I bet you will see attrition in many cases-even if your business has grown overall. How do you manage this attrition? Again, 50 percent of producers say they plan to move or would consider moving business to a new BGA next year. Don’t lose sight of your existing producers, even those that have not yet produced with you. Do you produce newsletters to keep them in the know? Do you conduct meetings to create comradery? Do you have contests?
• Many BGAs focus on recruiting new agents when 80 percent of their agents are not producing with them. Remember, just because those agents are not producing with you, it does not mean they are not producing at all. Again, 40 percent of independent producers have written with three or more BGAs over the last year.
• Get reporting from your company wholesaler (North American preferably) and do a “fallen angels campaign.” For example, if you had a large amount of GUL (guaranteed universal life insurance) business in 2016 and you lost production in 2017 because of GUL repricing, etc., the reporting will show you who fell off in production. Next, create a plan with your wholesaler to target those producers.
• Know your numbers! I call it the 20/80/20 rule-usually 20 percent or so of an MGA’s agents actually produce with them, and those agents represent 80 percent of the MGA’s business. Are your numbers in line with these numbers? If not, what can you do to improve them? Big agents are great, but be wary of concentration risk.

3. Paid case ratio-It doesn’t matter how many cases your agents submit if those cases are not getting placed.

• I believe that the biggest reason consumers get disappointed in a service or product is quite simply because of not meeting expectations that were laid out at the point of sale. Thus, field underwriting is important. If the client was quoted preferred and they got a standard, the case may not get placed. Continue to train the agents on field underwriting. Also, leverage the carriers’ underwriters for field underwriting training! If you have not done a meeting or webinar with underwriters presenting, you will find they typically attract great attendance.
• Conference calls between the BGA’s back offices and the underwriter at the carrier can help significantly in education on the carrier’s nuances.
• Do you train your agents on technological solutions like e-apps, expedited underwriting processes, drop ticket, etc.? These solutions can and do significantly help with the paid case ratio. One reason is because many times the apps cannot be submitted unless the fields are filled out properly. Another interesting reason that I have experienced is, when the carrier is able to decrease the cycle time from app submitted to issued, the placement rate goes up! Buyer’s remorse is less likely! If you are a BGA that does $1 million in production and can increase your paid case ratio by 10 percent, that is an extra $100,000 in sales.

4. Average case size.

• This is where cash value life insurance shines. For instance, in Q1 2018, the average indexed universal life insurance target premium was $7,412³ in comparison to GUL at $5,454 and term at $988. Educating your agents on the benefits of cash value life insurance can increase your average case size. Also remember, just because a producer does not write a certain product type with you, it does not mean that producer does not write that product type. Do you survey your field force to fully profile your agents?
• If you are an annuity shop, do you market single premium life insurance to those annuity producers? Annuity producers are used to collecting large checks from consumers and therefore are very prone to single premium life production. Furthermore, single premium life usually has the simplified underwriting that annuity agents appreciate.
• If the carrier’s underwriter approves more coverage than the client applied for, does the agent give the client the option to buy up their coverage?

Let’s assume you did all of the above successfully-you were able to recruit the equivalent of 10 percent of your production, mitigate attrition, increase your paid case ratio by five percent, and increase your average case size by 10 percent. That is how you grow by 25 percent per year!

Again, like gravity pulls and like gas, oxygen, spark and compression create an explosion, if you are…

1. Bringing in new agents that are producing
2. Managing attrition
3. Getting the cases paid
4. Getting reasonable sized cases

…then your engine has no choice but to run. Now you may need to do some “engine tuning” in order to accomplish the above, such as linking the compensation of your staff to the above activities, product education, etc., but that is where the council of a good, seasoned mechanic/wholesaler can be invaluable.

References:

1. NAILBA Independent Life Brokerage Study 2016.
2. Forbes 17 Stats and Facts Every Marketer Should Know About Video Marketing (September 6, 2017).
3. LIMRA, US Retail Independent Life Insurance Sales (Q1 2018).

The opinions and ideas expressed by Charlie Gipple are his own and not necessarily those of North American Company for Life and Health Insurance or its affiliates. North American Company does not endorse or promote these opinions and ideas.

Craigslist, Kawasaki, YouTube, Jiffy Lube, and Google are not affiliated with nor endorse or promote North American Company for Life and Health Insurance or its products or services.

I have been preaching the virtues of behavioral economics for over 15 years, since the Dotcom bust confirmed to me that markets and financial decisions are, in fact, driven by emotions just as much as the fundamentals. Therefore, I was absolutely thrilled in October when I learned that Behavioral Economist Richard Thaler had won the Nobel Prize in economics.  Thaler, who teaches at the University of Chicago, is a best-selling author by way of one of my favorite behavioral books, Nudge, which I would encourage you to read.  

Even though Thaler is the most recent, he is not the only behavioral economist to win the Nobel Prize. The first was Daniel Kahneman.  Kahneman is an Israeli-American psychologist who won the Nobel Prize in economics in 2002.  He also wrote a best-selling book and another one of my favorites on behavior and decision making called  .  As the title suggests, humans have two ways of thinking that play into our decision making; we have the “fast way” of thinking, which is our emotional and instinctual cave man way of thinking, and we also have our “slow way” of thinking, which is our analytical, problem solving way of thinking. There are positives and negatives to both. The key is understanding and managing the process the brain goes through when making decisions, whether those decisions are fast or slow.

Another behavioral economist that won the Nobel Prize was Robert Shiller, who many of you know by the “Case-Shiller Index” in real estate. Shiller is an economics professor at Yale who received his Nobel Prize in economics in 2013 for his studies that actually began 40 years ago by challenging the Efficient Markets Hypothesis. The Efficient Markets Hypothesis, which is the notion that the price of a given security is an accurate reflection of the value of the underlying property, was widely embraced by many pundits in finance at the time. Thus, questioning this theory was very bold and groundbreaking. Shiller has since argued that emotions and irrationality are involved in the investors decisions to buy and sell, which can create booms and busts in markets.  

The reason for pointing out the above is: If you are not yet a disciple of behavioral finance and do not spend a good amount of time reading up on this topic, three Nobel prizes should convince you that there is legitimacy to this discipline.  Don’t know what behavioral finance is? Behavioral finance is a subset of behavioral economics, and it’s defined as “The study of how finance is affected by psychology. This study attempts to understand and explain how human emotions influence consumers in their decision making process.”  

Although behavioral finance can appear to be most prominent in the securities business, it is actually very applicable in all areas of finance. Whether you are an insurance producer, an investment advisory representative (IAR), a registered representative, or all of the above, I believe the study of behavioral finance is one of the disciplines that separates you from your peers. Financial professionals that understand behavioral finance also understand how to tell stories, handle objections, and navigate and handle irrational client emotions.  Furthermore, financial professionals that understand behavioral finance also understand one of the most important components of behavioral finance—navigating consumer biases!

There are well over 100 documented biases¹ that we humans can fall victim to. Financial professionals witness many of these biases every day. What is a bias? A bias can be a preconceived notion, a prejudice, a thought process, etc. Basically, a bias is a block the brain may have in processing information in a rational way. So, as you are feeding information into the consumer’s brain, if that consumer has one of these 100 biases there is a possibility that your important information is being blocked before the client can even have that information processed by the left side of the brain (i.e. the analytical side). Many times, even if the information you are communicating to that client is mathematically and scientifically perfect, if there is a bias present you will get nowhere with that client unless you know how to identify and handle their bias. 

Examples of biases are:  

Confirmation Bias: The tendency to search for, interpret, favor, and recall information in a way that confirms one’s preexisting beliefs or hypotheses.

Herd Bias:  This is people’s tendency to feel comfortable in doing what other people are doing.  Hence, following the herd. There is a great amount of discomfort that people feel in going their own way when everybody else is going another way.

Recency Bias:  This is the tendency for people to put a significant amount of weight and consideration on events that have happened recently, while ignoring what may have happened in prior times. People tend to then assume that what happened recently will happen in the future because that recent experience is fresh in their minds.

Home Bias:  This is the tendency for people to not want to purchase or experience anything new because it is outside of what they have always been accustomed to and what is mainstream.

Loss Aversion Bias:  People are averse to loss. Many studies² show that people prefer avoiding a loss of a certain dollar amount more than they prefer gaining that certain dollar amount. Even more interesting, there are studies that show that the negative feelings associated with losing one dollar is equivalent to the positive feelings of gaining two. In other words, the negative feeling of loss is twice as powerful as the positive feeling of gain.

Regret Aversion Bias: This is one of my favorite biases to discuss. People obviously don’t like to be wrong, and they don’t like to admit they were wrong. This can lead to regret. Thus, Regret Aversion Bias is when consumers refuse to admit to themselves that they’ve made a poor buying decision. By refusing to fess up, they don’t have to face the unpleasant feelings associated with that decision. As a result, these consumers can hold on to a product or position for too long instead of facing the cold hard truth!

Before the days of GPS apps on cellphones, my wife and I were going to dinner to a restaurant that we had never been to before. I was driving, and once I got to the location where I thought the restaurant was, it was not there! So, because I am stubborn, I circled the block five times searching every plot of land on that block for any sign of the restaurant. After a while it was obvious to my wife and me that I was lost! What did my wife say at that point?  She said, “Why don’t you just stop and get directions?” At which point I said, “No, I got this!”  I wandered around aimlessly for another 15 minutes and finally said to my wife, “I am going to stop and get directions.”  This was very hard for me to do! Why? Because I was basically admitting defeat, which led to regret, which was further exacerbated by her saying, “I told you so.” The reason for me not stopping earlier for directions was because I suffered from regret aversion bias.

When I was just starting my career, I worked for one of the large carrier companies. In my branch office there was a peer of mine that was always out to prove to his potential clients that they were wrong and stupid for making the choices they have made, and that they needed to listen to his great advice in order to get on the path to financial success. In his mind he thought this was the way to convince his clients to follow his advice. When they did not follow his advice, he would be the first to tell them, “I told you so” in hindsight. Very prideful. Do you think he lasted long in the business? No! All of his clients were merely potential clients and never became actual clients. 

In other words, you cannot tell the client to make a decision that will be contrary to what they originally thought unless you position it appropriately. Why? Because by the client listening to you and taking action they would be admitting defeat, which would then lead to regret. This is regret aversion bias. Furthermore, if you were to position your recommendation as a change in strategy versus righting a wrong, the chances of you getting the sale would be much greater. An example of a conversation like this may be the example of a client who bought a term policy 15 years ago and may now have a need for permanent coverage. This may be an effective statement for that client: “Mr. Client, when you purchased your term policy 15 years ago you made a very prudent decision given the resources you had at the time. However, your financial situation is much brighter than it was back then and now may be the time to reexamine whether or not you should stick with the term insurance or consider permanent coverage.” 

In short, in order to navigate regret aversion, it is much better to compliment the client on prior efforts and point out how the world has changed around them, which may warrant a change of strategy, which is much better than pointing out a significant mistake the client had made.

By the way, the example of the 15-year-old term policy was my real life example. If an agent were to point out that I made a serious blunder, and therefore I should listen to his new recommendation of permanent coverage, I would tell him to hit the road. However, the above verbiage would sell me on learning more about his new strategy!  By the way, I don’t regret buying the term insurance because I understand my resources were limited relative to today.  The only regret that I will never get over is the fact that I bought the policy from a company that is now a competitor of mine! 

References:

1. https://en.wikipedia.org/wiki/List_of_cognitive_biases 
   
2. https://en.wikipedia.org/wiki/Loss_aversion 

The opinions and ideas expressed by Charlie Gipple are his own and not necessarily those of North American Company for Life and Health Insurance or its affiliates. North American Company does not endorse or promote these opinions and ideas. 

In last month’s part one of Demystifying IUL Illustrations, I made the point that the risk inherent in illustrations (that are typically 30 to 50 pages long) is that the consumer never even pays attention to the content of the illustration. I likened it to the documentation that one signs while getting a mortgage. I would tell you that I read everything in the fine print before I signed for my mortgage but that would be a lie! Thus the mortgage documentation becomes a moot point for disclosure purposes similar to what can happen with indexed universal life insurance (IUL) illustrations. Clearly, we do not want that! 

I then went on to elaborate that the IUL illustration can actually be used as a great tool as long as the agent knows how to explain it in a simple manner. However, in order to explain something in a simple manner, one needs to understand the content, the numbers, and why the numbers behave the way they do in the illustration. As Albert Einstein said, “If you cannot explain it simply, you do not understand it well enough.”  

I also stated that the agent must understand that caution needs to be exercised, because the only guarantee the illustration offers is the fact that the illustration will be wrong. We just want the illustration to be wrong on the conservative side. 

Then I explained that illustrations that are maximum funded, with loans coming out in later years for retirement income, can be some of the most complicated to understand and explain. However, these are the most common illustrations when IUL is being used.  I then used an example scenario of Jill, our 45-year-old client, to demonstrate how to simplify the IUL illustration conversation. This is where I laid out a track for the financial professional to go down. This track is five specific points on the illustration that are great places to stop and emphasize for the client. Below are the details of the scenario followed by the five point track.

Scenario: Jill, a 45-year-old female in good health, has a life insurance need of $500,000. She wants to maximum fund this policy because, when she retires in 20 years, she would like to begin taking loans against the policy as retirement income. We assumed a six percent illustration rate and solved for a fixed/wash loan amount that can be taken against the policy from age 65 until age 100. In this scenario we chose an increasing death benefit (option 2) switching to level (option 1) after the premiums are paid. This death benefit option allows more premium to be paid into the policy, versus a level death benefit which decreases the net amount at risk (death benefit minus cash value) in the policy, which, in turn, reduces the cost of insurance charges. The five points of emphasis on the illustration were:

Point 1:  What is the total premium (seed) going into the policy over the funding period? $358,443 ($17,922 over 20 years).

Point 2: The year that the client would like to retire—20 years from now in my example.  

What has the death benefit grown to?  $1,121,000.

What is the cash surrender value?  $621,700.

(Note: There should also be a discussion around the assumptions used in the illustration and the fact that they are not guaranteed. This is usually the point where I have this discussion.) 

Point 3: The loan amount in the first year of retirement—$41,283.

This warrants a discussion with the client about the loans that allow them access to that cash surrender value (harvest) without the 1099 coming.

Point 4: Approximate life expectancy—age 85 in my example.  

At this point, I emphasize the total seed that we discussed in Point 1 and compare that to the total nontaxable harvest.  Total premium ($358,443) vs. total loans ($825,660) plus death benefit ($477,348) which totals $1,303,008.

Once finished walking through the first four points, at that point the client may ask questions such as:

• How much does all of this cost?  
• What are the expenses?
• Is putting $358,440 into something that generates a value of $1,303,008 between loans and death benefit a good value?

Point 5: The aforementioned questions bring us to the main content of this month’s column, where I discuss the internal rate of return (IRR) reports that many carriers have as supplemental outputs for their illustrations. 

Based on Jill paying one premium of $17,922.16 and having a death benefit of $516,013 in year one, that is an IRR of 2,779 percent should she pass away in that year. However, suggesting death in the first year is a ridiculous scenario that will rarely happen, but I show that to make a point. My goal is to demonstrate that, from purely an IRR  standpoint, dying young with life insurance is the best case financial scenario and that the IRR on the death benefit tapers off as time goes by. Clearly, dying young is not ideal! 

If dying young is the best financial scenario, then what would the worst case financial scenario be from purely an IRR standpoint? It would be that Jill dies very old.  This is due to the fact that the leverage power of life insurance burns off as the policy ages because of the time value of money, and also because the loans, plus the interest that Jill is taking, goes against the death benefit. In other words, the worst case for Jill and/or her beneficiaries from a IRR standpoint is that she lives so long in retirement and takes so much in loans for her retirement needs that she spends the death benefit down to almost nothing.  

Again, in our scenario with Jill we illustrated the loans coming out to age 100, at which point there is almost nothing left in cash surrender value and death benefit. So, back to the questions our hypothetical client may ask about costs and charges. What was the cost to Jill in the case that she lives until 100?

To answer that, let’s look at the IRR that Jill would have at age 100 after she put in $358,443 of premium ($17,922 x 20 years) and took out $1,444,905 ($41,283 x 35 years) in loans. Because I optimized the policy’s death benefit for distributions to compress the cost of insurance (COI) charges, the IRR would be quite attractive. It would be 5.57 percent or a taxable equivalent of 7.43 percent assuming she was in the 25 percent tax bracket. But if we illustrated the policy at six percent, why is the IRR only 5.57 percent and not six percent? Because of expenses. Therefore, what would be the total expense drag on this policy over the life of the policy? It would be 43 basis points (six percent minus 5.57 percent) per year!  

Many would argue that this level of expense is not astronomical, especially considering that the 0.43 percent was buying life insurance over Jill’s lifetime so that, if she were to die young in those early years, her beneficiaries get multiples of what she put in—i.e. leverage! But even when that leverage has burnt off, it still was not a bad proposition for Jill because it cost her only 43 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 that IRR and the illustrated rate. If you can get the disparity to around 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, this disparity between the IRR and the illustrated rate can be quite reasonable.

The value of putting in $358,443 of premium and taking out $1,444,905 is significant. Cost is an issue only in the absence of value, and nobody can argue that there is an absence of value with cash value life insurance if the policy is designed correctly based on the client’s needs.

And remember, with IUL you are paying taxes on the seed and not the harvest.

The information presented is hypothetical and not intended to project or predict investment results.  The numbers cited in the illustration are based on the Builder IUL 8 issued by North American.

The net cost of a variable interest rate loan could be negative if the credits earned are greater than the interest charged.  The net cost of the loan could also be larger than under standard policy loans if the amount credited is less than the interest charged. In the extreme example, the amount credited could be zero and the net cost of the loan would equal the maximum interest rate charged on variable interest loans.  In brief, variable interest rate loans have more uncertainty than standard policy loans in both the interest rate charged and the interest rate credited.

Indexed universal life insurance products are not an investment in the “market” or in the applicable index and are subject to all policy fees and charges normally associated with most universal life insurance.

Income and growth on accumulated cash values is generally taxable only upon withdrawal. Adverse tax consequences may result if withdrawals exceed premiums paid into the policy.  Withdrawals or surrenders made during a surrender charge period will be subject to surrender charges and may reduce the ultimate death benefit and cash value.  Surrender charges vary by product, issue age, sex, underwriting class, and policy year.

Neither North American nor its agents give tax advice. Please advise your customers to consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements.

Builder IUL is issued on policy form series LS172 by North American Company for Life and Health Insurance, Administrative Office, Sioux Falls, SD 57193. Product, features, riders, endorsements or issue ages may not be available in all jurisdictions. Restrictions or limitations may apply.

I had a mentor once who asked me a question to demonstrate a very important point. He said, “Charlie, what would your wife’s response be if you approached her and said ‘Honey, do you know that your face could stop a clock?’” I said, “Well, my wife’s reaction would likely not be a positive one.” He then said, “OK, conversely Charlie, what would happen if you went up to your wife and said, ‘Honey, do you know that when I look at you time stands still?’” I then said, “It would likely be a better outcome.” He said, “What I just said was the exact same thing, but I said it very differently. In our business it is not what you say, it is how you say it!

The above was something that has always stuck with me. We are certainly in an analytical business, but the best salespeople I have ever met were those that understood that we are also in a language business. The best salespeople in this business, whether wholesalers or agents, are those that don’t avoid discussing the complicated, but rather communicate the complicated in a simplified manner.

It is human nature for the brain to shut down when it is receiving an overdose of analytics. If you have been in this business for any significant period of time you have been in a meeting where you were force-fed analytics on a mass scale. In these situations, you can be faced with “analysis paralysis” where the brain puts up a wall and wants to do anything other than continue to listen to the presenter. Since much of what we do requires a great amount of analytics, discussing analytics can be hard for us to avoid. However, what if you could deliver those analytics past that wall the brain puts up via a Trojan Horse? What is the Trojan Horse I am referring to? What I am referring to is stories, analogies, metaphors and simplification. If you can wrap those analytics in the “Trojan Horse” of a story or an analogy, the critical information the client needs to know will be transported into the brain!

A perfect example of the analytics that are involved in our business is sitting right in front of me as I type this column. As I sit here I am looking at an indexed universal life (IUL) insurance illustration that is 39 pages long. The “Tabular Detail Ledger” is 14 columns wide. So why not make this illustration the topic of this month’s column?

To the untrained eye the details of an illustration can be very daunting to look at because…where does one start? It’s a very important stack of papers, but yet the risk of “analysis paralysis” is high when the agent or client looks at it. As the agent one may think, “Where do I start to explain the illustration? Do I discuss every single value, every single year? Why does one column increase while the other columns decrease? How are all of these numbers arrived at?” Etc.

We need to be able to explain this to our clients effectively. After all, the client signing this illustration is required by insurance regulations. I am a believer in disclosing everything, but I am also a believer in being able to explain everything in a simple manner so the client understands everything. To me, the last thing an agent needs is for the client to completely disregard those pages and sign the illustration because it is just too daunting. To my point, if you have taken out a mortgage lately did you read all of the documentation that you signed? I didn’t think so. So, over-disclosure and over-illustration can present a risk in that it can completely dissuade the client from even paying attention to the illustration—when the client would have otherwise paid attention if the illustration were shorter.

Clearly, I am not suggesting we do away with illustrations nor am I suggesting that you should not discuss the illustration. What I am suggesting is that it is important that the client not only signs the illustration, but also that he/she understands it! Granted, you are not going to make a non-numbers client an actuary in a conversation. But what if there was a roadmap as well as a method to explaining the illustration in a simple manner so the client can actually understand it? This may sound like a lofty task but it can be done.

Many times the most complicated illustrations can be those where the client wants to maximum fund the policy over X years, then take potentially tax-free loans out against the policy to supplement their retirement income. These types of illustrations are actually the most popular type that are run when IUL is being considered. As a matter of fact, Wink’s Sales and Market Report Q1 2017 reports that 78 percent of IUL is sold with the “Pricing Objective” of cash accumulation, versus other objectives like guaranteed death benefit, wealth transfer, etc. So using a scenario where accumulation, then loans, are illustrated, I want to focus on the “flow” in which you can explain the illustration in five key points, with the fifth point being discussed next month.

(Disclosure: The below demonstration is not all encompassing of the discussion of caps, spreads, expenses, etc. that should be incorporated into the agent’s conversation with the client.)

Scenario:

The scenario I would like to use is this: We have Jill, a 45-year-old female in good health, who has a life insurance need of $500,000. She wants to maximum fund this policy because 20 years from now at retirement she would like to begin taking loans against the policy as retirement income. We will assume a six percent illustration rate and solve for a “Fixed/Wash Loan” amount that can be taken against the policy from age 65 until age 100. In this scenario we chose an increasing death benefit (Option 2 Death Benefit) switching to level (Option 1) after the premiums are paid. This death benefit option will allow more premium to be paid into the policy versus a level death benefit. What this does is it decreases the net amount at risk (death benefit minus cash value) in the policy which, in turn, reduces the cost of insurance charges.

(Note: Although I am starting with a death benefit in mind in this example, many times the illustrations are done with the starting point as the premium amount that the client wants to put in and the illustration solving for lowest death benefit. In both cases the below points would apply.)

Illustration Point #1: The Seed

If the IUL is designed properly, one of the benefits of those retirement distributions (loans) are that they are potentially tax free to the client. Yes, the premium you put into the policy has already been taxed but if the policy is set up correctly, the distributions are not. I like to say that with IUL, you are paying taxes on the seed, but not always on the harvest. The first point on the illustration is to point out what the premium/seed is going into the policy—not just the annual premium/seed, but the total of those 20 premiums. In this scenario Jill would be putting in $17,922 per year, or $358,440 over the 20-year period until age 65. This is the first point on the illustration to emphasize. What can Jill get in return for that “seed” of $358,440?

Illustration Point #2: The Potential Harvest at Retirement

The second crucial point on the illustration is the year in which she would like to retire, which is typically age 65. In this year you want to discuss a couple different points:

Death Benefit: What does the death benefit look like in that year of retirement, before the loans begin to come out? In this scenario Jill’s death benefit has increased to a little more than $1.1 million. This is a point that presents an opportunity to discuss why you illustrated an increasing death benefit—the fact that it decreases internal expenses in the policy and it also offers the ability for the death benefit to offset inflation.

Surrender Value: At age 65 Jill’s surrender value is $621,700. This warrants a discussion around the fact that she put in a “seed” of $358,440 and is able to, at that time, take out a harvest” of $621,700. That is, assuming the illustration is 100% accurate, which it never will be. This is where you discuss the fact that the illustration was assuming six percent, which is merely a projection and not guaranteed. A conversation around the “guaranteed values” is important at this time.

As you discuss the “projected” $621,700 in surrender value in that retirement year, you can tell Jill at that point that she could request that money to be sent to her and the insurance company will send her a check. She could cash out that entire $621,700! However, the check is not the only thing the insurance company will send out in this scenario. They will also send out a 1099 for the difference between what she put in (basis) and what she took out. Any time a life insurance policy dies before the client dies, it is taxed like an annuity! Thus, she would get a tax bill on $263,260 ($621,700 —$358,440) in income. Clearly, we do not want this. So this is where you tell Jill how she can get access to that “harvest” without the 1099 coming. This is where you move on to point #3.

Illustration Point #3: The Loan Amount

In the first year of retirement for Jill (Age 66) she can take loans against the policy of $41,143 in this example. As you point this number out you want to explain two different things to Jill:

Again, the loan is typically not taxable. Why not? Because loans generally are not taxable! When she goes to the bank to get a mortgage or a loan, those transactions are not taxable to Jill, correct? This situation is no different, assuming it is a non-MEC contract of course!

You projected the loans to run until age 100. If she wanted the loans illustrated longer, age 120 for example, you can run it that way as well.

When I am training agents I like to point something else out: Have you ever been asked by the client, “Why do I have to take a loan from myself? That is my money I am taking out!” Here is my explanation:

The client is not taking anything out of their policy. What is happening is the client is going to the insurance company and the insurance company is making a loan to the client; in this example to the tune of $41,143 per year. These loans are not much different than Wells Fargo giving the client a loan. However, how does the insurance company guarantee they would get their loans plus interest back should the client die or surrender the policy? This is where the insurance company collateralizes the surrender value and the death benefit of the client’s policy year by year as those annual loans are taken. The ability for the insurance company to do this is great because the loans, plus interest, are fully protected by the policy. This is why you see the “Surrender Value” and “Death Benefit” columns on the illustration decreasing once loans are taken, not because money has been taken out of the policy, but because a portion of the death benefit is being used as collateral! Furthermore, this is also why the accumulation value, also known as cash value, is not decreasing—because the client did not take one penny of their cash value out of the policy. The client merely got a loan from the insurance company and the insurance company used the surrender value and death benefit as collateral. Again, on the illustration the accumulation value usually continues to grow while the surrender value and death benefit decrease.

Illustration Point #4: Life Expectancy

Although Jill, as a 45-year-old female, has a life expectancy of 82 (per the Social Security Tables), I will generally use the next five-year increment because of the fact that insurance company illustrations usually sum up the premiums and loan amounts in five-year increments. Thus, in the example using Jill, I will have a discussion around the numbers at age 85.

This is where I will reemphasize the fact that she would be putting in a “seed” of $358,440, but in exchange for that “seed” she would be allowed total loans over her lifetime that add up to $822,860 ($41,143 X 20 years) that will not be taxed. Again, the illustrations will generally add these numbers up for you in 5 year increments. I then point out that the $822,860 was not the total “harvest” the policy would have generated. Why not? Because if she happened to pass away in that year there is also a death benefit that is passed on to the beneficiaries that is tax free. The death benefit in this scenario is $507,727. In this scenario there is a total “harvest” generated from the insurance policy of $1,330,587 (total loans + death benefit) versus a “seed” of $358,440. Again, this is based off the projection of six percent, which is just that—a projection.

At this point in time, especially if the client is more on the analytical side, the client may want to discuss the costs in the policy. In other words, is putting in $358,440 into something that generates a value of $1,330,587 40 years later a good value? Unless the client is savvy with the cash flow functions in a financial calculator, that can be hard for them to quantify. This is where I like to utilize the Internal Rate of Return Report that usually can be included in the insurance company’s illustration. To me, these reports are invaluable when it comes to quantifying the value of the policy, and also in quantifying the expenses embedded in the policy. 

This fifth point, Internal Rate of Return Report, warrants its own column and is “to be continued” next month.

Neither North American nor its agents give tax advice. Please advise your customers to consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements.

Indexed Universal Life Insurance products are not an investment in the “market” or in the applicable index and are subject to all policy fees and charges normally associated with most universal life insurance.

The opinions and ideas expressed by Charles Gipple are his own and not necessarily those of North American or its affiliates. North American does not endorse or promote these opinions and ideas nor does the company or agents give tax advice. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed as to accuracy. All presentations are for agent representative use only and cannot be used, in whole or part, with consumers.

Income and growth on accumulated cash values is generally taxable only upon withdrawal. Adverse tax consequences may result if withdrawals exceed premiums paid into the policy. Withdrawals or surrenders made during a Surrender Charge period will be subject to surrender charges and may reduce the ultimate death benefit and cash value. Surrender charges vary by product, issue age, sex, underwriting class, and policy year.

For most policies, withdrawals are free from federal income tax to the extent of the investment in the contract, and policy loans are also tax-free so long as the policy does not terminate before the death of the insured. However, if the policy is a Modified Endowment Contract (MEC), a withdrawal or policy loan may be taxable upon receipt. Further, unpaid loan interest on a MEC may be taxable. A MEC is a contract received in exchange for a MEC or for which premiums paid during a seven-year testing period exceed prescribed premium limits (7-pay premiums).

The net cost of a variable interest rate loan could be negative if the credits earned are greater than the interest charged. The net cost of the loan could also be larger than under standard policy loans if the amount credited is less than the interest charged. In the extreme example, the amount credited could be zero and the net cost of the loan would equal the maximum interest rate charged on variable interest loans. In brief, Variable Interest Rate Loans have more uncertainty than Standard Policy Loans in both the interest rate charged and the interest rate credited.

The information presented is hypothetical and not intended to project or predict investment results.

For my friends out there who have seen my head and how it can cast a blinding reflection if the sun is at the right angle, you may wonder how it is possible that I even need haircuts, let alone a haircut that costs $86? It will make sense by the end of this month’s column.

I have been brainwashed by what I have learned in my college finance classes as well as my almost 20 years of experience in financial services. I have been brainwashed by the ocean of statistics that you and I have swum our professional lives in that emphasize the large amounts of money needed to pay for children’s education, our retirement, medical costs in retirement, long-term care expenses, etc. Thus, my wife accuses me of overanalyzing everything that is financial, and being one of the cheapest people around. I am frugal for a couple different reasons.  

The first reason is because of the aforementioned statistics that have been burned into my brain and the need to avoid instant gratification so that I can otherwise save for those expenses decades down the road.  

Another reason I am frugal is because of two very simple economic concepts that I live by and believe every high school and university should teach students before they venture out into the world of financial independence. The two concepts I am referring to are “time value of money” and “opportunity cost.” I believe that if the education system is not going to educate on these concepts, it is an opportunity for those of us in financial services to fill that gap which, in turn, will create client opportunities for us.  

As you may know, the notion of time value of money is that a dollar today is more powerful than a dollar in the future. Why? Because a dollar today can be invested to be worth more than a dollar in the future. As Warren Buffett once said, “Someone is sitting in the shade today because someone planted a tree a long time ago.” Warren is referring to the fact that if you invest a dollar today and it gets a hypothetical five percent average return for 20 years, it will then be worth $2.65.  

Opportunity cost, my second concept, is the notion that if you have a resource (such as time or money) that you allocate to “something,” there is a missed opportunity that you experience by not choosing the alternative to that “something.” This concept is the guiding hand of how we spend our lives! This is the very foundation of how we use the limited resource of time that is given to us over our lives. We all think, “If I do X today, then missing out on doing Y is less of a missed opportunity than if I did Y and missed out on X.” We all do this, whether it’s instinctively or not so instinctively. In other words, day after day, we allocate our time to the activities that we believe will result in the least amount of opportunity cost, whether you recognize you are following this economic principle or not.  

An example of opportunity cost using money would be, if my seven year old pays $1 for a candy bar, he gets a candy bar, but the opportunity cost is the pack of gum he could have otherwise gotten. In essence, opportunity cost is the opportunity or opportunities you lose by choosing something.

Now let’s combine the two concepts of time value of money and opportunity cost using a real life example of a situation I went through several years ago. I had an eight year old vehicle that had over 150,000 miles on it, again, because I am cheap! Well, after the vehicle stranded us a couple of times, my wife implored me to trade this vehicle in for something else.  As I went through the debate with my wife on whether or not to get another vehicle, here is the logic that went through my strange mind:  If I were to trade in my eight year old vehicle that now is worth $10,000, for a brand new one that costs $40,000, the real cost to me will be somewhere around $130,000! 

Right now you are thinking I am either crazy or I missed the subtraction part of my math classes in elementary school. Allow me to explain. Enter opportunity cost and time value of money. 

By forking over $30,000 today, I am foregoing an opportunity to have that money invested elsewhere. Thus, there is an opportunity cost of what that investment could grow to be. This means that if I were to not give up that $30,000 today, but instead I would invest it where it can capture interest of, say five percent on average per year for 30 years, what would that value grow to? I would have $129,658 in this hypothetical account when I am 69 years old. That money could help with my retirement, pay for my grandchildren’s education, etc. That is the power of time value of money and opportunity cost.   And that’s why I’m not ashamed to drive an old beater!

A couple of other examples would be: 

• If I were to spend $20 on a haircut today, I would technically be paying out $86 in future value 30 years from now assuming a five percent rate.  
• If I were to buy a $5 latte every day for 30 years, I would technically be paying out $127,000 in future value 30 years from now assuming a five percent rate.  

Anyway, back to the vehicle. After explaining this logic to my wife, she exclaimed, “So do you suggest never getting a new car then?” I said, “Fair point,” and hesitantly agreed to it. (Note: I am embellishing a little as it is not like I get out a financial calculator every time I spend money.)

As we drove to the dealership, I asked my wife what her requirements were of the new vehicle, even though this new vehicle was going to be mine! She said she had two simple requirements. The first requirement would, of course, be cost! She knows I would not be on board with spending a fortune on something that depreciates the moment you fire it up. The second requirement she sought was capacity, i.e. the capability to comfortably transport our two sons and a million of their friends to and from sporting events along with all of their equipment. With this last requirement, my wish of buying a pickup truck immediately disappeared.

As we walked into the dealership, right there in front of us was a vehicle for which she immediately proclaimed, “I love it!” Again, this vehicle was supposed to be mine and the vehicle she was falling in love with was a minivan. Apparently this minivan satisfied her two criteria. This is when I enlightened my wife that I had a third requirement that the minivan did not fulfill. My third requirement was the horsepower and towing capabilities, should I decide to purchase something later on that needed to be towed—a boat for example. She agreed, and we went to the Sport Utility Vehicle (SUV) section.

As we looked at the SUV we liked, we realized this decision was going to be a bit more complicated than what we thought. That is, the SUV required a premium of $5,000 over the minivan. At this point we essentially had a value triangle for each of these vehicles that we needed to analyze, since this decision was not just about “cost” in isolation or “capacity” in isolation.  It was more complicated than that.  

As you can see above, the value triangles lay out our three requirements and the corresponding data. The bottom left side of the triangle was equivalent on both vehicles. They both had the capacity to transport several kids, as my wife was seeking. The differences came in the top corner (price) and the bottom right corner (horsepower and towing). Effectively, if we went with the minivan to save $5,000, there would be an opportunity cost of not having the horsepower and towing I was looking for. After debating for an hour, she let me buy the SUV.  

To me, the opportunity cost of paying the $5,000 extra and getting the towing capabilities was much less than saving $5,000 and not having that capability. There is a reason why one of the fastest growing segments of the U.S. automobile market has been SUVs in recent years.  They have the versatility of being able to haul a million people around like a minivan, with the horsepower and towing capabilities of a pickup truck. The SUV has the best of both worlds where opportunity cost may often be minimized.

With that being a primer, let’s discuss opportunity cost as it relates to guaranteed universal life insurance (GUL) and guaranteed index universal life Insurance (GIUL). I believe this is a conversation that is not discussed enough because of our (the entire industry) comfort level around GUL. However, if we start analyzing and discussing the concept of opportunity cost, I am confident that the industry will start selling a lot more GIUL. 

Let’s use an example of a 50-year-old male (preferred non-smoker) that has a death benefit need of $1 million. Because this individual has an absolute need for the life insurance to be in force for his lifetime, I illustrated the death benefit to be guaranteed until age 120, as long as he pays the premiums until age 100.

At this point, a picture is worth a thousand words. Below you will see the value triangles of these two products.

As was the case with the minivan/SUV example, the bottom left corner is equivalent in both examples.  Regardless of how interest rates or any index perform, the death benefit is guaranteed to age 120 as long as the client pays the premiums as illustrated. Where do these products differ? If you look at the top corner, the cheapest product is the GUL, with an annual premium (to age 100) of $10,380 per year. Thus, by looking at just these two specs/corners in isolation, one would believe that the GUL would be the way to go. However, we need to consider all three corners of the value triangle and the tradeoffs/opportunity costs that exist. Even though the GUL is $508 cheaper than the GIUL, choosing the GUL comes at an opportunity cost in the form of cash value. As you can see the cash value on the GIUL in year 20 grows to $215,675 (assuming a six percent illustrated rate), which is almost a return of the total premiums paid up to that point.  

I would estimate that if I were to ask a room of 10 prospects which one they would choose, a good majority of them would choose to pay the roughly five percent more premium in exchange for the cash value potential. GIUL is flexible and versatile so that if the consumer’s needs change later in life and cash value is needed to subsidize retirement, it’s there. Just as the SUV had both the capacity of a minivan and horsepower of a pickup, the GIUL has the death benefit guarantee of a GUL while also providing cash value potential that indexed universal life (IUL) insurance is known for.  

If there was an overarching message I would like to communicate in this month’s column, it would be two things:  

1. The first is, my desired features of a couple of life insurance policies I own today are different than what I thought they would be 15 years ago when I bought them. Why? Because as much as we believe we can determine what we will need in the future, time changes a person and their financial goals. Products that have the flexibility and versatility to change along with life are important. I bet when Walt Disney applied for his life insurance policy he never thought that he would ultimately use that policy’s cash value to finance and create what would be Disneyland.
2. As mentioned, life is about tradeoffs and opportunity costs, and many times the cheapest product is not the cheapest when you factor in opportunity costs. This is especially true with life insurance pricing. So let the client decide if saving $508 is worth the opportunity cost of not having cash value. Even though it may be an easier sale to just give the client what they want when they ask for the cheapest permanent coverage, discussing the tradeoffs/value triangle should be our responsibility as we cannot assume our clients know about the opportunity cost of buying the cheapest product.  

For the reader that has a keen understanding of the two concepts I have been discussing, time value of money and opportunity cost, you may be thinking, “What if my client were to buy the GUL and invest the premium difference of $508? Could they achieve the same level of cash value in that investment?” My financial calculator tells me it is possible only if the investment performs to the tune of 24.9 percent compound average return over the 20 years in order to get the same $215,675.  Furthermore, this is not taking into consideration the potential tax benefits of cash value life insurance. 

In closing, GUL is a great product and there are, of course, many scenarios where GUL would be the more appropriate product for that respective client. I am merely advocating that financial professionals and consumers heed the tradeoffs that may exist from product to product.

“As I hurtled through space, one thought kept crossing my mind—every part of this rocket was supplied by the lowest bidder.” —John Glenn 

Neither North American nor its agents give tax advice.  Please advise your customers to consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements.

Indexed universal life insurance products are not an investment in the “market” or in the applicable index and are subject to all policy fees and charges normally associated with most universal life insurance.

The opinions and ideas expressed by Charles Gipple are his own and not necessarily those of North American or its affiliates.  North American does not endorse or promote these opinions and ideas nor does the company or agents give tax advice.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed as to accuracy. All presentations are for agent representative use only and cannot be used, in whole or part, with consumers.

I believe that all species go through similar stages throughout their lifecycle; birth, dependency, youth, maturity, adulthood, then death. I was going through some old pictures a couple of weeks ago and saw our beloved family dog (Max) that left this Earth two years ago. He had been with us since college when he was 6 weeks old and had a life many dogs dream of; dog owners looking to provide their best friends with long and happy lives may want to protect them with something like Pets Best dog insurance. Max hung out with us in our college dorm as a puppy, he then moved into our first house with us, he moved across the country with us for my job, he was there when our first and second sons were born, then later was best buddies with my kids as they grew old enough to play with him. He had seen it all. After spending 15 great years (over 100 dog years) with us I had to make that call to the veterinarian, which was one of the hardest calls I have ever made. We loved Max like he was one of our kids and it broke our hearts when we had to end his pain.

I think of the last six months of his life, which is equivalent to a few human years. He was about 90 percent dependent on us. He was blind, he didn’t know where his food was, he couldn’t move very well, etc. Many of us have seen this decline happen with their pets; and family, which I will touch on in a bit, and many of us turn to medication such as CBD for Pets to help ease their pains during those times.

What would Maxs final days have been like if he didn’t have a loving family to take care of him? Without getting morbid, we all know how nature and predators take care of elderly animals that cannot care for themselves. However, as a domesticated animal whose family had an obligation to take care of him, he had an additional stage added into his lifecycle that I mentioned in the first sentence of this column. If he wasn’t eating, we would search for tips if your dog isn’t eating, or if he wasn’t drinking, we would try and find out why. We had a duty of care and we made sure we were the best possible owners for our beloved furry friend. That additional stage was Late Life Dependency. We as humans many times have this additional stage as well. Unlike other animals, we as humans have an obligation to take care of our fellow man/woman when they cannot take care of themselves. What I am referring to is long term care. As many of us know, there is a 70 percent chance that if you are over the age of 65 you will indeed need long term care services.

My point to the previous comparison is that every species on Earth ages and becomes frail where many times they cannot take care of themselves. If you have never seen this happen with a family member than you probably have with a pet. This is the way that nature works and cannot be denied by anybody even those that really believe themselves when they say I will not need long term care. The difference between us and other species is, we have an obligation to care for one another and we have the long term care resources to do so. Of course, this introduces a problem to us, humans, that the simpler species are not subject to how to fund this late-life dependency.

To state that long term care funding is a problem is an understatement. In 2013, total nationwide expenditures for long term care were a whopping $339 billion versus only $30 billion in 1980.* Furthermore, in 2013, 43 percent of the long term care services were paid for by Medicaid and only six percent of those expenditures were paid for by private insurance.* Today only 13 percent of individuals thought to be eligible for long term care insurance actually own it.

The size of this problem, the size of the market, the fact that the market has not been penetrated, and the vast number of innovative solutions available represent one of the biggest opportunities for agents today. I believe that when you look at the long term care risk that faces many of your clients today, it is a problem too large to ignore. Furthermore, I believe from a legal standpoint you should not ignore this risk facing your clients. To demonstrate, Harley Gordon, one of the nations foremost long term care legal experts cites an example of an agent Adams that got a call from the son of a client of hers.

Adams received a call from a good clients son, a local attorney. He proceeded to tell her that his dad was in a nursing home and paying for it with his life savings. He then told her, You have 15 minutes to produce evidence that you recommended a long term care plan in general and long term care insurance in particular. Fortunately, she had discussed the matter and had a letter recommending the sale of long term care insurance. Without it, she believes she would have been sued.

I am not an attorney but here is what I believe: I believe that lawsuits in the future will not just be about what you recommended that was wrong, but also about what you did not recommend that was right!

Again, the fact that there are 111 million Americans over the age of 50 along with the innovations in product development, there are many reasons to be excited about incorporating into your practice a solution to this problem. Below I would like to discuss just a few possible solutions as well as a concept for your consideration.

Stand Alone LTCI:
Although the stand-alone long term care insurance marketplace has gone through some significant de-risking, these policies are still superior to what they were when first offered. When first offered in the late 70s by the handful of carriers that offered it, LTCI only covered expenses associated with nursing home/skilled nursing facilities. This is in contrast to the policies today that also offer coverage for in-home, adult daycare, and assisted living facilities. Claims experience shows that the expanded list of covered expenses has indeed been taken advantage of. To demonstrate, based on the Medicare and You 2014 study by the US Department of Health and Human Services, 51 percent of those that go on claim choose in-home care, 31 percent choose the nursing home, and 18 percent choose the assisted living facility or adult daycare. These numbers are important because they demonstrate the flaw in the notion that long term care insurance is nursing home insurance. It is important to discuss with clients that LTCI is insurance that can actually allow you to stay out of the nursing home and allow you to choose between the options above! And claim statistics show that people do indeed choose to stay out of the nursing home. In other words, because of the expanded services covered, the old label of nursing home insurance is no longer appropriate. As a result, the demand for these products has increased among more broad age groups. This shift can be seen in the fact that the average issue age on LTCI has gone down steadily over the decades. In 1990 the average buyer was 68 years of age. In 2016 the average issue age was less than 59 years of age. This is a favorable development as LTCI is not just a product for the elderly40 percent of people who need care are under the age of 65.**

Combination/Hybrid Products: Because many people discuss combination products, acceleration products, and linked benefit products as if these terms are synonymous, I would like to spend some time differentiating the terminology as these terms are not synonymous. Combination/hybrid products are the broad category of products that can be on a life insurance chassis or an annuity chassis. Thus, a combination/hybrid product is an annuity or life insurance policy that has some form of long term care benefit, usually in the form of a rider. These products can be life insurance with accelerated death benefit riders, annuities with long term care riders or they can be true linked benefit products. With what has happened in the stand-alone LTCI marketplace, in 2016 there were twice the amount of combination life insurance policies sold as there were stand-alone LTCI policies sold. Clearly the flexibility of these combo products is very appealing to financial professionals and consumers, and will only continue to grow in popularity.

Even though annuities can be a combo/hybrid product, I would like to just focus on two subcategories of the combo/hybrid world. These are products with accelerated death benefit riders and linked benefit products.

Accelerated Death Benefit Type Products: This is a subcategory of the broader combination product/hybrid world. These are usually life insurance-based products where the death benefit (and no more than the death benefit) can be accelerated for the purposes of a long term care event or a chronic illness. When I present this product I like to point out that the life insurance of the old days typically had one trigger in order to access the death benefit death. However, today’s life insurance is life insurance, not death insurance. This is where the insured can actually get enjoyment out of the product during their lifetimes in the event of a chronic illness or a long term care event. Thus, the two prominent rider types offered within this category are chronic illness riders and long term care riders. Note that chronic illness riders were predominantly previously filed as requiring a permanent condition. There are now some chronic illness riders coming to the market that do not require permanence.

Linked Benefit Products: Again, linked benefit products is a subcategory of the broader combination product/hybrid world. These are usually life insurance products where there is a long term care pool that is created that can be multiples of the death benefit on the underlying life insurance product. Of course, the additional long term care pool would come at an extra cost and possibly additional underwriting relative to just an acceleration product. A linked benefit product may give two to six times the death benefit in the form of a long term care pool. The long term care benefits that go beyond the total death benefit are through the use of a continuation of benefits or extension of benefits rider. Thus, the COB/EOB is the primary difference between the linked benefit category and the accelerated death benefit category.

The Flexibility of Hybrid Life Products:
To end this column I want to add to a concept created by Moshe Milevsky (Professor of Finance at York University). Above I created a graphical representation that shows two forms of Capital that we have throughout our lives. We start life with a great amount of human capital, which is the present value of all of our future earnings. As we age and go through life we start to lose our human capital because we are getting older and therefore our future earning power diminishes. Thus, on the graph, you see the human capital line descending as one gets older. However, as we get older our financial capital (401k plan, IRAs, investments, etc.) should be growing. Thus, the financial capital line is ascending. In other words, think of life as converting your human capital into financial capital as you go. The problem with both of these forms of capital is, should a catastrophic event happen, you can lose it! This is where insurance comes into play.

How does one ensure human capital? As you can imagine, your human capital can be insured via life insurance or disability insurance. For example, should your human capital drop from $1 million to $0 in one day because of death, it would be ideal if your beneficiary would then be given $1 million in financial capital/death benefit as an offset. This is done via life insurance. Same thing should a disability happen. Above is a yellow-colored period of time where human capital insurance is needed. Of course, this is generalized for simplicity of illustration.

How does one ensure financial capital? There are many ways one can lose financial capital, one of which is via long term care costs. Of course, this risk can be insured via LTCI or combo products. Another risk to financial capital may be longevity risk, which can be insured via annuities.

I started this column discussing the various phases of our lives and the fact that our lifecycles are a little more complicated than other species on earth. For these complicated lifecycles, which will only get more complicated as life expectancies increase, we need products that are flexible enough to cater to various risks as we go. This is the very reason I believe financial professionals like the flexibility of life insurance with riders (chronic illness or long term care). In the early years, life insurance can protect human capital via a death benefit. Later in life, the financial capital can be augmented by the cash value in the life insurance policy while at the same time that same policy can provide a level of insurance for the financial capital via a chronic illness or long term care rider.

References:
*Fact Sheet: Long-Term Services and Supports (AARP)
**The State of Long Term Care Insurance 2016 (NAIC)

About ten years ago I had a 6:00 am Southwest flight out of Omaha to Phoenix.  I was dead tired because I had to wake up at 3:30 am to get on the flight but I dragged myself to the airport. Waiting at the gate to get on the airplane seemed to take forever. All I wanted to do was get on the plane and take a nap.  As I boarded the plane I was happy because there were probably about 50 people on the flight which would mean that I would likely have plenty of room to get comfortable and take my nap.  Indeed, after I sat down I noticed that in my row it was just me and somebody across the aisle in the other seat that looked like he was probably a frequent traveler. Some frequent travelers have a projection of arrogance to them. Without going into detail, this guy definitely did. Anyway, as I sat there in my seat I started to doze off into a half-conscious state. I could feel the plane pull back from the gate and go through the long process of idling out to the runway. The feeling of the plane lumbering along through the obstacles to get to the runway is actually kind of a soothing feeling, a lot like rocking a baby to sleep.  In my half-awake state of mind I could then feel the plane’s full thrust kick in when I was pushed back in my seat.  It was obvious we were now making our way down the runway.  As we made it down the runway we were nearing the final stage, where you just begin to feel the front wheel lift up as we go airborne.  Then, all of a sudden, BOOM! This is the point when my whole world got rocked.  It felt like we hit a brick wall as I was jolted wide awake. We were then skidding down the runway as I pulled myself to the window in panic to see where the end of the runway was because we had to be close. I also glanced over at Mr. Frequent Traveler across the aisle, whose eyes were the size of dinner plates. He was looking back at me for confirmation we were going to live, which I could not provide him. He was panicking, the other passengers were panicking and, worse of all, the flight attendants were panicking! What felt like a lifetime finally came to an end. We finally slowed down and got it under control.  As the dust settled and we began that slowly idle back to the gates I could hear people sobbing toward the back of the plane. That is when the captain came on the intercom to tell us what had just happened. What did he say?  In a very calm voice he comes on and says “Hello folks, sorry about that somewhat uncomfortable take off attempt. As we began to get airborne we had a code tripped that the right side engine was failing so we had to abort our take off.  We will have to take you back to our gate and see what we need to do to get you on your way home. We do apologize for the inconvenience and greatly appreciate your patience as we get you home safe and sound.” All of the sudden, with the calm words from the pilot projecting that nothing unmanageable had happened, everything seemed OK! You would have thought that the pilot had been there and done that a million times! 

Isn’t it amazing how a few calming words can put you at ease?  I had flown hundreds of flights a year up to that point and I knew that this incident was not normal for me or for anybody else.  I knew that flight was a near death experience.  I knew this, my friend across the aisle knew this, and the flight attendants knew this.  Even more interesting is, even though I also knew that it was the pilot’s job to project a sense of calmness even if he knew we all were going to die, it still worked!  A lot like when you tell yourself a salesman is going to try to sell you something and you aren’t going to buy it.  But yet once you hear the pitch you buy it hook, line, and sinker.  The calm reassuring voice of the pilot put me and everybody else at ease even though I knew it was his job.  The pilot became an instant hero.  As a matter of fact, as we were deplaning I noticed several people hugging the pilot as they walked past.

When we got into the gate I called my friend who worked for another airline who pulled the incident up in his system.  He said that incident I had just gone through was indeed a very big deal.  He said that the airplane had actually been so far into the takeoff process that it passed what is called “V1” which is basically the speed of no return.  He had stated that for the pilot to make the call to abort the takeoff at that point was a tough call because it was a choice between either getting airborne and having the plane fail in the air or aborting and running out of runway and crashing on the ground.  Fortunately, it was neither one.

My point is, you are your clients’ airplane captain.  When they call you up because they are hitting turbulence in their lives, whether because they are losing money in the market, have a death claim, a long-term care claim, etc., your value in these times lies in the way that you handle the situation. This is your opportunity to become a hero by doing the opposite of panicking and assuring those that are panicking.  This is what seven-figure financial professionals do.  They project a sense of “I have been there and done that and this is no big deal.”  Furthermore, there is professionalism in not panicking in any situation—not just times of crisis.  These times I am referring to may be:  

• When a client is panicking because of a claim, losing their money in the market, etc.  Are you that calming voice even at times when you are also scared for the client?
• When a client asks you a question you don’t know the answer to, do you panic or very calmly say “I don’t know but I will get you the answer ASAP.”
• Getting tough questions in a seminar.  Does the audience see you panic or are you calm and cool?  
• If your computer or projector goes down in a seminar, do you stumble and panic?
• When a client is critical of you and/or your business, do you panic and get defensive?

When I was getting started in the business there were times where I would get “panicky” because of a big meeting I had to conduct, a bad message I had to give to somebody, or a large audience I had to present to.  I had a mentor back then who would always say, “You have done this a million times and have you failed yet?  No you haven’t.  So why panic now?”  He would then go on to say “So what is the worst that can happen if you were to fail?  It’s not like they can kill you.” For some strange reason those words have always stuck with me, “It’s not like they can kill me.” We take our business very serious but keeping a perspective of what is really important in life will also help you to not panic when things get stressful.  We tend to let the negative trash in our heads believe that it’s a life or death situation if we fail at a task.  It is not.  This creates fear and fear is what holds us back. 

Not panicking is not only healthy for you, it is also healthy for your clients and your relationship with those clients. This is because having a positive mindset is a self-fulfilling prophecy.  Meaning, if you are always positive and never panic, clients feel that and will in-turn be positive and will not panic. You are looked at as the “pilot” and therefore the creation of a positive environment is in your hands.  Prospects/clients look to your mindset in order to form their own. Again, it is a self-fulfilling prophecy. 

For financial professional use only. Not for use with consumers.