Charlie Gipple, CFP, CLU, ChFC

My dad, who was the wittiest and toughest person I ever knew, owned a construction business (underground utilities and concrete) for 40-years. As somebody who “dug ditches” since his early teens all the way up to his death, he had a way with words that I usually don’t repeat but I will here. He once told me jokingly, “How do you know when the deal was negotiated fairly for both sides? When both sides of the agreement feel that they have been screwed.” Now, that’s not something that you learn in business school, nor do I condone that method of thinking. He tended to say things for the effect.

Rather, I prefer the thought of both sides feeling that they received a fair deal. That is how you make for happy business partners and a sustainable and reputable business. I do believe that when agents partner with other agents and “split commissions” that there is a structure that—based on my experience—does exactly that. It makes both sides feel the deal is fair.

Oftentimes a “junior agent” might seek to partner with a veteran agent. The reasons for this partnership are obvious. If the junior agent cannot get the sale without the help of a veteran agent, it would be silly to not utilize a veteran (assuming one is available) even if it means that the junior agent would get less than 100 percent of the total compensation. As they say, 100 percent of $0 is zero compensation. By the way, if you are a junior agent and don’t have access to a “veteran agent,” partner with an IMO that will help you with the sale. In many cases—as with my IMO—there would generally not be a commission split unless I am hopping on an airplane.

A second scenario might be the inverse of the above. This is where a veteran agent will seek to partner with a junior agent. Why would a “rainmaker” want to partner with somebody junior? For the veteran agent to free up time to do what he/she does best—rainmaking. Thus the veteran agent may seek to offload some of the time-consuming legwork to a junior agent.

A third example may have nothing to do with junior versus veteran. It may be a scenario where an insurance agent is partnering with a CPA or an attorney. Many times the CPA has a captive audience and they just need an “insurance expert” to do the case design and also close the case for them.

These three scenarios are great business scenarios and very smart! They allow each individual to do what they do best while not trying to do a task that neither person is optimal at, while at the same time the junior advisor (or the CPA/Attorney) is learning from the veteran agent. The three scenarios are efficiency at its finest and what makes our industry’s compensation flexibility such a great thing. However, you must know what a fair “split” arrangement looks like so that neither party feels ripped-off.

So, what is a fair split arrangement? This is the main topic of this article.

The Million Dollar Round Table (MDRT) was the first—that I know of—to really prescribe a breakdown of what commission splits should look like. These commission split percentages that they recommended were generally based on the types of services that each agent would provide. The below breakdown is very similar to what the MDRT first came up with except for some slight verbiage changes that we applied. This is merely a guide, but I believe a very good guide.

• 20 percent—Prospect Delivery: This is where the agent has brought the client to the table, whether through past relationships, a referral, or marketing activities.
• 20 percent—Data Collection and Delivery: This is where the agent collects all the data needed for the sale (health information, financial information, fact finding) and also delivers material to the client that is needed prior to the sale.
• 20 percent—Case Design: This is where the agent designs the strategy, which includes: running illustrations, modeling scenarios, seeking the right prices, organizing the end plan that is to be presented, etc.
• 20 percent—Closing The Deal: This is where the veteran agent comes in many times to “make it rain.” This is where the final presentation/conversation occurs with the clients. This is the inflection point—the case/plan either gets implemented here or dies here!
• 20 percent—Ongoing Service: This is the delivery of the policy, annual reviews, continuous updates for the clients, etc.

With the above being said, a common approach would be that the veteran helps close the sale. That would mean that the veteran could easily justify getting 20 percent and the junior agent getting 80 percent. If the veteran also did case design, then he/she might ask for 40 percent.

As an IMO, I work with scores of agents per week and they often ask me how they should get compensated on cases they “split” with other agents. I have never had an agency balk at the above MDRT method.

I have never had a client balk at my indexed annuity or indexed universal life insurance conversations when I tell them that the products are designed to do better than their fixed rate peers, not the stock market. I will tell them that if fixed rates on fixed annuities today are three or four percent, then over the long run they can expect to potentially get four, five, six, or seven percent in an indexed annuity. However, these are not guarantees. If the client balks at that conversation, then it is usually because the client is not the right fit for indexed annuities. For example, if I am talking with a 25-year-old kid who is expecting double digits between now and his retirement, then he will likely scoff at four, five, six, or seven percent. But that is OK because that tells me that he is a bad fit for this product type. Conversely, if I set the expectation that these products will perform for that 25-year-old the way he wants, I would be setting myself up for annual reviews that are as pleasant as colonoscopies. (Note: I would argue that indexed annuities as a bond alternative is something that even some younger folks should think about, but I digress.)

The fact that consumers are fine with indexed annuities, without having to inflate the story, is why I am perplexed when I see in marketing material or hear in a sales pitch how “XYZ product has performed 12 percent over the last ten-years.” To be clear, I have spoken about the true past performance of my clients’ indexed annuities and think that great past performance should be cheered. In fact, I am seeing biennial statements for a few of my clients that are indicating 20 percent interest credits over the last two years. So, am I speaking out of both sides of my mouth here? What is my problem with marketing “12 percent ten-year returns on XYZ Indexed Annuity?” A few things:

1. There is a difference between stating what has truly happened and setting the expectation that it will happen in the future.
2. It can be disingenuous: Many times, those returns are not true returns. In fact, oftentimes the product has not even been in existence for 10 years. So how are they marketing that? They are marketing that because that is what the illustrations are able to show. Per illustration regulations, the illustrations are able to show “back casted” performance over the last 10 years, as if that particular index and product had been in existence.
3. The A-10 Warthog: That favorable “back casting” oftentimes is what the product was designed around. Like how the A-10 Warthog jet was designed around the giant 30 mm gatling gun, versus the gun being put into an already existing airplane, carriers oftentimes find—or create in partnership with an investment bank—indices that “back cast” beautifully and then design the product around that. As we all know by reading the Dalbar Studies, chasing history can be a losing proposition.
4. It goes against basic economics. If a carrier is able to take a call option budget equal to, say, four percent of the entire premium and turn that four percent into a 12 percent return over a year, it is unsustainable. That is a 200 percent return on our call option budget! If many of the very smart people on Wall Street believed that the carriers’ call option strategies would consistently deliver 200 percent returns, they would swarm to those call options themselves and bid the prices up so high that the ultimate return on that call option strategy would be nowhere near 200 percent. Markets may not always be “efficient,” but I can guarantee that they are efficient enough to not allow 200 percent returns for very long.

These products are beautiful products and the time is right for these products, with the bond market (AGG) being down around 10 percent ytd. and the S&P 500 also being down double digits. Although in a down year a client has the potential to lose out on a four percent interest credit with indexed annuities, I do believe in the notion of “risk premium.” That is, if the carrier were to take that four percent and buy call options with it, they should be able to get more than that four percent back, over the long run. For example, over the long run stocks have done better than bonds, because of the fact that stockholders have always been rewarded for taking on that extra risk. I view the carrier’s call option budget no differently. The carrier may not always get a 200 percent “risk premium,” but an additional one, two or three percent to pass through to the clients on top of the original four percent call option budget would be nice. Said another way, indexed annuities have outperformed their fixed rate peers over the long run, and I believe they will continue to do so. Thus, the title of this column!

My first meeting with a “rich guy”:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Observations

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

Some of my fondest memories as a kid have to do with being on the lake in a boat enjoying water sports. So once I had kids it became a burning desire to torture them as I drove the boat and they held on to the tubes for dear life. So, we bought a boat!

It is no secret when I say that buying a boat, in addition to the SUV that is required to pull the boat, costs a small fortune. Buying one of those items costs a small fortune let alone both of them. So, here is a thought: Wouldn’t it be nice if my Suburban also worked as a boat to spare me the cost of buying the boat and the hassle of hauling the boat around? If my Suburban came with the “Amphibious Option?” Even if that option cost a little more, it would probably be cheaper than buying a boat in addition to the Suburban. Unfortunately, GM does not offer that option yet.

Although the life insurance industry has not traditionally been known for innovation, this is an area where we have innovated beyond vehicle manufacturers (sarcasm). The “amphibious” option is indeed available with life insurance policies and annuities when it comes to long term care coverage.

Below, I want to highlight a particular product/strategy that I like. I call this product “the amphibious life insurance product.” Although I am discussing one of my favorite products here—which I can share with you if you email me—it is not about this specific product but rather the concept. Afterall, this is not the only product and rider out there of this kind. I will not name names in order to remain compliant with the carriers.

Case study: You have a 50-year-old male that would like some level of life insurance coverage in order to provide an inheritance to his kids. This client is also concerned about the expenses associated with long term care/chronic illness that he will likely experience in his later years. You, the agent, believe that $300,000 in life insurance coverage would do the job. You will also look to a product that will provide a large long term care/chronic illness benefit should he need care.

When one of my agents comes to me to ask for help in scenarios like this, one of the first things I will do is check life insurance prices across the entire industry for this particular client. To do this, I will run a report to find a list of the lowest cost policies that will guarantee his $300,000 in death benefit that will be guaranteed forever. “Forever” is defined as to age 121. This will be a starting point for how much the “SUV” costs, to use my previous analogy. Nine times out of ten the product I am highlighting will be in the top three from a price standpoint. Using our 50-year-old male (standard health) who is seeking $300k in death benefit, the product I am referring to is the #2 in lowest premium, at $4,014 per year. Again, that is just for the death benefit coverage—the SUV. This is our starting point.

However, how do we make this product “amphibious?” Where that entire $300k applies not just to death benefit coverage but also to long term care coverage? The answer to the question is, we would add a chronic illness rider to the policy which comes at an additional cost. What I tell clients is, “The old-fashioned life insurance tells you that there is only one way to get the death benefit; you have to go and die, which is not fun. However, by adding this rider, it will give you an additional trigger where you can activate the death benefit during your life. It’s life insurance, not death insurance!” Effectively what the client is doing is they are upgrading their SUV by adding the “amphibious” option that applies not just to death but also to long term care.

By adding this rider you can point to the $300,000 death benefit and tell that client that the $300,000 will be paid out—whether in life or after death. I also like the riders that do not cost any additional premium. However, the “discounted death benefit” upon chronic illness does not allow us to tell the client with certainty that they and/or their heirs will get the entire $300,000. The actual chronic illness benefit can be uncertain with many of the discounted death benefit riders because the actual cost to the client is experienced on the backend, at claim time. The rider I am discussing has no “discount” at claim time.

How much does this guaranteed universal life policy cost with the “amphibious option?” $4,663. In other words, by adding the chronic illness rider, we added $649 ($4,663 minus $4,014) to the premium. That is what it costs to upgrade our SUV to also work as a boat. Illustration Details: For this rider, I chose a maximum acceleration of $8,000 per month for the chronic illness payout. That would give us a 37.5-month benefit period, calculated by dividing the $300k death benefit by $8,000.

Even after adding the additional cost of the chronic illness rider, the premium on this policy is still within the top seven GUL policies in the industry—at least in this exact example.

So, the death benefit coverage on this product is exceptionally low cost but what about the cost of the chronic illness rider? Instead of adding the chronic illness rider to our policy, what if we bought a stand-alone LTCI policy with similar benefits? What would that LTCI policy cost per year in premium? $1,443, or $794 more than the cost of our chronic illness rider. Illustration Details: The long term care policy I illustrated provides an $8,000 per month benefit for 36 months. There was no “37.5 month benefit period” so I went as close as I could. Also note, I chose no inflation options to make it apples to apples. This is technically a $288,000 benefit pool, calculated by $8,000 per month times 36 months.

As I summarize everything in the spreadsheet, by going with the one life product, plus the chronic illness rider, the premium is cheaper than the total premium of the life policy plus the LTCI policy. The savings is $794 per year in premium. With that said, it is important to understand that you cannot market chronic illness riders as “long term care,” as that is prohibited. Also understand that stand-alone LTCI policies are much more “modular” and have many more options (inflation, elimination periods, partnership, etc.) than chronic illness riders. In other words, if I turn my suburban into a boat, I will likely be limited in how my suburban performs on the water relative to if I bought an actual boat. Needless to say, a Suburban is not an apples-to-apples comparison to a boat!

In my perfect world, everybody would have the means to buy an LTCI policy that provides at least $8,000/month benefits, with long benefit periods, and five percent lifetime inflation. However, considering we do not live in a perfect world, this strategy can provide immense value to those consumers that need death benefit coverage and also lower-cost alternatives to the fully-loaded long term care options that exist.

One more thing: You can also look to the “indexed GUL” policy that this company has. This can be a strategy to further bring down the price. Assuming a 3.25 percent illustrated rate on the indexed life policy, as well as current policy charges, what is the premium it would take to carry our $300k policy out to 121? Only $3,606. That number includes our chronic illness rider that will provide $8,000 per month of benefits for 37.5 months. For the skeptical folks (like me) that are wondering if the death benefit is guaranteed if the market were to be down forever and COI charges were to increase to the max—the death benefit is guaranteed to age 86 as long as the premiums are paid.

There are a few annuity and life insurance social media groups in which I am a “group expert.” These social media chat groups are closed groups that are only available to financial professionals where they can ask questions and comment on ideas and strategies that are working for them. It is also a forum for which other financial professionals can respond to the feedback and strategies communicated.

Some of these groups have thousands of financial professionals in them and are wonderful resources, not just for the agents but also for me as an independent marketing organization. These forums not only allow me to contribute but also allow me to learn what is on the minds of the agents.

With the large quantity of financial professionals in these groups and also the ease of those financial professionals to just type up a message and let it fly, it can serve as unfiltered insight into what is working, what is not working, misperceptions, etc. When I say it is “unfiltered” that is because it is extremely easy for some people to speak their mind when they are sitting behind a computer. If you have ever spent any time at all on a social media platform, you know what I am talking about. Unfortunately, sometimes the conversation goes something like the below. Pardon the satire but I’m sure you understand:

Person trying to help: “I think oranges are a great tasting fruit because…”

Person that knows nothing about the conversation topic: “Are you kidding! Apples are horrible! I would never recommend them to my clients. Make sure your E and O is updated.”

Person trying to help: “I am talking about how oranges are great tasting fruits, not apples.”

Person that knows nothing about the conversation topic: “Who would ever recommend apples to clients? Plus, they are not fruits, they are vegetables. That is stupid. My Brazilian Butternut Cantaloupe is ten times the vegetable that your apple is.”

Person trying to help: “I’m talking about oranges and fruit, not apples and vegetables!”

Person that knows nothing about the conversation topic: “I see, so now you’re trying to change the topic huh?”

And before you know it, the strategy that you wanted to share about your oranges has gone the way of the dinosaur, kind of like my point to this column, as I have digressed.

What is my point? My point is that I see a lot of glaring misperceptions that are often laid out very publicly and obviously, although a little more nuanced than apples versus oranges. Much of those nuances have to do with the complicated world of long term care hybrid products. So, why not address some of those examples where I have seen rampant confusion. By the way, although I poke fun in my social media example above, much of the confusion around hybrid products is warranted as the industry has gotten very commingled and more complicated. But don’t take “complicated” as not exciting, because the long term care hybrid world is indeed extremely exciting and lucrative if you know what you are doing.

Not Many Understand The Entire Universe Of Long Term Care Products
If you are a visual person like me, a slide from one of my agent training decks will help us visualize the universe of long term care products. This may not be the “entire universe,” but it is close!

The slide shows that the universe can be broken into three different “worlds.” Although there are exceptions, what I tried to do was to arrange the chart to demonstrate the products with the most long term care leverage on the left, with the leverage dropping as you move to the right. Of course, when we get into single pay scenarios (life and annuity) it gets a little more complicated however.

Starting from the left, you have the granddaddy of them all, traditional stand-alone long term care. To oversimplify, this works like health insurance. Again, it will generally provide the most long term care leverage, per dollar of premium.

Secondly, you have the “world” that represents a large majority of the entire universe today—as measured by industry wide cases sold. These are the combination/hybrid products. These are annuities or life insurance with a long term care benefit attached in the form of a “rider.” Within this world you have several variations of these combo/hybrid products. We will come back to this because this is where much of the confusion lies—and thus opportunity.

Third, you have annuities that have waivers of surrender charges for nursing home confinement or “doublers” on the GLWB payouts. The long term care protection afforded by these products are usually a distant need relative to the other benefits these annuities possess. The long term care benefits on these generally have no underwriting.

“Combination Products” Is Not Synonymous To “Linked Benefit Products”
As you can see from the graphic, the “Combo/Hybrid” world is separated into two different continents, the Linked Benefit continent, and the Accelerated Death Benefit continent. Let’s start with the accelerated death benefit products.

Accelerated Death Benefit Products: 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. Well, today’s life insurance is life insurance, not death insurance.

Accelerated Death Benefit Riders are where the insured can actually get relief 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.” Once upon a time chronic illness riders required a permanent condition, which made true long term care riders generally more attractive than the chronic illness riders. Since NAIC Model Reg changes in 2014, this condition of permanence is no longer the case for the most part. Therefore, the differences between long term care riders and chronic illness riders are very slim.

Linked Benefit Products: Again, linked benefit products are a subcategory of the broader “combination product/hybrid” world. People tend to think “combo products” are “linked benefit” products and vice versa. Not so! One is a sub-component of the other.

These products are usually life insurance products where there is a long term care “pool” that is created that can be multiples of the death benefit provided by 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 life insurance product might give two to three 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.

Real Life Numbers (Company Name Omitted): The client is a healthy 55-year-old female. She does a single pay of $100,000 in premium into XYZ Linked Benefit life product. The death benefit is $152,000 and the long term care pool is $456,000. (Note: Benefit periods, etc. I won’t go into here.) When the client goes on claim, the $152,000 that is the death benefit is used up first as an “acceleration of death benefit.” Once that is depleted, the client moves into the second phase, the continuation/extension of benefits. Again, it is that second phase that separates the linked benefits from the rest of the combo/hybrid world.

As noted in last month’s column, one of my favorite products is actually a “linked benefit” annuity product that triples the clients premium for purposes of long term care, with almost no underwriting! That is the box on the lower left side of my graphic. Think “Live, Die, or Quit.” If the client lives and needs care, he/she gets three times the contract value. If he/she dies, the bene gets the contract value, which is what the client put in plus growth (usually). If he/she wants to “quit,” they get the contract value—or surrender value if within the surrender period.

Chronic Illness Riders Are Generally Not FREE!
The most common misperception that I see is the notion that chronic illness riders on life insurance are free. Unless there is one in some corner of the industry that I have never seen, I will say they are not free. You either pay for them upfront via an additional premium (morbidity charge) or the client pays on the backend when they elect the chronic illness payout. There is also a third—a lien structure—that I won’t go into here.

The most common chronic illness structure is the “backend,” otherwise known as the “discounted death benefit” structure. To be clear, there is no cost on this rider if the client never uses it—which is one of the reasons to like this type of rider. However, if the client uses it, the ultimate cash in hand to the client is less than what the death benefit was actually reduced by. The difference between those two numbers is effectively the cost to the client and the beneficiaries. Example: Client goes on chronic illness claim and the death benefit is reduced by $100,000. How much cash might the client get in hand? Maybe $80,000. Hence, the $20,000 difference between the death benefit reduction and what was received can be considered the “cost.”

With the discounted death benefit design, the amount that a client ultimately gets is usually not known until claim. That is because the calculation is usually the death benefit discounted back to the date of claim by a discount interest rate that is not known until the actual claim. Again, however, if the client never goes on claim they never paid a penny for the rider. It is a great rider, but it is important to note that it is not always “free.”

One of my favorites is an “upfront” rider that does have the additional charge to the client as they pay their premium. Why do I like this one? Because the client knows exactly what they will get when it comes time to claim. There is generally not a discount on the death benefit on these types of riders. You either pay upfront, or you pay on the backend. With this rider, you can point to the death benefit on the ledger and tell your clients that whether in life or after death, somebody will indeed get that value. Of course, as long as they pay the premium!

Summary
There is a lot to know about the long term care Universe. We did not even get into reimbursement versus indemnification, 101g versus 7702b, per diem limits and taxation, etc. One thing I learned a long time ago is that there is no life, annuity, or long term care option that is “the best.” It is client specific. A benefit that is “the best” for one client, may be too expensive for another. Said another way, with these products there is always a counterbalance that makes the task of finding “the best” not so simple.

I am going to eat my orange now.

As I discuss this particular product type as being a “low friction” long term care sale, I do not want the reader to gather that the main reason to sell it is because it’s a “layup” sale whereas the client will give up value versus a better/higher friction product. After all, I will always work to educate my clients on the right product, whether that sale is “high friction” or not. And although I think that many clients’ best product choice should be a fully loaded, long term care Partnership approved, $8,000 a month benefit with a five percent inflation rider, that does not always fly for consumers because of price, misconceptions about the various long term care insurance options, etc. Let’s face it, getting the client to pay $2k to $10k a year ongoing premium—depending on the client—can be met with a good amount of negativity from the consumer.

Outside of the ongoing premium, standalone long term care policies have two primary areas where consumers criticize them:

• Premiums have historically increased substantially.
• If the client doesn’t use it, they lose it. If they die without ever needing care, they “wasted” their premium.

Although these perceptions are not unfounded, I do like traditional long term care insurance because, per dollar of premium, you generally get the highest long term care leverage of any of the products. Plus, I believe premiums are much more sustainable on the new generation of products because of updated lapse and interest assumptions priced into the products. But again, sometimes convincing clients to go that direction is a lost cause.

Before discussing the product, a great sales strategy is to address the concerns that you know consumers will bring up before they even bring it up. That tells the consumer that you understand what their concerns are without them having to prompt you. I previously mentioned the two main concerns that consumers have with traditional long term care insurance. And most consumers don’t realize that there are other long term care options beyond traditional/standalone. So, by discussing the following points, you can usually get the attention of the consumers that have preconceived notions about long term care insurance.

“Many times, consumers have two different concerns around long term care insurance—premium increases and the fact that if you never need the care, you have effectively “wasted” the premium you paid. Well, those concerns have basically been addressed with the particular solution I would like to introduce you to.”

As you articulate the above paragraph, your prospect/client would have been nodding his/her head before you finished it.

What is this product I am referring to? It is a long term care annuity, also known as a “linked benefit annuity” or a “hybrid annuity.” I prefer to call it a long term care annuity because it more explicitly tells the client what the product does. Anyway, the chassis itself is like a traditional fixed annuity whereas the interest rate is guaranteed for the first year but then can float, and likely will float. A common interest rate today is close to three percent in the first year with a minimum rate in the following years around one percent. Additionally, there is a relatively small monthly long term care fee deducted from the client’s value on a monthly basis. Now, if the client ever wanted to cash out this “accumulation value” they can do that like any other annuity. Just keep in mind that–like most annuities—there are surrender charges that go anywhere from five years to 10 years, depending on the product.

So far what I have just talked about is just like any other traditional fixed annuity. A particular type of consumer is already interested, and I haven’t even gotten to the long term care part! That “particular type of consumer” I am referring to is the one that has their money in a certificate of deposit for example—earning nothing! Just last week I got to this point in the presentation on this long term care annuity and the client said, “Why would I not do this?” I said, “Well hold on, we haven’t even gotten to the main reason to consider this solution, the long term care benefit.”

Now to the good part. What is the long term care benefit? It is triple what the accumulation value is. So, if the client puts in $100,000, and that $100,000 has grown to $110,000, the long term care pool is $330,000. Generally, the client gets access to the $330,000 once he or she cannot do two activities of daily living for a 90-day period.

One thing to note is, it’s not like the client can just cash out the entire $330,000 at the time they qualify for the long term care benefits. That type of product would not be sustainable for carriers. When you think of long term care insurance pricing, for a given long term care pool insurance carriers are on the hook for larger risks the faster they let the client tap into that long term care pool. So, naturally, there are benefit periods that these carriers have priced into these policies. The common benefit period is 72 months (or 6 years) with the products I am referring to. So, in my previous example, $330,000 divided by six years is $55,000 per year that the client can be “reimbursed” for from the policy when it comes to long term care benefits. This means that if the client is in the nursing home or received in-home care for a period of six years, and if at least $55,000 per year was spent on that care, our client would receive $330,000 in tax free benefits even though they only paid $100,000 in premium.

By the way, underwriting on these types of policies is basically non-existent. Underwriting is about ten to fifteen “knockout questions” and a 30-minute phone interview with an underwriter.

Now, a few negatives:

1. The Benefit is Spread Out: As mentioned, for a given long term care pool, the higher the benefit period is, the less the risk is that the insurance company will pay out the entire $330,000. This is because if the consumer were to only be in the nursing home for three years and then pass away, the insurance company would have only been on the hook for $165,000 ($55,000 x three years). So again, for a given long term care pool, the shorter the benefit period is, the better for the consumer and riskier for the insurance company. The six-year guideline is a bit of a negative because statistics show that nursing home stays are less than three years on average. However, with the rise of cognitive issues like dementia, I don’t feel a whole lot of heartburn with the six-year benefit period. Long term care events have been trending longer over the last couple of decades because of cognitive illnesses.
2. High Deductible: You can think of these policies as being “high deductible” policies. In other words, when the $330,000 is tapped into, the first two years is actually the client’s money (accumulation value) coming out first. Then, in the third year, that is when the consumer is dipping into the insurance company’s pocket.
3. The Fee: There is a long term care fee that is deducted monthly from these policies. However, if you were to illustrate a traditional LTCI policy with the same long term care pool, you would find that many times the traditional LTCI premium would be multiples of the factor that is deducted from these long term care annuity policies. This is partially because of the “high deductible” nature of these policies. Also, with these policies, that fee is generally guaranteed to never increase!
4. Limited Options: Options around inflation benefits and various benefit periods are basically non-existent with these types of products, whereas standalone LTCI, and also the life insurance based long term care hybrids have more robust options. However, you certainly pay for those options!

Even with the negatives that I mentioned, it is still a very low friction sale because of the fact that in the end the consumer is often able to get more interest out of the policy than what they were getting in a certificate of deposit even after the long term care fee is deducted. Therefore, our low interest rate environment makes it an ideal time to present these products to your clients.

An Analogy for Consumers:
Let’s say that your $100,000 is a very tasty but magical fruit. You can eat (spend) that fruit of $100,000 anytime you like right now. Conversely, there is a way where you can take this magical fruit and plant it. By doing so, it will immediately bear a tree that will have three of those fruits. You have tripled your fruit. Kind of cool huh? Granted, this tree will require a little watering and nurturing (long term care fees) but that is what allows you to have triple the fruit that you have right now. The only rule is when you do start eating this awesome fruit, you cannot eat any more than 1/2 of one fruit (one-sixth of the total) each year in order for you to not shock and kill the tree. We do not want the tree to die before harvesting all three fruits (the $300k long term care pool). Granted, you can rip your one fruit (surrender value) off the tree anytime if you like, but it’s wiser if you eat only half a fruit at a time to not shock the tree. That is effectively how this product works.

Lately I have been conducting training for the agents of CG Financial Group on estate planning. When I talk with folks to invite them to these webinars, I will occasionally have a few of them question just how useful estate planning is in today’s day and age when the lifetime estate tax exemption is $12.06 million (2022) for a single person and $24.12 million for a married couple. (Note: Any estates beyond this size are subject to a 40 percent estate tax.) Their skepticism is warranted because not many families have over $12 million. However, as the cliché goes—we need to observe where the puck is going versus where it is now. Or, in my previous columns I have spoken about another cliché—the “Pig Through the Python.”

The “Pig Through the Python” refers to the giant chunk of Americans that are currently working their way through their 60s and 70s. These are the baby boomers. This demographic “pig” in the python is not just about the size of the baby boomer population, it is also about the wealth they own—which is well over half of our country’s wealth depending on what measure you reference. As this very large and wealthy demographic cohort gets digested and pushed “to the right” of the age chart, it’s important to think about the financial phases this influential group will go through.

From a financial standpoint I view the baby boomer generation as generally having three more “phases” left to complete:

1. Right now, the youngest baby boomers are in their pre-retirement years (age 58) and are planning for the “Decumulation’’ phase of their retirement. Of course, the older baby boomers are already in this phase. This is where the rhetorical pig currently is, which is why it is easy for an agent to be exclusively focused on income planning.
2. The second phase of retirement that some of the older baby boomers have already dealt with is the “Extended Care” phase. If long term care is not a part of your practice, I would make it a part—or partner with a long term care expert where you can split cases. The pig is coming that direction!
3. The third phase that baby boomers and their families—and all of us for that matter—will deal with is the “Wealth Transfer” stage. Unless we find a way to prevent death, every single one of us—or our families—will deal with transferring our wealth. Whether we plan it or not, this transfer will happen after we die in 100 percent of our scenarios. And successfully transferring wealth to the next generation requires estate planning.

Again, with today’s large estate tax exemption, it is hard to imagine a world where we are consistently discussing estate planning. However, we all know things can change, and likely will change, with the amount of debt our country is in and with the popularity of targeting “the rich.” As a matter of fact, things are scheduled to change! In 2026 the “Tax Cuts and Jobs Act” sunsetting will mean that the estate tax exemption will go back to 2017 levels—$5.6 million per individual and $11.2 million for a married couple. Although I am fully cognizant that this number is still very high and still excludes a lot of folks, again, things can change! As a matter of fact, the Biden plan is for the estate tax and gift tax exemption to be $3.5 million. Considering that estate sizes can easily double between now and your client’s death, the prospect of a $3.5 million exemption puts a lot more people in the crosshairs of the estate tax. I know a lot of folks that have $2 million estates whereas they would have an estate tax issue if their estates were to double in size assuming a $3.5 million exemption.

In my previous sentence, if the current estate tax exemption was $3.5 million, and if I projected that my $2 million estate would eventually hit $4 million, my estate would be subject to a $200,000 tax (40 percent on $500,000). A way to minimize this tax might be if I “gifted” the present value of $500,000 (or more) today so that my estate does not exceed the $3.5 million in the future. And the “present value” may only be $250,000 for example. That is just a very simplified example of estate planning with gifting. Technically, I would want to give more than the present value of $500k but I won’t go there!

A Quick Note on Gifting
Many people don’t understand the value of gifting because, after all, for every dollar you gift above the annual exclusion it reduces your estate tax exemption dollar for dollar. So, either way, you are going to be taxed 40 percent once your gift/estate tax exemption is expended. Then what is the reason for gifting? If you look at my simplified example, I only lost $250,000 off of my exemptions versus the $500,000 that it would be if I let that asset grow in my possession then died with it! A lot of estate planning has to do with “freezing” the asset sizes and thus the estate size. This “freezing” can be done by gifting but also by using much more sophisticated tools than what I used above. There are Grantor Retained Annuity Trusts (GRATs), business entities, charitable trusts of various kinds, intra-family loans, etc.

More Than Just Estate Taxes
Lastly, estate planning has to do with so much more than just “estate taxes.” It also has to do with income taxes (IRS), estate preservation (long term care), annuities, life insurance, and probate avoidance. So, don’t let the current large estate tax exemptions dissuade you from sharpening up on estate planning. That is where the “pig” is heading.