Charlie Gipple, CFP, CLU, ChFC

This message is prompted by hearing about yet another agent last week (not associated with CG Financial Group) that got herself in trouble by selling cash value life insurance as an “investment” without regard to the actual death benefit need.

As you may or may not know, prior to starting CG Financial Group, I spent 20 years on the carrier side of things where I have been privy to many complaints about this topic. Therefore, I feel that I have a unique perspective which I am obligated to share with you, the financial professional reading this column. Plus, these thoughts are inherently unique because I am not an attorney but am agreeing with the caution that the home office attorneys often express on this topic. Afterall, distribution folks and attorneys do not always agree!

Sales folks often view attorneys as being afraid of their own shadows and attorneys often view sales folks as being motivated to cram a square peg into a round hole to make a commission. Obviously, I am usually one of those “sales folks.” But not with this topic.

Selling life insurance as an “investment” without ever discussing the death benefit need and costs is a great concern that attorneys in carrier home offices have around cash value life insurance sales.

Now, I have spent my career educating financial professionals and consumers on the value of various cash value life insurance policies. I will continue to do this, and CG Financial Group will continue to support agents with our number one product sold—cash value life insurance! Why? Because it’s a great product for the right clients.

However, it is my obligation to make sure the fine financial professionals reading this column can create and/or maintain flourishing and “lawsuit free” businesses. I will always tell the truth, even if the truth leads to fewer sales. Eventually integrity wins the day.

Here are my thoughts:
When selling life insurance, there must be a life insurance need!

I know that when you look at some of the benefits of IUL, whole life, VUL, etc., that one may be able to make a case for why they are “suitable” even without the death benefit. After all, you have tax advantaged growth, great interest rates on loans, tax-free loans, and the “possibility” of decent growth rates. One may think that those traits alone would justify a sale to a client that is merely looking for an “investment.” Not so.

The bottom line is that the client is paying COI charges that are paying for a death benefit. I know that I/you could also make the case that some of those COI expenses are just “the cost of doing business” in a product that has benefits that other “investments” don’t have, but that does not fly in arbitration/lawsuits.

Hypothetical lawsuit:
Let’s say you or I discussed IUL or whole life with a client that did not “need” the death benefit but loved all the other accumulation and income traits previously mentioned. Thus, you/I sold the product as solely an “investment” to this client. You/I sold this life insurance without assessing the client’s need for life insurance and therefore you never really discussed the death benefit.

My vision of how the court process would go:

Opposing Attorney: “Mr. agent, tell me in a yes or no answer. Is it true that there are charges in insurance policies that are solely for the purpose of creating a death benefit for the consumers?”
You/Me: “Yes”

Opposing Attorney: “What are those charges called?”
You/Me: “Cost of Insurance Charges.”

Opposing Attorney: “Now also tell me—yes or no—is it also true that my client paid X thousand dollars in these COI charges over 10 years to have that death benefit?”
You/Me: “I don’t recall the exact amount of COI Charges.”

Opposing Attorney: “Well I have the exact number here and it is X thousand dollars over 10 years. Does that sound about right to you?”
You/Me: “Yes, it does.”

Opposing Attorney: “Is it also true that you and my client never even discussed the death benefit component that cost my client X thousand dollars, and as a matter of fact my client had never even expressed a desire or a need to purchase additional life insurance coverage?”
You/Me: “Correct.”

Opposing Attorney: “So, to summarize, my client has paid X thousand dollars in expenses—that was not disclosed to him—for a benefit that my client did not even need? Does that sound correct?”
You/Me: “umm, uhm…”

Opposing Attorney: “I rest my case.”

In the above scenario, even if you had some fantasy life insurance product that guaranteed the client 50 percent per year tax free, the conversation would go the same way! So the point is, even if you wholeheartedly believe you are doing the right thing, understand the need for the “death benefit.”

Lastly, lawsuits are not the only risks to one’s business that may cause significant loss. Large chargebacks (without the lawsuit) are also a risk. And those chargebacks can happen—even after the chargeback period—if it is deemed by the carrier that you sold an “unsuitable product” based on that client’s needs.

Last Christmas my wife and I agreed to not get each other anything. Well, I found a very nice watch that she wanted at a very good price. I recalled our agreement, but I also knew I was doing the right thing by taking advantage of the sale. There was no way she would get mad at me because I was doing a smart and well-intentioned thing. Plus, I knew it would save her money in the long run. Well, on Christmas day I gave it to her. I got in trouble even though my intentions were pure.

Recap: In last month’s column I discussed the two opposite ends of the spectrum when it comes to funding a life insurance policy, specifically indexed universal life insurance. Those opposite ends are, the death benefit focused side and the cash accumulation side. I also discussed how “overfunding/max funding” works from a mechanical standpoint in reducing COI charges. To summarize in an over simplistic way, we want the cash value and death benefit lines as close to together as possible if we are going for maximum accumulation! If you would like a copy of last month’s column, email me and I will send it to you.

I ended last month’s column with a “teaser” on a question that tripped up my agent in his sales presentation to his client Brian. By the way, I am not picking on this agent in particular because this is a common issue I address with many agents as I help with the more “advanced” case designs. What was the question that the client had that created confusion for my agent? Here is the question from his client that tripped up my agent which seems very basic on the surface: “If I want a higher death benefit than the ‘minimum death benefit’ on this product, can I go with a higher death benefit?”

Of course, the simple answer is, yes! But is that the best answer? Although the “minimum non-MEC death benefit” for our healthy 45-year old is $231,000 when he is funding it at $10,000 annually, the agent can illustrate a higher death benefit than that “minimum”—up to a certain level of course. However, if you really understand the mechanics of cash value life insurance, you know there should be much more analysis involved than just jacking up the death benefit in the IUL illustration and calling it good.

Generalization or Specialization?
The client, Brian, was wondering if he can get an additional $100k of death benefit on top of the $231k within the same product. He wanted to see if he could get this additional coverage for 20 years. Again, the answer is yes, he can do this, but is that the right way to go? Afterall, what started out as a case focused largely on accumulation has now morphed into an accumulation and death benefit focused policy. What is the intent of the product—accumulation or death benefit? Can you buy a golf club that makes a good putter and a driver at the same time? Or, do you need to separate out products? When looking at cash value life insurance, should products satisfy general objectives or are the products more specialized? Let’s discuss my view on this.

Following are two diagrams: The purpose of these simple diagrams is to demonstrate the relationship between the $10k premium going in, the two different death benefits over time and also the “Net Amount at Risk.” Again, in both diagrams we chose the “Increasing Death Benefit” in the early years for reasons I explained in last month’s column.

In Diagram A is a graphic of our first 20 years or so in the policy without the additional $100,000 in death benefit included. Per the illustration, based on $10,000 per year in premiums, the minimum “non-MEC death benefit” is $231,000. As we have already discussed last month, the difference between the two lines is the “Net Amount at Risk” that determines the COI charges.

Now, because IUL is a “flexible premium” product, we can choose to have the face amount at $331k instead of the $221k that was the minimum death benefit. Afterall, our client needs that additional $100,000 of coverage for 20 years. Without digging into the numbers year by year, and instead keeping this conceptual, let’s overlay the “new” scenario of Brian funding at the same $10k per year but now moving this IUL’s death benefit up to $331,000. See Diagram B.

As you can see in Diagram B, the old scenario is represented by the dashed lines. I also included the new $331k face amount (in blue) and also the new projected cash accumulation value (in black). Notice how the cash accumulation is not as steep as the previous dashed accumulation (in red). That is because of the additional expense drag that is incorporated into Diagram B which is composed of:

• Higher cost of insurance charges which is based on the higher “Net Amount at Risk”
• Higher per thousand charges which is based on the higher face amount

If you have read any of my past IUL analysis, you would recognize the two expenses above as being two of “The Big Three” of expenses that I discuss frequently. The third being Premium Loads, which is a function of the premium going into the policy. Note: I have since changed it to “The Big Four” now that many companies have asset-based charges.

In the assumptions in Diagram C I used a very reasonable five percent illustrated rate, instead of the 6.9 percent that I could have used as the max. The only thing that illustrating a higher rate would do is to prove my point even further.

As you can see, by having a death benefit of $100k beyond the “Minimum Non-MEC” that the IRS would allow, you are watering down the cash value performance of the policy because of the higher expenses. By adding the $100k death benefit, one is watering down the Year 20 Cash Value by $10,581 and the annual loans by almost $1,000. Most importantly, how much in additional charges would Brian have in the $331k policy versus the $221k policy? $5,934 over the 20 years–or an average of $297 per year.

So, What Is My Suggestion?
Am I suggesting we leave Brian without the $100,000 additional death benefit? Of course not. To me it is a question of, “What would be the cost of $100,000 of coverage for 20 years from a source outside of this IUL policy?” Then we would compare that cost to the $5,934 that it would cost if we used the IUL for that additional $100k coverage.

Utilizing the same health class as the above IUL, the best 20-year term price for Brian on $100,000 in coverage would only be $175 per year, cheaper than the $297 per year embedded in the IUL pricing. Furthermore, the 20-year term premium/expenses/charges are 100 percent guaranteed whereas the IUL can adjust. Now, needs can change, so I would suggest a term policy with great conversion privileges, as this particular term has.

What I am suggesting is that with cash value policies in general—not just IUL—that many times these policies are “specialists” in either cash accumulation or death benefit. It is rare if not nonexistent where there is a product at the top of the industry for death benefit leverage and also cash value potential.

What I ultimately suggested to my agent was to offer both products—the max funded $231k face IUL and also the term policy. He sold them both!

Note: I also looked at the Term Blending Rider on the IUL which was fairly expensive. Term blending riders are great for when the client wants to fund an IUL but has varying premiums that he/she will put in over time. Term blending is a great “place holder” for death benefit that can be converted to the permanent base coverage later on. Inquire if you are interested in learning more about term blending.

In Summation
Now, by Brian paying the premium of $10,000 per year into the IUL and $175 per year into the term, he is paying $10,175 in total premiums. I could show you the math of including all of that into the IUL, but the end conclusion will not change by adding $175 per year to the premium.

Much of what I wrote here is fairly brief because I wanted to keep this simple, accurate and conceptual. For instance, I could have discussed “term blending riders” that many IULs offer, but that would not have changed the conclusion. Furthermore, I did not incorporate time value of money to discount back the COI charges into today’s dollars, etc. I have done those mental gymnastics outside of this paper and I have always come to the same conclusion–that it is always best to try to “max fund” accumulation IUL whenever you use it, and buy the death benefit leverage from a death benefit focused product separately. In other words, my belief is, specialization is important!

It is best to use a Ferrari for racing and an RV for camping instead of trying to use one of those vehicles for both activities.

As my company trains scores of financial professionals every month on permanent life insurance, we always observe common questions and misperceptions that warrant a column or two. Lately I have observed some common questions around how to illustrate IUL, how to optimize the death benefits, and how to optimize the product offering based on the clients’ goals–whether the goals are death benefit focused or cash value focused. Let’s discuss.

Because indexed universal life insurance provides premium flexibility as well as death benefit flexibility, there are many objectives a consumer can have that drives the purchase of an indexed universal life insurance policy. However, the two broad categories are:

1. Death Benefit Objective: Small Premiums/Big Death Benefit
The first objective is to pay as little in premium as possible in order to get a desired death benefit, usually the larger the better. Some IUL policies have a death benefit that is guaranteed for a certain number of years assuming the consumer pays the “minimum no-lapse” premiums. There are even some IUL policies out there that have lifetime no-lapse guarantees! Lastly, some policies have essentially no guarantees that run only as long as the cash value can support the internal charges. Of course, just like anything else, the more guarantees, the higher the expenses (generally).

For just the death benefit need there can be lower cost insurance options than IUL, such as term life insurance or guaranteed universal life–”Perm Term” as I call it. However, with indexed universal life insurance consumers may choose to pay higher premiums because it provides the death benefit protection they desire but also the ability to accumulate cash value that can be accessed for various reasons such as: Emergencies, education expenses, retirement funds, etc.

2. Cash Value Objective: Large Premiums/Minimum Death Benefit
If the death benefit products that I discussed previously are the golfer’s equivalent of the “putter,” then this category is the “driver.” This is usually the opposite—you cram in as much premium as possible for as little of a death benefit as possible.

This objective is usually referred to as “max-funding” or “overfunding.” I prefer the term max-funding because over-funding just sounds like you are doing something incorrect.

Anyway, a large majority of industrywide IUL sales are bought with this objective in mind. For consumers that have this objective, they have a life insurance need but also have a very strong focus on cash value growth and minimizing the cost of insurance charges. The goal is usually to generate enough cash value in the policy so that they can take loans against the policy—that are generally tax free.

Why Overfund a Life Insurance Policy?
The notion of putting more premium into a life insurance policy than is necessary seems very counterintuitive to consumers. Here is a quick story on this topic.

I was recently on a call with one of my agents (and friends) in California helping him as he discussed IUL with one of his clients. This was the second meeting with this client who was already well versed on the topic of IUL and was likely going to move forward with it outside of a couple of final clarifying questions. This was a high net worth 45-year-old male client that was maxing out his 401k plan, had done very well with other investments and now was looking for an “alternative asset” that was more on the conservative side. He also wanted an asset that he can turn into a stream of retirement income in 20 years. He had an additional $10,000 per year that he wanted to put to work.

This was the perfect client for IUL as he understood the power of potentially tax-free loans, living benefits and, most important, he also understood that his current life insurance coverage was on the “lean” side.

The call was going quite well, as the agent did a great job answering all the questions the client had except for one question where he got tripped up. What was that question? We will get there in a bit. But first, here is the question that I thought the agent did a great job with. The question from the client was, “Why minimize the death benefit? If I have a choice between having more death benefit coverage or less death benefit coverage for the same premium, why would I go with the less?”

This is a great question and not the first time I have heard this question from a client or an agent. Thus, the reason for this article! It is a reasonable question because if IUL is a “flexible premium product” and if the client could possibly pay the same premium for a little higher death benefit, why wouldn’t he? Can he have his cake and eat it too?

The agent responded to that question with an answer that I thought was very well articulated. He said, “By minimizing the death benefit relative to the cash value we are able to keep the internal charges in the policy down, which allows for the product to accumulate more cash at a faster rate.”

This answer is very accurate because, as you know, the cost of insurance charges are assessed on the net amount at risk. To discuss this topic briefly with you, I thought I would include the following diagrams that I had previously trained this agent (and many others) to use.

In short, if you can keep the red cash value line and the green death benefit line as close to each other as possible, then, all else being equal, the COI charges will be minimized. That is because the COI factors are based on the net amount at risk. The IRS regulates how low the death benefit can go relative to the premium and cash value with Guideline Premium rules and Seven-Pay rules.

Pay close attention to where I have the death benefits starting for each respective death benefit option. Note that in most cases the “Option 2 (Increasing) Death Benefit” will allow for the death benefit to start out much lower than the “Option 1 (Level) Death Benefit.” Furthermore, if you look at the diagrams, the Option 2 Death Benefit has the smallest gap in the beginning years and the Option 1 has the smallest gap in the later years.

So, if one is better in the early years and the other is better in the later years, which option do we typically go with? Both! That is exactly why you see many IUL illustrations starting out at Option 2 but then switching to Option 1 after the premiums stop going in. You get to use the optimal option for both sides of the time spectrum.

The Tougher Question
Now, what about the question I mentioned that my agent (and friend) tripped on a little bit? It was this question: “If I want a higher death benefit than the ‘minimum death benefit’ on this product, should we do the higher death benefit?”

In essence, the client wanted more death benefit than the $231k that was the “minimum death benefit” on this product but yet he also liked the accumulation potential to be as high as possible on the IUL. Can he have a golf club that can be a good putter and also a good driver? What route should he go? What did the agent recommend? To be continued…

First off, my goal is to make this so non-political that, by the end of this column, you will not know whether I am a Democrat or a Republican. So if you read the title of this article expecting to witness a train wreck below you can rest easy. I hope. And yes, I am fully cognizant that bringing up politics is almost as dangerous as telling my friend, Steve Howard, that I am not a Chiefs fan! Actually, I do like the Chiefs.

The purpose of this article is to merely take learnings from a group of folks (politicians) who deal with numbers of people that dwarf the numbers of people we work with and apply those learnings to your business. In other words, with political elections you have the “Law of Large Numbers” which makes for a very interesting litmus test on how to interact with the public, i.e. our prospective clients.

The Brain
There are two different ways that our brain processes information—one way is the analytical or conscious way, and the other is the emotional or subconscious way.

I have read several books on how humans make decisions and they all explain these two different thinking types in a different way. The book Storyselling for Financial Advisors explains the brain functionality as left brain versus right brain. Basically, if you were to take a map of the United States and look at it, on the left you would have California and on the right, you would have New York and Washington DC. Now, turn the map away from you as if you are showing somebody this map. You now have New York and Washington DC on the left and California on the right. Think of these two locations: New York and DC are analytics, numbers, Wall Street, Alpha, Beta, legislation, analytics, objective, etc. This part of the country takes deep thinking! Conversely, on the “Right Side” of your forward-facing map you have Beverly Hills, Hollywood, etc. These places are fun, exciting, stories, movies, random, intuitive, etc. This is how our brain works. Left brain analytical processing versus right brain emotional processing.

Now, there are other books that explain our thinking a little differently and more neurologically in depth. For example, the book Your Money and Your Brain by Jason Zweig explains the brain as being less about left and right and more about up and down. In other words, the analytical part of the brain is the Cerebral Cortex on the top front part of your brain. And the emotional part of your brain is in the core, called the Basal Ganglia. This definition of how we think I believe is probably more precise because he backs it with MRI research where the patients are given emotional and analytical tests while their brain activity is monitored by MRI data. Regardless, the brain is broken down into two areas—analytical and emotional. So regardless of which definition is right (left, right, up, down) one thing that is undisputed is we think in two different ways, analytical and emotional.

Emotional Wins Every Time!
As I have been witnessing the presidential debates not just this year but also four years ago, I have observed a very interesting correlation, or lack thereof, that I thought I would write about.

First off, I believe that you cannot be a complete idiot and make it to be a top candidate for the leader of the free world, whether on the Democratic side or Republican side. I think it is likely that almost everybody that makes it to the debate stage probably has an IQ beyond the average American. Furthermore, you will often see a candidate or two that are among the smartest minds in the country, maybe even the world. As a matter of fact, on the Democratic side, at the beginning of the election season 9 of the 14 candidates attended an Ivy League school, eight have law degrees, and two are Rhodes scholars. On the Republican side, going back to the 2016 campaign, you had a doctor that was the first ever to separate conjoined twins—Ben Carson. I don’t know about you, but to me that seems like an intimidating task!

Here is the correlation, or lack thereof: How far did those analytical left-brain skills get them? I have not seen any correlation in how book smart one is relative to the other candidates and their likelihood of winning.

All the democrats are losing to Bernie Sanders (at the time of this writing). And going back to the 2016 Republican debate, we all know that all the republicans lost to Donald Trump. Bernie Sanders has very little formal education relative to some of the others. The same would apply to Donald Trump.

My point is, the direct correlation in this litmus test is those that become successful are those that also communicate in an “emotional/right brained” fashion. And—needless to say—Trump and Sanders trigger various emotions with various people! The politicians that win are able to trigger the emotional right side of the brain better than any of the others.

These people that ultimately win can tell stories that compel people to act. Logic alone many times does not compel people to act. Think of some of the most memorable speeches coming from any presidential figure. Those speeches were emotionally charged, and many times have very little “analytical” significance. Now, I am not suggesting that academics are not important. Afterall, I would like to think that I study this business as much as anybody and believe in designations, etc. What I am suggesting is that it can be a moot point if you cannot get people to act. How we get people to act is by telling stories and opening that “inner eye” of emotions. Whether you love XYZ politician or hate him/her, make note of how they get people to act! Most of the time, they get votes because that politician has hit a hot button.

Have Conviction in Your Recommendation
Unrelated to any of the candidates today, I will pose this question that I have recently been reminded of in my own dealings with a client. The question is: If a politician stood up on stage and gave their ideas without 100 percent conviction, would you get behind that person? If that politician said, “I think my tax plan could possibly create a good amount of wealth for the American people but the actual amount I am not sure of,” would anybody get behind that? No!

On the political stage those that have the best recommendation as well as the strongest conviction around how that recommendation will work will be the more successful. People can say what they want about Trump or Sanders, but lacking in conviction is not what anybody would explain them as.

Like in politics, the more confident we as professionals are in making recommendations, the more the client will buy.

Now it is time to be a little self-deprecating and tell you about a recent experience I had. After 22 years in the business and understanding the common sense I just laid out in the previous paragraphs, I basically did the opposite of what I just explained. Thus, what prompted me to write this article.

I was meeting with a nice lady that was 83 years old. I liked her and she liked me, and she trusted me at this point. This was our second meeting and I was showing her two different options for her $200,000 that she had sitting in a low yielding CD. She was very small and very petite but also very healthy. However, she was concerned that her $200,000 was not earning anything in interest. She also understood the long term care risk and was somewhat concerned about it. All her siblings had gone into a nursing home and it was almost a certainty that she would end up there. She had longevity in her family as well as “morbidity” in her family.

To address her concerns I formulated two different options for her. The first option was that she could continue to grow her assets like she had been doing, except in a guaranteed annuity that was giving her almost four percent for five years. This particular product was a very “low-friction“ sale because she wasn’t earning anything on her certificates of deposit. This was a no-brainer!

But, I also proposed to her a second option. That second option was a long term care annuity that immediately tripled her money for purposes of long term care coverage. This option increased her $200,000 to $600,000 with very little underwriting. The underwriting component was important because she could not qualify for the fully underwritten products.

Both were great options and when she looked at me and asked, “Which option should I go with?”, what did I say? In my attempt to be as gentle and low pressure as possible (which is how I work) I told her, “You cannot go wrong with either one and it is just a choice of more accumulation potential with the MYGA annuity or the high long term care amount with the long term care annuity. It is whatever you are comfortable with Mrs. Bailey.”

As she told me she would think about it and get back in touch with me next week, I immediately realized what I already knew! I lacked conviction in my recommendation. I am never “wishy washy” but this time I was and therefore I lost the sale (and rightfully so). More important than “the sale,” I lost the opportunity to help her out. She is still sitting in the CD that is not earning anything. I will help her eventually, but this was a learning experience.

Sometimes people just want to be told what to do and don’t like “wishy-washiness.” I knew this before and I went against it in order to not disenchant this nice lady. Well, I got exactly what I was trying to avoid.

So, whether you are a politician or a financial professional, if you are speaking to the emotions of your customers and doing so with sound recommendations that have conviction, your customers will vote for you with their trust.

In 1835 there was a significant development in the firearms industry. This was the year a gentleman named Sam Colt received a patent on a handgun called the “Revolver.” Although there were previous versions of the revolver, they were rare. Sam Colt’s design would be the first one to get mass produced. This innovation was groundbreaking, as now one could fire five shots (later to become six shots) just as fast as one could pull the hammer back then subsequently pull the trigger.

This was in great contrast to the “single shot” designs that were widely available prior to this creation. By the mid to late 19th century this handgun was the standard for good guys and bad guys alike. With this innovation came the old west adage that “God created men and Sam Colt made them equal.” In other words, it didn’t matter how big or tough you were. If somebody else had a Colt, you were inferior to them. Or, if you both had a Colt, you were equal. They called the Colt Revolver “The Great Equalizer.”

Fast forward to today–a much more commercialized world where we are very much driven to be high performers at our jobs. I believe we have a new “equalizer” that can be a limiter on your performance relative to your competitors. And I don’t know about you, but I don’t want to be inferior to my competitors!

What is the new “equalizer?” It is the 8:00 to 5:00 work schedule that somebody, somewhere institutionalized.

Let me discuss my “belief” by using a hypothetical example. Today, two people graduate from college at age 22 and enter financial services as insurance agents. These two individuals will each go through their careers and, like clockwork, will start work every day at 8:00 am and end the day at 5:00 pm for the next 43 years until they both retire. My belief is that their career trajectories would not diverge a significant amount. I will concede that one may be smarter than the other and one may be naturally more efficient than the other during that nine hour workday, but I don’t believe you would see a situation where one of those people would be making huge amounts of money by age 65 and the other would be destitute. Why? Because if we are all in the same profession, like being an insurance agent, we all are doing basically the same thing between those hours. It is the treadmill of phone calls, prospecting, client meetings, putting out fires, etc.

Again, one may say, “But what if one person was just a pure genius and the other was not the sharpest tool in the shed?” I would argue, as Angela Duckworth does in her bestselling book Grit, that IQ is secondary. I do not believe that our maker can create one person that is so far superior to another that the difference cannot be offset by hard work. As a matter of fact, in some of Duckworth’s studies she found that in some cases she has seen a negative correlation between how smart people are based on IQ and how successful they turn out to be in certain functions like national spelling bees, college graduation, etc. This is because the “smart people” may rest on their laurels while those that do not have natural talent work to offset their shortcomings through hard work and perseverance—i.e. grit! And in the end the person with the grit usually wins. Duckworth defines grit as “perseverance and passion for long-term goals.”

I have worked with and observed thousands of financial professionals over the last 20 years. As I have interacted with these financial professionals, I have always had a curious eye about what makes the top echelon so successful.

I have found that there are many inconsistencies in the activities, qualities and traits from top agent to top agent. Some do seminars, some don’t. Some know their product inside out and some don’t. Some are analytical, some aren’t. However, there is one consistent common activity among the top echelon. Take note: I am calling this an “activity” not a trait. The fact that this is an activity is great because “activities” can be controlled by you if you decide to adopt them!

What do they do that ensures that their paths “diverge” from their peers? Grit! They cheat the “great equalizer” of the 8:00 to 5:00 work schedule. They wake up early. They don’t buy into the 8:00 to 5:00 work schedule. They make their days have more hours in them so they are not “equalized” with their competitors.

I purposely call “grit” an activity because—as I tell my 12-year-old basketball player son—this is not something you need to be born with; it is a decision that is 100 percent in your control. Do you want to be great or do you want to “blend in?”

My challenge to you would be the same challenge that I have given to thousands of people over the years to whom I have spoken on this topic. I will tell you as I told them—if I am wrong, call me up six months from now and tell me that I was way off and I am full of it. I have not received any calls yet other than calls confirming my belief. My challenge would be to start by just setting your alarm clock 30 minutes earlier in the morning. If you do this I can promise you that you will feel as though those 30 minutes were much more meaningful than just 30 minutes.

Those 30 minutes—this is your time. I wake up at 4:30 every morning, and for three hours or so I have uninterrupted time to read and catch up on emails that the “treadmill” of the 8:00 to 5:00 workday will not allow me to do. I believe that if you are going to “cheat” the 8:00 to 5:00 work schedule it is best to do it in the morning—because the morning hours are your hours!

I know this message is much different than the messages one may hear from “efficiency consultants” or infomercials that you may see at 3:00 am. Many times, those messages suggest that there is some brainy secret ingredient that allows one to evade the hard work and the grinding that our business requires. These messages are usually something like, “Work less but work more efficiently.” Or, “Be a millionaire by only working 20-hour weeks.” Or my favorite, “Work smarter, not harder.”

To be very facetious, although I am in no shape to play professional football, I think I am going to try out for the Patriots next year. When Bill Belichick asks me what the heck I am thinking, I will tell him that although I have not worked to have the athletic ability that the other team members have, I will just work “smarter” than the others. Let’s see how that works. It will last one play until I get hit by some beast who grinded away his whole life to achieve a low four second 40-yard dash time and a 500-pound bench-press.

Whether it’s athletics or business, the rules are the same!

Please note that I am a family man. I spend every second with my family that I can, and I make it meaningful. I am not suggesting that work should cannibalize your life. What I am suggesting however is that if you want to reach the top echelon as a professional it is a grind. The great news is that it’s a choice that you can make and, if you make that choice, your success is guaranteed.

In discussing the power of long work hours and grit I would like to share a personal story. I grew up in a small town in Southwest Iowa. I was always a head taller than the other kids in my grade, but I didn’t even touch a basketball prior to the seventh grade as my family was not much of a “sports family.” Therefore I never had much of an interest in basketball even though many of my friends loved it. Plus, I never had natural athletic talent like many of my friends. I was very uncoordinated and could barely walk and chew gum without tripping when I was young and growing fast.

My lack of desire changed one day, however, when I was in seventh grade. It took one person, Coach Hook, who was our varsity basketball coach, to light a fire of “grit” under me. By the way, Coach Hook was known in Southwest Iowa as a coach that had a long history of building some of the best basketball teams in the state by investing time in his kids year after year.

Well, that day he ran into me while I was outside the middle school waiting for the bus. He took an immediate interest in how tall I was relative to the other kids. He then started speaking with me about how I could be a great basketball player and he wanted to see me work to be a star by the time I came into high school. He continued these conversations with me every time he saw me and eventually convinced me that I could be a good player if I wanted to be.

As I worked to get better at basketball I remember looking up to some of the “stars” that were juniors and seniors on the varsity team of that time. I remember thinking about them and wondering how much practice it took them to get to the skill level they achieved. Did it take 50,000 practice shots? Did it take 100,000 practice shots? Did it take a million practice shots? Then I remember thinking that whatever that number was, it didn’t matter because I would pass that immediately. In other words, I would “accelerate” the development process by relentlessly practicing every chance I got so that I would not be “as good” as those people by my senior year—I would be better than them by my sophomore year. This was a cool thing because the number of “practice shots” I took every day was 100 percent in my control. Day after day it was my choice how much I practiced and thus how quickly I would surpass the number of hours that those “stars” had ever practiced.

At our house we had a very primitive basketball hoop where the pole that held the backboard was basically just “buried” in the gravel driveway. That was my basketball court, a gravel driveway. Many nights under the flood light that hung from our garage I would stay up until the morning hours practicing as my hands became coated in dirt and gravel dust. Sure enough, by my sophomore year in high school I was starting Varsity and was all conference for three of my four years in high school and ultimately went on to play in college.

To me those years were confirmation that, although I was an uncoordinated seventh grader relative to my peers, there were no shortcomings that could not be offset by hard work. The mindset for the rest of my life was formed in those years!

In other words, we are all humans and therefore we cannot be created that much different than one another. The difference is grit, practice and perseverance. These three things are a choice–not something one needs to be born with.

To wrap this up: We work in a great business that deserves effort beyond what the “average” business requires. The national median income for an entire household today is around $60,000. I would argue that in our business we have the ability to make much more than what the “median” household makes. And what does the “median person” do? They go to work at 8:00 and come home at 5:00. They don’t touch a book. They sleep in on the weekends. They “work smarter, not harder.”

Do you fall victim to “the great equalizer” and go to work at eight and come home at five? Or, do you accelerate the process of developing your talents, developing your book of business, developing your team, etc., by getting up early and leveraging “Grit”?

“Nothing in this world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent.”—Calvin Coolidge

Yield Compression

It’s not breaking news that life insurance carriers (and everybody else) have seen 37 years of dropping yields on bonds. At the time of this writing, the Moody’s Baa Corporate Bond Yield sits right at 3.91 percent, which is more than 100 basis points lower than at the beginning of the year! I believe that the Baa yield is the best proxy for insurance company investments because insurance carriers predominantly invest in investment grade corporate bonds versus treasury bonds. After all, if you can buy a bond from a strong investment grade company that yields 50—150 basis points over a treasury bond, why wouldn’t you? Furthermore, carriers generally invest more prominently in Baa type bonds than Aaa type bonds.

Because of these persistent low interest rates, insurance carriers have been forced to reprice their annuity and life insurance products many times over. This is because of the resulting decreases in general account yields. To put numbers to it: At the end of 2007 the aggregate yield that U.S. life insurance companies were getting on their fixed income assets – which is usually what backs life and annuity products – was 6.1 percent. Well, based off the 2018 ACLI Life Insurers Fact Book, that yield in 2017 (10 years later) had dropped to 4.43 percent. Thus, it is no mystery why caps on IUL have decreased. Furthermore, I don’t believe the pain is over yet for two primary reasons.

1. As the bonds that the carriers bought, say, 15 years ago mature and are replaced by new lower yielding bonds, the companies’ general account yields will continue to get watered down. Here is a simplified example of what I am talking about: If an insurance company’s general account has a “blended yield” of 4.43 percent and this year has $20 million in bonds from 15 years ago that are maturing, they must reinvest that $20 million in today’s low rate environment. The yield on the bonds that are maturing could very easily have been seven percent. It does not take a mathematician to understand that unless you replace those seven percent bonds with seven percent or greater bonds, the general account yield is going to continue to be watered down. So, interest rates could actually rise from here and it still would not stop the yield compression for insurance carriers.
2. There are 17 trillion reasons why I don’t believe rates will increase soon. When there is $17 trillion in sovereign debt globally that is yielding negative, that means that here in the United States we are actually in a “relatively” high interest rate environment. That creates demand for our U.S. bonds which increases the prices. That price increase on bonds, in turn, suppresses the yields. As a result, my opinion is that U.S. interest rates cannot change course unless interest rates around the globe change course, which can take a significant amount of time! However, if a crisis happens it could be that “risk premiums” on corporate bonds increase—but I am not hoping for a crisis.

By the way, the federal reserve does not control long-term rates with the fed funds rate! The federal funds rate only controls the short end of the yield curve. Market forces control the 10-year, 20-year, 30-year treasuries, etc. Now, the federal reserve could (and has) affect the long end of the yield curve by their quantitative easing or tightening, but that is different than the federal funds rate.

Yield Compression=Lower Caps, Higher Term/GUL Rates, Lower Dividends
For the fun of it, let’s do some IUL pricing based off the 2007 general account yield of 6.1 percent and compare that to today.

Let’s assume our General Account is yielding the 6.1 percent. As we discussed previously, this was the case in 2007.

Let’s also assume we are pricing a cap on an annual reset S&P 500 strategy within an IUL. Assuming a $10,000 net premium going into the IUL, how much money would need to be invested in those general account bonds so the $10,000 grows back to the original $10,000, based off the yield of 6.1 percent? The answer is $9,425. In other words, when the $9,425 grows by 6.1 percent over the next year, the insurance company will have the client’s premium back which is the goal! This means we have $575 ($10,000 minus $9,425) as an options budget. What does the insurance company do with that $575?

Not to get too technical but the company buys a S&P 500 call option “at the money” and sells an S&P 500 call option “out of the money.” The difference between what the carrier bought the option for and sold the other one for should equal $575. Based off today’s options prices, an “at the money call” would cost the carrier $747—which is more than our option budget. Too bad because if we had enough option budget for this call, we would have an IUL with unlimited upside, i.e. no cap. So, instead, we will buy that option and sell another one so we net-out to our $575 budget.

In order to capture our $172 ($747 minus $575), we need to sell a call for “out of the money” by about 11.5 percent (based on today’s prices). What we have just done is given the upside beyond 11.5 percent to somebody else! Voila! If it were 2007, our IUL product would have a cap of 11.5 percent.

What about today? It’s a big difference. Based on the math that uses 4.43 percent as a general account yield, we would only have a cap of 7.5 percent!

Now, you may be thinking, “But many IUL products are currently offering caps much higher than 7.5 percent!” You are right and this concern is addressed in a couple of my points below.

What are my points?
Point 1: The pressure that insurance carriers are feeling is real! Insurance companies are faced with a 37-year dropping interest rate environment and as a result they have been forced to adjust the pricing on policies as well as discontinue products. Not because they wanted to, but because they have had to.

Point 2. It is paramount that an agent is working with a carrier that knows what they are doing and how to hedge these products.

Point 3: If you are an agent, do your due diligence and partner with an IMO that knows how these products work and knows the carriers involved! These products are technical and therefore you should partner with technical people! Ask your IMO to “stress test” various products.

Point 4: Know that there are ways that a carrier can subsidize the option budgets with internal charges to give the product more upside than a 7.5 percent cap. Of course, additional expenses do come with additional risk. Thus, the importance of the “stress test.”

Point 5: If internal charges in the policy are extremely low and caps seem too good to be true, ask questions!

Point 6: Although I used IUL as an example above, know that dropping general account yields are not just an IUL problem, this is a term problem (increasing prices), this is a GUL problem (increasing prices), this is a whole life problem (decreasing dividends), etc.

Point 7: Good carriers will separate themselves from the bad over the coming years in how they treat the consumers with the caps, rates, dividends, etc.

Point 8: Don’t just disclose to the clients that caps can decrease on their policy. Set the expectation that they will! Underpromise and overdeliver.

Point 9: Needless to say, be prudent with illustration assumptions.

The silver lining:
The silver lining is that there will eventually be a point of “equilibrium” where the general accounts no longer yield more than the new investments put into the general account. I am hoping we are close to that point as the Moody’s Baa yield is not too much lower than the average general account yield. In the end, the value of all these products is relative to what else is out there and the value is still unquestionable. After all, prevailing interest rates have also dropped the rates of savings accounts, certificates of deposit, money market accounts, etc.

In Closing
The magic that these products provide, whether life insurance or annuities, lies in the mortality and longevity credits. With life insurance, if one dies prematurely there are thousands of other insureds in the insurance pool that pay for the death benefit of the deceased that could equal multiples of the premium the insured paid. Ben Feldman would discuss that with life insurance you can purchase “dollars with pennies.” With annuities you have the inverse: If you live until the ripe old age of 110, those in the “pool” that passed away early bought the “longevity credits” that guarantee you lifetime income. Mortality and longevity credits are what make these products special. By the way, the potential tax benefits of life insurance and annuities are kind of nice as well!

A couple decades ago (and about 50 pounds ago) I was a good basketball player. And by “good” I am not suggesting NBA “good,” I am suggesting high school all-state “good.” I was lean, had a good vertical jump and could run a mile in less than five minutes. Notice how I am speaking very much in past tense! Anyway, at 6’6″ and being able to move very well, I had a good combination. You are probably now wondering why I mention this in the context of Shaq and Steph Curry? Well, not only am I a fan of the two, you can often find me looking through a Steph Curry Jersey buying guide, but I have some interesting comparisons to make, so I will get there.

Here was my issue: The hoop could have been the size of the Grand Canyon, but if I was shooting beyond the three-point line, it was not going in! That didn’t matter to me, however, because each of us five players on the team had our own positions that we played and our own sectors on the floor that we favored. We played where we dominated! If past the three-point line I was airballing and if down-low I was dunking on people, where do you think I played 99 percent of the time? This logic does not take a championship-winning NCAA coach to figure out. Putting it simply, if someone was going to be betting on one of these US Sportsbooks, then there bet probably should have been placed on me making the most dunks by full-time.

So to my point and analogy, I view financial products as very analogous to basketball positions. You have some products that are great accumulation products for younger people that have 20-30 years until retirement. If one wants eight percent-plus returns, mutual funds, stocks, and ETFs have the ability to do this. Afterall, over the last 90 years the stock market has done well at hitting the three-pointers, as the S&P 500 with dividends has averaged around 10 percent. As the baby boomers saved for retirement in the stock market, they have done well in general by relying on the point guards (mutual funds, stocks, etc.) to shoot the three-pointers. However, with the oldest baby boomer now eight years into retirement and the youngest baby boomer only 10 years out from retirement, the ball needs to be passed to Shaquille O’Neal down low to win the retirement income game.

My analogy is that mutual funds, stocks, etc., may be great three-point shooting guards but annuities are great centers that play down low.

When I say that the capabilities annuities have in providing retirement income are just as unique as Shaquille O’Neal’s ability to dunk over people, I don’t believe I am exaggerating and here is why.

To step back a minute: This week I attended a meeting on structured products where I shared the stage with a lot of smart people that discussed structured notes, structured CDs and, of course, indexed annuities. A lot of people there were actuaries from insurance companies or quants from investment banks. The investment banks were in attendance because it is they who insurance carriers buy the call options/put options from in order to hedge indexed annuities and structured variable annuities. These investment banks also create indices that can be used in indexed annuity products instead of just the traditional S&P 500 index. Of course, we have seen a proliferation of these new indices within indexed annuities. Very smart people were at this meeting talking about indexed products!

Anyway, one of the speakers there was an individual that oversaw the retail insurance arm of one of these large investment banks and he discussed the prominence of indexed annuities with their field force. If you are already shocked by this, so was I! As you can probably concur, this investment bank’s “field force” I would think of as traditionally being the “stock jockey” types. Well, this individual said that within his arm of the company-which was the annuity and insurance arm-that 30 percent of his sales were now indexed annuities. Ten years ago who would have thought that a big investment bank would even bother to approve indexed annuities for sale, let alone have 30 percent of their insurance business be indexed annuities! Who would have thought that these products would have a very prominent position within these big Wall Street-type firms? By the way, their “insurance business” also included variable annuities which used to dominate the annuity game.

What was the reason his field force had really begun to embrace indexed annuities? Here is verbatim what he said:

“We have realized that indexed annuities with guaranteed lifetime withdrawal benefit riders provide levels of guaranteed income that cannot be replicated in the capital markets.”
-Anonymous Investment Banking Guy

What he is referring to is what I have been saying for years-no investment firm can copy what our products do!

Financial advisors/securities reps-which I am one of-have traditionally discussed the “William Bengen four percent withdrawal rule of thumb.” That is, a retiree should take no more than four percent from their stock/bond portfolios at retirement in order to not run out of money in their retirement years. Well, conversely, with indexed annuities there are GLWBs that can guarantee five to six percent withdrawal rates for a 65-year-old. He is right-this cannot be replicated! It is only insurance companies and the magic of the “pooling” that insurance companies utilize that can allow annuities to stand out from mutual funds, stocks, bonds, etc. These longevity credits can only be “replicated” by the pooling that insurance companies do! Investment companies cannot do this. To explain the “pooling” that he is alluding to, here is a simplified story from a prominent retirement expert:

“There were five 95-year-old ladies sitting around the table playing bingo. One of the 95-year-old ladies looked up and said “This is very boring! We have been doing this for 30 years and it’s time to try something new. Let’s all put $100 on the table right now and whoever is still alive a year from now will be able to split the entire $500 pool.” They all agreed it sounded like fun so they each threw $100 on the table. One year goes by and the mortality tables show us that there are only four of those 96-year-olds still alive. One of them unfortunately passed away. What does this mean? This means that each of those four 96-year-olds get $125 at that point in time, which is $500 divided up four different ways. It wasn’t even invested in anything over that year but they each got a 25 percent return on their money!” -Moshe Milevsky

Now, I am not suggesting that annuities or these “longevity credits” will give 25 percent returns. It is the concept that those that pass away early pay for those that live too long via these “longevity credits.” This is the inverse of life insurance and this is what makes annuities irreplaceable, just like how life insurance is irreplaceable with what it does. Nobody would ever argue against the logic of life insurance so why do many-like Ken Fisher-argue against the logic of annuities?

The biggest wealth transition in the history of our country-$30 to $40 Trillion-is taking place. By “wealth transition” I am referring to the amount of money going from pre-retirement to post retirement. The ball is now being passed down low and there is one product that dominates this like Shaq-annuities. The fact that annuities are so unique compared to anything else out there is what we really need to educate consumers to as an industry. If the game has now turned into a game that needs to be played “down low,” then annuities are Shaquille O’Neal.

In today’s low interest rate environment, I like many of the volatility-controlled strategies that are being created that add to the accumulation story of indexed annuities. There is great value in these strategies that allow savers to possibly get higher returns. However, these products are not designed to outperform the stock market, just like you will never see Shaq in a three-point contest with Steph Curry.

So again, we as an industry need to educate about exactly where it is that annuities cannot be replicated, and it is not the “X percent potential return” story. Rather, it is how annuities can provide this irreplaceable value of longevity credits. If we can provide more education on these longevity credits, we can overcome the “ambiguity aversion” that exists among many consumers as well as some financial professionals!

The game has changed, and it is now a “down-low game.” That is, it is now a retirement income game. And fortunately, that is the game where all the money is today!

Steph Curry should stay at the three-point line, Shaquille O’Neal should stay down low, and nowadays I will not get anywhere near a basketball court.