Last year I decided to buy my two sons (8 and 11 years old) and myself motocross dirt bikes. My intention was to find us another hobby that we could enjoy together. I grew up around dirt bikes but never did the motocross thing. Anyway, I bought us all the helmets, boots, pads, braces, etc. and we were going to be hardcore motocrossers! I vividly remember the first day where I loaded up the dirt bikes and took my kids an hour north of Des Moines to a Motocross track where we were going to christen the bikes. I have never seen a motocross track up close prior to this. Well, I remember pulling into the track drive, which was still empty early Saturday morning. I remember getting out to get a closer look at the track while my sons stayed in the truck. As I walked up the first dirt “jump” it seemed big…really big! As I was standing at the top of this mountain looking around, my 8-year-old opens his car door and yells from the truck, “Daddy, are we supposed to ramp that?” I said, “Not today Matthew.” Then we rode the little trails behind the track all day and had a blast!
At the end of the day we watched other riders, that looked to be high schoolers, effortlessly jump those “mountains” like it was muscle memory. The thought of getting to that point seemed impossible last year. Well, we are there!
The parallel is that the way we talk in our business is muscle memory to us just like jumping terraces is to pro motocross riders. If you have been in the business for a long time, what you know and the language you use is now ingrained in your DNA. Therefore, it can be very easy to overlook the lack of understanding that the general population has concerning our products. I am sure a year ago those young high school kids could not fathom why I would not even consider jumping a 15-foot terrace.
In that vein, I want to focus on a few questions/objections around cash value life insurance that I have recently heard from consumers. If you have been in the business for a long time, you have likely heard these questions/objections and likely effortlessly know the answers. Like the kid that effortlessly jumps the terraces. However, many times it is not just knowing the answer but knowing how to respond so the consumer actually understands the answer. Don’t overestimate what the general population knows!
Question/Objection #1: “How is the life insurance cash value non-taxable?”
This is a great question from consumers that do not fully understand cash value life insurance. To answer this question, I usually use the following verbiage to explain this:
Let’s say you pay premiums of $1,000 per year into an IUL or whole life policy. In year 20, and after paying $20,000 in premiums, the cash value has grown to $30,000. How can you gain access to that $30,000? One way is to cash it out. You can simply ask the insurance company for your money back and the insurance company will gladly send you the check. However, that is not the only thing that will be sent to you. A 1099 will also come that will lead to income taxation on the $10,000 you took out above and beyond what you put in. Conversely, if you do not want that 1099 to come, what can you do? Take a loan against the policy. There is a reason that financial professionals discuss policy loans rather than “withdrawals” when they discuss accessing policy cash values. This is because loans are not taxable and withdrawals above basis are! When was the last time you went to get an auto loan and received a 1099 on the amount you got from that bank? Never. Somewhere in the 75,000 pages of IRS Tax Code it says that policy loans are not taxed assuming the policy is not what they call a MEC.
(By the way, to be technical, it’s Section 7702A that says loans are not treated as distributions under Section 72.)
Almost every time, my response above will lead to the second question…
Question/Objection #2: “But that’s my money! Why do I have to take a loan from myself?”
This is where I discuss with the client that, first of all, she wants it to be a loan! Why does she want it to be a loan? Because of the tax advantages we just discussed. Second, it is not a loan “from herself” or “from her policy.” The loan is actually from the insurance company, just like a loan from the bank. However, the hoops that a bank would make her jump through in order to get a loan are non-existent with these policy loans. These loans are contractually guaranteed to be available to her without loan applications, credit reports, W2s, etc. This is because the policy loan is a very safe loan for the insurance company to make, even without all the formalities. Why is it a safe loan? Because that insurance company collateralizes the death benefit in case she were to pass away without paying back the loan. Also, the insurance company would collateralize the surrender value in case she doesn’t pay back the loan and wants to cash out her policy. Therefore on the illustration you will see that the cash value is never reduced when loans are taken. The only values that are reduced on the ledger when loans are taken are the surrender value and the death benefit. That is because of the “lien” assessed against those two values.
When you start thinking of a life insurance company (where the loans come from) as a completely separate entity from the insurance policy (where the client’s cash value is), one’s understanding of life insurance loans becomes a lot easier.
Objection #3: “I don’t trust insurance companies.”
Here is an interesting one… Not long ago I was having dinner with a friend of mine (John) where we were discussing everything we should not discuss—religion, politics and money. He is my age—a very youthful 41 years old—and owns a very successful construction business. He is the epitome of the American Dream and a self-made man. He never went to college, but since he was a teenager he understood that if he worked his tail off he would be rewarded. That has come true for him!
He is a good friend but very set in his ways and has some biases against the financial services business. By the way, my dad owned a construction business while I was growing up, so I have witnessed some of this “anti-white-collar bias” that exists with some blue-collar professionals like my dad and like my friend John.
Anyway, somewhere in the conversation I started discussing how he should look at a cash value life insurance policy, not only for the death benefit but also the ability to take loans against the policy tax-free for his kids’ college or his retirement. I expanded on the concept by laying out what the math on my personal policy looks like as I am the exact same age as he. After he asked for clarification on the loans and the tax status on the loans (as mentioned previously in this article) John indicated that he did not trust insurance companies as they are all out for making a big profit. He also made the statement that the insurance carrier will likely “jack up” the rate charged on everybody’s loans so they can make a “huuuuge” profit. At this point I dusted off my participating whole life bat, because he just threw a hanging curve over the middle of the plate for me!
I then asked John, “So let’s say the insurance carrier jacks your loan rate up to the maximum rate in order to get more profit. Who gets that profit?” He said, “The shareholders/owners get the profit which is the main objective with any corporation—not just insurance companies!” I said, “You are right! But what if you were one of the owners of the company? What if that massive profit that these insurance companies supposedly get were partially paid to you as a dividend because you are one of the owners?” He paused at this point because he was confused. I continued, “So by being an owner, not only do you vote on the Board of Directors for the company, you also get to participate in the profits that may be generated by what the insurance company does with your money and that of a million other policyholders.” After a long pause he says, “How do I do this without buying shares in the company?” I said, “What I just explained to you is how a participating whole life policy works where the policyholders are the owners of the company. You are the insured, you are your own lender, you are an owner of the company, and you also vote on the Board of Directors that run the company.”
I will be meeting with John next week to show him his own illustration that he requested.
As an IUL fanatic, I will say that I also love participating whole life insurance. To me, one is not better than the other; it is a function of where on the risk/return spectrum the client is. Riding the trails is not any better or any worse than riding the motocross track. It is all about what the client is comfortable with.
Fishermen Wanted
The Pond That Had Never Been Fished
When I was about 12 years old and my brother was 10 my dad took us fishing at an old farm pond just north of Atlantic, IA-the small community in southwest Iowa where I was born. Of course, as I’ve written about in the past, this was a weekend ritual with my dad in the summertime just as hunting was the weekend ritual in the wintertime. Anyway, an old farmer my dad was friends with let us use his pond that was adjacent to a smaller pond. As we drove into the pasture in the pickup truck, we passed by the smaller pond that looked like it had never been fished before because it appeared to be lacking in opportunities. We went straight to the big pond where–over the next hour or so-we drowned a few worms without any bites. As a 12-year-old fidgety kid, I got impatient! As we were sitting there, I asked my dad if I could walk 100 yards or so to the other pond and try it. He said, “Go ahead, but you won’t catch anything.”
I walked over to the other pond, put a worm on my hook, and let it fly. As soon as that bobber hit the water it went straight under like a submarine! I was shocked as I wrestled to shore the biggest Bull Head that I have ever seen in my life. As soon as I pulled it out of the water, I began to run across the pasture to tell my dad and brother that I hit the motherload. Envision a 12-year old kid running across a pasture wearing a giant smile lugging a fishing pole that was about to break because of the giant fish swinging on the end. By the time I got to my dad and brother at the other pond they already had their stuff packed because they heard my commotion and knew I struck gold. They were already heading in my direction. An hour later we had an entire stringer filled up with about 40 fish. I am not exaggerating when I say that our bobbers were sinking as soon as they hit the water. These fish must have been on top of each other! I don’t know the science behind the abundance of fish in this pond, but one can certainly attribute a part of it to the fact that nobody had ever fished it. It may also have been the case because the pond was well protected and the Pond filter was regularly maintained. Or maybe there were other factors that helped the fishes in breeding abundantly! If only I had been an avid reader of fishing tips, advice, and news that you can find featured on websites like CatchandFillet.com and the many others found online, we might have hooked ourselves a lot more than just 40 or so fish!
A Lot of Fish and Retiring Fishermen
I think there is a similar opportunity today for new agents, carriers and agencies/IMOs. As we know, we are in the middle of the largest wealth transfer from pre-retirement into retirement in the history of our country. The baby boomer generation that controls $30 trillion in wealth is retiring and moving their money into IRAs, which we can help with. Eventually they will also transfer that wealth to the next generation, which we can also help with. To use my fishing analogy, the fish are multiplying by the day!
Furthermore, while you have this increasing demand for our services, what is happening to the “supply” of our services, or the supply of fisherman? As we know, the average agent is a baby boomer as well-at around 59 years old. A large chunk of them are and will continue to retire-leaving the fishing hole relatively free for the taking. I have seen several studies over the years-many of them by my friends at LIMRA-that cite 40,000 as the number of agents that need to be recruited per year to fill the gap that will be left by agents retiring. We have not been filling these vacancies and will continue to fall short unless we as an industry get our act together. Although this is a serious issue for our industry, it is the “motherload” for those agents coming into the business or those that will be in the business over the next decade or so!
What about technology filling this gap? Although technology is obviously a part of the research process for many consumers today, fortunately consumers still want to talk with a living, breathing human being before they actually purchase. Humans will still be in the mix!
Do a google search on “bringing new agents into insurance.” See what you come up with. You will find nothing profound outside of the typical “The average agent is almost 60 years old; selling insurance is hard; carriers need to embrace technology; etc.” There is not much out there because this is a hard problem to solve. Well, as I tell my kids, the beauty of things that are hard is that your competitors likely cannot do them-which means if you do them, the potential rewards are high.
How do we as IMOs and carriers attract new people into our business? Although one can write a novel on this, here are ten of my thoughts.
This means us leaders (agencies/IMOs/carriers) in independent distribution need to fill the function of education, training and professional development. You don’t just give a kid a fishing pole and have him learn himself! This can be difficult because training, education and professional development take a long-term view versus a quarter-by-quarter view. However, you enjoy the shade today because you planted a tree 10 years ago.
Some carriers and IMOs have great training material but, like anything we buy in life, the packaging is almost as important as the product itself. As I say, “At McDonalds nobody ever buys the Bic Mac. They always buy the #1.” If a carrier or IMO developed a comprehensive training system that is packaged in a way that can be “turnkey” replicated by an agency for use with their newly recruited agents, that carrier or IMO would come closer to cracking the code. More coming from CG Financial Group on this “turnkey system.”
In the annual Insurance Barometer Studies that LIMRA and Life Happens conduct, they often cite the lack of enough life insurance coverage being very correlated with the lack of knowledge consumers have of life insurance. In other words, the more educated the consumer is about the need and benefit of the products, the more coverage they have! I would argue this correlation exists regardless of the products being sold. Help the agents with the educational content as well as the media to use in educating their clients.
For consumers, the below quote tells the story:
“There are more than 42 million consumers in the market for financial guidance. About two-thirds of those using social-media sites for finance-related topics are looking for information on product and services (62 percent), or looking for reviews on financial professionals (61 percent). Consumers, predominantly Gen X and Millennials, are using social media when assessing financial professionals; 34 percent say they would research financial professionals on social platforms.”-www.Lifehappens.org.
A thought on video: If you have seen my videos, they are casual! Sometimes I am in a T-shirt after working out. This is because I have learned after creating thousands of videos that there is almost a negative correlation in how “polished” I am and the level of viewership. People are human and it is natural for humans to cringe at a stuffy looking person giving a stuffy message. Don’t get slowed down by feeling that your videos must be perfect!
If you are doing the right thing and trying to help the agents and their clients you will eventually win. If you have a mindset of “abundance” and share openly, you will win. The “Abundance Mindset” is what Stephen Covey talks about when he says that you should share openly with others and there are enough “fish” to go around.
Something funny as I look back at the fishing trip I mentioned at the beginning, is what happened a couple of hours into our fishing spree. An old farmer that my dad knew was driving his tractor down the gravel road. This gravel road was within shouting distance of the water’s edge where we were sitting. That farmer stopped to yell a few pleasantries to my dad. As you can imagine, the farmer asked “the question” that usually requires a thoughtful response from fisherman that are protective of their fishing hole. The farmer asked, “Are you catching any?” If you knew my dad, you could guess his answer: “Nope, just drowning a lot of worms.” As a naïve 12-year-old I was confused about why my dad said that-he should’ve been proud of what we just caught! He should also let that farmer know about the huge opportunity that exists! I spoke up and said “What do you mean dad? We caught a lot of fish!” And I pulled our stringer up out of the water to display what we just caught. I later learned from my dad that unless you want other fishermen to catch your fish, you never tell them how good your fishing hole is.
Well, 78 million baby boomers and $30 trillion in wealth equals more fish than any of us can catch-and therefore we need more fishermen. So, don’t follow the advice of my dad-display your stringer proudly! Tell these new recruits about the amount of fish in this pond that you will give them access to if they join your agency/IMO/carrier. The opportunity has never been greater. Have an abundance mindset and you will win.