Michael Gorlick

Today, many of your clients who are either in or approaching retirement are faced with a “taxing” problem. For years they not only saved retirement monies in qualified plans such as IRAs and 401(k)s, but they also built up substantial retirement savings outside of these plans. Both current retirees and pre-retirees are now faced with forced distributions from their qualified plans, beginning after attaining age 701/2, called required minimum distributions (RMDs). Your clients, whether they need the money or not, are forced to withdraw and pay taxes on these distributions, which are based on life expectancy tables.

However, thanks to some recently established guidelines from the U.S. Treasury Department, the qualified longevity annuity contract (QLAC) is quickly changing the retirement planning landscape by allowing your clients to defer some RMDs associated with qualified plans—and the associated taxes—up to age 85.

So what is a QLAC? Many industry pundits are talking about this new annuity, when in reality the foundation has been around for quite some time. The QLAC concept is merely a new tax treatment for deferred income annuities (DIAs) purchased inside a tax-deferred framework such as IRAs or other qualified accounts. DIAs have been around for several years and are a type of “longevity annuity.” These products are similar to their more popular single premium immediate annuity (SPIA) brethren; however, DIAs specialize in long term deferral before income begins, as opposed to a SPIA’s immediate income start date.

The real value of a QLAC is derived from the fact that it is exempt from your client’s RMD calculation and can be deferred up to the month after the client turns age 85—which is significantly beyond the age when RMDs begin.

Looking Back: A Little History…

In July 2014 the Treasury Department altered a feature of the RMD rules that had previously mandated that individuals over the age of 701/2 withdraw an actuarially calculated portion of funds from their qualified accounts and pay taxes on the withdrawal. This new change to the rules encourages individuals to be proactively involved and responsible for their long term financial well-being by utilizing existing annuity product designs and adding a tax incentive. The resulting QLAC strategy has become the latest financial planning tool to benefit baby boomers—and others—by helping them manage and avoid taxation on a portion of their retirement income, along with providing a necessary income stream later in life.

While not a complete panacea, this new Treasury Department guideline allows your clients to defer 25 percent of their qualified plan account balances or $125,000 (whichever is less) from RMD calculations, and the ensuing taxes, until after they turn age 85.

The development of QLACs began with longevity annuities, which were initially designed to help mitigate longevity risk (outliving one’s retirement income). By placing a portion of one’s assets in a longevity annuity that contractually provides for a guaranteed income stream starting at older ages, the remaining assets can be utilized to provide current income. It also provides some comfort knowing that should circumstances produce an income shortfall at older ages, an income “safety net” would be provided. It didn’t take long for insurance companies and planners to realize the benefit of similar product designs that provided income at earlier ages, paving the way for the advent of DIAs. These products have become another variation of guaranteed future income, with income choices or settlement options similar to SPIAs.

Technically Speaking: The ABCs of QLACs

The basics of QLACs are fairly straightforward. How does a QLAC actually work?

 • QLACs are DIAs for which it has been specified at the time of purchase that the DIA is intended to be a QLAC. Otherwise it will be considered a non-QLAC and will follow standard qualified/IRA rules.

 • Premiums are limited to the lesser of $125,000 or 25 percent of the participant’s qualified account values. These account values are based on the December 31st values of the prior year. The dollar limit applies across all plans and IRAs collectively, while the percentage limit applies to each plan separately and to IRAs on an aggregated basis.

 • Premiums paid into a QLAC may be excluded from RMD calculations up until the month after the individual turns 85.

 • GLAC income payments must begin no later than the first day of the month following the month of the participant’s 85th birthday.

 • Payments under a QLAC can be single or joint life, with either “life only” or “life with cash refund” option.

 • Pre-commencement death benefits can be either return-of-premium (ROP) or no death benefit. ROP plus interest is not permitted.

 • Four increase options are currently available: CPI-U Index, 1 to 5 percent simple, 1 to 5 percent compounded, or flat dollar.

 • Commuted value and/or cash surrender value provisions are not permitted.

 • Issuers will be required to file information annually with the IRS. This does not exempt clients from individual reporting requirements.

 • Only fixed annuities can be used as a QLAC. Variable and indexed annuities, or similar contracts, are not permitted.

Where the Rubber Meets the Road:

The QLAC Marketplace

One of the best things about the QLAC is how encompassing and flexible the concept is in regard to which clients are eligible to purchase one. In essence, any client who doesn’t need current or future RMD income and is especially concerned about paying taxes on these unwanted distributions is a potential prospect. Ideally your client would be a qualified plan participant who is currently under age 701/2, has $500,000 in qualified monies in IRAs or 401(k)s and has no need for the distribution. These clients can defer 25 percent of their RMDs and associated income taxes by allocating 25 percent of plan assets (equal to $125,000) into the QLAC. The RMDs on the $125,000 would be fully deferred up to the month after the client turns age 85. This client could very well be the poster child for the perfect QLAC opportunity.

Regardless of the individual client, QLACs can offer distinct tax advantages for retirees that were unheard of prior to July 2014. Clearly, the federal government is now endorsing strategies such as QLACs to help individuals plan for their financial needs at advanced ages. As the baby boomer generation retires, healthy clients can expect to live 25-30+ years in retirement—a sharp contrast to just a few decades ago. With more and more clients concerned about outliving their retirement assets, the QLAC offers a tax-favored alternative to help plan for the future.

Looking Ahead:

Possible QLAC Opportunities…and Pitfalls

Your middle to upper middle class clients may provide the most opportunity with this concept. Clients with small amounts in qualified plans or accounts are not likely to be concerned about avoiding RMDs and would be far more inclined to focus on maximum payouts. Conversely, clients with particularly large amounts of qualified funds might find that a QLAC provides a negligible value due to the maximum contribution limitations. You may prefer to focus on retirees in their early seventies and younger with qualified assets of $500,000 to $1,500,000 and who have other income sources. As DIAs appear to be the best product model (to date) to satisfy the QLAC guidelines, don’t be surprised if you see more carriers flood the market with their own proprietary QLAC-compliant products integrating many popular DIA features.

As noted earlier, a few restrictions and/or administrative issues may possibly apply. All QLAC allocations must be designated as such at the time they are purchased. Since purchases can be aggregated over time or until the maximum contribution thresholds are met, reporting requirements are imposed on the custodial carrier. As is the case with all tax reporting issues, individuals are responsible for accurate reporting and the IRS reconciles individual returns by comparison to what is reported to them by custodians and administrators. For individuals and custodians alike, calculating the $125,000 limit is strictly a dollar contribution amount; however, the 25 percent maximum limit is determined by utilizing the December 31st value preceding the purchase and aggregating the purchase payments until the threshold is reached. Note that the maximum contribution dollar amount of $125,000 applies to all qualified plans and accounts collectively; for example, not just IRAs and not just 401(k) accounts, etc. The 25 percent maximum applies to each plan separately and to IRAs on an aggregated basis.

Conclusion: Your Next Steps

All evidence points to the fact that these new QLAC guidelines can benefit a large percentage of our shared client demographic. While the QLAC concept is relatively new, clearly the new opportunities presented by this strategy cannot be understated. This marketplace is poised to show explosive growth in the new year, and with this growth will most likely come additional input and guidance from both the federal government and the individual carriers themselves. Even as we speak, we are starting to see the QLAC concept gaining more and more exposure; in brokerage distribution, the media, and from the industry as a whole. Currently, the field of carriers offering QLAC-compliant products is very narrow, although many carriers have made public their intentions to enter this marketplace in early 2015. Regardless, we have only seen the tip of the QLAC iceberg and the opportunities it will provide to a generation of our clients. 

Financial advisors are helping baby boomers prepare for their retirement in more ways than ever before. However, our industry may be overlooking a significant threat to our clients’ continued comfortable lifestyle.

The secret nest-egg killer? Out-of-pocket health care costs. Many advisors are not including a discussion about these expenses in their planning process, primarily because they’re not familiar with or comfortable about discussing these costs. Yet what could be more disturbing is the notion that many clients are completely unaware of (and unprepared for) these expenses!

It seems that many of us (including advisors, insurance carriers and industry pundits) don’t really have a true understanding of these costs and how they will, in all probability, escalate during retirement. The “traditional” discussion surrounding retirement planning has taken on the tone of proper allocation of assets, not outliving income, transfer of wealth, and paying future estate taxes. However, the costs outlined below are a very real threat, and the idea is to deal with them now, before it’s too late.

Health care expenses in retirement have always been a concern, but the addition of means-testing in Medicare premium calculations (a method of setting premiums based on income) further complicates the issue. Medicare has been using this means-testing since 2008 to determine the necessary Part B premiums, and Part D became subject to this in 2011 as well.

Currently, the lowest income threshold is $85,000 for an individual—if a client earns above this amount, he can expect to pay more premium. Medicare is still one of the least expensive options available for funding health care in retirement—the current monthly premium for Part B is $104.90, and the average monthly premium for Part D is $38,¹ for a total of $1,714.80 a year. For clients at the maximum means-tested bracket, the costs rise to an extra $230.80 per month for Part B (a 220 percent increase) and an extra $66.40 for Part D (roughly 75 percent)—equaling approximately $5,641.20 per person per year.² However, the more pressing concern is where these costs may eventually be heading.

Just recently, President Obama proposed that beginning in 2017, premiums for Medicare Parts B and D would increase by 15 percent. This proposal “…would maintain the same income threshold to determine who must pay higher premiums until 25 percent of Part B and D beneficiaries have to pay the premiums.”³

That 15 percent increase should be sufficient to motivate planners to take notice!

The expected cost for Part B in 2017 will be roughly $1,568 a year per person, or a 22 percent increase from 2013 (this figure aligns with a Medicare Board of Trustees 2012 report).⁴ At this rate, a 65-year-old couple living until age 85 can expect to incur a cost of $99,896 for just Part B premiums alone. If they happen to be in that upper 25 percent as specified by President Obama, they will pay $319,378, or an extra $10,974.10 a year for the exact same coverage. All of a sudden, these six-figure expenses don’t seem so insignificant.

These numbers are real, and our industry is slowly beginning to embrace this reality because this is an issue that every single client of ours is going to have to ultimately address. If we continue using our existing retirement planning models without incorporating health care expenses, the income solutions we provide could fall significantly short of our clients’ expectations. Simply hoping should never be a part of your client’s financial strategy.

Footnotes:

 1. www.webmd.com/health-insurance/medicare-part-d-prescription-drug-plans

 2. www.medicare.gov

 3. http://nbcpolitics.nbcnews.com/_news/2012/12/10/15824325-in-fiscal-bargaining-buzz-over-means-testing-grows-louder?lite

 4. http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/downloads/tr2012.pdf

The Brokerage Business Is Dynamic,The Potential For Success Unlimited

What do you find most exciting about the insurance business?

Kathy Carlson: Most of all, the camaraderie! Our industry has advanced over the past 25 years. The products we offer have improved, the means to apply for insurance have multiplied, the underwriting processes have progressed, and communications are instantaneous. While these changes in and of themselves are exciting, it is our propensity to share ideas and experiences with each other that has allowed the insurance industry to evolve in such positive ways.

I have established so many meaningful relationships and friendships. It’s uplifting to know the entire industry works together to continually improve in order to reach one common goal—that consumers get the best possible solutions for their needs.

William Cason: We have huge opportunities for writing more life insurance. All of the LIMRA surveys talk about how vastly underinsured and uninsured Americans are. Many people don’t have agents calling on them, perhaps an effect of the decline in home service agents. I think the use of technology and simplified applications/underwriting will help us reach the grossly underinsured as well as the often uninsured, middle market.

Michael Gorlick: Insurance, in its best form, is a creative process—combining one’s creative knowledge with a vast palette of products and resources—that is exciting and satisfying when it results in the best solution for a client’s important financial need. Being in the position to be “heard” regarding product development, product improvement and product distribution makes every day open to possibilities.

The brokerage marketplace is always dynamic. The sophistication of available products coupled with the depth of broker knowledge continues to grow. The markets we cater to will change dramatically over the next decade. I believe there is no better business to be in and the potential for success is truly unlimited.

On the producer front, the average brokerage producer is in his late fifties—in other words, an aging group of producers. However, we are seeing more business coming from independent broker/dealers, banks, and property and casualty firms. Providing back-office case management and marketing expertise to these groups, while exposing them to new lines of business, is where the brokerage industry’s future growth will be found. Exciting times lie ahead!

On the marketing front, a clear opportunity exists in the rapidly growing market for retirement products. The industry will be clearly defining its role in this large, fast-growing and profitable financial segment. According to LIMRA, over the next five years, nearly $1 trillion of retirement savings assets will enter the retail market.

Capitalizing on this emerging opportunity will require a better understanding of the needs of the customers approaching retirement as well as those customers already retired. Nearly one out of every two customers, age 55 to 80, expresses an interest in a guaranteed income product. This represents a market potential of nearly $250 billion, according to LIMRA.

There is no other industry that can guarantee lifetime income when it is needed most. Our industry is the only industry that can guarantee wealth transfer, income replacement, and income at any time. In an era when guarantees and security are so important to customers, we can play a starring role.

Mark Rosen: The insurance business may be thought of as staid and conservative, but it is really very dynamic with developments encompassing product changes, underwriting opportunities and sales ideas that relate to the current as well as anticipated tax environment. From the planner’s perspective, insurance provides a wide range of solutions to their clients’ needs from income replacement to business succession to retirement and tax planning.

What about the life insurance business keeps you up at night?

Cason: Not enough good training and an increase in the average age of the agent population. In years past, people went to work for career agency systems. Now everyone can sell life insurance, but apart from the mutual companies, no one focuses on it (money managers, financial planners, CPAs, banks, health insurance agents, senior market specialists, P&C agents, Internet marketing, etc.). As a result there are more and more Americans who are uninsured. While there has been a rise in worksite sales of life insurance, the usual results are that individuals are not being adequately insured, as no one is doing a needs analysis with them.

Training about the importance of cash-value products seems to be lacking. There are many agents who are caught up in the spreadsheet mentality (selling the cheapest product out there) instead of explaining and selling the value of products that might cost the consumer a bit extra but are a better fit.

I also worry that we don’t have enough young people entering the industry so distribution will look much different 10 to 15 years from now than it currently does. In addition to that, there are not enough advisors to sit down and do planning for people, so a large number of them either do not have life insurance or don’t have nearly enough.

Our country’s national debt is also somewhat concerning. As the government looks for alternative revenue sources, life insurance policies could get caught in the cross hairs. The possibility that we could lose the tax-favored treatment of cash value buildup in life insurance and also the tax-free status of the death benefit is a real possibility.

Gorlick: What keeps me up at night are the things that can’t be controlled—government regulations. We fought last year against fixed indexed annuities being regulated by the Securities and Exchange Commission and won. We constantly fight to retain the tax-free buildup in life insurance contracts. We are continually presented with new regulations describing how to conduct our business.

While I believe that government regulation is good when it truly protects the consumer, we appear to be constantly under attack as an industry. Was the financial meltdown in September of 2008 really caused by insurance carriers, as many in Congress would have you believe, or the failure of mortgage giants Fannie and Freddie (which, as of late February, received more than $150 billion in bailout funds with no end in sight)?

We know from LIMRA research that Americans in retirement have the following top four priorities: health care, inflation, volatility and longevity. We have strong consumer-friendly products—with guarantees—that can address every concern a customer may present. What other industry can provide all the financial solutions that individuals truly need?

We have products that will address health care (medical supplemental policies, traditional long term care, linked benefit life or annuities with LTC); inflation (a number of wealth transfer strategies); volatility (policies that absolutely guarantee tax-free benefits or other forms of payouts); and longevity (products that outlive the customer).

Nothing Wall Street offers has the guarantees and security that our industry can provide. It is interesting to note that the insurance industry is always regarded as being one rung below the upper tier of the financial services industry. Yet we can offer products for pennies on the dollar that can provide the solution that allows a family to be spared from financial devastation.

Rosen: I try not to let the things that I can’t control, like the pending legislative issues, keep me up at night. However, I certainly want to be aware and involved in the process and try to understand potential changes and their implications. So, at this stage of my career it isn’t so much the insurance business issues that cause me heartburn. Instead, many of the major issues and concerns revolve more around actually running a business such as staffing, technology, benefits, management and sales. While I am very proud of what our organization has accomplished, we have to work every day on the non-insurance aspects to keep things running right.

Carlson: I am concerned about the future. Where will brokerage general agencies fit into the marketplace in five years? As the insurance companies allow more direct contracts, from where will our business originate?

Another concern is that technology has changed consumer buying habits so they are more apt to gather information online. I observe so many agents focusing on selling insurance based on price quotes rather than uncovering their clients’ true needs. My fear is that the traditional relationship between agent and client is diminishing. Statistics from LIMRA show that the average household is underinsured. I’m eager to find a way to serve those potential customers.

Our core agent base is aging. Attracting new, younger agents must be a top priority for the industry.

What new product twists or legislation do you believe producers should be aware of?

Gorlick: On the annuity side: As more states adopt the NAIC model annuity suitability rule, each carrier must develop specific product training that must be completed before a producer can solicit any annuity business. Producers have been used to soliciting and then being appointed by the carrier; this will no longer work in many states, and producers need to be aware of this significant change in how they conduct business.

At Zenith Marketing, we track the state-specific regulations, which we constantly update. We are actively looking at creating our own four-hour CE approved course following NAIC guidelines. We are striving to make the annuity sale as easy as possible for our producers while providing them “real value” to help them grow their business.

On the life side: There is much to talk about because sometimes the easiest sale is the one that’s made instead of the challenging sale which may be more suitable.

For instance, product features such as return of premium riders on all products—including term—are under-presented. There are a multitude of valuable riders that should always be reviewed and considered. As an industry we have fallen in love with the spreadsheet. There is so much more we can do “beyond the spreadsheet!” Consider:

• In some situations, an individual life policy on the spouse is a better deal than survivorship universal life with one uninsurable.

• Sometimes 1035 money rolled into an immediate annuity can generate a net income that will purchase more insurance than the traditional 1035 exchange.

• Sometimes a term sale is the best solution instead of selling a “stripped down” universal life policy.

A professional insurance producer should know all the product options that are available and utilize his quiver of financial solutions and resources to present the best product for each client’s individual needs.

Rosen: Ask questions, understand your clients’ objectives, learn your product, including unique features and riders that can bring incredible value. Be sure to network and add value to every relationship. Also, recognize your primary role and then strategically partner for areas of the business that should not be allowed to sap your time and energy. These include shopping the market for underwriting and product support. There are brokerage agencies that have spent decades honing their expertise in these areas, and you can better serve your clientele by taking advantage of these resources.

Cason: There is potential for many business-owned policies to be written after implementation of the pension protection act that leaves policies subject to income taxation. Many agents don’t know about the law and many carriers don’t include a consent form with their application packet, therefore leaving many policies potentially exposed. Also, life/LTC hybrid products are very attractive.

What advice about building an insurance business do you have for producers?

Rosen: Ask questions, understand your clients’ objectives, learn your product, including unique features and riders that can bring incredible value. Be sure to network and add value to every relationship. Also, recognize your primary role and then strategically partner for areas of the business that should not be allowed to sap your time and energy. These include shopping the market for underwriting and product support. There are brokerage agencies that have spent decades honing their expertise in these areas, and you can better serve your clientele by taking advantage of these resources. [MR]

Carlson: Don’t just sell insurance, build relationships. Listen to your clients and ask the necessary questions, regardless of how difficult. Many agents are apprehensive about asking the personal questions essential to underwriting insurance—or afraid to return to their clients with undesirable news. Don’t walk away from the tough cases. Be up-front and honest. Build client relationships on trust and knowledge. Clients’ needs are always changing. If the relationship is there, you will have a client for life. And in turn, also gain additional potential for referral business. [KC]

Cason: Ask every client about life insurance. Brokers with multi-line agencies have a great opportunity to approach their clients about life insurance. Hiring the right support staff and investing in technology is also important. [WC]

Gorlick: If you as a producer “do the right thing,” you’ll be in business for a long time. And if that is your modus operandi, there is no better time to be a producer in this business. With current unstable economic events and changing demographics, the ability to provide guarantees, security and flexibility in the products we offer is unbeatable!

Producers need to partner with a brokerage general agency (BGA) that can get the business processed as quickly as possible with the least hassle, while achieving the desired result. They should leave that “back office” function to the expert—the BGA!

With one out of two households recognizing the need for more life insurance and 25 percent saying they are likely to buy in the next year, 2011 should be a banner year for the independent producer.

Undoubtedly the producer of tomorrow needs to be a generalist—providing a full variety of life, annuity, linked life/annuity with long term care, medical supplement, disability insurance, critical illness and traditional long term care solutions. Clearly, there are many different needs that must be addressed.

Consumers must understand that the government will not be able to provide an adequate safety net. Luckily, the insurance industry has the will and the way to protect their financial integrity. What a wonderful time to be in this business! [MG]