Richard Hellerich

“Those who cannot remember the past are condemned to repeat it.”—George Santayana

In late December congress passed the most sweeping overhaul of the tax system in over 30 years. That news, coupled with last year’s double-digit market gains and low volatility, has bolstered many Wall Street analysts to forecast the S&P 500 will reach 2,800+ by the end of 2018, and optimistically predict that the current bull market will become the longest in history in August of this year. As always, there are contrarians with more pessimistic outlooks. How should this news affect a conversation with your clients and prospects nearing retirement and protecting their accumulated gains earmarked for retirement? 

One only needs to recall the Tech bubble of the early 2000s, followed by the housing bubble/credit crisis of 2007-2009, and the impact on retirement savings and 401(k) balances. Thousands of people near or beginning retirement had their financial futures turned upside down, and many more were forced into retirement due to circumstances beyond their control. Older workers fortunate enough to continue earning a paycheck had the luxury of postponing retirement, while many others faced the dilemma of an unexpected, forced, retirement and having to tap their already beleaguered nest egg just to survive.

Add to this recipe the uncertain economic future of Social Security obligations, changing worker demographics to support it and the crush of Baby Boomers now entering retirement, and you begin to sense the economic impact the next market correction could have on aging Americans.

The FIA Value Proposition
Our older clients who have learned from history, or are at least wary of it, usually fit a more conservative risk profile when it comes to their retirement savings. For over 20 years the fixed indexed annuity has offered this basic value proposition: Upside interest crediting potential linked to gains in a market index with no direct exposure to downside market risk.

The value of this proposition is greatly magnified for those boomers nearing retirement who don’t have the luxury of a 10, 15 or 20+ year time horizon to recover market losses. For them, the ability to lock in and protect previously credited interest credits in exchange for a portion of the total market upside is an important and attractive benefit. Consider this simple example: If your investment suffered a 30 percent market loss in the first year, you would need a 43 percent gain in the following year to get back to your original account balance. While these kinds of losses and gains are extreme, ask any fixed annuity veteran who experienced the economic crisis of 2007-2009 if they helped prospects who suffered these kinds of losses in accounts exposed to market risk. Anyone remember the joke at that time, “My 401(k) is now a 201(k)?”

This protection from market loss is one of the greatest benefits of this unique annuity product. While fixed indexed annuity clients might experience a zero return year, they will never lose previously credited account value regardless of how the market performs. (A number of carriers provide great marketing pieces to illustrate this concept. Please contact me if you would like a copy.) We are all able to help our FIA clients cheer the market on to new heights since we would expect the various index-linked interest crediting options available to perform better in a rising bull market, but clients that experience a significant market decline appreciate the principal-protected safety of their investment from market risk. 

FIA Accumulation Features for Income Later
As mentioned earlier, the evolution of fixed indexed product design now spans more than 20 years. During that time new strategies for guaranteed income benefits have been developed to help consumers create more predictable retirement income streams. These income riders are offered with most of today’s FIA products and guarantee a lifetime income stream you can trigger at some point in the future. These riders grow (or “roll-up”) the income account value of the contract at a specified rate, usually between five and eight percent and lasting seven to 20 years. It is important to note that the value of this income account is only used to determine the value of income payments and not available as a lump sum.

Income riders can be useful planning tools in helping clients guarantee their desired monthly income goal. Based on the contractual guarantees of the rider, what is the least amount of premium required to help our client achieve their desired income level? Beware of the contractual provisions and crediting methodologies found in fixed income annuities and the various income riders. We have discovered, and can illustrate, that the highest roll-up percentage or longest roll-up period do not automatically generate the highest guaranteed income for the client. In fact, certain carriers/products seem to have performance “sweet-spots” depending on the client’s age, deferral period before income is taken, and joint or single income. This information is critical in finding the best solution to recommend for your client’s specific goals.

Accumulation for Potential Chronic Care Issues
The Social Security Administration reports that the average 65-year-old woman alive today can expect to live to age 85 and 65-year-old males to age 83. In addition, one in ten will live past age 95.  With this increase in longevity, clients should consider the impact chronic health issues could have on their financial security later in life. 

Unfortunately, many consumers with long term care policies have experienced frustration with increasing premiums, reduced benefits, and carriers that have left the marketplace. With the rising costs of medical care, self-insuring is an option only for the very affluent or those gambling that they will fall into the estimated 30 percent of the population that will avoid some kind of long term care need eventually. Are there any other options to protect financial stability and afford assistance in the event of a chronic care issue?

Annuities with chronic care riders that provide an enhanced benefit if you are unable to do two of the six ADLs (Activities of Daily Living) continue to gain popularity. Many times these riders feature a multiplier that doubles or triples the premium available in the event of a chronic care event. This means a $100,000 initial premium could amount to $200,000 to $300,000 available for qualifying health issues. If the client does not utilize the chronic care features, the annuity contract and premium still can provide income or estate planning benefits.

Our principal-protected insurance products continue to evolve and provide benefits, guarantees and flexibility that would amaze earlier generations of Americans. We still have 10,000 baby boomers reaching retirement age every day, needing assistance in protecting their financial futures. Make the decision that today is the best time ever to be in the senior market helping clients prepare for retirement—and have a phenomenal 2018!

What products are generating the most interest (and sales) from your producers?

Rich Hellerich:
With the strong market performance recently, we are seeing increased interest in our FIA products focused on accumulation. Producers have presented clients with the concept of locking in a portion of their current market gains utilizing a fixed indexed annuity. If the market continues to climb, they still enjoy market-linked index credits to their principal; if the market falls they have protected their gains made over the past several years. These FIAs offer strong accumulation potential with robust caps and participation rates.

Ron Lane:
Clients are looking for guarantees when purchasing annuity products. Our producers tend to have an older clientele and are selling Multi-Year Guaranteed Annuities.  Even in this low interest rate environment, conservative investors are happier with annuity returns compared to bank CDs. 

When it comes to indexed annuities, most of our producers are interested in upfront bonus products that make up for lower cap rates. When we analyzed our index producers, many have recently (last six months) switched to uncapped products due to the continued gains in the equity markets. Uncapped products offer better upside potential for gains and still protect the clients from market volatility. 

How concerned are you, and your producers, about the DOL Fiduciary Rule, and what steps are you taking to deal with it?

Rich Hellerich:
Like many others in our industry, we are concerned with the turmoil and expense this partisan regulation has brought on all of us; agents, marketing organizations and wholesale distribution, carriers and ultimately consumers.  I believe that producers have been subjected to fear-mongering from some organizations using the proposed rule to proselytize relationships and garner contracts.

Specifically answering your question, we are ready if the rule is implemented full force. We have taken action to assist our producers whether they are insurance-only, RIA/IAR, or Registered Representative. We have full access to Financial Institution status if needed, reinforced our relationships with existing securities platform relationships, and expanded our ability to serve producers that want to explore their options by becoming securities licensed. We have the producer covered, regardless of his or her sales platform.

We continue daily to follow the many articles and pontification regarding the Rule’s final form, implementation date, and total cost our organization will pay to comply. At present, I don’t believe anyone knows how this is going to finally play out. My guess is that PTE 84-24, or something similar, is here to stay.

Ron Lane:
Overall, our producers seem to have excellent relationships with their clients so disclosing additional information to them doesn’t make our agents uncomfortable. Our agents are mainly concerned with being compliant and making sure they can obtain the correct documentation for their carriers and personal files. Fairlane is making sure our representatives are versed on the DOL requirements when writing qualified business.  Our marketing staff maintains DOL materials as well as home office guidelines to help producers stay in compliance. 

As of this writing, the supporters of the Labor Department’s Fiduciary Rule are lamenting the newly proposed 18-month implementation delay, while opponents are saying the postponement is needed to give the agency time to review the rule. We’ll stay tuned for our producers.  

Living benefit riders continue to appeal to producers and clients.  What has been your experience with these and other lifetime benefit options?

Rich Hellerich:
Interest in this aspect of FIA contract options continues to escalate. While the vast majority of our FAI sales are focused on accumulation or guaranteed lifetime income solutions, we have a growing number of agents that are helping their clients face the prospect of a chronic care issue by putting part of their total premium into a FIA contract specifically for chronic care issues. These clients were adverse to uncertainy regarding long term care insurance options and liked the idea that if they didn’t need the coverage, the policy was now an additional backstop to their possible retirement income needs and financial security. 

In addition, concerns regarding the financial status of government programs such as Medicare will generate more interest in these riders. I believe we will witness tremendous growth in the sales of chronic care riders considering the continuing flood of retiring Baby Boomers as we move forward. Where else can consumers take advantage of a financial product and know exactly what their guaranteed benefit is with the opportunity for even better performance depending on the indexed returns? These new riders enhance an already compelling benefit presentation for today’s fixed indexed annuity producers!

Ron Lane:
Living benefit riders, particularly income riders, give our producers another chance to offer their clients the guarantees they are looking for. Offering a guaranteed income for life regardless of stock market performance and interest rate environment is a huge value-add to anyone’s retirement portfolio. This concept is a valuable supplement to social security and other investments that may not be as secure. Other living benefits, including nursing home waivers and terminal illness riders, are very valuable because they give clients peace of mind by having access to their money (and potentially an additional benefit) in the event of an unfortunate medical situation.  Many riders carry no additional costs and add yet another arrow to the agent’s quiver.  Consumers respond positively to the added benefits and many carriers have implemented these benefits at issue. 

From interest rates to product appeal and innovation, what is your forecast for the annuity business through 2018?

Rich Hellerich:
Innovation may well take a backseat to regulation. Thanks to the uncertainty created by the ambiguities and interpretation of the DOL Fiduciary Rule, and despite news at press time that the DOL itself has requested an extended delay in implementation, I believe any forecast must consider the possibility of further carrier announcements regarding compensation and product design.

Carriers, anticipating a January 1, 2018, effective date have been retooling product portfolios and are well down the road anticipating they would have to be ready by the end of this year. Millions of dollars and countless hours have been spent not only by the carriers, but additionally fixed annuity distribution channels on new CRM and financial analysis software, procedures, and systems to assist producers in this new era of government regulation. The question is, will carriers go ahead with these revamped or new products and adjusted commission structures, or maintain current designs not wanting to be the “first on the beach?” With the investment already made or committed, will AMOs go ahead with at least partial implementation of the strategies they have put in place? It will be interesting to watch this play out over the next 18 months.

In this era of continually suppressed interest rates, we have seen very positive producer and consumer reaction to fixed guaranteed rates north of 3.00 percent. FIA sales continue to be strong in our office despite the continued bull market.

The bottom line for producers, distribution channels and carriers is we have our own “bull market” in thousands of consumers nearing retirement that want the security of knowing they have created a retirement strategy that addresses guaranteed income, protection from possible chronic care issues, and protection from market downturns. For those agents paying attention to the regulatory, political and economic factors shaping our industry, and how they interact with their clients and prospects, my forecast is partly cloudy with a slight chance of rain, becoming sunny by year end. 

Ron Lane:
As we continue to push through this low interest rate environment, clients will still turn to annuity products for safety and peace of mind. They will ask for guarantees and conservative returns without being concerned about stock market volatility. Products with bonuses and riders guaranteed by insurance companies and fixed annuities with fair rates and living benefit options will prevail in 2018. 

We’re confident that interest rates will rise in 2018 or before year’s end. Our economy has been growing and the equity markets are more than stable. With higher rates, the markets could rebalance, forcing consumers to take some profits.  Fixed annuities will be more attractive as a warehouse for qualified monies.  If the DOL does postpone any changes until July 2019, the next two years should set sales records for the industry.    

Richard (Rich) Hellerich is the president of Great Plains Annuity & Life Marketing, Inc. He can be reached at Great Plains Annuity & Life Marketing, Inc., 10901 W. 84th Terrace, Suite 125, Lenexa, KS 66214. Telephone: 800-710-1115 Email: rich@gpam.biz. Website: www.­greatplainsannuity.com.

Ronald J. Lane, Sr., is president of Fairlane Financial Corp. He can be reached at Fairlane Financial Corp., 1200 South Pine Island Road, Suite 100, Fort Lauderdale, FL 33324. Telephone: 800-327-1460. Email: rjlane@888fairlane.com. 

Are we about to enter a rising interest rate environment after years of flat-line returns? Assuming we are headed to higher rates, how can we help conservative clients fearful of locking up principal long term if credited rates continue to rise? 

Federal Reserve Chair Janet Yellen’s recent announcement to expect three quarter-point interest rate hikes in 2017 could be good news for savers considering a fixed annuity purchase. We will have to wait and see how the economy responds to the new administration and if the Fed will really follow through on all three forecasted increases, but most financial pundits see rates rising in 2017. The 10-Year Treasury rate has moved from 1.88 percent on November 8, 2016, to 2.45 percent on January 3, 2017.

According to Bankrate.com, the average five-year CD rate is at 1.79 percent as of early January, 2017. Five–year MYGAs (Multi-Year Guaranteed Annuities) are currently available at credited rates ranging from 2.15 percent to 3.00 percent. 

Laddering concepts have been around for quite some time, frequently used with certificates of deposit or bonds. For our purposes here, a ladder is defined as a portfolio of bonds, CDs, or annuities with different maturity dates. Rather than purchase one large financial instrument with a single maturity date, the same principal is divided among several smaller purchases to minimize interest–rate risk and increase liquidity. 

Fixed annuities enjoy a distinct rate advantage over certificates of deposit today. While we can build annuity ladders in a number of ways, incorporating SPIAs, MYGAs and even FIAs, I will use a simple multi-year guaranteed annuity (MYGA) ladder to illustrate the concept. 

How Ladders Work
Yield ladders are a safe money yield enhancement technique based on the premise that yields tend to be higher as length of maturity increases. Laddering is designed to maximize yields without trying to guess where interest rates might go. 

Yield ladders are built by placing equal parts of the principal into the different maturities, or maturity buckets, so that you have a part of your money available to earn new rates or meet liquidity needs. In this example our goal following the third year is to have approximately one-third of the total asset value available to re-invest each year.

Let’s say we are working with a total of $150,000 of non-qualified premium. Although a yield ladder may be built using any number of contract guarantee periods, we will start with a three-year period and split the money into three equal parts using a three year, four year, and five year MYGA policy–placing $50,000 in each segment.  Our primary concerns are safety of principal and having periodic access to a portion our $150,000 asset.

As each of our MYGAs reach the end of their contract guarantee, we can push our tax-deferred earnings forward using a 1035 exchange to purchase a new policy. At the end of year three we have the option of replacing our initial three-year contract using that account balance to purchase a five-year MYGA. Using a 1035 exchange we can move our tax-deferred growth forward until we decide to access that annuity. This process is repeated at the end of year four using a 1035 to move the proceeds from the four-year contract into a new five-year MYGA.     

What Has Happened
By using laddering we are earning rates greater than the three-year rates on all of our money even though we have access to one-third of the growing asset each year. The power of laddering is it permits you to get the higher yields associated with longer terms while maintaining your liquidity. 

It is important to remember that by using fixed annuities we also enjoyed the advantages of tax-deferral and enjoyed protection from probate. You should also consider multiple carriers based on the crediting rate offered and specific carrier ratings and financials. 

Many people sacrifice yield by keeping money in short maturity instruments because they don’t want to miss out if rates rise. A yield ladder means you always have money coming due that will earn the new rate, and you will be able to take advantage of any yield curve benefits of the longer rate term. Even though I used a three year timetable with three annual buckets, a yield ladder may be any length and have any number of maturity buckets. The key to success is having the discipline to keep the ladder going. 

This is a very basic example of using annuity ladders to help your clients. You can also illustrate incredible guaranteed lifetime income solutions for clients combining FIAs, their social security and other financial assets using a laddering approach as well.

What changes do you foresee for carriers, wholesalers and brokers if the new DOL fiduciary guidelines remain unchanged?

John Douglass: The U.S. Department of Labor’s new proposed rules defining fiduciary investment advice is a huge issue for registered reps, broker/dealers and insurance representatives.  Broker/dealers are re-evaluating compliance rules for their reps.  Brokers with minimal production or only collecting trail income from a few clients not actively managed will be a liability and could receive a U-5 if the liability is considered too high.  I foresee E&O costs are likely to go up and these changes will force many brokers who are not active enough to justify the additional expense and liabilities to consider retirement.  To further complicate the situation, regarding insurance reps, each insurance company develops its own agent guidelines so each will approach the proposed rules differently.  

There are many troubling new regulations in the works in respect to the U.S. Department of Labor’s new set of proposed rules defining fiduciary investment advice, but one provision in particular opens the door for lawsuits involving brokers and firms.  [It does not allow the investment advice contract between the adviser and the retirement investor to provide for the retirement investor’s waiver of his right to bring a class action lawsuit in court to resolve disputes or to include any exculpatory provisions disclaiming or limiting the adviser’s liability for violation of the contract.] This is a troublesome new era we are entering.

I would like to mention the implications and predict the fallout of these regulations.  These regulations will be the final bullet to many brokers to give up security licenses and keep their life insurance licenses.  Let’s look at the positive implication—this will bring more brokers to the independent channel who will need help in addressing these new regulations.  We offer cost savings, along with the variety of product choices and assistance on applications.  We are ready to embrace the new guidelines and move on, offering attractive alternatives for many brokers to help them build their business.

Rich Hellerich: Based on numerous conference calls and meetings with home office management and distribution partners in our industry, I wish we all had a clearer picture of the changes the DOL Fiduciary Rule will bring to brokerage distribution if it goes into effect. I still cling to hope that one of the industry lawsuits that have been filed will result in the DOL being forced to comply with the appropriate analysis of the impact of this regulation on both the consumers they are purporting to protect and our industry in terms of ridiculous compliance expense and potential employment reduction. 

Hopefully, judges hearing suits filed challenging the Labor Department will find merit in arguments that:

• The rule is “impermissibly vague”;

• The DOL lacks statutory authority to redefine the  term ”fiduciary”;

• Advice to roll 401(k) assets to an IRA raises to the level of fiduciary recommendation;

• The definition of reasonable compensation is vague;

• Question the legality of FIAs being regulated under the Best Interest Contract Exemption (BICE);

• The rule creates a new “private right of action” which gives individuals/classes the ability to sue. This right can only be created by Congress (and was upheld in a 2001 Supreme Court decision: Alexander v. Sandoval).  

Your question states “if the fiduciary ‘guidelines’ remain unchanged” (I have inserted regulation since “guidelines” usually suggest participation is voluntary), so I will not spend time presenting a compelling argument that insurance products (fixed indexed annuities) regulated by state insurance departments are different from variable annuities and other securities investment options for qualified funds. Heaven knows many financial reporters have failed to understand the difference between fixed indexed and variable annuities for years. I wonder if there was any review of the number of consumer complaints regarding FIAs versus other financial products that come under this rule?

Based on the information I have presently here are some possible (probable?) outcomes I anticipate:

• This rule will create substantial unintended consequences in the fixed annuity marketplace for most annuity carriers, AMOs, and licensed producers since sales using qualified premiums are 50 percent or more of total sales.

• Carriers that do not become “Financial Institutions” may exit the fixed indexed annuity marketplace resulting in fewer product options and less competition to benefit the consumer.

• Heaped compensation is probably modified, with insurance-only agents expected to embrace and adapt to a new model of trail commissions.

• Because of the new costs of meeting this regulation on top of stringent annuity sale suitability review that went into effect January 1, 2012, many carriers may modify products and streamline their annuity portfolios (again reducing choice and benefits currently available to the public).

• If the DOL is allowed to create a new “private right of action” (consumer lawsuits) E&O premiums may rise dramatically.

• A possible scenario where “independent brokers” might ultimately be forced back into captive or PPGA distribution models with limited access to carriers and products. Due to the application of “financial institution” and “fiduciary” legal liabilities, I believe brokers could be limited to 2-4 carrier solutions rather than scores of carriers and products available today.  (By the way, I find this result ironic in that my broker’s ability to search the entire marketplace for my best insurance solution may come down to 2-4 options rather than the numerous solutions available today.)

• Safety-conscious consumers nearing retirement with only 401k/qualified accounts set aside for retirement will lose access to advisors and insurance products that help them understand and eliminate market-risk to their savings, move the longevity risk to the insurance carrier and provide them guarantees.  

No matter how well-intentioned this and other regulation is, we seem to always end up with more and more Federal bureaucratic control increasing the cost of the product or service, reducing product benefits and features, and resulting in hundreds if not thousands of new government jobs while harming the very people they were claiming to protect. The Patient Protection and Affordable Care Act comes to mind as an example. Seems to me that recent legislation, bills and other decrees are written that create the opposite outcome of how the regulation is named.           

Ron Lane: Wholesalers are planning to beef up their in-house underwriting departments.  If the DOL is able to implement their approved regulations, additional pre-underwriting steps will have to be taken before a qualified annuity case can be submitted to a home office.  Although most wholesalers already have compliance and suitability departments, if the DOL implements their approved regulations, many additional pre-underwriting steps will have to be taken before an annuity case can be submitted to a home office. 

Brokers will have to form alliances with broker/dealers if they don’t already possess them.  Many brokers have these relationships already, but have been reluctant to utilize them due to the resulting costs.  BDs usually mandate that new business goes through the “grid.” In that case, either the rep or the broker gets a haircut on the override commission. If the DOL is successful in implementing the new rules, carriers may not accept new business directly from a writing agent that isn’t represented by an up-line entity.  

Carriers will build stronger partitions between the producers and themselves.  I say this because, ultimately, insurance carriers are still responsible for the actions of their licensed representatives.  The carriers want/need layers between their writing agents and home offices.  Before a qualified annuity is approved, it first will have to go through more rigorous processes like double suitability and double compliance from the departments of the registered rep, RIA or bank to reduce the carriers’ liability.

Living benefit riders on indexed annuities have become a popular presentation tool. How have these income options changed the market place?

John Douglass: The annuity market had focused on accumulation versus income with the tax advantages they offer over traditional CDs or other investments.  The living benefit rider dramatically changed the focus to income.  The low interest rate environment, reduced cap rates, and market volatility has made this a strong talking point with retirees.  I see indexed annuities as another tool in the tool box, not the only focus.  The living benefit option can be oversold, and easy to do while offering a lot of attractive benefits.

Many agencies and companies have the attitude that an indexed annuity with a living benefit rider is the product you are going to sell and will tell you how to do it!  Obviously, these products have captured millions of dollars that will be with insurance companies for years into the future.  Think of sales future and building a block of business you control as your clients’ needs change.  A reminder, there are many options for obtaining future monies from annuities:  SPIAs; periodic withdrawals; or your clients may never need additional income.  A prudent broker puts his client’s objectives and needs first.  The fact finder interview with your client will determine their needs and where to begin the planning process to determine the product choice:  MYGA, SPIA, SPWL, or fixed index annuities to name a few, each offering unique benefits.  Your independent brokerage firm offers various product options with different durations, meeting different objectives, and can help diversify a portfolio to meet each client’s unique needs.

Rich Hellerich: I believe the presentation of these riders is popular because the fixed annuity marketplace has once again brought innovative solutions to meet the concerns consumers have when planning for a long retirement. Imagine you are sitting with a couple nearing retirement that asks the following three questions:

• What if one of us lives to be 95?

• What if one of us faces chronic care health issues?

• What if we die unexpectedly?

We can now offer our clients options to address their concerns with numerous solutions from excellent insurance carriers. Educating your prospects on the idea of maintaining control of their financial assets while addressing these concerns has to be rewarding! 

If recent industry and academic studies are correct regarding savings most pre-retirees have earmarked for their financial futures, what other products offer the flexibility, benefits and guarantees found in fixed and fixed indexed annuities? The ability for the same premium dollars to “multi-task” to provide this insurance, without the fear of paying premiums for coverage you may not need, is both appealing and popular.     

Ron Lane: The long term care side of the insurance market has been greatly affected by living benefit riders. It can be difficult for clients past a certain age to qualify for LTCI policies.  Generally, LTCI policies aren’t what they used to be when considering price versus benefits.  Many older consumers find that LTCI policies are “too little, too late” and don’t bother with a stand-alone policy. Annuities with living benefit riders can provide some peace of mind in lieu of one of these LTCI policies or to supplement them.  Although the riders don’t cover all the benefits of long term care entirely, they can certainly help.  Policies providing early access to monies in a time of need can help diminish the reluctance clients may have toward purchasing an annuity.  

We also see many producers offering annuity products with living benefit riders to older clients who want to earn something on their money but are afraid to lock it up in case of changes in their financial picture or changes in their health.  When a client is in a situation where they are worried about paying the high cost of long term care but seek a future income stream that could be doubled or even tripled, an indexed annuity with living benefit riders should fit nicely with their needs. 

The low interest rate environment is continuing. How can brokers address the topic with consumers while promoting annuities?  

John Douglass: The low interest environment has hurt a lot of investment options.  For the last eight years, we have had to deal with the uncertainty of interest rates.  Many annuity policies have maintained a 3.00 percent contractual minimum interest rate.  These strong guarantees have helped many investors keep a reasonable floor on their return.  Regarding sales of new policies, annuities compete strongly with other products experiencing the same historically low rates.  We have been very strong in attracting money market funds and bank CD monies offering competitive interest rates for 1-10 years.  We continue to watch for existing annuities that are dropping to low guaranteed rates, providing the broker an opportunity to improve the interest rate with a new product sale.  The sales remain strong, mainly to an older market and the increase to age 90 issue ages has helped.  Risk of market fluctuation and loss of principal is a scary thought for fixed annuity potential buyers, making guaranteed annuities an attractive alternative.  The guarantees that fixed annuities can offer are reassuring product choices for many investors.  An alternative sales tip is to be aware of other product ideas, like the very popular SPWL with new living benefit riders.  

Rich Hellerich: Take back control of our currency from the Federal Reserve? No, that’s not likely.

I believe the answer lies in first evaluating the client’s risk profile and reviewing their other financial options compared to fixed/fixed indexed annuities. The second aspect is addressing the differences, benefits and guarantees of annuities when compared to other financial vehicles. 

For the conservative saver, current rates of return on CDs make many multi-year guaranteed annuities (MYGAs) attractive provided they understand the specifics of the annuity contract, any available liquidity features and potential surrender charges on early withdrawals. That combined with techniques like yield laddering into longer maturity annuities can increase overall returns.

More aggressive savers can recognize the value proposition of a fixed indexed annuity that guarantees no losses to principal due to stock market declines and a better–than-average chance to earn better–than-average interest credits over the life of the contract.

We may be stuck in this low rate environment for years to come, so agents need to be working with a production partner that can help them effectively present this message and educate their prospects.   

78 million new Americans were born between 1946 and 1964. Known as the baby boomers, this generation fueled the rapid expansion of the U.S. economy over the past 40 years. In 2006, the first set of baby boomers reached age 60, with more than 3.6 million boomers set to turn 60 each year after that for the next 18 years (through 2024).

Compared to how their parents and grandparents defined retirement, today’s boomers are not “settlers”. For many of this generation, they plan to be more active than any previous retirement generation. Many are opting to live in their own homes with the help of West PACE. They are living longer, adopting healthier lifestyles. Study after study cites boomers’ desires to pursue hobbies, travel and volunteering opportunities delayed during their working years. While our product marketing materials show the happy boomer couple walking the beach or boarding the cruise ship, I fear many boomers are uneasy with the knowledge they are not financially prepared to enter the retirement phase of their lives. Having big goals and aims for retirement also comes at a price of needing to save more and being financially prepared for what life throws at you. Many retired people hope to live life to the full, such as being a part of an active adult community in Utah (or wherever they might be based) – which ultimately comes at a price! Although the thought of it is very exciting, it’s important for those about to retire to keep on top of their financial information.

Chart 1 from the LIMRA Secure Retirement Institute1 depicts only 50 percent of older boomers (born 1946-1955) have amassed $100,000 or more in retirement savings. For trailing edge boomers (born 1956-1964) only 43 percent have $100,000 or more in retirement savings. Those of you active in the senior market know that clients with a $100,000 nest egg, combined with a moderate social security benefit, are facing a bleak retirement future. While we can present them with insurance products that offer some amazing benefits, these clients are faced with the prospect of continuing to work past retirement age, lowering their expected standard of living, or dying early to avoid outliving their assets.

Based on these numbers, a recently introduced insurance company commercial depicting a couple avoiding Retirement planning is spot on! The humorous couple outdo each other with ridiculous reasons why they are too busy to discuss their retirement future. For those of us in the business of helping our clients reach their retirement goals, the humor fades quickly.

Chart 1 points to the immense educational effort that our industry should be undertaking and the opportunity for our carriers and producers to help consumers make informed choices and take responsibility for their retirement future. Those with less than $100,000 saved for retirement had better hope they can continue employment if they have any desire to maintain their lifestyle, and that may be a problem for Gen Xers and Millennials standing in line for those positions. Millennials are also going to need our help based on an article posted March 29 by USA TODAY with the headline: “Millennials’ New Retirement Number? $1.8 million (or more!)” The article stated that the youngest boomers, born in 1964, would need $1.3 million in retirement assets. The amount for Gen Xers was $1.6 million and $1.8 million for Millennials. The article also assumed a seven percent growth rate on investments…anyone want to take that bet based on a consistent seven percent return based on recent history?

Having established the need and immense opportunity to serve this market (DOL rules notwithstanding), how do we get their attention to focus on making a viable retirement plan?

Education-A Critical Disconnect:
Are boomers disconnected from present financial realities and the security of their nest eggs? Google “boomer retirement” on the internet and over 500,000 results will be generated. Within this sea of information are studies citing more than a third of boomers believe that Social Security will be their primary source of retirement income. The Social Security Administration notes that old age benefits are designed to cover approximately 40 percent of salary and not be a primary source of income. In addition, unless Social Security funding issues are addressed, there is a very real possibility that future benefits will be reduced. Here are some common sense issues every boomer should be considering:

I’m responsible for my own retirement.

I may well spend 25-30+ years in retirement.

What if I lose my job before I want to retire?

How will I pay future health care costs?

Social Security solvency concerns me.

Would a 30+ percent loss in my 401(k) change my plans?

A U.S. News article this past February cited recent Urban Institute studies noting how boomers are changing the traditional retirement model. The article stated that traditional pension plans covered 30-40 percent of adults born in the 1940s and 1950s, but are expected to cover only 11 percent of those born in the 1980s. To overcome their lack of retirement savings many boomers plan to work past retirement age. This will allow for higher Social Security income benefits when they do retire, and reduce the assets needed to cover the income gap between retirement expenses and their Social Security payout. Delaying retirement will also help finance the cost of increased life expectancy and attendant health care costs.

Because boomers are such a diverse demographic, you might want to consider employment status in addition to age range. Many boomer prospects intending to work past normal retirement age, for health insurance benefits and to bolster their retirement nest eggs, may find great appeal in opportunities to safely grow and protect savings generated in their later years.

Retirement 101
Once your prospects have shared their goals and dreams for their retirement, you can help them create their personal retirement text book with the completion of a thorough financial fact-finder. Caution: If you launch into the features and benefits found in most product sales literature prior to completing this step, your sale is probably dead (or should be). How can you possibly recommend a product solution without understanding the overall financial situation? The more detailed your fact-finding process, the more likely you will succeed in offering viable solutions your clients can utilize and appreciate. You need a tool that captures a focused snapshot of the prospect’s current financial situation to expose potential retirement risks and how those risks might be mitigated.

The results of this process also helps your case development partner at your annuity marketing organization (AMO) to find the best product solutions to present and can be an immense assist in suitability review once your case arrives at the insurance carrier’s new business department. Ask your AMO for help in finding a quality fact-finder that addresses risk tolerance, potential health issues and income generation in addition to the obvious information needed.

Our value proposition is a simple one. We market insurance products. We show clients how they can transfer some of their risk of outliving their savings and protect loved ones if they die prematurely. Our prudent clients insure their homes and automobiles, so the concept of protecting their retirement future should not be difficult to embrace. After years of helping my own clients, I believe the issues (and your presentation) simply boil down to the following:

Risk tolerance

Income generation

Health concerns

They may not pin-point these concerns as clearly as the bullet points above, but these are the three biggest fears I have consistently addressed over the years.

Risk Tolerance:
Remember the recessions of 2001 and 2008-2009? Nearly $7 trillion in shareholder wealth was wiped out, and resulted in financial catastrophe for many of those nearing retirement. While waiting for a market recovery may be acceptable if you are in your 30s or 40s, it is quite another issue of you are within a few years of leaving the workforce. This recession also witnessed many older workers faced with unemployment. Illuminating the concept of risk tolerance to help your prospect determine his personal comfort level is one of the most important conversations you can have during your fact-finding session. Your fact-finder should effectively present the concept of risk tolerance and help your prospect determine his risk comfort level…think Rule of 100 with a conservative, moderate and aggressive mindset.

Boomer Health Issues:
One of the most important issues to address is potential chronic care issues that could derail what appears to be a sound retirement plan. If your prospect has dealt with a parent, family member or acquaintance that has faced chronic care expenses in retirement, he will be appreciative of planning for this “what if” scenario for himself and his spouse. The combination of boomers living longer and soaring health care costs point to demand for care facilities and professions that may well outstrip supply. Brokers need to have a frank discussion of how prospects intend to deal with this risk. Fortunately, the recently introduced chronic care riders and living benefits features found in many fixed indexed annuities may be a valuable asset worthy of your client’s consideration.

Income Generation:
We need to understand and appreciate that most our clients who have done a great job of accumulating retirement assets have not really thought out how to convert those assets to a lifetime income stream. Your fact-finder should inventory all available income assets. Common sense says we start with a review of the prospect’s Social Security earnings, coordinated with their spouse, to maximize those benefits. There are many great software solutions available to agents today that can assist in this effort. I also suggest that you consider additional education regarding Social Security benefits to better serve your clients. The training firm we work with has educated hundreds of agents to better assist clients trying to navigate the SSA to enjoy the optimum Social Security benefits they have earned.

This leads you to a discussion of how to span the income gap between Social Security benefits and their monthly and annual financial needs. You will want to pay attention to potential tax ramifications of not only Social Security, but other qualified assets as well when structuring income streams.

If you serve the senior market and help create guaranteed lifetime income for your clients, what better solutions exist than fixed annuities and fixed indexed annuities with income rider benefits? Again, your AMO can assist with case development solutions to create a tailored fit for your clients. Work with your AMO to think outside the box, and resist the temptation to always offer just one or two solutions because you are comfortable with the product(s). Your client does not care about the product near as much as trusting the individual and carrier offering the solutions to his concerns!

You have the ability to help clients overcome their health and longevity financial concerns with the guarantees and “peace of mind” only insurance product solutions offer, and there is no shortage of folks that need your help.

Footnote:
1. http://www.limra.com/uploadedFiles/limra.com/LIMRA_Root/Posts/PR/_Media/PDFs/Generation%20chart.pdf

JohnDouglass, President, Annuities Exchange

Richard Hellerich, President, Great Plains Annuity & Life Marketing

Ron Lane, President, Fairlane Financial Corporation

Q: In what innovative ways can brokers use annuities to increase sales and better serve their clients?

John Douglass: Serving our clients is key, and annuities have done an excellent job! Since 2008, when financial markets were going into recession, we have experienced many things—bank money markets paying next to nothing, mutual funds, variable annuities, and stocks taking major hits. Even the American standby, your home, was experiencing dropping values, and yet in this same market you see annuities excel! Multi-year guaranteed annuities (MYGAs) guaranteed interest rates of 2 to 5 percent provide peace of mind to policyholders. We have point-to-point cap rates that paid 6 percent and continue with no reductions, even after being issued a few years ago. Every month we receive copies of single premium immediate annuity (SPIA) statements showing payments continuing to be unaffected by the current economic woes. Last, while unsecured investments left the investor taking all the risk, insurance state guarantee funds, in most states, have doubled protection levels. Annuities have done their job of providing guaranteed income streams to thousands of retirees. As annuity brokers, we have delivered while other investments faltered. My point in all this is that the best way to increase sales is to tell the story of the successes to your prospective clients as to how annuities can be used in innovative ways to balance portfolios, limit risk exposure and provide income streams. Tell your own success stories! Annuities deliver guaranteed financial rewards well into the future!

Richard Hellerich: 1: Work every day to become the recognized local expert on fixed annuities. If you strive to reach that goal you will ultimately have more referrals than you can handle. Successful brokers know that while access to carriers, product and commissions is widely available, it is important to partner with a competent annuity marketing organization (AMO). Look for an experienced annuity marketing specialist to partner with who can provide advanced case development, product education and sales concepts.

 2: Consumers are looking for education, not a sales pitch. If you have a website, consider providing financial calculators and education on the use of annuities and income planning. Many of the top annuity carriers have quality consumer marketing tools such as videos, point-of-sale materials, white papers, and third-party materials to help you educate your clients and make more sales. Some of the best annuity concepts have been around for a while and withstood the test of time. Examples of these include the split annuity concept, laddered annuity concept and annuity-life arbitrage. If you are not familiar with these concepts, ask your AMO for assistance.

 3: Ask your prospects/clients to invite their adult children to the planning/sales presentations. We know an agent enjoying tremendous results with the children becoming her clients and generating additional quality business. When the clients’ children (usually in their late 40s to early 60s) witness first-hand the effort and expertise that went into their parents’ plans, they often ask to schedule an appointment to discuss their own situation. Though she never asked for them, this agent has also received referrals from the children to their friends. The children frequently share their experiences with their friends and co-workers, resulting in additional “painless” referral opportunities created by raving client fans. This has not only generated some terrific annuity and long term income planning cases, but substantial life cases as well.

Ron Lane: Seniors can benefit greatly from being able to leave money to their grandchildren for college or other living expenses through gifting. Where else can a loving grandparent purchase something today and know that at some future date a monthly monetary gift will be delivered to their grandchild’s door. An annuity can serve as a lasting reminder of a grandparent’s love.

Q: What are the best ways to utilize annuities in a rising interest rate environment?

Hellerich: Interest rate risk is a serious concern for many investors looking for a safe return on their money, especially those on fixed income. However, an even greater risk is staying on the sidelines too long.

Approximately seven years ago we believed we were at all-time low interest rates, and many clients were scared to lock up their money in a 5-year MYGA for fear that interest rates would soon increase and they would be stuck with a low rate. Hindsight is always 20/20, and had the clients known interest rates would continue to decline, they might have taken advantage of that “low” rate at the time they were offered it.

For some clients the answer may be “diversify,” but this advice is applicable only for those clients who have actually accumulated enough financial assets to enjoy the luxury of diversification. According to an Insured Retirement Institute (IRI) study1 released earlier this year, only 19 percent of boomers have $250,000 or more saved for retirement, and four in 10 reported having no savings for retirement. Assuming these numbers are accurate, 81 percent of boomers need help with a retirement savings plan, and I would place low interest rates way down their list of potential retirement problems. Seeing that 40 percent have no savings for retirement speaks volumes for both the lack of financial education in America and the severity of our economic issues.

Fixed and fixed indexed annuities can deliver real value to the appropriate clients regardless of the interest rate scenario. These clients are conservative, safety-conscious savers who value downside protection and upside potential. The opportunity is right in front of you—and according to the IRI study I cited, millions of prospects need our help to put the retirement savings they have managed to accumulate on a secure footing now.

Lane: Wow. What a concept: a rising interest rate environment! In the event interest rates increase more than a quarter point, and the U.S. Treasury yield also has a significant increase, it would be time to visit with all of the dormant policyholders who have been sitting patiently on the sidelines. Many life and health advisors sold fixed annuities years ago with 3 percent minimum rate guarantees. Their clients will soon be clamoring for higher rates of return.

One may ask whether it would be prudent for clients to exchange annuities that are out of their existing surrender periods for higher interest rates. Advisors may find that clients in this situation have kept funds deferred for reasons too numerous to mention. We think it would be prudent to review those old annuity policies to update beneficiaries, ownerships (trusts) and, ultimately, the overall plans for the monies. We think a percentage of policyholders would be enamored with higher rates of return. Advisors can’t know until they ask.

Douglass: The flexibility of annuities to adjust to rising interest rates is best reflected in the ability to set durations currently from 3 to 10 years and utilize the income riders to be turned on when needed at the optimum time. The MYGA products have increased liquidity to up to 15 percent, and some plans offer cumulative withdrawals up to 50 percent. The ability to reposition without penalties as rates rise is crucial. We want to be able to catch the wave of rising interest rates, reward our clients and generate new sales.

Q: How do you best position annuities with an aging client base?

Lane: Advisors can be successful reminding their clients that an annuity is simply a warehouse for monies. Dollars allocated to annuities may be thought of as a hedge against other investment losses. It’s like money in the bank, except at a significantly higher interest rate.

Older investors relish the fact that they can place a percentage of their wealth in tax deferred products and be guaranteed safety of principle. At their stage of life they are acutely aware of the importance of prudent investment safety. Agents should recommend that aging clients keep their investment horizons short (about 5-7 years). The successful advisor should position annuities as an interim place for growth and, if needed, future income streams.

Douglass: Annuities are an excellent vehicle for older clients. We have annuities that issue through age 90, even 100! The annuity market caters to seniors at a time when guarantees and flexibility are needed. Bank CDs and mutual funds are vehicles to hold monies, but annuities are king on payouts and lifetime income options. I feel it is important to note how complicated investing has become. As brokers, dealing with older clients especially, it is important to know that your clients understand the product—for their protection as well as yours. How will they explain or provide information to other family members if they do not understand the products? Annuities can provide a solution.

Hellerich: You could easily devote an entire issue of Broker World to this question!

Fixed and fixed indexed annuities can be an appropriate cornerstone for many financial plans. Experienced annuity agents also know when to suggest that clients take advantage of the various fixed annuity types, including immediate, multi-year guarantee, fixed indexed and deferred income, depending on the specific planning situation.

Here is a short list of fixed annuity benefits to discuss with clients:

 • Minimum guarantees

 • Safety from market losses

 • Guaranteed lifetime income options

 • Flexible payout options

 • Tax-advantaged growth

 • Competitive rates compared to CDs or savings accounts

 • Estate planning benefits

 • Living benefits for chronic care and wealth transfer

In addition, astute brokers are familiar with utilizing annuities for a number of concept sales such as laddering income planning, split-annuity and annuity-life arbitrage. Annuities offer a tremendous amount of planning solutions and flexibility when properly applied.

Always be prospecting for premium such as:

 • Existing under-performing annuity contracts out of surrender

 • Savings dollars inappropriately exposed to potential market loss

 • CDs and savings accounts with little or no interest credit

 • Required minimum distributions (RMDs) that could be repositioned into a single premium life (SPL) policy

Your annuity marketing organization and advisor should be helping you master these concepts and how to recognize potential opportunities to help your clients.

Q: How significant is the impact of increased emphasis on­ living benefits for the industry and the clients your ­brokers serve?

Douglass: Living benefits is a great tool promoted by brokers as the Swiss army knife of annuities—able to provide multiple benefits. Let me say it has dominated the market because insurance companies hope to control the monies long term, and the higher commissions make them attractive to sell. Remember, MYGA products often designed with options such as bonuses, cumulative withdrawals and Medicare coverage are just as significant. Though they do not get as much attention, our sales of MYGAs continue to be strong.

There are many unique uses for annuities. Two that are gaining increased popularity are pension funding and deferred income SPIAs. Annuities are a fantastic pension funding vehicle for professionals and small employers. Deferred SPIAs allow guaranteed payouts of future benefits. Annuities, as I mentioned, have served clients well, providing guarantees and flexibility in many product designs for accumulation or payouts.

Hellerich: Living benefits, including guaranteed lifetime withdrawals, chronic care and enhanced death benefits have created new annuity sales opportunities that didn’t exist prior to their introduction almost 10 years ago. For the brokers we serve, active in the income planning arena, these benefits have captured the attention of prospects looking for additional protection and flexibility for potential “what-ifs” that could derail their retirement planning.

Carrier competition and continuing improvement of these benefits provide consumers with valuable planning options and the ability for their premium to multi-task, offering financial protection for enhanced guaranteed income, potential chronic health issues and death benefits.

Broker education is critical! Allowing a client to think that a guaranteed 7 percent guaranteed lifetime withdrawal benefit (GLWB) roll-up rate is credited to account value may close the sale, but belies what is really happening. While a chronic care rider can provide significant financial assistance in the right circumstance, it does not automatically eliminate the value of traditional long term care coverage. These benefits have expanded the topics to cover during the planning phase, but clients must be thoroughly and accurately educated on how these benefits work.

There is no “silver bullet” annuity that works for every client, and navigating the growing number of riders available can become a full time job. Brokers need to thoroughly understand these enhanced benefits and recognize when to suggest their use for the appropriate client(s). An experienced and knowledgeable annuity marketing advisor can help you with education, selection and best use of these riders for your clients’ needs.

Are we working with a client who is only concerned with purchasing a safe accumulation product offering a better than average chance for a better than average return, or a client focused on guaranteed income with potential health and wealth transfer benefits? The broker should be absolutely confident regarding which client he is serving, and offer appropriate solutions based on the client’s primary goals.

Living benefits have been a tremendous positive for fixed indexed annuity sales, with valuable additional protection and benefits for the right clients.

Lane: Many of our advisors are showing the guaranteed lifetime withdrawal benefit (GLWB) on their proposals. The future living benefits attribute is attractive to today’s middle-aged clients because they like the idea of having an income stream they can never outlive while still having some control over their investment.

For the industry, however, the living benefits can be a double-edged sword. Policies enjoy better persistency when clients understand that they can convert their deferred annuities into future income streams—and that they are being charged for that feature. This low lapse rate helps carriers profit during the deferral periods and the payout phases of their policies.

The other edge of the sword cuts out any future repositioning of GLWB policies to other carriers. Advisors find it difficult to offer alternative annuity products to clients after their policies’ deferral periods have ended. The jury is still out as to whether the living benefits have been a blessing or a curse for 1035 business. Probably the latter!

Q: How can brokers help clients moving from the accumulation phase to the distri­bution phase?

Hellerich: Our job is to help our clients enjoy a worry-free retirement. Traditional retirement transitions are rare. Clients working continuously 45-50 years, getting a gold watch and then sitting on the porch are mostly a thing of the past. With the economic volatility of the past 15 years, the new normal is helping clients who are dealing with their own unique transition, by force or by choice. Some are still working today because the 2008 market crash decimated their retirement assets. Some were forced into early retirement by unexpected termination or downsizing, some due to unforeseen health issues, and the lucky ones actually planned their retirement date or left their job to turn a hobby or avocation into a new career. These unique situations create unique solutions based on the client’s financial situation, expectations and reality.

The best way to prepare clients is to start planning and discussing this transition well before it occurs. In a perfect world we would help clients start envisioning their retirement goals at least 10 years out. This gives us time to explore the “what-ifs” of continued employment, potential health issues and economic forecasting. The further out we start the planning process and consistently update our goals, the greater our ability to react and navigate the threats to our financial security.

Obvious concerns today include:

 • Longevity—outliving savings

 • Affordable health care

 • Financial impact of chronic illness

 • Social Security viability

 • Exposure to market losses just prior to retirement

 • Federal deficits

 • Planning ignorance

No wonder many clients have an uneasy feeling about tapping their nest egg or lack confidence in the hope of enjoying a secure retirement someday.

The distribution phase strategy that works best is a well balanced retirement plan. This strategy involves working with the client to break this down to three components: need based planning, luxury based planning and legacy based planning.

 a) Need based planning: This part of the strategy covers the income that is required, such as mortgage payments, car payments, insurance premiums, food, clothing, etc.

 b) Luxury based planning: This part covers the income that is wanted to take vacations, give gifts to kids, charitable donations, etc.

 c) Legacy based planning: This part covers the remainder of the assets and what the clients want to have happen after they have passed.

This planning is one of the most important services you can provide. You bring real value to your clients by helping them understand how far their current savings will take them and discussing the best distribution methods for their situations. I suggest that guarantees and benefits offered by fixed and fixed indexed annuities should be included in that discussion. Look for assistance from a quality annuity marketing organization that can help you create and present the best solutions for a secure retirement and reliable lifetime income. [RH]

Lane: Clients should be shown how to take a portion of their deferred annuities and enact a partial annuitization. This keeps some of the funds deferred and lets some of the money turn into an income stream. Most annuity policy provisions permit partial annuitization after some deferral period. Advisors who do annual asset reviews should be able to identify annuities that can be converted to their distribution phase. [RL]

Douglass: The best way to assist clients transitioning from the accumulation phase to the distribution phase, going into retirement or from a death, is to provide options. Annuities, more than any other vehicle, shine in the unique variety of product and payout options. This is a great opportunity for an agent to show his knowledge in the review of product choices and strengths of each, review of cost basis, tax status, length of benefits, etc. Each annuity type brings different talking points—for example, systematic withdrawals from a SPIA or an income rider, or periodic withdrawals from a MYGA. A good example: We recently saved a client a huge tax bill. The husband died, and his widow was ready to take a lump sum disbursement from an $800,000 IRA account. The broker set up an extended payout benefit, spreading taxes and benefiting the family. In summary, whether turning income on for retirement or receiving death proceeds, the payout phase shows the strength of annuities and stresses the need for an agent’s expertise. [JD]

Footnote:

 1. http://irionline.org/newsroom/newsroom-­detail-view/boomers-confidence-in-secure-retirement-sinks-to-five-year-low

Are we selling fixed indexed annuities (FIAs) correctly? I question those advisors who may find selling lifetime income benefit riders (LIBR) easier than presenting the total value proposition of the FIA. In light of current lower interest rates, higher spreads and reduced caps and participation rates in today’s financial environment, are roll-up rates the focus of the sales presentation?

If this premise is correct I encourage annuity agents to consider the following:

 • What was the client’s financial purpose (income or accumulation)?

 • What was the cost of the benefit riders against potential accumulation value?

 • Does your client have the resources and flexibility to react to future financial changes/opportunities?

Despite persistent low interest rates and the recent bull market. FIAs have enjoyed an incredible run in recent years. Industry sales research from LIMRA and WINK report the continued growth of the FIA segment of the annuity market. Do these sales trends indicate consumers are finally realizing the FIA value proposition of “interest credits linked to the performance of stock market indices, with protection from market downside losses”?

Many Americans’ 401(k) account balances were decimated in 2001 and 2008. Many of those nearing retirement or ready to retire were forced to keep working because of their account’s exposure to market losses and no option inside their plan to protect their nest egg. It is not surprising that many of these safety-conscious savers would find FIAs an attractive financial solution.

While I believe FIAs have been a tremendous innovation to both consumers nearing retirement and our industry, my concern is some policyholders are confused between the actual interest credits applied to their policy’s account value and LIBR roll-up rates of 5 to 8 percent.

Despite media and competitor claims that “fixed indexed annuities are a complex choice” for the consumer, I believe most experienced agents and brokers who offer FIAs are able to present the product’s value proposition fairly and effectively. My concern is focused on two distinct points:

 • Allowing the consumer to believe the 5 to 8 percent income benefit rider credit (only available for lifetime income) is applied to account value to overcome low crediting and base rates.

 • Selling the income rider to clients more concerned with an opportunity for safe accumulation rather than lifetime income.

Like most revolutionary insurance products, FIAs have evolved into a wide array of interest crediting methods (point-to-point, monthly average, performance triggered, etc.). Another area of growth is the number of indices that are now available compared to 1995 when the S&P dominated early generations of FIAs (Dow, Lehman Brothers, Russell, foreign market, et al.). Let’s add in caps, spreads, and participation rate to determining the interest that will be credited to the contract and an inexperienced agent may have a challenge in helping prospects understand how this wonderful product works.

Note that nothing changed with the original value proposition: the opportunity to participate in market-linked gains without exposure to market losses. Many agents simply got lost trying to present the latest, greatest crediting method/market index subjected to a cap, spread or participation rate. This is where struggling agents quickly discovered the value of their annuity marketing organization (AMO) or brokerage general agency (BGA) in providing them real education and tools to set client expectations rather than an inflated, unrealistic illustration.

LIBRs and GLBs

Around 2005 the first income benefit riders were introduced to the FIA market. These riders are also known as guaranteed withdrawal benefit riders (GWBRs), and other carrier-eccentric rider terms exist. (Is it just me, or do you ever wish all the home office attorneys would get together and determine common and singular terms for the same items?)

This was, and is, an exciting concept—the ability to purchase FIAs with lifetime income guaranteed regardless of how long the policyholder lives. These riders provide a separate, income-only account growing around 5 to 8 percent annually while in deferral, and the client can choose when to turn the income benefit on, and in some instances, off. Recently, additional guaranteed living benefits like chronic care and enhanced death benefit have been introduced. Are agents defaulting to the “multi-tasking” benefits of these features rather than determining if the client’s goals and desires were focused on safely building accumulation?

What’s the Answer?

Depending on each client’s unique financial situation, an FIA replete with a full array of guaranteed lifetime benefits (GLBs) may be an appropriate solution. But with GLB election rates hovering around 70 percent, are these benefits being oversold?

In completing the fact-finding process with the prospect nearing retirement, we should have learned the following information:

 • What are their financial concerns for the future?

 • What are their current financial assets and liabilities?

 • What other concerns exist? (Health, legacy, etc.)

 • What is their risk tolerance?

From this interview you craft your proposal. I see your opportunity to be that of providing the best solutions possible for the least amount of premium. Rather than simply offering one FIA with a premium bonus and additional income, chronic health and death benefits, this may include considering multiple product solutions to meet your prospects’ needs and goals. Pay close attention to and respect your prospects’ concerns regarding risk tolerance, accumulation goals and income needs. Also consider that premium correctly placed in a FIA with LIBR is rarely, if ever, appropriate for replacement. This makes the selection of the best available FIA/LIBR solution even more important to you and your prospect.

Other possible solutions may include laddering multiple products including single premium immediate annuities (SPIAs) and multi-year guarantee annuities (MYGAs) that give your client more flexibility in the future and the ability to create multiple or increasing income streams. If accumulation is the primary goal, the client should not suffer reduced credited interest with the cost of unnecessary riders, and there are excellent accumulation products available for safety-minded consumers.

Sharing this information with your AMO or BGA for a case-development conversation can bring great value to both you and your client. Work with partners who offer suggestions and solutions focused on you and your client’s best interests. Few agents can keep up with the plethora of carriers and product solutions available in today’s annuity marketplace. Your annuity production partner should be able to quickly pinpoint both the best accumulation and lifetime income products based on your case information. Also, be open to listening to your AMO/BGA marketing specialist regarding carriers or products that better fit your prospect’s situation when appropriate. If you are constantly hearing a “one-size-fits-all” solution from your marketing resource, you should consider getting a second opinion. 

John Douglass,  President, Annuities Exchange

Richard Hellerich,  President, Great Plains Annuity & Life Marketing

Q: What annuity products are most attractive in today’s marketplace?

John Douglass: A lot of new features and improvements being added to existing product lines are the current topics of discussion. Annuities offer the versatility of lifetime income, confinement benefits, and new allocation options to name a few. The annuity today is “not your father’s Oldsmobile,” as the car ads said. Today’s annuities are fresh, innovative products to cover life issues that retirees are facing—from the accumulation phase to income needs during retirement to cover ultra-high nursing home costs. I like the new indexed products, but watch cap renewal rate histories to be sure clients receive fair treatment in the future. Unfortunately, not all companies are providing competitive renewal caps, so be watchful. Multi-year guaranteed annuities (MYGAs) remain very popular relative to the low CD and money market rates. Advice with MYGAs is to watch for interest rate specials to get your client a good deal when available. Lastly, immediate annuities, which should be called income annuities because of the ability to defer the start date into the future, remain hot. For conservative clients worried about today’s uncertainties, there is nothing like an income annuity’s guaranteed check in the mailbox every month.

Rich Hellerich: Determining what annuity products are most attractive in today’s marketplace depends on a number of variables: individual prospect’s age, risk tolerance, financial situation and future goals. Matching the right annuity solution(s) to the right client can be challenging for agents and brokers, given the plethora of available products. I wonder how many income riders are sold on fixed indexed annuity (FIA) contracts where the client really was only concerned about avoiding market risk and guaranteed accumulation.

The additional challenge of the low interest rate environment has been with us for some time, but for risk-averse clients the contractual guarantees found in fixed or fixed indexed annuity products may provide just the peace of mind they are seeking for protecting their retirement savings from market risk. Risk-averse clients are well aware of the impact 2000 and 2008 had on their 401(k) balances. There is plenty of media ink being spread regarding the potential of another significant market downturn in the near future.

Agents who truly listen to their prospects’ retirement accumulation and income concerns have a wider array of arrows available in today’s annuity product quiver than ever before. I believe the key to helping agents convert prospects into clients is partnering with an annuity brokerage firm with a qualified, experienced annuity marketing specialist. When the agent has an effective back-office champion and partner to assist with case development and interfacing with the home office, they better serve their clients and are better informed regarding industry developments and up-to-the-minute product information. I see this arrangement work to the benefit of all parties every day.

Q: What annuity sales ideas do you offer brokers to increase their ability to serve clients well?

Hellerich: You could devote an entire issue of Broker World to this topic. I will focus my response on sales ideas rather than lead generation, which are interchangeable terms for many annuity agents.

 • Listen to your client. Ask questions, shut up and listen. What is the express purpose for the financial assets in question? What are your prospect’s financial concerns? Over the past 30 years I have witnessed some agents approaching every annuity sale with their product “hammer-du-jour” and treating every prospect like a nail needing to be beaten into submission. Don’t use a bulldozer when a shovel is called for, and be aware of buyer cues and signals indicating additional financial products may be called for to best serve the need.

 • Educate yourself. Continue to expand your knowledge of annuity topics including tax issues and how they relate to the needs of your clients. Products and riders are continually changing, and being up to date on the current offerings can only serve to better you and your clients. Also, if you are adept at explaining how your solutions will resolve the client’s needs and/or goals, your referral base is bound to increase!

 • Educate your client. Fixed and fixed indexed annuities do not sell themselves. I believe it is fair to say there is much to do in better educating those nearing retirement. There is rarely a product that matches all of the client’s requirements for retirement, but with proper planning and coordination with your client you can ladder several products to create a comprehensive plan. I have seen this type of planning develop lasting client relationships, with the producer’s name being top of mind when their friends or colleagues are looking for advice.

Douglass: The annuity sales idea that is the easiest and most often overlooked is staying in touch with your client base, i.e., the annual review, quarterly portfolio updates, and newsletters. For example, offer a new product idea every three months to encourage callbacks for information on addressing current concerns. The old saying is true: The best new clients are your existing ones! Be innovative! Re-invent yourself to adjust to market trends. We have many unique niche products popular today.

Q: What income options do you like best, and why?

Douglass: Income options is a huge topic to promote with clients. Clients have no idea of the variety and tax treatment of income payouts. Review the options with your clients, such as annual withdrawals, annuitization and lifetime income payouts triggered from rollups. The advantages and taxes of all should be discussed.

Hellerich: “The question isn’t at what age I want to retire, it’s at what income.” George Foreman

With the variety of income options available in today’s market, it really comes down to which one suits your client’s needs/goals. Trying to match a client with a product depends on a number of factors: When does the client want income? How much does he need? Are beneficiaries a primary focus? etc. Clients also need to understand the importance of planning timing and product options that can help combat future inflation. Answers to each of these questions lead to a different product requiring lots of research on the part of the producer. Fortunately, there are many tools available today that allow the producer to compare different income options based on the client’s specific situation. These tools allow the producer to put the decision back into the hands of the client, which is where it belongs.

Q: In what ways can annuities play a part in long term care planning today?

Hellerich: The introduction of chronic care riders in some annuity contracts allows policyholders to consider having their retirement savings dollars “multi-task” within an annuity contract offering such a benefit. This feature may alleviate the “use it or lose it” concerns of paying LTCI premiums, or supplement an existing LTCI policy if needed. Most of these chronic care options do not require extensive underwriting, opening these benefits to clients who might not qualify for traditional LTCI policies. Clients who are healthy and qualify should consider qualified, underwritten combination annuity/LTCI products with the annuity LTC rider providing benefits that may be tax-free if used for LTC needs.

Douglass: Long term care is a huge concern for seniors, and the industry has shut down many products for lack of the ability to price them for benefits in the future. I like the simple approach of a base annuity with increased benefits for long term care up to three times the value. The client receives current value and future benefits, unlike a policy that may or may not be in force in the future or even utilized at all. Every time I listen to seminars on these products I am excited, because they make so much sense in today’s uncertain health care market.

Q: What annuity riders do you think fill consumer needs well, and why?

Douglass: Selling annuities is a specialty, and it is annuity riders that illustrate that very well. For example, we offer a la carte annuities, where we can design a custom annuity with the riders a client wants and eliminate the ones he doesn’t, squeezing all the interest we can out of the contract for the benefit of the client. If you don’t need a withdrawal rider, don’t pay for it. If you’re competing against a bank CD, match it benefit for benefit, eliminating costs in exchange for increasing yield! Let the client design his own annuity. He will feel you really understand his needs when you give him a custom designed product.

Hellerich: A majority of the time the rider that provides the highest amount of income for the least amount of premium is the one that works the best. However, there are situations in which the client needs a bucket of money to provide multiple benefits. This is where an experienced annuity advisor can help a producer find the right product, or series of products, to help the client make the best decision. There are some riders that provide greater income within a few years of issue; others are better after many years of deferral. When considering the overall retirement plan, a careful selection that matches as many of the goals as possible is the one that fills the customer’s needs.

Q: What advantages and disadvantages of variable versus traditional fixed annuities should a broker be well able to discuss with clients and prospects?

Hellerich: If the broker is having any in-depth client discussions regarding the merits of fixed vs. variable annuities, he needs to have the appropriate securities license(s). That said, the prospect needs to understand these basic but major differences, with the assumption that both contracts are held to the length of contract terms:

Investment risk. With a fixed annuity, the insurance company assumes any market or investment risk in exchange for a guaranteed minimum or contractual return on your premium. Variable annuities transfer this investment risk to the contract owner and returns or losses will be based on the underlying investments the client has selected. Simply stated, the traditional fixed annuity offers a guaranteed fixed return, whereas the variable annuity may result in a higher return or lose principal, depending on the level of investment risk the investor (client) accepted. With the volatility of the market, are you comfortable assuming more risk in exchange for the opportunity of an enhanced return?

Fees. With most traditional fixed annuities, 100 percent of premium goes to work for the client’s contractually guaranteed rate of interest. Clients and prospects considering a variable annuity purchase need to completely understand the cost of fees built into the contract, along with their investment risk. A significant portion of gains can be lost to fees inside a variable contract.

Douglass: I feel there is a place for both equity based variable annuities and guaranteed fixed annuities. It comes down to objectives and suitability, to use the FINRA language. Is the client in accumulation mode, or younger? Does the client like the ability to move allocations depending on the market, or is the client older and more conservative, wanting guarantees? Brokers make the mistake of being on one side or the other in regard to products. The top brokers promote both! The brokerage houses do brokers a disservice because fixed annuities don’t fit well on their sales platforms, so they don’t encourage the brokers to sell them. However, the needs of the client should dictate product. The broker who sells both variable and fixed annuities has a major edge, especially with an aging client base and an increased need for income options.

Q: The hot topic seems to be product innovation, with all of the combo and living benefit riders. The problem is that while these products are similar, they are different enough that producers must take great care in choosing the proper one for their clients. What suggestions do you have for producers about this dilemma?

John Douglass: Watching benefit riders develop has been very interesting. Initially they were very popular as part of variable annuities, and they have transcended into being the number one driver on indexed annuities. These riders have positives and negatives.

The positives are guaranteed income, impressive roll-ups even in hard times, and now the added death benefit, confinement benefits, etc.—all in one product. The negatives would be the increasing fees, lowering roll-up interest rates, and loss of liquidity to completely exit a contract in the future.

If there is anything guaranteed in this world, it is that these current products have a shelf life that will expire, and the next generation will then be introduced. Look how much the products have changed in just the last five years. Agents selling these riders will be dealing with customer service centers to make sure that promises made at the point-of-sale will be delivered at a point in the future—in some cases 10 years out. This could be a slippery slope for many insurance brokers when they make promises to clients at the point-of-sale and need to deliver in the long term when the client “turns on” the benefits.

I am concerned with the income rider benefits’ projections. I do not find a lot of detail regarding actual guaranteed benefits in the sales materials, which is common in the insurance industry today. [JD]

Rich Hellerich: One of the best educational resources agents and financial advisors should rely on is their independent marketing organization (IMO). I believe you are correct in suggesting that “the devil is in the details” regarding subtle and not-so-subtle differences in features, benefits and charges found in these new product offerings. With the multitude of carriers and recent product launches, it is impossible for a busy producer to stay abreast of all the developments and changes in the market, and their IMO annuity marketing specialist should be their first source of information to assist with addressing client needs and offering appropriate case solutions. Another benefit in working with their IMO should be the education in how to properly position these new benefit enhancements for the prospect. This is a great opportunity for producers to discuss the financial impact a chronic care issue might have on a prospect’s retirement nest egg, and how any available death benefits work to the advantage of the spouse and heirs. Such a conversation will greatly assist agents in educating their prospects on these issues and in improving thorough fact-finding to determine appropriate and suitable solutions. Depending on the specific client situation, the solutions may be to offer traditional LTC or life insurance products in addition to, or rather than, a combo product.

The introduction of these new products gives quality producers the opportunity to provide greater value to clients and prospects while helping them create a financial plan that addresses the “what-ifs” of retirement. In addition to access to guaranteed lifetime income, clients can access these additional benefits and flexibility with chronic care protection and enhanced death benefits with the appropriate fixed indexed annuity (FIA).

The bottom line is to not be a product pusher, offering all prospects the same product solution. Take advantage of the assistance and expertise of your annuity and life marketing resources! [RH]

Ron Lane: Let’s quickly review annuity product design during the last several years. To gain or keep market share, actuaries tweaked fixed annuity products to compensate for low interest rates. Each carrier was forced to keep up with the others by offering their tweaks along the same lines. Insurance producers found it harder to differentiate products due to the number of carriers adding guaranteed lifetime withdrawal benefits, long term care waivers and enhanced life insurance benefits.

Product actuaries knew there were only 100 pennies in a dollar and that every additional policy attribute would cost something—either a percentage of the gain for each year or lower caps. Of course all annuity products must be balanced to generate value for the client, compensation for the producer and profit for the carrier. These consumer-centric annuities with additional attributes usually offered less compensation to the producer or lower cap rates for the client.

Before agents can suggest or recommend annuities with their various benefits (and various costs), they must ascertain their clients’ short and long term goals. Agents need not offer GLWB riders to clients who are using their fixed annuity as a warehouse for money which they intend to pass to a loved one at death.

In most cases, when explaining income riders to interested clients, agents should first focus on the payout percentage before going over the roll-up rate. The agent should always discuss and determine an appropriate deferral period for the client. It is also important to discuss the rider cost and to provide illustrations for a target date which show how the income account will grow over time. Roll-up rates, payout factors and additional comparative information is available through numerous websites.

Agents should determine each client’s investment temperament. Some clients will be worried about outliving their funds; they may be more receptive to purchasing income riders. Other clients may only be interested in deferring their accounts and leaving an inheritance for loved ones. In those cases, there are some excellent death benefit riders that can almost double the death benefit if paid out over a period of time.

To maintain good relationships, agents should arrange annual follow-up meetings with clients to review their statements. These meetings remind clients of the value annuities play in their retirement portfolios. They can also uncover new situations that may lead to changes in policies, and generate additional purchases or referrals. [RL]

Q: Now that the market appears to be starting to turn around, what do you see in the future for indexed annuities?

Hellerich: I would ask if the market is really starting to turn around and what are the odds of long term gains and improvement? What is the primary source of monies coming into the market today, and is this growth sustainable given other realities in our economy? Regardless of your answers to these questions, we can still make a great case for considering FIAs in preparing a sound retirement financial plan!

Some obvious benefits of traditional fixed annuities, subject to holding the contract to term and specific policy provisions, include:

 •  Guarantee of principal (safety)

 •  Guaranteed minimum growth

 •  Tax-deferral (triple compounding)

 •  Guaranteed lifetime income options

 •  Liquidity

 •  Estate planning benefits (probate)

In addition, we know FIAs offer the potential of market-linked growth without exposure to market risk. In this low interest rate environment, a policyowner enjoys all the benefits of a traditional fixed annuity plus the potential of higher credited interest to the contract without risking principal! Add the multiple indexing strategies found in most FIA contracts, plus the option of a declared fixed-interest credit, and you have a guaranteed insurance product that every baby boomer should be acquainted with when developing their financial strategy for retirement. Also consider the FIA for clients desiring a guaranteed amount of lifetime income benefits with riders offering roll-up rates of 4 to 6 percent or more for purposes of income.

Can you think of a better financial vehicle to offer safety-conscious consumers approaching retirement with today’s uncertain economic climate?

We are bullish on fixed indexed annuities. With 10,000 baby boomers turning 65 every day (and another 10,000 turning 64, 63, 62, etc.) there has never been a better time to present the FIA value proposition. In addition, fewer agents are entering the marketplace, so existing producers who embrace educating prospects on the FIA value proposition should flourish. [RH]

Lane: The market turnaround may be coming to a close with the presumption of higher interest rates around the corner. As I draft this response, 10-year Treasury notes are yielding 2.69 percent. Now let’s compare that to a record low of 1.379 percent on July 25, 2012. 

I think we will see higher interest rates in the future and that usually coincides with market decline. With higher interest rates, lackluster fixed annuities will regain their glow. However, I do not feel that minimum guaranteed interest rates will ever return to the 3 percent or higher rates of yesteryear. That provision almost destroyed some insurance carriers when interest rates hit rock bottom a few years ago.

Conversely, if we assume that the markets will continue to increase, indexed annuities should be made more attractive than they are today. It’s really about carriers being able to make their spreads while still offering consumers viable annuity products. The industry needs to find ways to simplify indexed annuities so that more agents will feel comfortable offering them to clients.

I have to admit, there are so many ways of crediting interest, charging for riders, and dealing with hundreds of other indexed annuity nuances that I even get lost sometimes—and I work with this all day, every day. I can only imagine what insurance professionals must go through when they are also offering life, health, disability, LTC, P&C…you get the point. [RL]

Douglass: What do I see in terms of the future for annuities? Red-hot! We have seen a jump in the cap rates on indexed products. It has been a resounding echo that the market is coming alive. As these cap rates go higher and as more brokers sell products, it shows that the economy is starting to turn around. I look forward to higher cap rates and better product features, and I think the indexed world is going to thrive—perhaps not as strong as when we first introduced them in the 1990s—but we’re coming back!

Multi-year guaranteed annuity rates are also increasing to higher interest yields on shorter durations. I expect a very strong 2014.

Brokers should contract now and get product suitability training up-to-date and be ready as rates rise. Since many brokers may have lost their company appointments due to inactivity, they must act now to be ready for the next sale. Better days are coming fast! [JD]

Q: We were all surprised at the conviction of Glenn Neasham for wrongfully selling an annuity to an 83-year-od woman. Do you believe that this conviction is fair? Has this situation influenced your business? If so, how? What long term ramifications do you believe this situation will have on future annuity sales to senior citizens?

John Douglass: Unbelievable! The con­viction of Glenn Neasham has literally rocked the insurance industry. Since news of this conviction hit the Internet and was covered in national publications, many agents continue to be afraid and unsure of how to proceed. The devastating effect that this conviction has had on Mr. Neasham’s career and family is horrendous. He is like many other agents, and I think that is why it hits home so hard. We all feel any one of us could be in this same situation.

He worked hard, he was successful, and he was caught in a conflict of litigation and regulations gone wrong. I want to quickly get to the point of who I feel is at fault: the legal system, state insurance departments and the insurance companies that we represent.

All of us are quick to focus on an over-aggressive prosecutor or the state strapped for cash, looking for any dollar it can get at anyone’s expense. Yet what is very sad is that state insurance commissioners’ offices no longer feel they have to support insurance agents—whether it is in the state of California, or anywhere else in the United States. Today, as individual agents, we stand alone.

The only good thing to come out of this situation is that it has created an awareness of these issues. If it had not been so absurdly ridiculous that Glenn Neasham was prosecuted, many situations, not quite as severe, may continue to go totally unnoticed.

Let’s not leave the companies we represent out of the blame. In our own agency, we have experienced ridiculous situations where insurance companies, without even a phone call to the brokers to hear their side, have reversed cases that have been on the books for up to two years and charged back commissions to avoid any legal conflicts. Our outrage regarding these insurance companies’ reversals has been totally ignored. Our disapproval of new compliance procedures falls on deaf ears. The answer to our complaints has been met with more compliance requirements from some companies!

An agent meets a brick wall when questioning any compliance form. Insurance companies will not question any of their compliance procedures, and the only option for an agent is to fall in line and swallow it. Frequently the response from the insurance com­panies is, “If you don’t like it, don’t do business with us.”

Quite frankly, my answer is that I hope these insurance companies feel the impact in lost business and brokers. If they don’t care about their insurance agents’ concerns, why should we care about them? Unfortunately, companies feel no agent or agency is worth putting themselves in conflict with regulators.

There needs to be more understanding of what it takes to be in the trenches, trying to write a piece of business and filling out a dozen pages of compliance information (that in many cases is to the point of ridiculousness). I object…as hard as I possibly can! If this is the way it is going to continue, there will no longer be any agents left to write annuities or life insurance contracts. The insurance companies can sit on their pile of cash and hopefully find some place to invest it, because the agents will not be there to write new business.

It was not always this way. Our national organizations stuck up for us. We had representation in the form of national lobby groups. I felt being a member of a national insurance group meant something. I am so disappointed right now with our insurance lobbyists in the way that they have allowed the federal government to walk all over us.

This is a serious time in the insurance industry. Is the agent system going to survive? Will agents feel comfortable writing a case without being worried about being sued?

I hope this Glenn Neasham case is a wake-up call to the insurance industry as a whole. It is time that brokers and companies get together and, working with legislators and regulators, start challenging these injustices, rather than lying back and letting insurance agents like Glenn Neasham take the fall.

In summary, I stand 100 percent behind the agent who is working hard to prospect and develop cases, despite being overburdened by unnecessary paperwork regarding suitability. Yet I am afraid that because of this case we are going to have to put in place a cognitive testing program to make sure people are mentally capable—which will be just one more hurdle for agents.

If a case is placed, are we going to be questioning whether a company is going to come back and take our commissions away a year or two later (well past any free-look period) when our client decides he no longer likes the product he bought?

Are we to just have an open checkbook for the insurance companies to come in and take the commissions back just because they do not want to fight or defend us?

Will we get a new dose of compliance regulations for cognitive testing?

Will the regulators go unchecked? Let’s hope not…then we can actually spend our time selling! [JD]

Rich Hellerich: Without first-hand information and full knowledge of the particulars of this case, saying Glenn Neasham’s conviction was fair or unfair is at best speculation. Did the client appear lucid and understand what she was purchasing? Why was the specific product recommended, and did it meet the expressed needs and desires of the client?

I believe the punishment is severe when you consider the product was approved by the state insurance department, issued to age 85, and processed by the issuing insurance carrier with no apparent problems.

My question is: Why was this case not in the jurisdiction of the state insurance department? There was no evidence of actual theft of the client’s premium and, in fact, it is reported the client received her original premium plus interest.

This situation calls attention to the extra care that should be taken when making an annuity recommendation to any client older than age 80. The need to completely document all aspects of what the sale is intending to accomplish is obvious, and I believe that, when possible, the prospect’s adult child(ren) or an heir should be included in all presentations to ensure everyone is on the same page. Who better than a family member or someone with an intimate knowledge of a prospect’s behavior to be present if there are concerns regarding dementia or mental capacity?

We have several brokers who always try to include at least one adult child in the fact-finding and sales sessions with older clients, and this often results in additional business from the children regarding their own retirement assets and planning. When they experience the expertise and effort put forth for the benefit of their parent(s), asking that same advisor for help with their planning is the frequent result. Annuity professionals who always strive to do right by their clients will have no shortage of referrals.

The influence and ramifications of this case and fallout from the SEC’s attempt to regulate FIA sales practices continues to evolve. As the baby boomers flood the retirement landscape, we anticipate more issues with trying to recognize a prospect’s potential cognitive impairment and what the agent’s role will be in that effort.

My concern is that this could become a “slippery slope” at point-of-sale in requiring the writing agent to be accountable for determining the client’s mental capacity. It is one thing when a lack of mental capability is obvious and quite another when the prospect is capable of hiding the issue.

If someone can hide his condition from a trained medical professional, what will be required of the agent to determine mental impairment at point-of-sale? Will each carrier have its own standard as we see today on financial suitability issues?

We have witnessed some financial suitability standards that, frankly, seem to be a moving target. Carriers that are not communicating their standards or are applying one set of standards for all clients, regardless of issue age, have become more of a challenge this year. While we appreciate and understand the carrier’s need to avoid obvious market conduct problems, we have also seen some decisions using the “blanket” approach mentioned above rather than common sense and honoring the client’s desire for long term protection of assets earmarked for their retirement. [RH]

Ron Lane: Speaking as a licensed insurance professional for 36 years, I do not believe that Mr. Neasham should have been convicted of felony theft by a jury of his peers. He did not appropriate funds from the 83-year-old client’s insurance policies for his personal use, nor did he induce the client to loan or give him any monies. However, I do wholeheartedly believe he used poor judgment in the type of annuity he offered to this elderly client.

In my opinion, it would have been more prudent for the California Insurance Commissioner to contact the insurance carrier that issued the annuity policy to discern whether this “senior case” was properly underwritten. During a case review, if the carrier found that the owner lacked the proper mental capacity to enter into a contract, they could have cancelled the agent’s licensing appointment, charged him back the commissions and/or ultimately petitioned the California Insurance Department to impose an agent fine.

The Neasham case may affect all insurance professionals psychologically—we can only hope in a positive way. Regardless of how methodically annuity products are presented to seniors, insurance professionals can never assume consumers are processing all of that information. The prospect needs to be questioned throughout the sales process to verify that he understands the policy provisions being offered.

Field underwriting by an agent can only go so far. I would also recommend that insurance carriers stay more ivolved in the underwriting process for seniors. In the future, signed forms and financial data may not be enough to discern whether a person has the capacity to understand all of the complicated provisions of an annuity contract. [RL]

Q: What do you consider to be the best new product or product enhancement that you are recommending to brokers? Is there a product or product enhancement not currently available that you would like to see introduced?

Hellerich: Any producer active in the fixed annuity market should agree that up until the introduction of guaranteed lifetime withdrawal benefits (GLWBs), referred to as income riders generically, fixed annuities were primarily a vehicle by which to transfer assets to heirs. With the market losses of 2008, many consumers who had saved diligently for retirement were left with half those savings, with the prospect that their retirement date would move well into the future. Current volatility in the stock market, consumer fears regarding the economy, and the long term viability of Social Security have moved income planning and the strategic decumulation of retirement assets to center stage. Consumers worried about outliving their assets now enjoy more planning options and control with GLWBs versus the purchase of a single premium immediate annuity.

In this low interest rate environment, secondary benefits and/or riders have become additional options for consumers to consider in making their purchasing decisions. We are experiencing tremendous response from brokers with two key benefits—chronic care and enhanced death benefit riders.

The advent of chronic care benefits within some annuity (or life) policies provide the opportunity for a conversation every broker should have with his prospect—if only to avoid a potential E&O claim. We know many consumers have the attitude that LTC is too expensive, or that they will pay for a benefit they will never use, despite industry statistics and the articles published in Broker World on this topic.

When clients decide to self-insure for possible LTC health issues without grasping the financial catastrophe such planning can wreak on their savings, children or heirs can be quick to ask if such coverage was presented.

While chronic care benefits are not always a replacement for such coverage, they can provide consumers a tremendous option with the coverage they do provide. This is especially true when the decision comes down to rising premium costs for a consumer’s current LTC coverage, a “use it or lose it” mindset regarding LTC premiums, or a simple lack of assets available to purchase LTC, even though they want the coverage. This rider offers the ability to augment existing coverage that may be in place to help control premium outlays, avoids the belief that the premium was wasted in the event such coverage was not needed, and provides peace-of-mind for those who might not be able to afford such coverage otherwise.

Again, we believe this approach is an excellent way for the annuity broker to protect himself from a possible inquiry as to why chronic care or LTC benefits were not part of the sales discussion with the client. Such a conversation may well be as important as the client’s liquid assets when reviewing suitability of the sale and avoiding a potential E&O claim.

Another feature recently introduced with some annuity contracts is enhanced death benefits for beneficiaries. This provides clients—especially those utilizing laddered income planning—comfort in knowing that an enhanced death benefit is available to their beneficiaries in excess of the premium until the guaranteed income begins. This is an important feature to policyholders concerned with access to guaranteed lifetime income benefits, but enhanced family wealth transfer value in the event of death.

I imagine that there may well be a number of new annuity products with additional secondary benefits to benefit consumers, but I don’t anticipate many new annuity products in the near future. We work in an industry known for innovation and fast response with product and benefits to meet consumer needs, but given our current interest rate and economic reality, we need to understand that carriers face difficult challenges today in pricing annuity products, making their necessary investment spread, and managing the resulting strain on reserves. This point is brought home with a review of recent interest and option rate credits, and we have begun to see some commission reductions in the marketplace.

One way to address this might be an “à la carte” fixed indexed annuity. Comparable to a multi-year guarantee (MYGA), the base product offers the best credited interest rate and option budget. Clients can select the benefits most important to them, such as guaranteed lifetime income, liquidity benefits, enhanced death benefit, etc. I would see this product on a longer term chassis, perhaps 10 year. With this timeframe, carriers would have more room in pricing, push better crediting rate opportunities to clients, and address suitability issues. Knowing the success some MYGA products have enjoyed with this à la carte concept, this might be worth a look, utilizing a fixed indexed annuity frame.

With the annuity products we do have available today, challenges with evolving suitability review and the economic concerns for the client, carrier and agent, I believe it is now more important than ever that brokers find and take advantage of a solid partnership with an annuity marketing organization (AMO). A broker needs to evaluate such a relationship on the AMO’s ability to truly offer independent advice and case development that best serves the broker and his client, enhances the broker’s relationship with the annuity carrier, and keeps the broker informed on ever-changing market/product conditions. [RH]

Lane: There aren’t many new product enhancements in the annuity arena. Guaranteed minimum withdrawal benefit riders are still in vogue, as are some of the long term care riders. It is so difficult in today’s investment climate for carriers to earn decent spreads; thus, they aren’t working on many new product ideas.

I like bailout provisions and return of premium features in annuity products. I know they cost basis points, but consumers still rally around the perceived value of these benefits.

Somewhere down the road we may see a selection process in annuity products that permit a policyholder to elect various benefit riders at issue, such as accidental death benefits, double indemnity, LTC, bailouts, return of premium, GMWBs with inflation riders, annuitization bonuses, cumulative withdrawals and annual completion benefits that guard against mass disintermediation when rates increase. [RL]

Douglass: Unfortunately the trend in this low interest rate environment is for insurance companies to withdraw products or increase prices. The agent is taking the hit for the current economic policies, which are forcing this low interest rate environment on consumers.

Until interest rate markets return to normalcy, it is going to be interesting to see how the insurance companies are able to produce a profit and how agents are going to have competitive products to sell.

Let’s hope that in the coming months we will see some major changes in economic policies despite who is in office. We need to return to a market where there is a reasonable profit for companies and consumers—where competitive interest rates are paid, giving some relief to seniors and other consumers who need our products. [JD]

John Douglass is principal of Annuities Exchange/Financial Products Corp. He can be reached at Annuities Exchange, 2600 North Mayfair Road, Suite 1190, Milwaukee, WI 63226. Telephone: 800-572-7283. Website: www.annuitiesexchange.com.

Richard (Rich) Hellerich is the principal of Great Plains Annuity & Life Marketing, Inc. He can be reached at Great Plains Annuity & Life Marketing, Inc., 11900 West 87th Street, Suite 115, Lenexa, KS 66215. Email: rich@gpam.biz. Website: www.­greatplainsannuity.com.

Ronald J. Lane, Sr., is president of Fairlane Financial Corp. He can be reached at Fairlane Financial Corp., 1200 South Pine Island Road, Suite 100, Fort Lauderdale, FL 33324. Telephone: 800-327-1460. Email: rjlane@888fairlane.com.