Thursday, March 28, 2024

To Switch To Level Funding, Or Not To Switch To Level Funding, That Is The Question

Level-funded plans offer a strategic blend of employer-sponsored health coverage, combining the predictability of fully insured plans with the economic benefits of self-funding. These innovative plans allow employers to set a fixed monthly payment to a carrier, which can help simplify the budgeting and financial planning process. The monthly fee covers estimated costs for expected claims, administrative costs, and stop-loss insurance, which limits the total annual losses for self-funded plans.

Level-funding was previously only used as a strategy for larger corporations but has expanded to become an accessible option for businesses as small as two lives, including startups and small companies. This evolution allows brokers to educate their clients on the advantages of level funding, showcasing it as a forward-thinking choice for managing healthcare costs effectively. It also unlocks the potential for businesses of all sizes to benefit from a model that was once out of reach.

Who Should Consider Level-Funding
Level funding is ideal for all types of small and mid-size businesses that find traditional, fully insured plans cost-prohibitive but still want to offer health benefits. These businesses seek more control over their healthcare costs, preferring a predictable, fixed monthly payment that helps with financial planning. Level funding is also attractive for companies that value transparency and want to see where their healthcare dollars are going. For those not quite ready to transition to an entirely self-funded plan but still want some advantages, level funding is a middle ground offering both cost savings and predictable expenses.

Benefits of Level-Funding
Unlike self-funded plans, the cost of a level-funded plan is consistent from month to month, creating more stability in financial planning for the year. At the end of the plan year, carriers make adjustments based on whether the total claims costs are higher or lower than what was projected for the year. Groups that experience lower-than-expected claims may be eligible for a refund of the surplus premium at the end of the year, another cost-saving mechanism of these plans.

As part of their level-funded plan offerings, some carriers include services and programs that make it easier for employees to make informed healthcare decisions and adopt healthy lifestyle practices. For example, telemedicine offers virtual visits that can be easier to schedule, more convenient, and less expensive than visiting an urgent care clinic or doctor’s office. Similarly, implementing wellness programs as part of a level-funded plan can help employees and their families build and maintain healthy lifestyle habits that lead to lower claims costs over time.

Though there are some cost-saving benefits to level-funded plans, businesses should consider the potential drawbacks of level-funded plans before making a commitment. Unlike fully insured plans, level-funded plans require the groups to go through underwriting. Smaller groups often have to get employees to complete individual medical questions, and the health of the group can significantly impact the rates. Unexpectedly high medical claims can also lead to large rate increases at renewal and no opportunity to earn back surplus premiums. There are also some additional regulatory burdens on the employer as level-funded plans are regulated differently than traditional fully insured options. Level funding offers an attractive alternative for savings, but companies need to think carefully about these risks and be ready to manage them. Working with a trusted insurance agent familiar with these options will help in assessing if level-funded is a good fit.

Considering the Transition to Self-Funding
Level-funding can be an excellent way for employers to test the waters of self-funding, but with lower risk and no long-term obligations. With self-funded health plans, employers must pay claims as they are received. The number and cost of claims can vary wildly from month to month, with no way to predict spending, creating risk and financial uncertainty that can be daunting for employers accustomed to predictable monthly costs. With a level-funded plan, employers will not have these concerns.

After a few years and a better understanding of the health of their employee base, some employers may want to move to a true self-funded model. Others may find that, for one reason or another, they are more comfortable offering fully insured health plans despite the higher costs and more stringent regulatory requirements. Still, others may find level funding to be the “just right” balance that’s right for their business and employees. The only way to find out is to start the conversation.

When I’m Sixty-Four

There is not a baby boomer who cannot readily identify the origin of that phrase and have a greater appreciation for it as they continue their march to this milestone age.

Paul McCartney wrote the melody for that now old tune around the age of fourteen back in the Spring of 1956. It was released in 1967 on the Beatles’ Sgt. Pepper’s Lonely Hearts Club Band album, when he was a mere lad of twenty-five, and yours truly was an even younger nine years old. Sixty-four seemed like eons into the future for both of us, because it was.

As the years passed, I passed the key markers along the path, quietly turning thirty, with an accompanying birthday party that featured baby bottles and pampers; forty, when I had completed twenty years of military service, and several of my friends and I had to embrace the realization that we had somehow gone from the young shavetail second lieutenants to being the very “old farts”—the colonels that we had made fun of during physical training. Fifty brought membership into AARP, more frequent prostate checks, and watching calories. Sixty brought on the dreaded colonoscopy, but sixty-four still was off in the distance.

As sixty-four approached, I still thought of it as just another milestone marker along the highway of life, and assumed that I would be just as strong, agile, thin, and have the same full head of hair. Well, sixty-four came and went last year, and while I still workout six days a week, mow the lawn and shovel the snow, I am not nearly as agile as evidenced by the less than graceful landing I achieve when jumping fences; there has definitely been some loss of muscle mass and strength, and the only thing thin about my body is the hair on the back of my head. Nonetheless, I liked sixty-four, and played the song regularly during that year, feeling very blessed to be enjoying a meds-free life, still capable of hiking and biking and keeping up with my grandchildren.

This past year, I had the dubious honor of trading my very cool, retired-military Tricare Prime health insurance for the famous red, white, and blue Medicare card, and Tricare for Life is now my secondary insurance. Thank goodness we will never have to worry about purchasing Medicare Supplements and companion Part D drug plans. Gratefully, the Open Enrollment season with the bombardment of calls from Med Supp salespeople, as well as the never-ending barrage of commercials featuring Joe Namath and William Devane is now over for another year.

Sixty-five is supposed to be the new Fifty, but I am beginning to seriously question that as I talk to my friends who are quietly entering retirement with an assortment of aches and pains, and a rash of doctors’ appointments for newly identified acute and chronic conditions that sometimes threaten to upend their retirement and vacation plans. I also noted that references to shoulder, knee, and hip replacements seemed to have a higher than usual presence in the annual Christmas letters and cards that we received this year. Fortunately, the advances in pharmacology and medical science have made these procedures relatively uneventful, as evidenced by the nine-hour hospital stay that my wife enjoyed this past Fall with her second hip replacement, as opposed to the 30-hour overnight stay that accompanied her first replacement nine years ago. The “warranty” on these replacement parts has also improved over the years, and recipients no longer must plan on a “replacement of the replacement” while still having fun with TSA as they pass through airport security.

In 1900, Teddy Roosevelt was president, and the life expectancy in the United States was only forty-seven years of age. In 1935, when his cousin Franklin Delano Roosevelt signed Social Security into existence, as a supplement to pensions and other retirement income enjoyed by citizens of our country, the life expectancy was up to sixty-three years and benefits would begin at age sixty-five. With sixteen workers for each beneficiary, the system was solvent and the future looked bright. Today, with life expectancy far exceeding that, and in the absence of pensions, and the ratio of workers to beneficiaries down to 2.5:1, there is much debate on the future of Social Security, Medicare, and the other “entitlement” programs.

Prior to COVID-19, the life expectancy in the United States had risen to 78.8. This was an average for both men and women, with women still maintaining an edge in longevity. Today, for those born in 2022 this life expectancy is 77.5 years according to the Centers for Disease Control and Prevention. Some states do have longer life expectancies, with Hawaii leading the way at 81.15, and Mississippi having the shortest at 74.91.

While countries like Japan are seeing their societies continue to age—since 2009 more adult diapers are sold per annum than their infant counterparts—the life expectancy in Japan is now 85.9 according to worldometers.info. In Switzerland, it is 84.4, and in France it is 83.3. The U.S. now enjoys the dubious distinction of being in 42nd place in terms of life expectancy among countries around the world.

What has caused life expectancy in the United States to lag behind other countries? Some experts attribute this to gaps in health insurance coverage or health care access, as well as deeper pockets of urban poverty, as well as an inequality between the “haves” and “have nots” which notoriously rears its ugly head in terms of medicine and health care. It is common knowledge that numbers do not always accurately portray the facts, and to this end, also influencing the “average” or median age in the U.S. is the fact that there is a great disparity in the life expectancies between Caucasian Americans (78.6), African Americans (72.9), Asian Americans (86.3), Hispanics (80.6), and Native Americans (77.4). There are counties in the US where the life expectancy of its residents is 86.3 years or as low as 66.81. The Boeing Study surveyed its own workforce and determined that those who retired at age 55 lived until age 83, while those who retired at age 65 only lived an additional 18 months!

While we still rank first in the world in terms of national net worth, because of the disparity in access to health care, and the above factors, life expectancy in the US is no less than six to seven years behind the world leaders. Further complicating this issue is the recent debate over vaccinations, and the ever-growing trend of deaths attributable to suicide, homicide, accidents, opioids, and fentanyl.

Fear not. There is still hope. I recently read a book recommended to me by my youngest daughter entitled Outlive written by Peter Attia, MD, a prominent longevity expert. In his book, Dr. Attia recounts how he discovered how unhealthy he was in his thirties despite being a marathon swimmer and avid biker. Under the premise that we need to adopt Medicine 3.0 and strive to live longer healthier lives by changing our paradigms about medicine and lifestyle, Dr. Attia methodically presents how we can do this and strive to live longer, healthier lives. He explains why your bloodwork and cholesterol results at your annual physical may be normal, but you might still be unhealthy–because “average” is different from “optimal.” He advocates prevention and early detection, exercise, and a more holistic approach to life. The goal is to feel the impact of acute and chronic conditions at a later age. The key to this is to eat better, sleep better, to remain active, focus on walking, retaining muscle mass, as well as exercising your mind, being mindful about our vision and hearing, as well as regular socialization. I am pleased to report that I had already adopted many of his suggestions prior to reading the book and can attest to observable positive changes in my own life.

Sadly, I have already outlived one of my adult children because of cancer. Nonetheless, I am still shooting for being around for the Tricentennial in 2076. I will be approaching my 118th birthday when it occurs. I hope to still be living on my own, and annoying multiple generations of my family with my own brand of Dad jokes.

In The Workplace: The Case For Long-Term Care Insurance And Disability Insurance

More employers are considering a long-term care insurance benefit for their employees. This additional benefit can help attract and retain great talent and also help employees better plan for their own futures. Since many employers already offer disability insurance (DI), there may be some confusion around the need for long-term care insurance (LTCi) and the differences between disability insurance and LTCi. With May being Disability Insurance Awareness Month, let’s take a moment to learn the differences between DI and long-term care insurance. Both benefits have a place in an employee’s overall financial plan.

Long-term care insurance and disability insurance are both designed to help someone cope with a loss of function but for
different purposes. However, they have some commonalities, including:

  • Group coverage may be available with limited or no health underwriting
  • If purchased as individual coverage with more comprehensive benefits, require health underwriting
  • They both fit into a comprehensive financial plan

Let’s review each type of coverage to better understand the differences.

What is long-term care insurance?
Where disability insurance covers a loss of income, long-term care insurance covers the cost of care for people who need assistance with activities of daily living due to chronic illness, disability, or aging. Long-term care insurance can help protect one’s assets and income from being depleted by expensive bills and provide peace of mind. Reasons why someone would want to purchase long-term care insurance are:

  • To have more choices and control over the type, quality, and location of care they receive, whether it is at home, in a facility, or in a community setting.
  • To avoid relying on family members or friends for caregiving, which can be stressful, time-consuming, and emotionally draining for both parties.
  • To reduce the risk of becoming impoverished or dependent on public programs such as Medicaid, which may have limited coverage and strict eligibility requirements.
  • To take advantage of tax benefits and incentives that may be available for long-term care insurance premiums and benefits.
  • To plan and ensure that they have adequate resources and support to meet their long-term care needs.

Liam’s LTCi Story
Liam had always been a healthy and active person. Even well into his seventies, he maintained an active lifestyle. One day he started feeling tired and nauseous but thought it was just a flu bug. After several weeks, he decided to see his doctor, who ran some tests and delivered the shocking news: Liam had kidney cancer. He needed surgery to remove the tumor, followed by chemotherapy and radiation. It also meant that Liam would need long-term care.

When Liam was 55 years old, he met with a long-term care insurance specialist who suggested he consider adding LTCi to his financial plan. Because Liam was in good health, he was approved for an LTCi policy. Fast forward 20 years and as Liam started chemotherapy and radiation, his LTCi policy gave him the financial means to be able to consider several options for his extended care, including home care and assisted living. He and his family decided on a local assisted living facility that provided him with meals, transportation, and social activities. He felt comfortable and supported in his new environment, and he made friends with other residents who were going through similar challenges.

Long-term care insurance gave Liam and his family peace of mind during a difficult time. It allowed him to choose his care options and maintain his dignity and independence. It also protected his financial security and legacy for the future.

How do you obtain long-term care insurance?
Many people obtain long-term care insurance from a private insurance company. However, more employers are offering a group plan—one of the simplest and most cost effective ways to get coverage. Often these policies are a guaranteed issue group benefit. The enrollment process can be as simple as filling out an enrollment form. Group LTCi or hybrid plans are also portable to an individual plan upon leaving the company or retirement.

Offering employees a base plan allows them to then consider an individual supplemental plan that may provide even greater coverage.

Getting individual coverage can be more complicated but also offers greater benefits overall. There will be an underwriting process that involves responding to health related questions. You will also have to undergo a medical exam. The insurance company will then determine your eligibility and premium based on your age, health, and the level of coverage you want. You can compare different policies and rates from different companies before you make a decision. Individual long-term care insurance can be more expensive than obtaining coverage through an employer, but it can also provide much greater protection. Life insurance with an LTCi rider are hybrid policies that provide a death benefit to beneficiaries if care is never needed. These group hybrids are more commonly offered than group standalone LTCi in the market today.

What is disability insurance?
Disability insurance is a type of insurance product that can protect against a loss of income if a policyholder is prevented from working due to a disability. A disability can be caused by an illness or injury that affects the ability to perform core work functions. Disability insurance can replace a portion of the policyholder’s base salary, usually 40 percent to 70 percent, up to a certain limit. Reasons why someone would purchase disability insurance include:

  • Can provide financial protection and peace of mind for people who rely on their income to support themselves and their families.
  • The risk of becoming disabled for an extended period is higher than many people think. According to the Social Security Administration, more than one in four 20-year-olds will experience a disability for 90 days or more before they reach 67.
  • Without disability insurance, a loss of income due to a disability can have serious consequences, such as difficulty paying bills, saving for retirement, or maintaining a standard of living.

Remember that DI is to protect against loss of income. That means that when employees retire, there is no longer a need for it.

Zoey’s DI Story
Zoey, a software engineer at a major tech company, was driving home from work when a truck ran a red light and hit her car. She was rushed to the hospital with a broken leg and had to undergo multiple surgeries. She was unable to work for three months and faced mounting bills and living expenses. Fortunately, she had taken advantage of the disability insurance offered by her employer. It covered 60 percent of her income while she was recovering. The insurance company also provided her with a case manager who helped her navigate the healthcare system and access the resources she needed. Alice was grateful for the coverage as it protected herself and her family from financial hardship.

How do you obtain disability insurance?
There are two main ways to obtain disability insurance: Through an employer or as individual coverage. Many employers offer short-term and/or long-term disability insurance as part of their employee benefits package. These policies are typically cheaper and easier to qualify for than individual policies, but they may have lower benefits, longer waiting periods, or stricter definitions of disability. They also may not be portable, meaning an employee could lose coverage if they change jobs.

Purchasing disability insurance as an individual can be done directly from a broker. These policies are more expensive than offering it to employees as a group benefit and require medical underwriting. On the other hand, they offer more flexibility and customization. You can choose the benefit amount, duration, waiting period, and definition of disability that suit your needs and budget. You can also keep your coverage as long as you pay the premiums, regardless of your employment status.

The Bottom Line: Peace of Mind and More Options
By now it’s clear that both disability insurance and long-term care insurance have a place in any employee’s financial plan.

Disability insurance and long-term care insurance are two types of policies that can help protect income and assets in case of a serious illness or injury. Disability insurance provides a continuation of income if the policyholder is unable to work due to a covered condition, while long-term care insurance covers the cost of services such as nursing home care, assisted living, or home health care—very real expenses that are not covered by health insurance or disability insurance.

By purchasing both types of insurance, employees can ensure that they are protected for different scenarios that might create tremendous financial hardship in the future.

My “Three Bucket” Approach To Explaining Fixed Annuities

As many of you financial professionals can attest to, annuities have become more “mainstream” in the minds of consumers. So much so that we financial professionals are often prompted for more information about annuities from our clients without us ever even mentioning annuities. The industry-wide sales numbers speak to the increasing popularity of annuities, as last year (2023) was the best year in the history of the annuity business with $380 billion (more than 1/3 of a trillion!) written industry wide. That is more than a 25 percent increase from the year prior—which was also a record.

With that, if you get a phone call from a client and he/she says, “Can you teach me really quick about your fixed annuity offerings?” what would your response be? This conversation can be tricky because if you are like me, your natural tendency is to get in the weeds about all the options, bells, and whistles. However, you obviously have to be succinct and jargon free because clients are busy… As somebody once said, “The best presentations have a good beginning, a good ending, and both of those items as close together as possible.”

So, here is my “bucket approach” that I explain to consumers that gives plenty of information but is not a 30-minute dissertation. Furthermore, the below points are not something I just spout out uninterrupted, as there are always questions along the way that make this a dialogue rather than a monologue. From here, imagine I am speaking with one of my clients.

The three different types of fixed annuities that I offer I will call bucket number one, bucket number two, and bucket number three.

Bucket 1: Guaranteed Rate Annuities
The first bucket is what I call the guaranteed rate annuities. If you are familiar with certificates of deposit, with these annuities the interest is credited just like how it is credited with certificates of deposit. Guaranteed and for the number of years you choose. Also, like CDs, you choose how long you want to have your money in the annuity, which can be anywhere from two years to 10 years. Usually, the interest rate is higher the longer out that you go. Again, the main characteristic here is that the interest rate is guaranteed for the length of the term that you choose.

What If you want your money back by the end of the term? There are generally liquidity provisions, such as interest only withdrawals or 10 percent withdrawals, where you can take money out if the need arises, even during your term. However, if you cash it all out prior to the end of the term, a lot like how you will lose interest with a CD, you will be subject to surrender charges with the annuity. What happens if you die prior to the end of the term? Most of these annuities will pass on to a named beneficiary whatever you put in plus whatever it grew to. Today I can give you a guaranteed interest rate of anywhere from 4.5 up to six percent, depending on the annuity term you choose.

Also, this is very cool about any annuity. Whatever interest you earn over a year you don’t have to pay taxes on, at least until you take your money out! Annuities are tax deferred. So, if you are getting five percent over a year on $100,000, you may get a 1099 for $5,000 from the bank on that CD. Conversely, with an annuity, that 1099 does not come until you cash it out. (Note: this last point is irrelevant if you are discussing IRA money.)

Bucket 2: Accumulation Indexed Annuities
The second bucket is a bucket that gives you more upside potential than bucket #1, and it also does not have the downside risk of the stock market. Over “the long run” the stock market has done quite well relative to fixed interest alternatives. However, many consumers don’t have “the long run” to wait out any market downturns that can arise if they have their money in the stock market! You may have heard of “The Retirement Red Zone.” When folks get close to retirement (The Red Zone), losing money is obviously more dangerous than if you were otherwise only 25 years old. You don’t want to lose your money right before you retire!

So, with this product, you can actually harness some of the upside potential that the stock market is known for. But, you don’t participate in the downside. This is bucket #2, which is what I call “accumulation indexed annuities.”

Quite simply, the interest rate that you get in a given year is linked to a stock market index, such as the S&P 500 index in a product example I will use. However, if the market drops 20 percent in a given year, for example, how much money do you lose? You do not lose a penny of your money. You get a zero percent interest in that year. Now, what happens if that market index goes up? You get everything the index does to the upside, up to what is called a cap. For example, one product that exists will give you a cap of 11 percent on the S&P 500. So, in short, in a given year you have the ability to get between zero and 11 percent. No loss if the market drops, but higher potential than fixed rates when the market increases.

These products are not designed to beat the stock market, they are designed to beat the bank and also bucket number one that I talked about. The “surrender charge terms” of these annuities are generally five years to 10 years.

Bucket 3: Income Focused Indexed Annuities
Then you have bucket number three. Bucket #3 is what I call income focused index annuities. Many folks nearing retirement don’t necessarily care so much about accumulating money, but rather having their money turned into an income stream—like Social Security—once they hit retirement. In my experience, folks love their Social Security, they just want more of it! This is where this product really shines. Per dollar that you allocate to an annuity, you will find that the level of income it can generate over your lifetime can potentially be superior to many other products that you are used to. By the way, that income stream is guaranteed and, again, for lifetime!

So how does it work? Your money will grow a lot like how I just explained in bucket #2, the accumulation indexed annuity. You will get somewhere between zero percent and whatever the “cap” is on this product. Now, the cap is generally less on these types of products, for instance six percent instead of 11 percent. However, with these products, regardless of how your money grows or does not grow, today we can point at a guaranteed income amount that the carrier will guarantee you when you want to activate guaranteed lifetime withdrawals. So, for example, a 63-year-old today with $100,000, I can point to a guaranteed level of income of somewhere between $8,000 and $9,000 that he/she can activate at age 65 for example. And that income goes forever and ever and ever, even if you run out of your own money because you have lived too long. Just keep in mind that the guaranteed lifetime income component does have a “fee” of anywhere from .9 percent to 1.2 percent. (Note: Many consumers have no clue what “basis points” are, so don’t use that terminology!)

In Closing
Eight out of 10 times most of the questions that arise are in Bucket #3. Questions such as “What happens if I die? Does the balance go to my spouse or beneficiary?” The answer is yes! Notice that in my conversation about bucket #3, I did not mention roll up rates, the calculations, the payout factors, etc. I usually don’t have to…

GLWBs on an index annuity are quite simply a guaranteed level of income that you can point to today, just like a Social Security statement, and assure the client that when he/she retires this is the income that they are guaranteed for life regardless of how their “index” does. And unlike the myths thrown out there by the media talking heads that are living 30 years in the past, the client does not lose control of their money once they start taking income. There is a difference between annuitization and guaranteed lifetime withdrawals!

Options For Being A Registered Rep And Also Selling Indexed Annuities

“Charlie, what should I do?”

This is the question I am often asked by financial professionals on what they should do when it comes to getting set up with their securities license while also wanting to sell indexed annuities. Even folks that are already securities licensed will ask me this question occasionally, because they are looking for easier ways to offer both securities and indexed annuities. Because of technical reasons and history, the answer to the question is not as easy as “get an insurance license for the annuities and a broker-dealer for the securities.” We will discuss the issues that surround my typical response to the above question.


First, I want to preface my article with some terminology. I do not want to assume that everybody understands the vernacular I will use below. So, let’s first discuss what types of agents/reps there are, who can sell what products, who “supervises” the sale, etc.

  1. Insurance Agents: This is likely you! These are agents that have passed the state insurance exam to sell insurance products like fixed annuities, term insurance, etc. The sale of these products is regulated by the state insurance departments. The actual insurance carriers also do some review of advertising material and also suitability. Usually there is a General Agency or an Independent Marketing Organization that trains the agents on how to do the insurance business. (Note: Some of these insurance products can also be securities, like variable annuities. These products require an insurance license and a securities license, per #2.)
  2. Registered Reps: A financial professional who passed their Series 6, Series 7, etc. and is able to offer securities (stocks, bonds, mutual funds) in order to make a commission. These folks must be registered with a Broker-Dealer who supervises your sales, approves your advertising, monitors your emails, etc. BDs are tasked with keeping you out of trouble! Here, the ultimate regulatory body is FINRA (Financial Industry Regulatory Authority), who governs your broker-dealer. If you get in trouble, it is FINRA that will fine you!
  3. Investment Advisor Reps (IARs): When you think of “fee-based advisors,” this is the category. These are the financial professionals that have passed the Series 65 or 66 exams, which are different exams than those a “registered rep” would have taken. These IARs are mandated to conduct themselves in a “fiduciary” capacity and generally cannot be paid a commission in that fiduciary capacity. Again, they charge fees but can usually offer similar securities as the registered reps can. They just generally cannot be paid commission on them. For products like mutual funds, there are usually “Advisory Share” classes that do not have the sales charge/commission built into them. Those “Advisory Shares” are what the IAR might offer his/her clients, while the registered rep offers “A Shares” for example. Like how insurance agents are supervised by the states and registered reps are supervised by their broker-dealer, Investment Advisor Reps are supervised by their “Registered Investment Advisor” (RIA). The Registered Investment Advisors are governed by the state securities regulator (North American Securities Administrators Association) or the SEC, depending on the size of the RIA.

A couple of points: The first is, we all have our “supervisors,” whether you are an agent, a registered rep, or an investment advisor. Also, you can be all three of the above, as I am. So yes, I report to the states for my insurance license, I also have a broker-dealer that just conducted their compliance review in my office, and I also have a registered investment advisory firm that I work with where I am able to offer fee-based planning products and services. It seems I spend half my life doing continuing education to satisfy all of these “bosses.”

Options for Registered Reps Around Indexed Annuities
If you are a registered rep or want to become a registered rep while also having the ability to write indexed annuities, here are my thoughts.

In 2005, the NASD (which is now FINRA) announced to their broker-dealer member firms that they (the NASD) would “recommend” that broker-dealers supervise the sale of indexed annuities that their registered reps sell, even though indexed annuities were not securities (as later confirmed with SEC 151a being vacated). It was basically a suggestion, an urging, a nudge, a proposition, which left many broker dealers wondering, “Is this a mandate or merely a suggestion?” This suggestion/urging/proposition was called “Notice to Members 05-50” and what ultimately led many broker-dealers to this day to take “jurisdiction” over your indexed annuity sales! That is, that most BDs now require your indexed annuity business to flow through them, similar to securities. That also means that the broker-dealer is generally taking a cut of your commission based on your “grid” that is usually applied only to your securities business.

Option 1. Choose Wisely
Whether you are a registered rep looking for suggestions on changes you can make to make your indexed annuity life easier, or if you are a newbie getting ready to get your registered rep license, here is what I would say: There are broker-dealers that are fairly “hands off” with your indexed annuity business, and some that are extremely intrusive. Choose wisely. I can also help with recommendations.

An example of a “hands off” broker-dealer would be one that understands that indexed annuities are not securities and says that they do not even want to see the signed applications, etc., for indexed annuities. No BD supervision and no cut of your indexed annuity commission. Similar to how a typical BD would treat a term life insurance case. These types of broker dealers allow you to conduct your fixed insurance business the way you did prior to NASD 05-50.

An example of a broker dealer that is extremely intrusive would be this one: I know a major BD that not only mandates that indexed annuity business flow through them, but they also mandate that all life insurance flow through them. They use the excuse of NASD 05-50 to take authority over even the fixed life insurance products! This means the BD gets a cut of the agent’s/rep’s commission as well. Furthermore, this broker dealer has its own general agency in house that the agents are required to use, versus the agents’ preferred IMO. And that general agency does extraordinarily little to train their agents on fixed insurance products. This BD (along with their general agency) is an order taker, not a business partner. Not trying to disparage anybody, just laying out the spectrum of BDs!

Option 2: Go the “IAR” Route
Since NASD 05-50, the number of registered reps in our country has fallen. Some registered reps have ditched their broker-dealers and instead aligned with RIA firms. When it comes to the securities businesses, these reps have chosen to give up commissions and go the fee based/recurring revenue route. In other words, many of these folks moved from my category two (registered rep) to my category three (IARs).

How does being an IAR help you with the indexed annuity/fixed insurance business? In short, RIAs generally do not touch your commission-based business, such as indexed annuities, life insurance, etc. What this means is, by affiliating with an RIA firm, you can generally go about your insurance business the way you would as if you were not securities licensed while at the same time being able to offer securities if the need calls for it. Of course, the securities revenue you receive would be based on a fee, one percent of assets under management for example.

I would estimate that for my group of financial professionals getting licensed today to sell securities, about 80 percent of them choose the IAR route versus the registered rep route. For those that are already registered reps, some of them are ditching their Series 6s and 7s to go the IAR route.

Option 3: Forget the Securities License
In a world that is becoming more “regulatory,” I am on the side of having a securities license and not choosing this option. My opinion is exacerbated by recent lawsuits that I have read surrounding “source of funds” issues. In other words, insurance agents are getting sued for selling fixed insurance products (annuities) to consumers because these agents allegedly made recommendations to sell the securities the clients currently owned in order to fund the annuity. Even though the sale was not a securities sale, our rule makers are taking the stance that discussing and recommending that the client sell out of securities means that the agent should also have a securities license.

Of my three options above, #2 is where I see the most activity.

Everyone Has A Story

In 2024, the long term care insurance industry will celebrate its golden anniversary. These fifty years have been chocked full of evolving product offerings ranging from initial nursing home only plans, to traditional, stand-alone products that offer coverage ranging from home care to assisted living facilities to skilled nursing facilities and every other form one can imagine. Hybrid and combination products that feature long term care riders attached to life insurance and annuity chassis, to asset-based products that allow policyholders to largely “self-insure” with a stop-loss measure attached.

Over the past twenty-five years, the long term care insurance industry has really come of age. The advent of new facilities being built by some of the largest names in the hotel industry, changes in tax laws, the addition of Partnership across nearly all fifty states, along with literally millions of years of policy data have allowed carriers to refine their offerings and to provide an even greater array of options for those seeking protection.

Ironically, it has been twenty-five years since I left the practice of law to pursue a career in the long term care insurance industry, so I have been around for half the duration of the industry. When I look back on my own experience, it astounds me how far we have come and, at the same time, how inertia still grips the vast majority of the country’s adults as they continue to mire themselves in denial.

My first clients were part of the Greatest Generation. They fought in World War II, came home, went to school on the GI Bill, raised a family (the Baby Boomer generation), often worked their entire career for the same company, retiring with a gold watch and a pension. If they had a family history of long term care, it was often unknown even to them until we asked open-ended questions that helped them discover this truth. Yes, Mom and/or Dad had come to live with them at the end of their lives, often occupying a bedroom formerly belonging to one of the children. I can remember often asking potential clients during the home interview if they can envision having to displace one of their grandchildren from their bedrooms.

Fast forward any number of years to the baby boomers. Unlike their parents, they do have the stories, far more readily as they quickly became the Sandwich Generation, often finding themselves taking care (physically, emotionally, financially) of aging parents while also supporting their children with college educations. Sadly, this often involves the necessity for second mortgages on their homes as well as a strain on them professionally, emotionally, and physically.

Often, an open-ended question as simple as, “Why did Grandpa (or Mom or Dad) have to move in with you?” would take them back in time to their youth, and we would begin the process of identifying need in their own lives.

As the years have passed, I have found it far easier to identify stories of family long term care among the baby boomers who have lived the “nightmare” up close and personal. One of the most poignant stories I have discovered took place about fifteen years ago. I asked my usual “Have you ever had a parent or grandparent live with you because they could not safely live on their own?” and heard the following story.

“My grandfather came to live with us while I was a freshman in high school. He came to live with us because my grandmother had died, and the family did not think it was safe for grandpa to live on his own. His memory was not what it used to be, and he would often leave the stove on, doors unlocked, or go out to the mailbox without any shoes on. At first, it was cool to have grandpa living with us. I would come home from school, drop off my books, have a snack, walk the dog, and then take my grandpa for a walk. On these walks he would tell me stories about flying in B-25 bombers over Germany in World War II. But as time went on, the walks got longer, Grandpa got slower, and after a while I knew the stories better than he did. By the time I was graduating I hated those walks, and was grateful that I had an after-school job so that I could avoid them.”

As I said, this was a very poignant story and even with the passing of time, I can still remember the visceral account as it was related to me by my client. Of course, the “hot spot” question that closed the sale for me was “how will you feel if, someday, a grandchild of yours has the same feelings about having to walk you around the block?” The look of resignation and then determination in his eyes told me that he was now a believer and would maintain his long term care insurance policy until he died. To date, despite a few rate increases, he has maintained the joint policy he purchased for he and his wife.

Satire is one of my favorite forms of comedy. Kevin Costner’s Robin Hood: Prince of Thieves became Mel Brooks’ Men in Tights. George Lucas’ Star Wars became, again, Mel Brooks’ Space Balls. All the true-life sad stories of grandparents moving in with their families gave rise to Robert DeNiro starring in 2020’s satire The War with Grandpa, which follows an interesting premise as to why DeNiro’s character is forced to move in with his daughter and her family.

After accidentally stealing from a grocery store due to having trouble with the self-checkouts and causing a scene with the store manager, recently widowed Ed Marino (DeNiro)) is visited by his daughter Sally Marino-Decker (Uma Thurman)) who wants him to move in with her family. Ed does not want to leave his house because he built it himself. Sally convinces Ed to move in with her and gives him her son Peter’s (Oakes Fegley) bedroom. Peter is not happy about giving his room to his grandfather and being moved to the attic. Ed is welcomed by Sally’s husband Arthur and two daughters Mia and Jenny. During his first day, Ed spends most of his time in his new room, sitting in his chair and looking at the sky while still thinking about his late wife.

Peter then tells his friends about his grandfather moving in with his family and living in his room. After a miserable first night in his new room in the attic, Peter decides to declare war. Ed agrees, so long as they follow the rules of engagement: They cannot damage other people’s belongings and cannot tell the family about their arrangement. Peter pulls a series of pranks, including replacing Ed’s shaving cream with quick-drying foam and damaging his record player. Ed gets back at Peter with pranks including removing all the screws from Peter’s furniture and rewriting his school report. Ed turns to his friends Danny (Cheech Marin) and Jerry (Christopher Walken) for some advice. Over time, Ed begins to spend time with his granddaughters and son-in-law and learns how to use modern technology, such as self-checkouts and apps which aids him in his own war-like efforts towards his increasingly aggressive grandson.

After an ever-escalating war of pranks on one another (nearly resembling the antics of Home Alone), there is the inevitable climax when the entire family is involved, all is revealed, and an armistice is forced onto the combatants.

As time passes, Ed and Peter finally are getting along until Ed leaves one day to be with Diane, with whom he is now in a relationship. Peter looks on angrily, declaring a war on both of them as they leave, leaving the door open for an unwanted sequel!

While this movie makes light of the ever-growing need for a three-generation family living under one roof, over the past twenty-five years I have encountered the resentment that often accompanies this necessary arrangement. So many times I have asked clients or prospective clients about these experiences and the difference having or not having had a policy made in their lives.

As previously noted, nearly everyone I encounter these days has a story of their own to share. Some of the stories are tinged with good memories and happy emotions, but increasingly I am hearing the opposite. Resentment, frustration, and sometimes even bitterness from the family members who “drew the short straw” or were the only ones willing to step up. Recently, with the advent of National Long Term Care Awareness Month, the staff at Krause Financial was encouraged to tell their own family story of long term care. We encourage you to view them on the Krause YouTube Channel.

The silver lining that accompanies the dark cloud of long term care is that today people have a wide range of choices on how and where to receive any necessary care. The key is to make sure that this care does not have a negative impact on the family financially, physically, mentally, or emotionally. It is about choice. But just like the person who fervently prays to win the lotto but fails to purchase a ticket, this peace of mind starts with having to purchase a policy. Encourage your clients to investigate this valuable coverage while they are younger and have the requisite health and wealth so that they can ensure that theirs is a story with a happy ending.

Should I Add Annuities To My Retirement Plan Or Not?

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Demystifying the annuity conundrum (are they all good or are they all bad?

It seems there is a divided financial services industry which fully embraces annuities as an intelligent complement to social security and other nonliquid assets and the other side of the industry that “bashes” annuities as investments too risky, too complex and commission driven so ipso facto stay away from them all.

Based on my 30 plus years in this industry acting in several capacities(as a General Counsel of a prominent life carrier, as a Chief Compliance Officer supervising hundreds of financial advisers, or as an independent financial advisor) I respectfully submit that both industry camps would serve the public better in not taking sides, i.e. with bad apples in both camps, a trusted adviser should and can serve his/her client’s best interest using both models where suitable. Yes, there are some annuities that have hidden charges, are overly risky and should be shied away from. Similarly, there are advisors who manage clients assets and profess to be “better” yet despite their window dressing are in the bottom line receiving far more compensation than they would by suggesting a risk free annuity with lifetime guarantees without extra rider charges.

To walk the talk, my wife and I have assets, some being managed by large institutional entities, and about a half a dozen lifetime annuities which pay us monthly and provide peace of mind that we don’t worry about the unpredictable stock market being severely affected by the incessant political infighting in Washington and unstable global economy. Presented with full disclosure of the advantages and disadvantages, a trusted advisor can and should educate a client approaching retirement with this landscape and suggest options so the client can make an informed decision about what is most suitable for him/her in terms of risk tolerance (baby boomers are likely more conservative at this time of life).

Anti-annuity bashers frequently misunderstand the myriad of annuity options and find it far simpler to say stay away because commission is paid upon sale. For example, a life only annuity with no period certain for the carrier to pay would be an extremely rare if ever good recommendation since one would make a single lump payment and take the risk that if they passed immediately after accepting the annuity, they would lose the entire investment after a single payment. If the policyholder has beneficiaries (the majority of clients do) this type of recommendation would be not only not in the client’s best interest but also “malpractice.” Query why commission is such a negative yet the majority of the retail industry is based on commission. Would one say all service providers, even waiters/waitresses, could be accused of steering their customers to the highest priced entrees since that will end up with a bigger bill thus higher tip? I’m sure we would agree some do but that doesn’t mean we can not discern what is in our “best interest” and what we would enjoy the most.

According to the Life Insurance Marketing and Research Association (LIMRA), annuity sales in 2022 totaled $310.6 billion, a 22 percent increase from the 2021 sales of $254.9 billion. Taking a layman’s noneconomic inference, 2008 had set the record in annuity sales (which has been far surpassed last year) in part attributed to the severe downtown with the stock market correction due to the dot com companies facing retrenchment. Now, when we are in an era of the baby boomers approaching and entering into retirement, desperate to find safety and security, this has led to massive annuity purchases notwithstanding money managers spending millions on TV advertisements saying to being wary. Todd Giesing, assistant vice president, LIMRA Annuity Research, recently stated the “Fluctuating interest rates in the fourth quarter prompted investors to lock in crediting and payout rates while they were high. Our forecast suggests that protection products will continue to boost growth in the annuity market for the next several years.” Fixed annuities provide downside protection against an unpredictable market whereas sales of variable annuities have suffered for precisely the same reasons when certain policies cannot offer this floor.

I don’t want to tip the scales for either camp since my defense of some annuities could lead certain pure money managers only accusing me of the famous line in Shakespeare’s Hamlet: “The lady doth protest too much, methinks.” (Kind of my pet peeve of not trusting anyone who says to me, “I’m telling you the truth.”) Isn’t that what you should have been already doing without saying you are?

Annuities will have varying degrees of decreasing surrender charges. For those unaware, This means that your money that you set aside into an annuity is held by the carrier who invests the funds and makes their own hedging bets counting on the funds being relied upon for the carrier to make a better spread than what they are offering to the public. The client is not incurring any charges if he/she lets the money grow during this period and allows the surrender charges to go down to zero. A downside is that this money is in a sense not liquid during this period although some carriers allow you to make a 10 percent annual free withdrawal. For qualified funds, if at an age when you have to take annual Required Minimum Distributions(RMDs), these withdrawals are also not subject to any current surrender charges. If you will never be comfortable in not having instant access at any time to all your funds, then annuities are not for you.

So how do you move forward with adding annuities to your overall retirement plan? Naturally, only a portion of your assets should be considered for this investment and the carrier itself ensures that no policyholder has unwittingly tied up the majority of their net worth.

In conjunction with adding another bucket(s) of guaranteed lifetime income for you and your spouse, for those clients I have worked with over the years they will always hear me on my soap box that long term care protection needs to be built into one’s overall retirement plan. (See My Long Term Care Story as an Advisor, Broker World 10/2021.) Obtaining this protection is a gift to your children and/or younger family members who love you. Maybe you have to experience or observe the enormous cost and challenging toll on the caretaker’s time, and emotional wear and tear, to really appreciate the urgency of incorporating this into a plan.

Assuming one’s children volunteer—that there is no worry that they will, of course, take care of you—this loving commitment is unfortunately probably unfair to the younger generation. Outside agency caretaker costs are annually increasing exponentially more than inflation. One client relayed that perhaps I misunderstood his culture. Perhaps so but I doubt it. Walking in on a loved one naked on a bedroom floor having soiled himself might change my friend’s perspective.

Getting one’s affairs in order requires an attorney who can draft a will, set up Powers of Attorney both over you and your property, health directives or trusts as the case may be. Even with my law degree, and multiple security licenses I have held, I usually but not always add annuities with no extra riders attached, include a long term care policy, and life insurance that serves as instant cash to help some estates pay estate taxes without having to sell at less than fair market value other existing appreciated assets. Or, for smaller estates, the life policy’s cash to loved ones is never a bad decision.

This planning is not rocket science. Knowing your advisor, feeling comfortable he/she is experienced, will result in you having peace of mind. Not worrying about the future of your loved ones equates to starting now. Why? I refer you to a book called Still Alice by Lisa Genova about a cognitive psychology professor at Harvard, 50 years of age, who recognizes that she has early stages of dementia and tries unsuccessfully to set her affairs in order before the impairment becomes too severe.

Managing Client Expectations: The Medical Side

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Successful business transactions require a high degree of satisfaction on the part of the client. The results don’t always have to be perfect, but they have to meet the anticipated outcome. A dissatisfied client for whatever reason might not be just a one-time outcome but a continuous loss of business from both the individual, his or her continued needs, and to referrals to family and friends. It might not even stop there, as the internet is now the great perpetuator of personal experiences, both good and bad, to those doing their homework on where to purchase. This is a somewhat melodramatic way of saying that managing client expectations is now more critical than ever and has extended quite firmly into medical underwriting.

In the past there was a great degree of variability in medical offers one could receive from individual insurers. Those who remember the days of Wild West substandard underwriting and the Term Wars can bear direct witness to the same case getting standard to decline arrays of results. With less insurers and an increased involvement of large reinsurers in the process, the individual outcomes have become more streamlined. Involvement of multiple insurers on the same case now lean to more consistent guidelines and policies. The old adage of “show me the impairments your company is good at” rarely exists anymore, since if you are too good at something you are probably wrong. Reinsurers now have thousands and thousands of additional lives they have tracked over the years and are closer to having seen it all than ever before. You are likely to get more similar outcomes wherever you go out with a policy.

Perhaps this is nowhere better illustrated not in the substandard array of underwriting but in the numerous amounts of preferred, select and standard issues where outcomes are tight and price improvements are finite. Many brokers and agents will illustrate a best-case scenario with the lowest pricing in most any event. When there are what the client feels are minor or controlled impairments, they are still looking toward optimal pricing. At one time, the medical director or chief underwriter had a good deal of discretion in adjusting the policy and hoping that investment or volume results would help negate any mortality giveaways. Now, most underwriting is automated, and the results are strict “kick-outs” where blood pressure or cholesterol values or glucose measurement and even build parameters will assign a class well before an underwriter gets to a case, if he gets to it all before a tentative offer is made. These parameters are generally made known to most agents and brokers from the start, so an exaggeration into a better class may meet with preventable failure just with a little due diligence to start.

Sadly, there is less of an appetite for substandard cases than ever before. In the search for predictable results, clean cases provide fewer poor outcomes and variability in mortality. Many companies will set a limit as to the amount of tables they will assess on a case, and sadly decline ones that require too much discovery or expense or even acquisition costs. In these cases, steering clients away from the disappointment of an unexpected decline and into products they can more easily qualify for will meet their needs and may be the better part of valor.

There are other things that can be done to maximize meeting client expectations while still maintaining control of a case and getting the expected outcome. If clients know what kickout rules apply and that their cholesterol measurement or blood pressure measurements and treatment for example are going to fall outside the line of best possible rate, illustrating the expected rate provides a mutually beneficial result. It’s not that you have to under-promise and overdeliver as the saying goes—under-promising may lose the case to another firm who correctly anticipated what would be offered. But more exactly promising and meeting that goal generally does get the job done. It requires a little research which is readily available or provided by the insurer to make this more easily attainable.

Letting a client know that there is a difference between clinical medicine and insurance medicine is another key. Individuals may have multiple impairments all of which are “controlled” and as such are expecting the same rate as those who have none of these conditions. You may have hypertension that is controlled, diabetes which meets treatment guidelines, and sleep apnea which by itself might not cause problems, or coronary atherosclerosis that may not merit a rating in and of itself. But the combination of all of these in a single individual does increase the risk and makes for pricing above the most favorable level. Doctors in clinical practice often tell their patients they are doing as well as can be expected, and patients take that literally as meaning they are in great health. When confronted by one of their patients that their insurance policy was priced higher than they expected, doctors may become patient advocates against the big bad insurance company and feel this is a criticism of their more than adequate care. When explained how risk assessment works and that the client is indeed doing well considering what the impairments are, doctors then become friends rather than enemies in helping the patient/insured understand what the actual problems and assessments really are.

Lastly, candor is probably the most important thing that influences the result of any policy, including providing for loved ones or businesses as was the original intention. In the initial phases, the agent, broker and client must be upfront about any problems or health abnormalities. An initial opinion or tentative quote will not hold if the underwriting process or underwriting results don’t bear that out—in the same way a driving record will flush out previous infractions or DUIs, each application generally will provide a list of every medication a client takes or prescription he or she has ever filled—and leads to more suspicious and detailed underwriting when it doesn’t bear out what the application has represented. In addition, particularly in the contestable period but throughout the life of the policy, if fraud is suspected, answering “No” to all medical questions or omitting significant parts of the medical history that is asked about will result in the policy being rescinded and the expected proceeds not being paid. This results in the ultimate bad will of beneficiaries who are blindsided by what the deceased did or did not say to have the policy issued in the first place.

Expectations that are met result in positive outcomes for all. We all as members of the insurance team must realize that. We are all on the same side trying to issue profitable business for ourselves and those we represent. The better we deliver, the more our industry will thrive.

Life Settlement Annuities: Unique Financial Solutions for Seniors

Life Settlement Annuities combine the uniquely advantageous features of both annuities and life settlements to help address the financial challenges brought on by aging and declining health for seniors in retirement. A Life Settlement Annuity is the seamless rollover of the funds realized through a life settlement into an annuity that can be underwritten to provide higher value relative to an individual’s rated age and health than a standard annuity.

As the American population ages, retirees face myriad financial concerns ranging from maintaining their lifestyle to the fear of running out of money. The looming specter of declining health and the eventual need for long term care adds another layer of complexity and urgency for seniors. In this challenging landscape, an emerging financial option called a “Life Settlement Annuity” combines the advantages of annuities and of a life settlement to help address the desire for financial security and independence.

The fears haunting retirees—running out of money, facing dependence, and grappling with healthcare costs—are
becoming more urgent as the population ages. Statistics paint a sobering picture: by 2025, Baby Boomers will begin hitting 80, and a staggering 70 percent of individuals over 65 will require formal long term care.

In this landscape of financial uncertainty, the insurance industry stands as a rock of stability. With a significant portion of Americans owning life insurance, the creative uses of these assets can unlock unique opportunities for the policy owners. As retirement unfolds, people can outlive their need for the life insurance policies they purchased in years past and decisions need to be made. Enter life settlement annuities—an innovative solution changing the retirement game for seniors with some new options for their assets to consider.

Unlocking Hidden Value for Retirees through Life Insurance and Annuities
Life insurance and annuities have been experiencing a surge in growth. In 2021, there were 260 million life insurance policies in force, amounting to $21.2 trillion in death benefit. Annuities, a key player in retirement planning, saw $2.53 trillion in-force with $310 billion in sales in 2022, marking a 22 percent increase from the previous year. As annuities continue to rise in popularity, the industry predicts a 14 percent overall increase in annuity sales in 2023, with fixed-indexed annuities expected to rise by 25 percent and fixed-deferred annuities by 20 percent.

More people are worried about their ability to retire and outliving their money than ever before. In recent years, as interest rates have gone up, annuities have emerged as a flight to safety and financial stability for retirees, providing a range of benefits that address the fears of seniors including guaranteed income for life, income for spouses or beneficiaries, tax-deferred growth, protection from market volatility, and income acceleration for long term care needs.

Life settlements have become a mainstream financial option for seniors due to high public awareness generated by large advertising campaigns. The settlement of an unneeded or unwanted policy provides numerous advantages for policy owners including: Economically rewarding seniors for advancing age and impairments; providing liquidity for retirement income and health/long term care needs; offering tax-advantaged income for health and long term care need; and, there are no costs or ongoing premium obligations for the policy owner.

Consumer awareness of life settlements is at an all-time high, with the annual market reaching $4.5 billion in 2022. Shockingly, that same year, 9,000,000 policies lapsed compared to the 3,000 settled, revealing a significant industry disparity in leveraging these assets. For these policy owners, the life settlement option resulted in 7.8 times higher payouts than the available cash surrender value (or in the case of term life policies, no CSV at all). As the market continues to grow the upside is enormous with Senior-owned life insurance accounting for a staggering $230 billion annually that could potentially qualify for a life settlement—a potential financial windfall that seniors and advisors should not ignore.

Life Settlement Annuities
The life settlement annuity is an ideal way to help people overcome retirement driven fears. By accessing the higher market value of an unneeded or unwanted life insurance policy through a life settlement, the policy owner can leverage its full market value with a seamless rollover into a mix of annuities specifically created to address financial challenges driven by aging and declining health.

First, annuities offer guaranteed rates of return, financial protection from market volatility, tax advantages, income for life, and ongoing income for spouses and beneficiaries. They can also be set up to provide tax-advantaged income and income acceleration for qualified long term care services.

Second, a life settlement is the sale of an existing life insurance policy and is designed to reward policy owners with higher value as the insured gets older or sicker. Life insurance policies are legally recognized as assets and life settlements are a way to unlock the hidden value in an unneeded or unwanted policy—just like when a homeowner sells their home if they are no longer going to live there. This is a way to access liquidity for retirement income, health or long term care needs after years of paying premiums.

By combining these two transactions into a life settlement annuity, the funds realized through the life settlement are rolled over into an annuity that can be underwritten to provide higher value relative to an individual’s age and health than would be received through a standard annuity. Also, according to industry statistics, life settlements can generate five to 10 times higher payouts than cash surrender value to rollover into an annuity. Based on the form of life settlement annuity selected, the policy owner can create a guaranteed income stream for life, increase monthly payouts through an underwritten SPIA, benefit from guaranteed returns and tax-deferred growth with a FIA, and, in the case of a need for long term care, increase the value of the funds in the annuity two to three times with a unique long term care rider.

Types of Life Settlement Annuities

  • Impaired Risk Single Premium Immediate Income Annuity (SPIA): Underwriting based on life settlement life expectancy data increases monthly payouts over standard risk scenarios. This SPIA option provides lifetime income, survivorship benefits, and a return of premium option.
  • Multi-Year Guaranteed Annuity (MYGA): MYGA offers a guaranteed rate of return over a set period, allowing clients to choose from a two, three or five year rate guarantee period with optional free withdrawal benefits. A five year guaranteed rate of return at six percent or more ensures a steady income draw equivalent with the principal remaining.
  • Long Term Care Based Fixed Index Annuity (FIA): FIA provides financial resources for long term care services, offering a guaranteed rate of return at five percent and an enhancement rider option to pay for long term care benefits by increasing the principal up to two or three times tax-free.

Life Settlement Annuities harness the untapped market value embedded within life insurance policies, allowing policyholders to extract five to 10 times more value than the cash surrender value of their policies—a potential game-changer for those facing lapse or surrender.

Moreover, life settlement annuities create multiple income streams for agents via referral fees, annuity commissions, and potential term conversion commissions. These financial instruments not only reward seniors for their age and impairments, but also offer liquidity to meet health and long term care needs without ongoing premium obligations.

Conclusion
As the U.S. population ages, the financial challenges associated with retirement and declining health become more pronounced. Agents in the life insurance industry are uniquely positioned to address these challenges by introducing innovative solutions like life settlement annuities. These annuities offer a lifeline for seniors—providing liquidity, tax-advantaged income, and unlocking hidden asset value in the form of illiquid life insurance policies. By embracing these solutions, agents can not only provide invaluable support to senior clients but also create new income streams for themselves in the process. In the evolving landscape of retirement planning, life settlement annuities stand out as a powerful tool to help seniors live out their retirement years with financial security and peace of mind.

The Financial Arena

On a Tuesday morning in November, I took my car in for repair. All of a sudden it had begun displaying a series of warning lights and messages:

  • Check Brake System!
  • Check ABS!
  • Check VSC System!

Ruh-roh.

While I waited for the repairs to be done, I walked down the street to a Panera Bread restaurant where I met a friend. We enjoyed bagels and coffee and conversation.

The dealership called to say they needed to collect a replacement part from another dealership and that my car would not be ready for another three hours. My friend left and I stayed and got some work done.

A married couple in their seventies came in and occupied the booth next to me. They had a pleasant conversation between them about repairs they were making to their home in anticipation of putting it on the market. They were getting ready to move into a single level, smaller, courtyard home.

Then in walked a man wearing a Cincinnati Bengals cap, a Bengals shirt, and jeans. He said, “Hey Mom and Dad, been waiting long?”

Dad: “Nah. We looked for you in the stands during Monday night’s game between the Bengals and Bills. Were you there?”

Son: “We were. We loved the feel of the arena that night!”

(He said “arena.” I liked the sound of it. Very Roman.)

Dad: “What was it like when Damar Hamlin came out onto the field?” (Hamlin suffered a cardiac arrest during a Week 16 game between the Bengals and Bills in the 2022-23 season. This was the first time Hamlin had walked back onto the field where he nearly died.)

Son: “The crowd expressed great empathy and warmth for him. He seemed to reciprocate.”

Dad: “Amazing, and on top of that, it was a great game!”

Mom (Switching subjects): “Are you still getting married in January?”

Son: “Yes, for sure.”

Dad: “Thank you for coming to meet with us. Your upcoming marriage has prompted us to think about our finances and the plans for our estate.”

I am admittedly a Bengals fan and had listened to this point in their conversation with casual interest. Suddenly, when estate planning came up in the conversation, I began exercising my best ease-dropping skills.

Here is what I learned about the family:

  • The married couple has two sons.
  • The older son is very successful and owns a business he built from scratch.
  • The younger son, in Bengals gear, is not so successful. His first marriage ended in divorce. He has had a few different careers. The woman he planned to marry in January is not someone his parents are thrilled about.

Point: All financial and estate planning occurs within the arena of vital family dynamics.

The Financial Arena
The English word “arena” dates back to the 1600s and has its origins in the Latin word, harena, meaning “sand, or a sand-strewn place of combat.”1 According to the dictionary, the word “arena” has various definitions:

“1: an area in a Roman amphitheater for gladiatorial combats
2a: an enclosed area used for public entertainment
b: a building containing an arena
3a: a sphere of interest, activity, or competition, the political arena
b: a place or situation for controversy, in the public arena”2

Question: In what sense is there a “Financial Arena?”

Answer: In this sense: “a sphere of interest, activity, or competition.”

Point: Financial planning is an ongoing process designed to guide people to make sensible decisions in the sphere of money that can help them achieve their life goals by competing against forces like inflation and market volatility. The activities that happen within this arena include the following:

  • Establishing life goals–short, medium, and long term
  • Identifying current assets and liabilities
  • Evaluating the current financial position–and the distance remaining between now and to achieving financial goals
  • Developing the plan–creating a clear path for achieving specific goals
  • Implementing the plan–making the necessary spending, saving, and investing changes in order to make goals happen
  • Monitoring and reviewing the plan regularly and making necessary adjustments

Sidenote: In Orlando, Florida, on the main campus of the University of Central Florida, there is a sports and entertainment arena named “Addition Financial Arena.” It was constructed beginning in 2006 as a replacement for the original UCF arena. Addition Financial is a credit union with a history of helping clients for more than four score years. On May 1, 2019, CFE changed the arena’s name to Addition Financial. Effective beginning August 18, 2022, UCF announced that Addition Financial had extended their naming rights for the facility through 2034. The arena is home to the UCF Knights men’s and women’s basketball teams.

The Financial Arena Is a Scene of Contest
Allow me to return to the family I overheard at Panera discussing financial and estate planning decisions. Recall that there are two sons. There is also a finite estate that the parents intend to pass on to these two men.

I do not feel in any way unethically responsible for knowing the details of this family’s financial picture because they loudly, and openly, discussed this with each other after I was already in place before they came in and sat down next to me. (Who doesn’t enjoy a little eavesdropping with their coffee?) Listening to the conversation, however, I made specific mental note of these sometimes-controversial factors:

  • Dad retired and rolled over his retirement plan assets into an IRA now held by a large investment firm. He estimated the current value at $700,000. It was initially significantly higher, but they have been living off the IRA over the past several years.
  • The house is owned outright and has an estimated market value north of $500,000. When the couple acquire a smaller home, they expect to have no post-sale, post-purchase surplus left over.
  • Dad described having another significant account (nonqualified) being managed by an independent financial professional (IFP). He estimated the current market value to be in excess of $400,000.
  • Dad and Mom want to pass on their existing funds to their sons while alive and not in testamentary fashion.
  • Problem #1: They are not interested in their younger son’s second wife benefiting directly from their gifts. They demand that he have a prenuptial agreement that specifically excludes her from receiving his inheritance.
  • Problem #2: They are unwilling to take into account the comparatively disproportionate financial standing of their sons in the division of assets between them.
  • Problem #3: The older son and the couple’s IFP (a woman) had previously dated, and now totally dislike each other. He does not trust her and frequently asks his parents to move the money to an IFP he uses.
  • Problem #4: The older son was not present at this meeting. He, however, has instructed his parents to only give him financial gifts in years that would coincide with favorable investment market conditions.
  • Problem #5: The younger son thinks his older brother is so successful financially that a greater portion of the estate should go to himself.
  • Problem #6: The older son is the favorite offspring of both Mom and Dad and the younger son knows it.
  • Problem #7: There are no grandchildren. This is a problem because Mom believes without grandchildren there really is no lasting legacy. She would prefer to give the money to charity.

Point: A successful IFP must help clients navigate economic factors of course, but there are often familial factors, sources of intense emotional contest and conflict, which often prove much more intransigent.

Blood and Money
There is a reason why the word arena came from the Latin word for “sand, or sandy place.” The broad open areas of Roman amphitheaters were strewn with sand to soak up the blood.

In the Old Testament, in Leviticus 17:14 we read that “the life of every creature is its blood.” That is why God said to the Israelites, “You must not eat the blood of any creature, because the life of every creature is its blood; anyone who eats it must be cut off.” Blood equals life.

But then we hear the expression “bloodshed.” Bloodshed is the destruction of life, as in war or murder, slaughter. It is death.

Point: When engaged in the arena of financial and estate planning, the IFP must remember both aspects of life and death when helping clients make plans. Money has utility during life and must be properly and responsibly passed on at death. In both instances, the IFP must address a wide array of issues such as taxation, inflation, risk, and multiple alternatives for accomplishing stated goals.

Application
Returning to our family in Panera, how might an IFP begin guiding them in their estate planning goals?

  • Meet separately with the parents away from either son.
    • In this meeting, gain full understanding of how they feel about their investment advisors and management.
    • What will they need by way of income to last their entire lives?
    • How much should they retain in an emergency fund?
    • What principles are guiding their preferences? Specifically, why do they wish to treat each son equally? Why do they not want their future daughter-in-law to benefit from their son’s future inheritance?
    • Ask the parents if life insurance might be a way to accomplish estate equalization.
    • Is a Grantor Trust perhaps indicated by the family dynamics? A properly drawn trust could supplant the need for a prenuptial.
    • Should they consider their older son’s feelings about their IFP?
    • What gives them the greatest joy when they think about their financial legacy?
    • Is there an opportunity to achieve Mom’s charitable aspirations?
  • Meet with the sons together and with both parents present. At this meeting both sons need to know that they are beneficiaries and not benefactors. This means that:
    • They will receive the gifts and/or inheritance when and in the manner that Mom and Dad prefer.
    • They need to plan for how they will utilize these gifts, and what steps they will take to multiply the gifts’ effectiveness and extend their longevity.

Summary
The Financial Arena is not a place for the timid to go to find refuge and safety. Every seasoned IFP knows that it is frequently a place to battle economic, societal, and familial contenders.

President Theodore Roosevelt, who left office in 1909, delivered a speech in Paris on April 23, 1910, which would become one of the most widely quoted orations of his career. Although he had labeled it, “Citizenship in a Republic,” it would become widely remembered as “The Man in the Arena.” At 3:00 PM in front of the Sorbonne, where an estimated 25,000 people packed the streets, Roosevelt criticized people who have “an intellectual aloofness which will not accept contact with life’s realities.”

Dr. Brené Brown paraphrased Roosevelt’s speech in a TED Talk and used his phrase “daring greatly” as the title of one of her books.

As this article concludes, let us remember that our business is not conducted in the realm of theories, but in the actual lives of real people with real problems.

From “The Man (Person) in the Arena:”

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”3

For every IFP battling in the Financial Arena of sweat and blood, I applaud you and hold you in great esteem. Keep striving to do the daring deeds of assisting people in their quest to live financially successful lives.

P.S. The conversation between the son and his parents took a strange turn when he suddenly, and with a surge of energy, announced in non sequitur fashion, “I bought my future wife a gun!” Dad said he had much to say about this. At this same moment the dealership called and informed me that my car was finished. I almost hated to leave before I heard where the conversation was going to go next!

Footnotes:

  1. https://www.etymonline.com/word/arena.
  2. https://www.merriam-webster.com/dictionary/arena.
  3. https://www.mentalfloss.com/article/63389/roosevelts-man-arena.
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