Thursday, March 28, 2024

On The Other Hand…

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Like Tevye in “Fiddler on the Roof,” many of us can readily identify with managing our way through a world of constant change, fighting to adapt to the demands of a new generation with a very different view of how things should be done today or how they may be done in the future. As leaders of financial services firms, we must find a way to constructively navigate changes to our own long-held traditions, lest we find ourselves singing a woeful song of “A t t r i t i o n__, Attrition:__ Attrition!”

Agency leaders can play a critical role in fostering practice succession strategies that maximize the three R’s—client retention, new-advisor retention and the senior-advisor’s business value retention. In our experience as a firm, the potential obstacles to a successful mentor/mentee relationship are many and require very intentional and directed processes for candidate vetting. Recruiting into a relationship or teaming for succession from within the organization, facilitating (initiating and monitoring) or transitioning effectively can be especially challenging.

While space will not permit a detailed examination of all these intricacies, perhaps we can discuss a few core components of each.

Vetting
Personality compatibility is an obvious starting point. Remember the mentor/mentee need to get along with each other as well as conduct meaningful business.

A properly vetted relationship can be a catalyst for re-invigorating opportunities within the senior advisor’s practice and energizing the creative juices of the junior advisor. This should be evident regardless of whether the ultimate “transition” is months or years away, or even if it is strictly a team exercise.

This is a process that often benefits greatly from an outside objective perspective assessing and giving proper weight to each person’s social style and the potential for complementary additive skills.

One without the other can be a recipe for disaster. No matter how much a senior advisor might benefit from a younger advisor’s technical skills, for instance, pairing a “driver” personality style senior with a true “analytical” junior is a venture that is likely doomed from the outset.

Facilitating
Occasionally, we have seen these pairings and/or teams spontaneously combust based solely on “chemistry” and old-fashioned “want to” on the part of the advisors involved. It is exciting when the mere idea of what could be bursts into a consuming fire of growth and activity.

It has usually been our experience that even if all the right pieces are in place, a bit of priming, tending and some poking around are required in order to sustain the flame. Again, a good coach or firm leader can provide insight into what is necessary to achieve the results desired by all parties.

Many times the firm leader will need to provide a framework for how to begin, monitor progress and brainstorm with the team(s) as to the next initiatives to move the business along and engage in some prodding of the parties to hold up their end and maintain momentum.

Transitioning
If the relationships have immediate momentum and the parties involved have the proper business acumen, plus clarity about timeframe(s) and mutual expectations, they may be perfectly capable of and inclined to create their own working agreements. If so, the firm leader/coach has facilitated the forging of this partnership. Mission accomplished.

Typically, the leader’s role is absolutely critical in formulating and formalizing a successful succession strategy or sustaining the functionality of a high performing advisor team. The firm leader should be prepared to provide the framework for practice valuations in succession scenarios and acquisition structures (including financing options) and best practices for maximizing value to all parties for the various teams.

On the Other Hand
Leaders must take the initiative to challenge standard succession planning practices so their agencies can adapt to changing needs. With these strategies they can successfully navigate to maximize retention of their clientele, and retain new advisors and the value of the senior advisor’s practice. And then, together, they can face the future with a fresh perspective.

Life Settlements: Five Things Every Advisor Should Know Before Diving In

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Life settlements have been in the market for over 30 years. What once was an unregulated financial transaction designed to help AIDS victims not covered by insurance pay for health care, has evolved into a well regulated, mainstream financial option for seniors. In 2018, there was $3.8 billion of life settlements transacted for life insurance policy death benefits that would have otherwise been lapsed or surrendered by the owners.

Americans own more than 150 million life insurance policies, but over $650 billion of death benefits are abandoned by the owners every year. Of that amount, seniors own $230 billion of death benefit that on an annual basis could potentially qualify for a life settlement. $3.8 billion of life settlements transacted last year indicates this is a healthy, growing market. Yet, in comparison to the amount of policies let go every year, and the high amount owned by seniors, you can see that the room for growth in this market is almost limitless!
More policy owners are becoming aware of life settlements every day thanks to TV commercials, positive news articles, and the growth of advisors incorporating life settlements into their practices. In fact, life settlements have become such a well-known option for policy owners that, if you are not talking to your clients about this option, someone else is.

Studies show that nine out of 10 life insurance policies are in danger of being lapsed or surrendered by the owner. But, according to the National Association of Insurance Commissioners (NAIC), the value that a policy owner can receive through a life settlement can be significantly higher. A Life Settlement Evaluation will quickly determine if your client would qualify to settle their policy while it is still in force and what percentage of the face value that they could receive as a payout for their policy.

But what should advisors know about life settlements beyond the basics, and what should they know about how the life settlement market functions?

Five Key Life Settlement facts you should know:

  • Surrender Value vs Settlement Value—Life settlement industry averages over the years show that life settlement market value can be five times to 10 times greater than surrender value, and certainly a smarter option than to lapse a life insurance policy after years of premium payments. The range for a life settlement can be as low as 10 percent of the face value, and can climb as high as 60 percent or greater of the face value.
  • Reverse Underwriting—Qualifying for a life settlement is the opposite of qualifying to purchase insurance. In this case, the older and more impaired the life of the insured is, the higher percentage of the death benefit the policy owner will receive in “present-day value.” A person who would qualify to buy a life or LTCI policy would be too young and/or healthy to qualify for a life settlement, and a person who would qualify for a settlement would be an automatic decline to buy any type of life/health insurance. The typical age range for a life settlement is 75-89, but younger or older applicants can qualify based on the severity of their health related impairments.
  • New Value from Old Asset—Life insurance policies are legally recognized as assets of the policy owner, with the right to sell their policy for its market value. Once a policy is sold, the owner will receive a lump sum that can be used in a variety of ways to meet the unique financial needs of seniors and/or those suffering from health and long term care needs. The minimum policy size to qualify for a life settlement is $100,000 of face value (and there is no upper limit for policy size).
  • Tax Advantages—Life settlements provide specific tax advantages for policy owners. If a policy owner is diagnosed as chronic or terminal, the proceeds from a life settlement are tax-exempt. If a life settlement is done for a policy owner not chronic or terminal, the proceeds received are taxed at capital gain for any amount received above the basis in the policy (basis=premiums paid). Policy owners rarely need to pay taxes for life settlements.
  • Fiduciary Responsibility—A life insurance policy is legally recognized as an asset like a home or stocks. The owners of these assets need to be informed of their options to maximize their value, and the same is true of a life insurance policy. Advisors need to understand this option and educate their clients or risk possible legal ramifications. There are settled lawsuits on the books brought by policy owners against advisors for failing to inform them of their life settlement option. Life settlement evaluations are a smart defense for advisors against potential future problems from clients who abandon a life insurance policy.

What Is the Life Settlement Evaluation Process?
Step One—Information: Submit policy owner information and a current, in-force illustration.
Step Two—Analysis: Policy owner information is reviewed for age, gender, state of residence, and prevailing health impairments impacting remaining life expectancy (the typical qualifying range is 2-10 years). The policy illustration will be reviewed to analyze the policy economics for the remaining time the new policy owner would keep the policy in force.
Step Three—Results: Longevity/settlement experts present a policy valuation analysis detailing what the owner could expect to receive as a percentage of the death benefit for their policy. A formal purchase and sale agreement is executed if the policy owner agrees to the valuation offer. The typical time it takes from Step One—opening the case, to Step Three—closing the purchase and sale of the policy, is 60-90 days.

Advisor Life Settlement Checklist

  • What type of licensed entity is the organization: Provider or Broker?
  • Are you working direct with the buyer, or are you working with a broker between you and the buyer?
  • Does the settlement entity have contracting documents and state filed disclosure forms to appoint an advisor under their license and E&O?
  • Will the entity cover the costs of, and order, all medical records, life expectancy reports and do all the settlement work for the submitting agent?
  • If an advisor is going to co-broker with a licensed life settlement broker, have they been properly informed about state regulatory laws that the advisor (and any up-line participating in remuneration) must possess a life settlement broker’s license, specific life settlement E&O coverage, and meet consumer disclosure and annual state filing requirements?
  • Does the settlement entity require any kind of exclusive, prohibiting the advisors from talking to other settlement entities about a case at any time?
  • Does the settlement entity take a commission out of the gross offer to pay themselves, or is it a no-load settlement with advisors fees paid separately from the offer?
  • If a brokerage commission is taken, how does the advisor independently verify from the buyer how much the actual gross offer is, and how is the co-brokerage commission divided between the settlement broker, the advisor and any up-line?
  • Is the compensation for a settlement based on the face amount of the policy, or is it taken as a percentage out of the gross offer?
  • If a term conversion, does all of the conversion compensation get paid to the advisor and the up-line?

Life settlements play an important role in financial planning for seniors. A policy owner is always better off to get the highest value for their asset, than to potentially lapse or surrender for far less. There are a number of advantages for seniors who utilize a life settlement, including: Favorable pricing for higher age and more impairments, property ownership rights and protections, tax advantages, and fiduciary considerations.

But, for advisors seeking to access the life settlement market, it’s important they conduct due diligence before working with a settlement entity. Advisors should understand the key differences between: Working with a life settlement broker or under direct appointment with a buyer; co-brokerage licensing requirements and E&O coverage; no-load settlements vs commissions taken out of the offer; and disclosure vs non-disclosure compensation rules. These are among the factors that can be completely opposite from each other based on if advisors co-broker a life settlement versus acting as an appointed agent of a life settlement buyer.

The Recipe For The Secret Sauce Of Success Begins With More Than A Dash Of Discipline

As I begin a new chapter in my professional life in the long term care industry, attempting to recruit both veteran and new producers to offer all forms of long term care insurance protection, it is with a bit of nostalgia that I look back on what attracted me to the career back in the day.

Twenty-two years ago I was a burned out attorney seeking a new career. After a couple of years of first casual and then serious investigation, I found it: Long term care insurance. I watched a friend of mine switch careers and immerse himself in this new venture and, after seven weeks, he had submitted a significant amount of business…and the first checks were coming in…and the numbers on those checks were impressive enough to catch my attention. Imagine the shock that my decision brought to my wife, and even my children, who all thought that I was running with a few stripped gears in the brain box or displaying all the symptoms of a mid-life crisis.

Dream big, work hard, stay focused, surround yourself with good people.
Despite some skepticism on the part of family and friends, I was intrigued enough to take the plunge. The degree of satisfaction that my friend was experiencing was the even more important factor for me. He arranged an interview for me, I learned just how bright the opportunity and his future promised to be for he and his family, and saw that with the discipline that I had developed through both my military and legal careers that my future could be even brighter. I was hooked. A year later, when we were on the beach at the Ritz-Carlton in sunny Jamaica, being brought drinks and reveling in the lap of luxury, my wife was hooked too; I believe her exact words were: “This is a good gig. Where are we going next year?”

Some may find this shocking, but, amazingly, the opportunity is as bright if not brighter today than it was back then. In addition to the financial rewards that have always been there, now more than ever this career offers the LTCI producer nearly complete freedom in the form of a golden entrepreneurial opportunity. There is no need to sell a commoditized product or to become merely an order taker of direct mail generated leads. The LTCI producer can, and should, regard himself or herself as a specialist in providing tomorrow’s peace-of-mind solutions today.

In the age of the disappearing pension, renewal or residual income is most certainly the gift that keeps on giving. When I came into the industry it was described to me as the “best get rich slow scheme around.” I can testify to the fact that I have seen many people—producers, second-tier (district) leaders, and agency leaders—come and go, but after applying diligence and perseverance, ride off into the sunset armed with a six-figure income stream and financial security for themselves and their families.

Without a doubt, discipline is the beginning of all success. Stated even more plainly, self-discipline is the strongest tool in the entrepreneurial tool box. It is the key ingredient in the recipe for the secret sauce of success. For a lot of people it is a learned trait, which must be honed like any other skill. Day by day, block by block, the more discipline that you create within yourself, the greater your chances of achieving success. If you have big dreams, such as being a Leading Producer, it is key to breakdown your overall objective into manageable daily tasks, e.g. the necessary number of appointments set and seen, the number of applications and premium submitted, as well as the marketing and networking activities that will be necessary to achieve this level of success. It all starts with the small tasks.

Even as a brand new agent, I had a pristine vision of what I wanted to accomplish on an annual basis, e.g. qualify as a leading producer by placing $180,000-$200,000 in new long term care premium. I realized that $5000 of submitted premium each week would create a large enough pipeline that, at 80 percent placement rate, I would cruise over the finish line with about a 10 percent cushion. To accomplish this would require no less than eight appointments set each week. To achieve this level required about 100-150 telephone dials per week.

Fortunately for me, and my family that was dependent on this new career for all the sustenance of life, I quickly realized that solid discipline is dependent upon positive coaching and mentoring. While I knew that my numbers would get me to the level of success that I wanted, I also realized that accountability coaches, with a largely steady stream of positive feedback and constructive criticism, would fuel my machine. While somewhat difficult at first, this discipline and commitment to these metrics and activity brought success and achievement. Let’s face it—production is the measure of success in any sales organization, and this achievement and recognition served to strengthen my discipline and bred even more success. This success in turn created even more discipline, more activity, even more success.

The equation quickly became: Discipline + Activity + Measured Accountability = Life Sustaining Dollars + Once-in-a-Lifetime Incentive Trips…and those wonderful renewals that keep on giving to this very day.

But even more important, the satisfaction and genuine joy and happiness of helping people in a positive manner and in a way that few others could do for them made my effort less of a career and something more like a calling or crusade. I also learned that talking positively to myself was better than simply listening to the self-doubt that would inevitably rear its ugly head after a tough appointment or an even tougher week.

Hindsight is always 20-20. For this reason it is always easy to look back with perfect clarity. As I engage in this luxury today, I realize that being part of a captive company system for 16 years was actually pretty simplistic in nature. Life was good, and I dare say relatively simple, and unfortunately most of us remained ignorant of the world around us. While vaguely aware of the growing market of alternative products, and peripherally cognizant of the ever growing number of changes in the industry and market around us, most of us continued moving forward in our role as “hammers” looking for new “nails” with which to visit and to offer our wares.

When our captive system came to an abrupt end, it was traumatic for many of the agents. Some gravitated to other captive systems or to a brokerage general agency that was reminiscent of the space in which they were previously used to operating.

That moment in time was a true crossroads for me. While I had always embraced change, finding opportunity in it, and welcoming it as a channel for my abnormally high achievement drive, I too had to find my new niche in the industry. As this change and evolution has continued over the past four years I can honestly say that I now feel like a little worm that has crawled over from the radish into the apple and discovered how sweet life can be for both me and my clients now that I have a full array of carriers and products with which to serve them.

While I am still known as a Traditional Stand-Alone LTCI Guy, I can and will admit to having sold hybrid products along with life insurance with long term care riders to my clients over the past several years. That is our industry today. That is what we mean by long term care insurance—it is a spectrum of carriers and products designed to match the varying needs and desires of our clients. No longer merely a one trick pony or hammer looking for nails to drive, I can utilize a completely holistic approach to better meet the needs of my clients. In order to maximize the diversity of products available to meet the needs of the general public, client centricity remains the key to success.

Despite the naysayers who continue to forecast the death of the long term care insurance industry, the market is very much still there. Between the Boomers and Gen-Xers—79 million and 84 million respectively—we have over 160 million people as our immediate audience. With market penetration still less than 10 percent, that translates into a lot of people who need to talk to us.

Also influencing these conversations is the fact that we are now usually talking to people that have the experience of dealing with parents, grandparents or other loved ones in care situations. Today’s prospects are, or have been, caregivers themselves, or have family or friends who are in this position. As a result, they are far more receptive to the concepts associated with protecting themselves as well as their families against the needs associated with long term care. The statistics associated with this product are very real to them, and their resistance to this plan is becoming easier to overcome.

More good news/bad news: With a more diverse population sharing a wider range of needs, we must be ever more diligent and disciplined in developing a broader portfolio of products with which to meet these needs. Filling our quiver with additional arrows also provides us with the ability to help more people than ever before with a wide array of carriers and products.

Amazingly, it has never been easier to sell this insurance. With each passing year, more and more of this coverage is being purchased virtually. This means that we no longer have to make house calls or do face to face appointments the majority of the time! With advances in electronic applications and policy delivery, carriers continue to make it easier to do business locally or throughout the entire country either online or even over the phone without leaving your home office.

Sheer market numbers aside, something that has changed is that our approach to finding new clients to talk to has to be different. Unlike the days of direct mail leads, today we must be savvy in networking, prospecting, and social media, and be more fearless in terms of opening our mouths to share our critical message.

I have had occasion to talk to a lot of people—veteran agents as well as young people seeking a career—in the last several months, all looking for the right “niche” from which to operate. To everyone who is considering the long term care insurance industry, I will enthusiastically say that ours is a great business to be a part of—carriers offer “street comp” far in excess of what it was twenty years ago when I became a new agent, and there seems to be far greater awareness of the long term care pandemic facing this country making it all the easier to make a sale.

To this end, I offer the following checklist to anyone contemplating a final career in the long term care industry:

  • Do you have an entrepreneurial spirit? If so, please apply.
  • If you are Compassionate, Passionate, Empathetic, and Coachable—please apply.
  • f you are seeking a franchise-like opportunity with replicable success and no required capitalization—please apply.
  • If independence, control, and the ability to set your own hours is important—please apply.
  • If you want to control your own destiny—please apply.
  • If helping people secure their futures is appealing to you—please apply.
  • If you like to set and subsequently achieve goals—please apply.
  • If you have the discipline to distinguish between work time and play time—please apply.

Remember, nobody will ever pay you more than you pay yourself—so please apply.

Is Zero Still Your Hero?

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How High Fees and Bonuses Have Adjusted the IUL Landscape

When I first learned of indexed universal life (IUL) products years ago, I was taught that, “Zero is your hero.” As you are most likely aware, this product is tied to the stock market but isn’t actually “in” the market. Hence, when the market is negative you won’t lose cash value to negative market returns. Negative returns result in a simple yet comforting zero index credit to your policy. There is still the cost of insurance and other fees; however, these costs are not deemed significant because competitive products can have low costs and are viewed simply as the cost of doing business. I was taught, “IUL costs and fees are high in the early years but decrease as the policy matures and access to cash is needed most.” That statement rings true today, but should be amended to exclude “early years.” The new statement should be, “IUL costs and fees can be high, based on your risk tolerance, and can continue to be high every year you own the contract.” It should not stop there since, comparing IULs to 401(k)s and mutual funds, the IUL traditionally has had lower costs and fees than investments in the other vehicles. This is no longer the case with the high bonus and high fee IUL products. With today’s new generation of IUL products, which include additional costs as high as a six percent asset charge per year, a key selling point (low cost) of IULs no longer applies. This begs the question, is zero still your hero?

With the introduction of AG49 in 2015, illustrations became more uniform in nature. Max uniform caps on illustrated rates were mandated. This uniformity birthed a frenzy of innovation. Illustration wars were tabled, but the battle for highest bonus had begun. With the introduction of high bonuses came an additional layer of fees. The question no longer was, “What is the illustration rate?” It has now become, “How big is the bonus?” The latter question should be followed up with, “What are the fees?” These new bonuses bring an extra expense inside the policy that means we can no longer say, “Zero is our Hero.” In most cases, consumers will not do a deep dive into policy costs to see exactly how much these bonuses will cost them over time. The onus is on the advisor to be transparent when talking about fees and be able to thoroughly explain illustrations and the inner workings of an IUL contract. It is easier for advisors to purposely ignore these additional costs than to delve deeper. The advisor should also be able to explain that in some cases fees are taken first, can reduce potential returns, and add up over time.

When discussing fees, illustrations have shown that in a high index credit year high fees are tolerable. Not many clients will complain about double-digit net returns after fees or asset charges, and bonuses or multipliers, are applied. In great index credit years, high fee and high bonus products look phenomenal. The problem occurs when we look at moderate, zero, and negative years. For example, using purely hypothetical numbers, let’s take a five percent asset charge and 200 percent multiplier IUL that returns a positive interest credit of two percent. At the end of the year the net result is a minus one charge (-5 + 2(200%) = -1). If the policy earns a zero or negative interest credit the net result is a minus five charge (-5 + 0(200%) = -5). As you can see moderate, zero, and negative interest credits can produce an asset charge assessed to the cash value. Imagine an annual review where you have to tell your client that their policy received an interest credit but still lost money. The high bonus/multiplier high fee IUL product satisfies an aggressive risk tolerance profile. This profile can represent an ideal IUL client, aged between 35 and 55. They must also have a long time horizon and not be concerned with the sequence of returns. For clients over 55 and premium finance cases, this high bonus, high fee IUL may be cost prohibitive.

When comparing fees and expenses of traditional IULs to 401(k)s and mutual funds the cost over time of the IULs could be significantly less. Depending on age however, with high bonus, high fee IULs the inverse is true. Take for example a client over 55. The client is in their early 70’s and purchases a high bonus, high fee IUL with a sizeable bucket. Hypothetically, at age 85, the high bonus, high fee IUL can be two to five times higher than alternative investments. When looking at the actual numbers, the fees from the IUL compared to a taxable account are jarring.

Two main selling points of a traditional IUL have been low fees compared to 401(k)s and mutual funds, and protection from negative market returns. With the advent of the high bonus/multiplier, high fee IUL products this is no longer the case. On the risk tolerance scale, someone with a conservative or moderate risk profile can still enjoy the cash accumulation benefits of a traditional IUL. But the way the industry is headed due to increased regulation, the risk profile may change with it. These new high bonus, high fee IUL products are more of a hybrid variable universal life (VUL) type product. In many cases they are “High Risk IULs” and suit a younger and more aggressive clientele. Ideally, IUL products should offer allocation options that cater to a client’s risk tolerance. For the saver, they can choose the fixed account, or a low to no fee, or low to no bonus option. For the younger more aggressive client, they can go all in with a high bonus/multiplier, high fee option considering they know the risk involved. The answer to the question presented in the title is not answered with a simple yes or no, the answer depends on your outlook on life. If you are a glass half full person, a positive index credit number will be your new zero, anywhere from plus three to plus six. To receive a zero with a high fee and bonus IUL, the policy would have to return a number slightly higher than the asset fee to not lose money. If you are a glass half empty person, a negative number will be your new zero. If the IUL policy receives an interest credit that is moderate or zero the net result will be a negative number. How comfortable are you with a minus one to minus three net result? When crunching the numbers on the high bonus, high fee IUL products, the concept of “Zero is your hero” needs to be reimagined.

Annuity Round Table—September 2019

Q.Which products are currently seeing the most activity and which do you foresee having strong sales in 2020?

Douglass
Currently, our MYGs are very popular. First, the interest rates are attractive for today’s market. Secondly, they are short term, in hopes of interest rates increasing.

Gipple
Which products we are currently seeing the most activity with kind of ebbs and flows week after week with the behavior of the stock market and the mentalities of consumers. However, overall, the elephant in the room for us is in what we refer to as the “income soon” category. That is, indexed annuities with a rider attached that is designed to provide guaranteed income starting within five years. I would say about 75 percent of the products that we illustrate and sell are in the indexed annuity “income soon” category. Occasionally however, when the stock market gets crazy, we will see a spike in indexed annuities that have strong accumulation potential such as higher caps or a good volatility controlled strategy. MYGAs also spike in times of turmoil. For example, in the rough stock market of Q4, 2018, MYGA sales industry-wide were up over 80 percent from the same quarter in 2017. But again, overall, it is the “income soon” category. The relatively new “structured variable annuities” that share the traits of indexed annuities have grown as well within the securities distribution. These products make a great bond alternative.

What will sell in 2020? I think a lot of the same. I think the fixed annuity business in general will continue to be strong even though we will continue to have regulatory developments at the state level that could get interesting. Annuities just have a great tailwind, which is the baby boomers—who own 60 percent of our country’s wealth—retiring. I also believe that the equities markets will be rocky in 2020 for various domestic and global reasons. As a result, accumulation focused indexed annuities and also MYGAs will sell. Within the securities distribution, “structured variable annuities” will continue to grow. And of course, the aforementioned demographics will allow the sales of indexed annuities with GLWBs to continue to grow. Regardless of market conditions, annuities provide these baby boomers with something they cannot get elsewhere—longevity credits. And the value of longevity credits is huge whether markets are rough or smooth.

Q.Which consumer markets/demographics are currently purchasing annuities, and what product types?

Douglass
The market for MYG annuities has always focused on an older demographic. I would consider 50 and above as our key market. However, the indexed annuity can appeal to all ages with upside potential.

Gipple
I often discuss a spectrum that spans the 20 year period that starts 10 years before retirement and goes to 10 years after retirement. This is the 20 year spectrum of the common annuity purchasers. On the young end of this spectrum (Ages 50-55) you have variable annuities. Then as you progress down the spectrum and get close to retirement, you have clients buying FIAs or VAs with GLWBs. After retirement you have accumulation focused FIAs and also MYGAs as alternatives to bank-type conservative products. I would say the typical client has at least a few hundred thousand dollars in investable assets and—based on industry averages—buys an annuity for $100,000—$150,000 (depending on annuity type). The multi-millionaires that don’t believe they will ever run out of money are still more interested in stocks/bonds/ETFs/REITS/etc. than they are annuities.

The next decade or so will be interesting because research shows that the 82 million people strong millennial population is more conservative than their parents ever were. This will lead the average issue age of annuities to decrease.

Q.Where do you project interest rates going in the coming year and what effect do you see that having on the sales of various product types?

Douglass
With return of higher interest rates, all guarantee-based product’s appeal would greatly increase. MYGs and indexed annuities would enjoy higher caps or growth potential.

Gipple
I think there are 15 trillion reasons that interest rates will remain low for a while. That is, of the $100 trillion global bond market, $15 trillion is currently yielding negative! This means that our bonds in the U.S. will continue to be demanded by global investors which will keep our bond prices high, which puts downward pressure on yields. I also believe that a rocky stock market will continue to bolster demand for “safe haven” assets like U.S. Treasury Bonds, which will also put downward pressure on rates. I just hope there is somewhat of an offset to those lower rates by corporate credit spreads increasing. After all, it is mostly corporate bonds (versus treasuries) that insurance carriers purchase.

I think regardless of what interest rates do, fixed annuities as a whole and also structured variable annuities will continue to grow. Why? Because it’s all a relativity game right? In other words, if caps on indexed annuities, for example, go to three percent, that would probably mean that certificate of deposit rates go to almost nothing. With the low rates continuing, you will also see a continuation in the development of the volatility controlled strategies that have proliferated in recent years.

Q.What product features and/or riders are fueling sales in the fixed indexed and variable annuity markets?

Douglass
Product features like upfront bonuses have fueled sales in annuity products, fixed or variable. The increase in allowable annual withdrawals up to 15 percent of the accumulated value is also an attractive feature.

Gipple
In the fixed annuity world, everything is increasing. As of Q1 of 2019, fixed annuity sales were 38 percent higher than Q1, 2018, and every category (Book Value, MYGA, FIA, SPIA, DIA) had increased from a year earlier by double digits.

The VA world is different. As a matter of fact, as of Q1, 2018, the fixed annuity market had experienced more sales than the VA market for 11 of the preceding 13 quarters. What a flip-flop from a decade ago! Also, VA sales in Q1, 2019, were down almost 10 percent versus Q1, 2018. Again, however, it is not all goom and dloom with VAs as structured variable annuities are really growing. But, at only $12 billion in 2018 sales, it is still a small component of the overall $230 billion annuity market.

Q.Are you seeing an increase in younger producers? What might be done to attract younger generations to annuity sales?

Douglass
The increase in interest rates would attract younger brokers to enter the profession seeking higher potential for sales. Another big factor would be the need for wealthy individuals to seek advisors which would provide more lead potential and increase sales opportunities. The revision of estate laws and tax structure would fuel the market. Our products need to solve a need for our clients. Annuity and life products provide security and peace of mind, including income potential for the future.

Gipple
My organization works with many younger producers but I cannot say I have seen an “increase” in their presence. To me, attracting young producers is all about education, training and professional development. However, educating young producers may be unattractive to some carriers and IMOs because this makes for a very long time from bringing the agent aboard to actually getting revenue from their sales. I am 41 years old and have another 20—30 years to go, so I am not as concerned about short term sales as I am about building a sustainable practice with professionals, young or “seasoned.” If an IMO either has an educational curriculum or has a carrier that provides a “template” educational curriculum, that—along with a few other things—would go a long way in attracting younger folks. Also, as I alluded to earlier, I believe that the “flight to conservatism” with younger investors may make annuities more “cool” than how they have been perceived historically—like how cool stocks and bonds were in the 90’s. My column in this month’s magazine elaborates a little more on bringing in “new blood.”

Be An Insurance Specialist To RIAs

We receive multiple inquiries from our registered BGAs about how a representative can work with a fee-only investment advisor for the sale of variable life or annuities. The RIA business is booming. As of April, 2018, the U.S. Securities and Exchange Commission (SEC) reported just over 12,500 RIA firms employing over 800,000 non-clerical individuals. That compares to just over 3,700 broker/dealers employing fewer than 630,000 registered representatives. According to a TD Ameritrade survey, RIAs recorded a 14.3 percent growth in revenue on average for 2018 and grew their client base by 7.5 percent. Their clients often have insurance needs, either for protection, estate planning or accumulation purposes. Many of these firms are fee-only, meaning they do not accept commission-based compensation. With the new SEC guidance and CFP Code of Ethics, there is more clarification on how RIAs can get paid and how they need to treat clients.

How can you leverage your insurance expertise with these RIAs and make it a win-win for you and the RIA?

When the RIA is “fee based” and has insurance-licensed, FINRA-registered members, it is easy. You can work with their client and the advisor, and they can earn a commission as an agent on the application. When the other professional is only insurance licensed there isn’t a way to pay VUL commissions to them, but you can compensate by increasing the commission split on fixed business you may do with them in the future.

However, what happens if the RIA is “fee-only” and/or a CFP working under the new code of ethics and standards of conduct?

In the beginning of the CFP certification it was supposed that the CFP acted as the coordinating financial professional and worked with the other financial professionals to assure a coordinated financial planning process. This meant that the RIA/CFP worked with the accountant, attorney and insurance agents to assure that all the planning parts worked together to fulfill the client’s financial planning needs. In the 1970s and ‘80s, this worked fine, but by the 1990s many of these other financial professionals were moving into the original advisor’s space. Attorneys and accountants were selling investment and insurance products, insurance agents became “financial advisors,” and all the professionals were competing in each other’s space. Because of this competition for the RIA’s clients, they quit referring them to their competitors. This is where the opportunity lies for a true insurance professional. You can work with these RIAs to help complete their client’s insurance planning process. Want to become the insurance solution for the client relationship for the RIA without competing for the relationship? If you will act as an insurance specialist to RIAs, there are ways to work successfully under the new and revised best-interest guidelines that fee-only RIAs must adhere to going forward.

There are only a handful of BGAs that have successfully marketed to and worked with RIAs in their respective geographical areas. The RIA marketplace will continue to grow, and their clients will continue to need insurance-based solutions. As an example, we had a BGA successfully place three large VUL cases with clients of an RIA this year alone. The BGA had marketed to this RIA, and several others, over the past 18 months. As with most insurance sales, the first engagement occurs when the client requests life insurance. In this scenario, the RIA asked the BGA to come in and explain how they could fill this need and potentially be compensated. Armed with the available arrangement options from The Leaders Group, they were able to place the first case, and two others were placed with another advisor of the firm, for a combined target premium of nearly seven figures.

The RIA marketplace will continue to grow, and if you aren’t working in this area of life insurance distribution you could be missing the largest opportunity of the next decade. Just like the wirehouse market of the 1990s and 2000s, there are not many BGAs working in this market yet. In 10 years, however, there may not be many new relationships available. As always, there are ways to help RIAs stay in compliance and still generate more recurring revenue from additional AUM through life insurance, and we will continue to research all the best available avenues to approach these markets.

The Combination Life Insurance Market Continues To Grow And Evolve

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Combination life insurance (life insurance with long term care insurance features) continues to grow and evolve.

Table 1 (from LIMRA) shows the number of combination life insurance policies and related new premium from 2007-2018. It excludes work-site sales and combination annuities. Two percent more combination life insurance policies were sold in 2018 than in 2017. Premium dropped two percent, but that’s misleading as will be discussed.

Table 2 shows the distribution of those combination life policies in 2018. As will be discussed later, “CI” means “chronic illness” as opposed to “LTCI” which means “long term care insurance” and “ADB” means “accelerated death benefit” only as opposed to “EOB” which means that an “extension of benefit” is available as well as an ADB.

There are many ways the combination market can be divided, one of the most significant ones being in terms of coverage provided (risk borne by insurers). As Table 2 shows, only nine percent of 2018 combination policies were sold on products that permitted more than the death benefit to be used, if a need for long term care (LTC) occurs, by offering an EOB feature. More than 90 percent of the policies were sold on products which offered only an accelerated death benefit (ADB) for LTC.

Product differences explain some of the price variations between insurers shown below. Insurers may differ in their assumptions of LTC incidence and in their assumptions regarding how often insureds choose to access their ADB when they do need LTC. Different lapse assumptions or ADB election assumptions based on market can have a significant impact. Also, insurers may differ as to whether they assume that an LTC feature improves product persistency and how such persistency improvement is reflected in pricing. ADBs and EOBs can generate different capital requirements for various insurers based on their mix of business, and insurers vary in how they allocate expenses to “riders” (for example, optional features that add additional cost). Underwriting requirements or classification can make a difference (there are definitely distinctions of that type below), because a healthier class should have a lower mortality premium but may have a higher LTCI premium because more survive to ages of LTC incidence. Differences in pricing techniques (particularly for newer features) might cause inadvertent differences.

Accelerated Death Benefit (ADB)
ADBs are an inexpensive way for insurers to help consumers cover LTC costs, by giving them the flexibility to use their ADB, if they wish, when LTC is needed. The insurer does not pay out more money; instead the insurer simply pays it out earlier (a loss of investment income). If a lot of the death benefit is paid out as an ADB benefit, it seems likely that the insured would have died fairly soon thereafter; a short period of foregone interest involves low cost. If little was advanced, the foregone interest on that advanced money is low. Furthermore, the cost is low to the degree that people save their death benefit for their beneficiaries, using the ADB as a last resort.

Comparing only two carriers, I found significant difference in the cost of adding an ADB provision as shown in Table 3.

ADB costs more (in dollars) for females than for males because females are more likely to need LTC (hence to use ADB), are likely to need LTC longer (hence are likely to use more of their ADB) and are more likely to continue to live after the full ADB has been advanced (which means more loss of interest from advancing the death benefit). The gender difference in percentage add-ons for ADB is even larger, because the female’s life premiums (denominator) are lower.

It is interesting that the percentage add-ons for ADB differ so much by insurer. One insurer’s percentage add-on increases as age increases, whereas the other insurer’s add-on generally decreases as age increases. At the end of the previous section, I explained some of the factors that can impact pricing.

Extension of Benefits (EOB)
Extension of benefits (EOB) provisions continue to pay benefits after the death benefit has been used up (and often provide a residual death benefit). Thus, the insurer takes a much more meaningful LTC risk, rather than simply lost investment income.

From a consumer’s perspective, a life insurance policy with an extension of benefits provision is a better way to “self-insure.” The consumer “self-insures” the first two or three years of LTC with their beneficiary’s death benefit, as that death benefit is used to pay for LTC. After the death benefit is used up, the consumer has an inexpensive partial stop-loss or catastrophe type of coverage because the self-insurance portion represents a two-year or three-year elimination period before true LTCI risk transfer occurs.

Table 4 (see page 22) shows that EOB provisions add more cost than ADB provisions, even though they are much less likely to be used, particularly by males. Of course, that’s because the EOB is a marginal additional cost for the insurer, rather than only paying cost earlier.

The four leftmost columns in Table 4 show the percentage additional cost of adding EOB to a life insurance policy that already includes ADB. The Carrier C product is a work-site product with unisex pricing. Because it has a shorter extension of benefit period (25 months compared to 3 years) and because the extension starts a bit later (after 25 months compared to after 24 months), I would expect the EOB cost add-on to be lower for Carrier C than for Carrier B. Some possible explanations for Table 4 differences were mentioned earlier.

The rightmost two columns are different, showing the ratio of the extra premium to add EOB to a policy to the extra premium to add ADB to a policy. Not surprisingly, the additional cost of the EOB compared to the ADB is smaller for men than for women, because few men outlive the ADB benefit. The ratio increases with issue age because more older buyers will have coverage in their 80s.

A longer EOB would cost more; a shorter EOB would cost less.

Insurance products which offer only an ADB typically have no discounts for married people, whereas products with EOBs often discount prices for married people (for example, 10 percent). Stand-alone LTCI policies typically have the largest discounts for couples but require that both buy.

Compound Benefit Increases (CBIO)
Compound benefit increase features (CBIO; the maximum monthly benefit and potential lifetime benefit compound) add more cost than either ADB or EOB. When ADB is exercised, most (perhaps all) insurers subtract only the base benefit (not the portion attributable to compounding) from the death benefit.*

Whereas the ADB does not create additional benefits (solely paying an ultimate benefit earlier) and the EOB creates additional benefits but not until after the ADB is used up, the CBIO feature creates additional marginal benefits as soon as the insured goes on claim. Therefore, it can cost many multiples of the cost of ADB, depending on the compounding percentage and on the benefit period, etc.

Table 5 shows the cost of adding CBIO to a five-year benefit period linked-benefit product.

The percentages in Table 5 are applied to a bigger base than the percentages in Table 4 as the Table 5 denominators include the cost of the EOB feature.

*Insurers differ in how they handle benefits that are less than the maximum. Consider a base benefit of $3000/month which has grown to $6000/month. If a policyholder uses only $3000 in a month, one insurer may deduct that full $3000 payment from the death benefit, while another might consider the $3000 payment to be half base and half compounding thereby reducing the death benefit by only $1500.

Single Premium vs. Recurring Premium
Tables 1 and 2 combine single premium sales and recurring premium sales, thereby obscuring some significant differences. LIMRA shared some data with me, permitting me to determine the distributions mentioned below.

ADB sales are most commonly made to satisfy a life insurance need. The ADB feature may be automatically included because of the insurer’s product design or may be added at the suggestion of the financial advisor. Fewer than two percent of ADB policies are paid for with a single premium.

On the other hand, when EOB policies were first created, they 100 percent were sold with single premiums. The concept was to move “lazy assets” (low-yielding assets) to an EOB policy to leverage the investment for LTCI purposes. In these sales, the primary motivation was generally LTCI, the life insurance component being attractive to avoid “use it or lose it.”

However, as inforce stand-alone LTCI policies started having large price increases, and large price increases applied to new stand-alone LTCI sales also, the EOB carriers recognized an opportunity to grow by making their product available on a recurring premium basis. Originally the expansion was limited to 10 premium years at most, but in 2018 we continue to see more lifetime-pay products becoming available. In 2018, 57 percent of the EOB sales were single premiums compared to fewer than two percent of the ADB sales.

All other things being equal, I would expect EOB policies to have higher premiums because they add on an additional LTCI benefit. However, in 2018 and 2017, ADB average single premiums were roughly 50 percent larger than EOB single premiums. Perhaps the ADB single premium cases had larger death benefits, were sold at higher ages, or were more often rated due to health conditions.

On the other hand, the average recurring premium on EOB policies was more than twice the average recurring premium on ADB policies. Besides the additional cost of EOB (and sometimes CBIO), this difference might reflect that a higher percentage of ADB policies have premiums scheduled to be paid a very long time as opposed to 10 years or less.

Single premiums accounted for 61 percent of LIMRA’s reported new 2017 premium, but only 58 percent of new 2018 premium. Correspondingly, the market share of recurring premium increased. Thus the “drop” in 2018 premium seems to be balanced by an increase in future premiums. A decrease in average issue age, which seems likely with the shift toward recurring premiums, could increase the present value of future premiums.

Section 7702(b) vs. Section 101(g)
Another way that combination policies can be distinguished from one another is by which provision of the legal code applies to them. Section 7702(b) policies have LTCI benefits that can legally be called “long term care insurance” and must satisfy all the LTCI legal requirements. Most ADB policies have chronic illness provisions, which comply with Section 101(g) which permits incidental coverages to be added to life insurance policies if they do not exceed 10 percent of the value of policy benefits.

Financial advisors (FAs) are not allowed to refer to Section 101(g) policies as “long term care insurance.” I believe that puts FAs in a very tough spot. Section 101(g) provisions can be more favorable than Section 7702(b) provisions because Section 101(g) provisions are more likely to pay the full LTC benefit regardless of the cost incurred, rather than limiting the benefit to reimburse the amount of LTC cost incurred. They may satisfy requirements for Section 7702(b) policies and any such requirements they don’t satisfy may be less important to the consumer than the advantages Section 101(g) provisions may have. Rather than forbidding them to be called “LTCI,” it might be better to require that the insurer disclose any LTCI requirements which they violate.

The Deficit Reduction Act (DRA, 2006) required certification (training) to sell LTCI policies which qualified for the State LTC Partnership programs. The NAIC’s recommended wording (to implement DRA) required certification for all LTCI policies whether the policies qualify for Partnership programs or not. I prefer the NAIC wording so that all (at least all stand-alone) LTCI consumers can have access to Partnership policies.

Some states adopted the NAIC wording, while others adopted wording straight from the DRA. In states which have adopted either the DRA wording or the NAIC wording, most (if not all) insurers selling stand-alone LTCI have uniformly required certification regardless of whether a policy is Partnership-qualified or not. Insurers selling combination policies (including linked-benefit policies), on the other hand, have generally not required certification in states with DRA wording.

Evolution
Sales are shifting from stand-alone long term care insurance toward combination products, but not as much as many industry watchers think. In 2018, 56,288 stand-alone LTCI policies were sold1 vs. 35,431 EOB linked-benefit policies. The huge “wave” of combination policies consists of ADB-only policies.

Although approximately 60 percent more stand-alone LTCI policies were sold than EOB policies, the EOB market produced ten times as much new premium as the stand-alone LTCI market ($1.78 billion vs. only $0.172 billion1). To judge relative stand-alone and combination LTC sales based on premium is misleading because:

  • The inclusion of life insurance generates a higher premium, not attributable to LTC risk.
  • The prevalence of single-premium and limited-pay (e.g., 10-year-pay) sales in the EOB market tilts the comparison. One dollar of recurring premium sales is worth a lot more than one dollar of single premium sales.

I mentioned previously the shift from single premium EOB policies to recurring premium EOB policies. The availability of recurring premiums has opened the market to younger and less affluent buyers. Unfortunately, we don’t have data to demonstrate those trends.

In order to sweeten the death benefit and LTCI benefit value propositions, EOB policies have reduced their “money-back” guarantees. Whereas consumers were previously guaranteed that they could get their money back at any time, now many policies are sold with cash values equal to 80 percent of premiums paid.

A third evolution for EOB policies has been that they are now more often sold with CBIO than in the past, as they are seen as an alternative to stand-alone LTCI, but that trend might temper as the price for CBIO might increase for new sales.

With CBIO seemingly more common on linked-benefit products than in the past, and fewer CBIO sales on stand-alone policies than in the past, and with shorter benefit periods being more common on stand-alone policies than in the past, the total amount of new LTCI risk transfer seems to be shifting toward linked-benefit policies.

ADB and linked-benefit policies are also extending into the work-site market, with some linked-benefit policies on a Section 101(g) chassis. Guaranteed-issue stand-alone LTCI has disappeared but guaranteed-issue coverage is available with work-site linked-benefit products.

For younger-age employees, combination products have greater appeal than stand-alone LTCI because life insurance is important to their young families. At those younger ages the cost of ADB and EOB is reduced because the premium-paying period is long and because a lot of coverages will no longer be inforce when the young employee reaches 80 or more years old.

A potential concern in the work-site market is that buyers (especially young buyers) might think they have more LTC protection than will be the case when they need care. The lack of CBIO, possibly exacerbated by a small death benefit, may limit ultimate purchasing power for LTC services.

As the work-site market for combination products grows, if work-site policies are included in the data we’ll see more sales at younger ages and more recurring premium.

Other than in the work-site, underwriting seems to be narrowing between stand-alone LTCI and linked-benefit policies. However, linked-benefit policies are more likely to be underwritten on an “accept-reject” basis with fewer attending physician reports. “Accept-reject” underwriting generally allows a few more policies to be issued, but sometimes a deeper underwriting dive allows a policy to be issued that wouldn’t pass “accept-reject” analysis. Because of the limited risk in ADB-only policies, LTC underwriting is less important for them.

Combination policies are less likely than stand-alone policies to limit benefits to the cost of actual LTC expenses. Not only is such a “cash” or “indemnity” policy more attractive, but it is also easier to explain, which is important in the work-site.

Generally, the public is more confident of premium stability in the linked-benefit product. However, the large price increases on older inforce stand-alone LTCI policies have led to pricing and regulatory changes which greatly reduce the risk of large price increases on stand-alone LTCI policies issued today.

A new development in 2019 is that at least two EOB policies now have separate premiums for the ADB portion of the LTCI benefit as well as for the EOB and CBIO portions. The result is that all three of those premiums (ADB, EOB and CBIO) can be tax-favored as LTCI for Section 7702(b)-type policies. Without a CBIO feature, the portion of the entire policy premium which is tax-deductible may be in the 18 percent to 20 percent range for men and the 25 percent to 33 percent range for women. When CBIO is added, the tax-deductible percentage of premium can increase to 43 percent to 57 percent for males and 58 percent to 66 percent for females.

Other recent innovations include:

  • Marketing a stand-alone LTCI policy with a return of premium benefit option and cash value option to compete against linked-benefit products.
  • Designing a linked-benefit product with a seven-year LTCI benefit period where the death benefit gets spread over two years. At least most (if not all) previous seven-year benefit periods had death benefits spread over three years, which required 50 percent more death benefit to get the same monthly LTCI benefit. The new design provides more LTCI benefit but less death benefit for the same premium.
  • New approaches exist to help clients decide whether to purchase stand-alone or linked-benefit products, but that discussion is beyond the scope of this article.
  • The ability to do §1035 exchanges and/or to use qualified assets to fund LTC insurance has increased. From my perspective, this is a market which financial advisors have barely scraped. There are wonderful things they can do for clients who have large gains in life insurance contracts or annuities.

Going forward:

  • The pricing and underwriting differences cited herein seem likely to narrow.
  • Conversion to Principles-Based Reserves and a new mortality table may increase the cost of linked-benefit products.
  • If/when interest rates rise, new combination products may have stronger LTCI benefits.
  • Increasing interest rates and Principles-Based Reserves might also result in fewer linked-benefit policies being fully guaranteed than is the case today.
  • §1035 transfers from non-qualified annuities open the possibility for gains to never be taxed. Gary Forman, SVP of Long Term Care Associates, suggested that the Federal government might decide to provide a tax incentive to use qualified funds to purchase LTC protection.
  • Viatical settlements (of existing life insurance policies which lack ADBs) seem to be increasingly used to pay for LTC. Might those insurers start competing with the viaticals to avoid policy surrender? It wouldn’t hurt to ask an insurer without an ADB whether they would be willing to negotiate.
  • A new Shoppers’ Guide was adopted by the NAIC in April and is available at https://www.naic.org/prod_serv/LTC-LP-19.pdf. It discusses combination products much more than its predecessor. I was involved in designing the new Shoppers’ Guide and respect the attention the regulators paid to these issues and their interest in learning what the industry thinks of the new Shoppers’ Guide and how the industry uses the guide (any differently than the previous one?). I would be happy to be a conduit for any comments readers might have (claude.thau@gmail.com).

Terminology has also evolved
The insurance industry has used many names to describe these types of policies, but wording is consolidating and may consolidate more.

“Linked-benefit” is used by LIMRA and herein solely for products which might pay LTC benefits greater than the death benefit (i.e., an extension of benefits is available), regardless of whether the EOB is purchased or not. One advantage of this nomenclature is that “linked-benefit” is unique, which reduces confusion. Another is that it distinguishes from products which offer only ADB.

“Combination” (or “combo”) is used by LIMRA and herein to include both ADB policies and EOB (“linked-benefit”) policies. One way to remember the terminology is to think of “Combo” totals as “combining” ADB and EOB.

“Hybrid” has been used a lot in the industry but is often associated with cars today. To avoid confusion, it is preferable that we avoid using different terms for the same feature.

“Asset-based” or “Savings-based” is relevant when clients are moving assets to purchase a single premium combination product. With the great expansion of recurring-premium linked-benefit sales, these terms seem less relevant.

Reference:

  1. 2019 Milliman Long Term Care Insurance Survey, Broker World magazine, July 2019, page 30.

How To Capitalize On Voluntary Benefits

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When employees seek protection in the event of a health crisis or tragic event, as a broker your employer clients look to you as a trusted advisor to help offer the best solutions. However, many brokers could be missing out when it comes to offering voluntary benefits, especially among small to mid-size employer groups. There is ample opportunity to engage with these employers, but some common setbacks can steer brokers away from exploring them further. As noted in the BenefitsPro and Eastbridge May 2018 report, Brokers and Voluntary Benefits—The Competition Intensifies, brokers indicated that in order to be more successful they need more time to sell voluntary, more knowledge about carriers and their offerings, and more assurances regarding administrative and billing capabilities. The good news is there’s a solution to help brokers grow their businesses and address these needs, and that’s by building partnerships with voluntary benefit enrollment firms.

Voluntary landscape
But first, why are voluntary benefits important? Some of the most common reasons employers offer voluntary products is to address the following needs among their employees:

  • Financial well-being
  • Interest in the product
  • Gaps in their plan, and more benefit options
  • For groups typically with 100 or more employees, employers find great value in providing a voluntary benefits solution because it:
  • Replaces a benefit they used to offer and contribute to;
  • Offers a cost savings for the company;
  • Reduces 401(k) and 403(b) loans and withdrawals; and,
  • Aids in recruiting and retaining employees.

So, what’s currently in demand on a voluntary basis? Employers are most interested in offering long term care, critical illness, cancer, term life, and hospital indemnity/supplemental products. As pointed out in Eastbridge’s MarketVisionTM—The Employer Viewpoint May 2019 report, 64 percent of employers offer one to three voluntary products to their employees, which supplements coverage employers already have with their existing health insurance plans. But, employers with more than 50 employees are much more likely to consider adding a new voluntary benefit, move certain benefits to voluntary or shift more costs of group plans to employees.

Enrollment resources
Brokers like yourself might be looking for additional support in order to provide enhanced guidance and resources to your clients. It could be beneficial to connect with an intermediary who can assist and bring additional value to your clients. Intermediaries can operate as partners to improve the client experience, allowing you to expand your business and grow your client relationships.

A non-traditional enrollment service manages enrollments on behalf of broker clients and offers voluntary benefits to employees during face-to-face meetings. In many cases, employers with less than 1,000 employees prefer allowing a one-to-one meeting with a professional enroller compared to those with 1,000+ employees. A non-traditional enrollment service is also uniquely qualified to work cases whose size, location, or working conditions make them less desirable to traditional enrollers. If variables like these have made it difficult to work with an employer group, a non-traditional firm would provide much more flexibility. On top of that, it can help alleviate some of the burden in feeling like you have to be a “voluntary benefits product expert.” So it’s not necessary to research a slew of products excessively—that’s the enrollers job. A non-traditional enrollment service can even offer a benefits platform that makes benefits administration easy while it provides for online enrollment if needed. Plus, custom websites can be created to offer a single access point for enrollment, plan documents, forms, etc.

When handling future voluntary enrollments, larger employer groups with 1,000+ employees favor working with their broker in conjunction with an enrollment firm, while groups with 100 or less employees would rather work directly with a broker as the main resource for their voluntary enrollments. So, if brokers can cultivate a partnership with an enrollment firm to support them through the enrollment process, it’s a win-win for any group—no matter the size.

Maximizing success
To assist your clients in offering the right coverage options to their employees, it’s helpful to guide their employees on understanding the basics about voluntary benefits and their choices:

  • Pricing. Could cost savings be involved for the employer, the employees, or both? Make sure they’re informed on any potential savings to ensure they are satisfied with their experience. By doing this, you’ll develop a trusting relationship which could result in repeat business.Product function. With so many choices to consider, it can be confusing for employers to understand the differences between products and how these different plans could affect their employees.
  • Product function. With so many choices to consider, it can be confusing for employers to understand the differences between products and how these different plans could affect their employees.
  • Liabilities. As a broker, it’s important to breakdown any potential financial liabilities your client or their employees may have. Offering suggestions on how to best budget and prepare for those financial risks would be valuable.

Non-traditional intermediaries can simplify this process by performing enrollments one-on-one where employees can choose the products that best fit their needs. They should use a professional, consistent and repeatable enrollment methodology to maximize success and ensure that employees understand their options full-circle.

Understanding employee generational makeup
When partnering with a non-traditional enrollment service employers should receive attentive service paired with high-quality products—meanwhile, it frees you up to focus on nurturing your client relationships.

For example, if your client’s employees skew older in age, they might have a stronger knowledge base from life experience that has built a perception around certain insurance products. Boomers might know the basics about supplemental health and life insurance products, but it’s still important to set a foundation, build their trust and communicate as clearly as you can. As Boomers get closer to retirement, it’s essential they prepare for any potential financial risks or loss of life. This can give them peace of mind to protect their loved ones or leave a legacy.

When working with Gen-X employees, many of whom value both independence and work-life balance, changing jobs could be a common occurrence. So providing these individuals the opportunity to purchase supplemental and voluntary products that can be convertible or portable, with favorable pricing and underwriting conditions, may be seen as extremely valuable.

If employees are younger (more Gen-Y in nature), they may be reaching important life milestones such as a career transition, getting married, building a family or purchasing a home. With all of these exciting events employees might seek even more advice in order to make informed confident decisions. These individuals also appreciate work flexibility and work-life balance, but also strongly value their independence along with being highly educated and tech-savvy. Hence, supplemental insurance products can assure employees that they’re financially sound and secure based on their own choosing, during times of need.

You should match your communication efforts and tailor product recommendations to fit employees’ lifestyles, needs and future changes. An enrollment solutions partnership can set the tone and build trust with your clients showing that you understand their goals and their employees’ needs for their current or future stages of life.

From both an employer and employee perspective, it benefits all parties to make sure clients are educated and aware of additional benefit options that can be offered to their employees. There are many ways clients can leverage these cost savings to secure peace of mind for their workforce. Whether you utilize an enrollment partner, or enhance your client relations’ efforts with these best practices, it’s never too late to meet with your clients to help their employees plan for the unexpected and protect their financial future.

To Be Or Not To Be…That Is The Question

Avoiding The Tragedy Of Long Term Care

The word tragedy was derived from the Greek word tragoidia which literally means ”the song of the goat.” It is called “the song of the goat” because in ancient Greece the theater performers used to wear goatskin costumes to represent satyrs. Today in theater and literature a tragedy is a work that has an unhappy ending. The ending must include the main character’s downfall.

According to Aristotle, “A tragedy is the imitation of an action that is serious and also, as having magnitude, complete in itself; in appropriate and pleasurable language; in a dramatic rather than narrative form; with incidents arousing pity and fear, wherewith to accomplish a catharsis of these emotions.”

William Shakespeare wrote a great number of plays. They ranged from comedies to tragedies. A Shakespearean tragedy is characterized by a range of elements: A main character cursed by fate and possessed of a tragic flaw; a struggle between Good and Evil—external conflict imposed as a result of plot or opposing evil character, or an internal conflict where the hero has to struggle with his own demons.

Everyone considers the story of Romeo and Juliet as the quintessential love story but remember it was a tragedy—their love story most decidedly had a very unhappy ending.

A more contemporary definition of tragedy includes: “A lamentable, dreadful, or fatal event or affair; calamity, disaster.” In my minds eye, that definition would certainly include the ravaging effects of a long term care episode.

In our agency, we refer to ourselves as Long Term Care Advocates, but peel away the veneer, and we remain no different than anyone else with an insurance license: We sell an insurance product—we are sales people. While we remain more popular than a car salesman or member of Congress, like every other sales industry our carrier partners measure our success in the amount of premium generated each year.

Because we are sales people it can be very easy to lose ourselves in the numbers related to premium sales, find ourselves caught up in the excitement of being a leading producer, reaping the benefits of this status while enjoying the luxury of exotic trips offered by the carriers—all the while forgetting about the people behind the policies and the numbers.

As an attorney in a former life I had experienced crafting hundreds of wills, for a multitude of clients, without having any of them die. To this day I still have several file cartons containing hundreds of wills in my garage. And then it happened: One of my clients died, and I was instructed by a family member and executor of the will that I should file the will with the Clerk of the Court and consider myself retained to represent the estate in court. That was a huge reality check for me. I had fallen into the trap of thinking of these estate planning clients in the abstract; it never occurred to me that someday one of them might even die and this intellectual exercise of selecting trustees, guardians, and the considered disposition of their worldly possessions could become a reality.

Fortunately for me, my first claim in the long term care industry arose only about seven months after I entered this new profession. Ironically, both of my clients had purchased their policies only a few months before, while in excellent health, even achieving preferred health status at ages 78 and 75 respectively. What went wrong? Their health took dramatic changes for the worse, in ways unimaginable, and the end for both of them came on very suddenly. Because I had promised to be the “face of their policies,” when the need to file claims arose they reached out to me, and I was both honored and a little overwhelmed to assist them with initiating calls to the claims department of the carrier. Fate smiled on me, and a very helpful claims analyst seamlessly took charge of the process, mindful of making me “look good” to the clients and their family even though I was quite superfluous to the claims process equation, and provided great assistance in establishing care in the home for these two fine people.

A mere three months later I was walking through the post-funeral reception at their home, with their daughter on my arm gratefully introducing me as “Daddy’s long term care agent,” and encouraging people to take my business card (making me feel somewhat like a ghoul). Twenty years after that experience it still remains a surreal memory.

That otherwise tragic experience was a dramatic wake-up call for me and, without a doubt, made me into an advocate committed to spreading the word about how invaluable this insurance product can be if purchased early enough.

Those two gentle people, happy to still be mowing the lawn [in black knee socks, sandals, and Bermuda shorts] or working three days a week in a large retail store at the mall, enjoying life with their children and grandchildren, still remain larger than life memories to me. Meeting them, serving them, advocating on their behalf, impressed upon me how fragile life is for all of us, and how our worlds can be changed by an accident or a doctor’s visit or diagnosis; that our daily lives and routines remain subject to the randomness of fate and science.

Despite the fact that we live in the Time of Instant Everything, where information is literally at our fingertips with search engines such as Google, and news is available on a 24-hour basis, there are certain topics that remain far below the radar screen. While a baby is born to the Royal Family in England and the joyous news is spread instantaneously, or a plane crash anywhere in the world is a tragedy of which everyone becomes instantly aware, long term care is something so very few know anything about. Quite often it is not until a routine physical examination becomes a life changing event that people consciously begin to plan, much less think about, their long term care.

For years I have referenced Christopher Reeve and Michael J. Fox as “poster children” for long term care, even including them in the body of the home interview that I conduct with clients.

Christopher Reeve had it all. After studying at Cornell University and the Juilliard School in New York, he became known around the world as Superman. At 6’4” his natural physique allowed him to appear in this role in four major motion pictures. His life changed instantly and permanently, nay even tragically, when at age 43 he became paralyzed from the neck down following a horseback riding accident. He also required a respirator to assist with his breathing for the balance of his life. But for the good graces and fund raising efforts of close friends like Robin Williams (a fellow Julliard classmate) he and his family would have faced cataclysmic financial disaster in terms of his long term care. He died nine years later at age 52.

At the age of 29 Michael J. Fox was at the height of his career. He had starred in the highly acclaimed Back to the Future trilogy, as well as other feature films, and was starring in the top rated television show when he was diagnosed with Parkinson’s Disease. He was able to continue for an additional seven years before publicly revealing the diagnosis, but was forced to semi-retire from acting at age 39 when the symptoms became problematic.

Long term care. What is it? More often than not it is an event like Reeves’, or it can also be a slow decline in health like Fox’s. Essentially, it is an episode of our life when we can no longer take care of ourselves during which we may need assistance with the Activities of Daily Living (ADLs) which include bathing, toileting, transferring, eating, dressing, and continence, or suffer from a form of cognitive impairment requiring custodial care due to safety concerns.

Life expectancy for those alive when Teddy Roosevelt was president was age 47. By the time his fifth cousin Franklin Roosevelt signed Social Security into existence, life expectancy had risen to age 63. Today it is over 81. We are living longer, dying slower. Advances in medical and pharmaceutical treatments, and the ability to adopt healthier lifestyles, favorably impacts and alters the demographics of our society and we continue to age in place.

James Doohan, Jimmy Stewart, Glen Campbell, Rosa Parks, Peter Falk, Pat Summitt, Perry Como, Charles Bronson, Rita Hayworth, Norman Rockwell, Sugar Ray Robinson, Casey Kasem, Aaron Copeland, and Burgess Meredith. Robin Williams. Ronald Reagan. What do they have in common? Alzheimer’s Disease. Like many of the thousands of people we’ve talked with over the years, none of them seriously considered they would ever have to deal with something as devastating as this disease. For this reason I am grateful for the opportunity to have helped each and every person who has purchased a long term care insurance policy and addressed this major risk in their lives.

Sadly, Alzheimer’s is also known as The Long Goodbye, during which the afflicted patient slowly suffers mental and physical deterioration; it is a nefarious disease that effects people from all walks of life. It does not discriminate between the wealthy and the poor, the publicly famous and the private person. While hugely expensive financially, even worse is the emotional toll on the circle of family and friends as their loved one slowly slips away.

Alzheimers has always been with us. It was often referred to simply as dementia or as “hardening of the arteries,” but largely did not reveal itself unless the afflicted person lived into old age. Today we also battle other debilitating diseases: Parkinson’s and Muscular Sclerosis with Michael J. Fox, Muhammad Ali, Neil Diamond and Linda Ronstadt victims of these diseases, their voices being quieted.

When it impacts people we know due to their public profile, it may even temporarily raise awareness and maybe even serve as a call to action.

Global warming and climate change seems to be making weather across our country far more violent and extreme. We cannot alter it. But we can prepare for it. Likewise, we can’t prevent the onset of long term care, but we can prepare for it so that its impact is not devastating.

Ronald Reagan made his affliction with Alzheimer’s a matter of public record in order to raise awareness. I personally witnessed the courage and grace of his daughter Maureen, wife Nancy, and other family members as they publicly spoke lovingly and openly about the slow demise of this man.

Our clients, and those people not yet our clients, need to speak with us, to be educated, and to take action to be prepared for the pandemic impact of long term care. More than half of all claims are for cognitive impairment simply because we are living longer as a society, and over 71 percent are for female policyholders because of their greater natural longevity.

I resolved years ago that I was not content with being part of the problem, preferring instead to be part of the solution. I exhort all who are reading this to join me in this crusade.

Dear Actuary,

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I have a lot of people asking me about LTCI solutions, but they tell me it sounds too expensive. What can I do to help them get a plan that meets both their needs and their budget? —Affordable in Arkansas

Dear Affordable,
Most long term care agents will answer this way: “If you think LTCI is too expensive, you should see the cost of not having LTCI!” Then the agent will show the prospect the cost of care in their area, and the costs might be truly scary. In fact, so scary that the prospect runs away without a plan!

This is the traditional needs analysis. Needs analysis is an important part of long term care planning, but it may not always be best to discuss at the beginning of the conversation. Admittedly, this can work for skilled agents with certain prospects who see LTCI as a luxury. However, far too often, it results in the prospect deciding not to purchase a LTCI plan once they see the price tag.

Closely related to needs analysis is the defined benefits approach. Agents commonly select pre-determined benefits and ask for one-size-fits-all quotes. This approach also frequently results in clients passing up coverage altogether.

Many agents tell me they despise it when their prospects demand quotes early on in the conversation before they have assessed needs and considered benefits. Here is an alternative approach. Agree with your prospect and embrace these questions! These questions can be a door opener to show how affordable LTCI can be, to ask about funding sources, and allow you to share insurance tax advantages.

This conversation often leads to funding analysis. The idea is to first help your client identify which assets or income are ideal for them to use to pay for insurance protection. This can establish an initial target price point, payment period option (single pay, multi-pay, or lifetime-pay), and can be useful to identify funding sources with tax advantages. Funding analysis can be effective as evidenced by life insurance plans with long term care riders that commonly use an asset-based funding source to great success. You can use funding analysis for any insurance plan.

The funding analysis may be so effective that later in the conversation, when cost of care is discussed, you will find your client asking to buy more coverage. At this stage they better understand the value proposition of the insurance plan.

Closely related to funding analysis is the defined contribution or target premium approach. This is a method where you determine how much money will be put into the plan and choose the plan that maximizes benefits based on a price target.

An example of this strategy is to start with a percentage of income that will be used to fund the insurance plan. This is similar to the approach used in the 401(k) market to identify a percentage of income to take out of the paycheck for a defined contribution plan.

Many agents and websites employ a “good, better, best” methodology to allow the prospect to choose the right starting price for them. This is a combination of the defined benefits approach with three pricing options. Many prospects will choose the middle option. Often this will result in a price that most clients choose on average.

The Target Premium and Funding Approach in Practice
The importance of the funding approach hit home recently. I was having brunch with a good friend, Steve. He is a very successful 62-year-old business executive. As a life-long bachelor, he is winding down his career and contemplating his travel plans in retirement. We got to talking about my long term care business. I told him that everyone needs a long term care plan whether or not insurance is used as the solution.

Marc—“What’s your long term care plan?”

Steve—“I’ll self-insure. I’m really healthy and can’t picture needing it. The insurance companies are trying to make money off of me, and if they don’t they’ll just raise my rates.”

Did I mention that Steve is not a fan of insurance?

Marc—“You might consider buying a really small policy. There are core high-end features built into even small plans, and, when you consider the costs involved, the insurance company won’t be making much money. There are plans today where you can prepay the premiums and limit the risk of rate increases.”

Steve—“Tell me more.”

Steve’s an analytical type, so I drew up a plan to demonstrate the LTCI value proposition (Chart 1). We discussed both traditional and Hybrid alternatives. The plan he preferred most looked like this:

The plan cost only $1,822 per year and would be paid up in 10 years! At that point no more premiums would be due and the insurance company couldn’t raise his rates or reduce his benefits.

At age 85, this plan could provide just under $200,000 of benefits paid out at about $100/day should he need long term care services for several years. Not a high-end plan, but he could self-fund the rest as he planned to do anyway. This is a good foundational plan for the care he might need in the future.

The value proposition is that the insurance plan might provide a maximum of 10.5 times tax-free benefits compared to the total premiums paid, which significantly exceeded the multiple he could get from self-funding over the same horizon.

I could see the wheels turning as Steve began to assess the financial tradeoffs.

The Triple Tax Advantage of HSAs for LTCI
Steve spent most of his career as one of the country’s foremost tax experts in his field. So, we began to dig a little deeper.

Marc—“Let’s discuss some funding options for this plan. Do you own an HSA?”

Many tax experts aren’t aware that you can fund LTCI premiums using an HSA up to an annual limit. HSAs have soared in popularity because of the ACA and growth of high deductible health care plans. HSAs have grown 10-fold since 2008 with about $51 billion of assets as of 2018.1

Steve—“In fact I do have an HSA that is accumulating a lot of money.”

It can make a lot of sense to fund LTCI from an HSA. HSAs can be left to a spouse at death but otherwise generally get taxed if the remaining amount is left to the estate.

Steve was able to take his original tax-deductible contribution into the HSA, which had grown tax free, and then withdraw the money, tax free, to pay for his LTCI premiums. This so called “triple tax advantage” could be parlayed into significantly more LTCI benefits that would also be received tax free.

We discussed the cost of care in his area today and the potential cost of care in the future. For home health care the average cost might be three times higher than this plan, and facility care costs are even higher.

Chart 2 shows the plan that Steve finalized:

Steve decided to more than double the LTCI premium initially quoted to maximize his HSA withdrawals. He will most likely continue to fund the premiums out of his HSA over the next nine years and have a greater amount of protection than his self-funded plan alone.
If you have married clients, not only can they benefit from joint policies and spousal discounts, but they may also be able to use one spouse’s HSA to fund both of their LTCI plans!

Inside the Numbers
I researched the average stand-alone LTCI purchase price based on data from annual industry surveys. Looking at the period starting in 2004 through 2018, I realized something extraordinary. The average purchase premium hasn’t really changed in the last 15 years.2 Average industry premiums have nearly tracked inflation:

  • For stand-alone LTCI, the average new policy price is about $2,500 per person.
  • For life insurance hybrid plans that include long term care or chronic illness riders, the average is about $6,400 per person as a recurring premium and $91,000 as a single premium.

The Bottom Line
Many people will use LTCI solutions to partially or fully fund plans once they are convinced that it is affordable and offers value. Addressing funding and price early in the conversation can reduce fear for your client. They know what to expect and it builds more trust.

You may feel like you are helping your prospect by showing the cost of care early in the conversation, but it could be a disservice if they were to walk away without any plan at all. Once funding and price are on the table, it further helps improve the agent-client relationship. Your prospect knows that you have their best interest at heart because of a mutual objective: To help provide them the most beneficial plan possible for their budget.

Reference:

  • https://www.morningstar.com/blog/2018/11/12/top-hsa-providers.html
  • If this sounds counterintuitive, consider that the most common benefit purchased today is a three year benefit period with three percent compound inflation protection. 15 years ago, the most common benefit was lifetime coverage with five percent compound inflation.
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