An Interview with DuWayne Kilbo and Marc Schwartz: Why You Need to Review Your Clients’ Policies Now.

In our previous two blogs, Marc Schwartz talked about how pricing adjustments among a few life insurers had created an “out-of-control” environment for some of our clients.  In part two of “Putting Clients Back in Control,” Marc explored several product solutions that can help put your clients back in control – but for you, what’s most important is knowing first what your clients want out of their life insurance policies.  Here, Marc and DuWayne Kilbo discuss why you need to review your clients’ policies now.

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The idea and process of Policy Review has been around forever. Why is it so important now?

Marc:  There has been a lot of negative press around life insurer pricing adjustments, and that has created an environment where your clients need the reassurance that you’re aware of the issues and you’re looking out for their best interests. With the recent reductions in dividend rates from the mutual companies, the various COI issues in 2016 and spread compression because of the overall interest rate environment, the need to reach out to your policy owners and your centers of influence is more important than ever.  This should basically be a business development activity for all life insurance professionals and advisors in 2017.

Related: New York Times: Why Some Life Insurance Premiums are Skyrocketing

You mentioned recent reductions in dividend rates. It seemed for a while that dividends were floating above the interest rate drops.  What’s changed?

DuWayne:  It took longer for the sustained low interest rates to significantly affect dividend rates, but recently we’ve seen a cascade of dividend rate reductions from most if not all of the major carriers.  One carrier has experienced a 33% drop in dividend rate over the past nine years, which corresponds to comparable seasoned triple-A bond rates over the same period.  Additionally, the policy expense component in participating policies is adjusted independently of the dividend rate, and many carriers are, or will be, increasing those rates as well.

Chart: Historical Life Dividends: 1988 to 2017

So what should be the next step for an agent or advisor?

DuWayne:  First and most importantly, to confirm with their clients that they’re in sync as to the purpose and goals of their insurance.  Clients often have older policies, or have acquired policies from other sources, and reviewing the entire life insurance and annuity portfolio, with the client’s goals in mind, is priority one.

Marc:  For participating plans where dividends play such a big part, agents should review the initial projections that were used in making the sale – chances are that the policy’s performance has fallen short in some ways, especially for policies issued 10-20 years ago.  Paying particular attention to the distribution side, if that was a high priority for your client, means looking closely not just at the numbers, but at the contractual loan provisions as well.

Article: “Under Control: Five experts discuss how annual reviews can realign clients’ insurance portfolios . . . and calm their nerves”

So policy reviews are critical in determining if policies are performing as needed – and will alert stakeholders if adjustments are required to get “back on track.” Are there other reasons to review a client’s life insurance portfolio?

DuWayne: Yes, absolutely! Besides underlying product performance, policy reviews provide an opportunity to audit “structural integrity” of the life insurance portfolio. In other words, think of this as a planning review in addition to policy review. Is the amount of coverage still relevant?  Are ownership and beneficiary designation properly set up? Have key documents (trusts, split-dollar, buy-sell agreements, etc.) been executed and are they still current? Has the client’s health improved and should the existing underwriting class be reviewed?

Marc:  Raising awareness and identifying areas of potential vulnerability will win trust and credibility with professional advisors and other centers of influence. Also, CPAs, attorneys and bankers are much more comfortable having this kind of service-oriented discussion with clients rather than one which might sound like a sales pitch. At the end of the day, it will all come back to whether the existing policy is doing the job or not.

And if a review indicates a need for a change, what options are available?

DuWayne:  In situations where premium cost and cash value performance have become more questionable, there are several options that can create face amount stability as well as upside cash value opportunity.  These include 1035 exchanges to newer products with baseline guarantees and potential market-indexed cash value growth, 1035 exchanges to policies that can accept sizeable outstanding policy loans and minimize adverse tax consequences, along with many other creative alternatives.

Where can agents and advisors get some help on this?

DuWayne:  That’s what we do.  Windsor is dedicated to help agents eliminate the hassle and uncertainty that can upset a client’s plans, and determine their best course of action going forward.  We have experienced and knowledgeable industry resources who can analyze the situation at hand and develop suitable alternatives.  We are expert in case design, carrier/product access and underwriting to drive the best case offer.

Marc:  And we have an outstanding service platform to help steer your applications through the roadblocks that sometimes get in the way of issuing a policy.  There’s no problem we haven’t seen and solved in Windsor’s 40 years serving life insurance agents and their clients – which means that agents can be confident that we’ll handle the back room, and they can focus on what they do best.  For starters, we’ve provided this link to a basic policy review fact finder that agents can complete and email or fax to our Policy Review team.  With all the changes swirling around the life insurance industry, now is the time to go back to your clients and reconfirm your commitment to their financial future.

What Can We Do to Put Clients Back in Control – Part Two

-by Marc Schwartz

In my previous blog I explained how many of our clients feel as though what they want and expect from their life insurance policy is no longer in their control.  Because some life companies have taken actions that create additional uncertainty and expense for their customers, it’s up to us, as experienced professionals, to find a way to put our clients back in control.  The key is to know what’s important to your clients and then find the products and features that deliver the predictability and value they expect.

Golden key and puzzle

No Lapse Guarantees (NLG)

No question that we’ve seen a dramatic retraction of the “perfect product” in the wealth transfer market. Many of the carriers that have remained have raised prices and/or capped face amounts, and that trend continues. But there are a handful of high quality carriers that are committed to the NLG space. One shining star that is a consistent leader in the benchmarks is wholly owned by a leading Japanese insurer. This same carrier is a relatively recent entrant to the high-end life insurance field and, with no significant historical block of NLG business, isn’t subject to the drag created by its in force legacy. NLG has not gone away…and major, well-rated players provide cost effective solutions which are guaranteed to meet client expectations.

No Lapse Guarantees – with Exit Strategies!

Ever have a client who acknowledges a current need for life insurance today but who balks at buying? Perhaps they’re not comfortable cutting big premium checks for a future obligation that may morph into something unrecognizable, increase costs, reduce benefits or even vanish completely? Or maybe they’re concerned that new and different problems could arise down the road — such as living too long or getting seriously sick along the way. Is the product you recommend nimble enough to address these kinds of concerns? What if clients could buy an option to “take the money and run” at certain points in the policy’s future? This is a compelling way to provide ironclad guarantees with optionality — helping clients overcome the perception of NLG as being inflexible. And by using a “split policy” approach (splitting the face amount into two policies), you can give the client three guaranteed options down the road:

  • Keep the coverage as is and continue paying premiums
  • Cancel both policies and receive all premiums paid back
  • Keep policy 1, cancel policy 2, and use a portion of the premium refund to fully pay up policy 1 while maintaining a guaranteed death benefit for life

Extended Guarantees – VUL and IUL

And, of course, you have clients that want the best of both worlds: a secure death benefit along with the potential to build cash value greater than what could be generated in a fixed NLG contract. There are multiple options for this hybrid solution including both Index UL and Variable UL flavors. Among these options, we have extended guarantees (typically to or around life expectancy) and true lifetime guarantees. One life insurer that we’ve had tremendous success with uses a VUL chassis with less restrictive AG37 reserving requirements, offering an inexpensive guaranteed death benefit with all the upside associated with true VUL. The same design is available as Survivorship VUL.  These products are exceptionally competitive in single and short pay scenarios and are the 1035 solution in the marketplace when NLG is a consideration. So, if you kept your FINRA registration…then you need to be thinking about Variable again!

Guaranteed Income Streams – For Life!

Over the last few years, many of us have pivoted to cash accumulation sales with IUL being the product of choice. Although these products allow upside participation and downside protection, they still are vulnerable to market influences and, to some extent, the ability of carriers to press buttons and pull levers. Even though some of these products offer extended guarantees, projecting future cash values and distributions is a bet heavily reliant on forces outside of your control.  As a way to address client concerns regarding future income, there are a handful of life insurers offering a Life Income Benefit Rider (LIBR). When the client is ready for income distribution, they can elect to exercise this rider and receive a level guaranteed income stream for life (calculated based on cash value at the time of election). In addition, a minimum death benefit is guaranteed for life regardless of total distributions made. And distributions are all loans, taking care of any tax issues. Think of it as a life policy morphing into a “life only annuity” but with no adverse tax consequences under current tax law. IUL is a product with many moving parts and LIBR allows client to “lock in” potentially tax-free income for life — which probably was their motivation to buy in the first place.

That’s just a sampling of how you can tailor the life insurance products and features available today to fit your client’s need for assurance, security and predictability.  As a trusted advisor and, in many cases, a friend of your client, one of the most valuable and lasting services you can provide is to have the tools, resources and knowledge to help put your client back in control.

 

 

What Can We Do to Put Clients Back in Control?

-by Marc Schwartz

You’ve probably noticed that life insurance has been making headlines recently – which is rarely a good thing.

When both the Wall Street Journal and the New York Times sound off on how life insurance companies today are facing lawsuits from some of their customers, it’s clearly cause for concern.  The legal actions have mostly been prompted by increased premium requirements on universal life and long term care contracts.  According to the companies, there are many reasons for the actions that result in the increases, including slow growth, a shrinking sales force, increased compliance requirements, greater reinsurance oversight, but most importantly a sustained historically low interest rate environment.  As the Times put it:

“It adds up to a vexing math problem: how to back a promise of 4 percent in a 2-percent-or-less world. For life insurers — where more than three-quarters of the industry’s $6.4 trillion in invested assets are parked in bonds — low rates like these can be calamitous.”

Solution and Strategy Path

And how are companies reacting?  In various ways – some with increased COIs, others with more limited product selection, price increases, restricted term conversions, layoffs and expense reductions, sales and service pullbacks, and non-traditional (read ‘cheaper’) product distribution.

What makes this scenario even more alarming, and confusing, for our clients is the scattershot nature of the actions that companies have taken to mitigate the threat to their viability in the business.  Public relations disasters abound and company actions appear arbitrary to the general public.  One company pays an extraordinary dividend to its overseas parent of $785 million, and soon after informs certain customers that the premiums required to continue their policies will be significantly higher.  Another company discovers that its universal life insureds over 70 with face amounts of $1 million or more are experiencing higher than expected mortality, and their COI rates will be adjusted to reflect the additional claims expense.

Both the Journal and the Times articles imply that companies like these have resorted to pressing buttons and pulling levers that in effect transfer an increasing proportion of policy risk to their customers. The companies respond that the changes they require have been reviewed and approved by the appropriate regulatory agencies, and are allowed by contract.  But the transfer of risk is real:  the risk of higher costs and policy failure due to higher fees and expenses, higher than expected mortality, or lower than expected earnings and growth on policy equity.

This does not bode well for an industry built on trust, predictability and meeting client expectations.  Right now, some of our clients feel as if the industry has not lived up to that trust, and by companies using contractual provisions that had rarely, if ever, been used before.  Some clients feel as if their life insurance, and by extension their sense of security and peace of mind, is out of their control.    Which leaves us with an important question:  Are there ways that we, experienced and expert in our profession, can put our clients back in control?

The answer is yes. There are products and riders that you can recommend today that give clients the control they want and need.  Products with contractual guarantees and exit options that reduce uncertainty in just the right places:  death benefit guarantees, cash value floors, contractual flexibility, or guaranteed maximum premiums.  The key is knowing what’s important to your clients, and matching them with the right companies and products.  We’ll explore those options and opportunities in our next Windsor blog.

 

Minimum Wage Retirement Planning

-by Marc Schwartz

Selling is a creative and dynamic process, at times requiring fresh thinking and a different approach to engage customers.

In the case of business owners, substantial monies are spent to attract and retain talented employees who can get the job done. However, often overlooked by business owners may be one of their better employees–the minimum wage employee. This is the lowest paid employee in the company who, if given the opportunity, has the ability to contribute significantly to a business owner’s success and well-being.

The “minimum wage employee” conversation is a creative and fresh way for you to make more sales with business owners.  Let’s walk through an example of how to put this employee to work for you and your business owner clients.

Your friend, Dave, is a 44-year old small business owner.  You’ve known Dave since college – he’s a hard worker, independent, creative, with a young family.   He’s put his time and energies into building the business and helping his spouse provide a good life for their children.  But Dave has never made much of an effort to invest toward his retirement.   Over lunch, Dave shares an odd encounter that he had the other day with a prospective employee.

“So this guy walks in to interview for a sales position that I have open right now.  And here’s what he says:

‘I’m not really here for your sales position, but I think you’ll find I can help with an opportunity you have right now, but that you don’t recognize.

‘First, here’s what I ask of you.  You agree to pay me minimum wage for the next 21 years.  That’s all.  No vacation, no sick leave, no benefits, no 401(k) match, no salary increases.  Just today’s minimum wage for 21 years, until you reach age 65.  That’s $7.25 an hour, $290 a week, about $1,255 a month, a little over $15,000 a year.  With me so far?

‘And here’s what I’ll do in return.  If you die before age 65, which we both hope won’t happen, the business stops paying me and I’ll give your spouse and children at least $300,000, tax-free.  I’ll miss you, but our deal will be done.  But if you live to age 65, I can potentially provide you with over $50,000 a year of supplemental retirement income until you reach age 85.  That’s 20 years of $50,000, or about $1,000,000.  How does that sound to you?’

Dave continues, “Of course I didn’t believe any of it, but he seemed to be serious.  So I asked, ‘How in the world are you going to do this?’ And he said, ‘Here’s how.’”

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lincoln-chart

[A tip of the Windsor hat to our friends at Lincoln Financial for their inspiration and these supporting materials:]

Minimum Wage Retirement Planner Presentation

Minimum Wage Retirement Flyer

Lincoln WealthAdvantage®Indexed UL Illustration

Contact Windsor for illustrations and more information about the potential advantages of Indexed UL.

The Conversion Quandary

– By Marc Schwartz

Term life insurance sales in the US consistently represent about 70% of the total death benefit bought by consumers every year, according to the Insurance Information Institute.  And for many of those buyers, the provision to convert their term insurance into permanent life insurance somewhere down the line represents an important option.  But according to several leading term insurers, less than 5% of term life policyholders ever take advantage of this option, and those who do often are motivated by deteriorating health.  Because these clients have a mortality risk of about five times normal for their age, life insurance companies have dabbled with creating limitations on conversion options (limited time frames to convert, restricted product choices, lower maximum ages) to decrease the impact of anti-selection on pricing and margins.  Understandably, these same insurers need to balance these limitations so as not to impact sales significantly.  So what’s a company to do?

Looking for the solution of the maze

Among efforts to solve this conversion quandary, there are currently three primary camps.  First are the “wait and see” or “no change” carriers.  These carriers continue to offer conversions for the full level term period to any permanent product currently available for sale up to a maximum conversion age.  Second are the “hybrid” carriers, companies that limit the conversion in some additional way.  They might allow conversion to any permanent product currently available for sale, but only for a limited number of years — then require a conversion only product.  They may also offer a buy up option (higher price) allowing the policy owner to convert for the full level term period (up to a maximum conversion age) to any permanent product.  Third are the “conversion product only” carriers.  These carriers restrict  conversions to a specific product.

At present, most carriers continue to allow their full suite of products for conversion throughout the entire level term period.  One carrier even allows conversion beyond the level term period when annual rate adjustments occur.  However, with the spotlight on mortality as a major driver of carrier profitably today and the possibility for significant excess, underpriced mortality, a number of carriers will choose more restrictive conversion practices, such as “hybrid” or “conversion only” options.  Lastly, you might think that current term policy owners are unaffected by this issue, because their conversion provisions are contractually locked in.  But that’s not the case.  Term policy contract language typically allows the insurer to change or modify its current conversion practices even for in force blocks of term policies.

It isn’t easy to sort all this out and explain it to your prospects and clients.  Windsor’s Term Conversion Quick Guide can help you sort through the term conversion practices of various major life insurance companies, to see which best fit your clients and fairly compensate you for your time, effort and professional advice.

To learn more or to discuss specific cases and clients, call Windsor at 800.410.9890.

 

 

The Longevity Lottery

casino roulette in motion

By Marc Schwartz

Willard Scott can’t keep up!  It’s no longer unique or surprising when we come across someone who is approaching age 100.  We probably have someone in our own immediate family going strong at 85, 90 or even 95 years old.  Whether because of good genes, healthy living, medical improvements or all of the above, living longer is a reality.

The blessing of a long life has many advantages but it also requires that we think about how to pay for that extended number of years.  The axiom that people fear “running out of money” more than they fear death is truer today than ever before.  The major risks to running out of money are market volatility, medical costs and spending too much.  Of course, we have to accept some level of market risk if we want a decent return on our assets, we try to control our spending (but we also want to enjoy our success) and we do our best to live healthy — but to a great degree two out of three are not in our control.

In the investment world if you have a large gain in a concentrated position you can use a “collar” to “hedge” your bet.  Simply put you “spend” some of the upside to “protect” the gain from risk of extreme loss.  It is a form of insurance.

It is no different with the risk of longevity.  We can spend a small percentage of our retirement assets (either out of the annual growth or capital) to protect us from running out of money in old age.  Today’s modern life insurance products offer living benefits that make our products more relevant and meaningful than ever before.  Life insurance for the living!

We have all heard lots about Chronic Care/LTC riders combined with a life insurance policy.  These riders are offered on dozens of products and all product types. And they do an amazing job protecting against the “getting sick” risk and helping to preserve our retirement assets for a long life.

But what if we could also guarantee annual cash flow from a life insurance policy?  What if we could combine the assurances of death benefit protection with the security of annuity-type income?  Now, there is such a product:  AIG’s Lifestyle Income Solution.

The Lifestyle Income Solution rider allows the policyowner to receive up to 10% of the death benefit in cash annually for 10 years beginning at age 85.  This is not the policy cash value, which is subject to performance risk, this is the death benefit amount.  The rider requires that you fund the policy at a certain level and the policy and rider must be in effect for at least 15 years prior to exercising the rider.

Let’s look at an example.

Male 45, 20 pay, face amount $1,000,000, annual premium $12,112 for 20 years, Lifestyle income distributed for 10 years starting at age 86

Chart1

That’s a return of over 4 times the premiums paid!  But what if your client needs the money earlier than age 85?  No problem.  The policyowner can turn on the benefit, at a discount, any time after the policy and rider have been in effect for 15 years.  In the example below the policyowner needs the money at age 76.  As you can see they still get nearly 2.5 times the premiums paid in benefits over 10 years.

Chart2

So what’s the downside? Well, once the policyowner has received back their basis (premiums paid) any future distributions are taxable as ordinary income (just like a distribution from a qualified retirement plan).  Still, remember the old adage:  “Even taxable money is better than none at all.”

The Lifestyle Solution Income rider is one product that offers:

  1. Death Benefit protection
  2. Chronic illness protection
  3. Retirement income protection
  4. Terminal illness access
  5. Return of premium (money back) protection

This solution is great for Executives (golden handcuffs), Professionals, Business Owners or anyone who wants to “hedge” their bet on winning the longevity lottery.

Give us a call at Windsor for customized case design and illustrations using the AIG Secure Lifetime approach.  Or visit www.retirestronger.com for marketing material you can use with clients and advisors.

This information is for Agent and Broker Use Only and is Not for Use with the General Public.  These materials are for general informational purposes only and should not be construed as legal or tax advice.  Anyone considering the implementation of the concepts, strategies or ideas discussed in these materials should consult their own tax and legal advisors. Circular 230 Notice:  This material was not intended or written to be used, and cannot be used, to avoid penalties under the Internal Revenue Code.

The life insurance illustrations associated with this blog assume the nonguaranteed values shown continue in all years.  This is not likely, and actual results will be more or less favorable. Values shown are not valid unless accompanied by a basic illustration from the issuing life insurance company.