Annuity Illustrations
Annuity Marketing, Sales Ideas, Suitability, and Issues by Michael J. Prestwich

•  Insurance companies are now responsible for unsuitable annuity sales which means they will have more exposure to litigation and disciplinary action
• Every annuity transaction must be reviewed for suitability prior to policy issue
• Prior to making annuity recommendation producers must gather information about the consumer in 12 areas of suitability information
• Companies must train and monitor the sales activity of their annuity producers

See Related Articles:

Wisconsin Regulators Eye Annuity Suitability

Insurers to be responsible for fixed-annuity suitability

NAIC Acts On Annuity Suitability - Contract Resales

Suitability 101

 

The conventional wisdom when doing a Roth IRA conversion in 2010 is to advise your clients to take Congress’ generous offer and wait to pay half the tax in the 2011 tax year and the other half in the 2012. However, it will be better for many of your clients to attribute the income to the 2010 tax year because of the tax increases that start in 2011:

·         the 10% tax bracket sunsets. This means that those filing Joint tax returns will pay 15% instead of 10% on the first $17,200 of income ($8,600 Single), an $840 tax increase.

·         the marriage penalty will return. Taxpayers who file a Joint return will pay 25% on $29,050 of their income instead of 15%. This is a $2,905 increase for Joint tax payers with Adjusted Gross Incomes of $174,800 or more.

·         the 31% income tax bracket will be replaced by 33% and the 35% tax bracket has been replaced by 39.6%.

·         If HR 3200 becomes law, add a 1% surcharge to the 31% tax bracket, a 2% surcharge to the 39.6% tax bracket, and a 4.4% surcharge on income that exceeds $1,000,000 – that’s 44%.

So what does this mean in dollar and cents terms?  Here are the tax calculations for a $1,000,000 Roth IRA conversion for a retired married couple, filing a joint return, who have an Adjusted Gross Income of $250,000 and itemized deductions of $50,000:

2010 Taxes Without Roth IRA Conversion: $41,811

2010 Taxes With $1,000,000 Roth IRA Conversion:  $386,848

Roth IRA Conversion Cost: $345,037

2011 Taxes Without Roth IRA Conversion: $43,484

2011 Taxes With $500,000 Roth IRA Conversion:  $241,716

2012 Taxes Without Roth IRA Conversion: $43,173

2012 Taxes With $500,000 Roth IRA Conversion:  $240,280

Roth IRA Conversion Cost: $395,339

In this situation, your client would save over $50,000 in Federal Income Taxes by attributing the $1,000,000 income from the Roth IRA Conversion to 2010 instead of $500,000 in 2011 and 2012. Clients who have lower incomes and/or smaller rollovers may find that splitting the income between 2011 and 2012 is ideal, but in this situation, this is clearly not the case.

Take home message: Before making a Roth IRA Conversion recommendation, first calculate the income tax ramifications for your client.

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In 2010 thousands of retirees will get conned by misinformed or unscrupulous salespeople who will talk them into an unsuitable Roth IRA conversion. If you want to become one of those people who, like Bernie Madoff, make themselves rich at the expense of their unsuspecting clients, here is a step-by-step guide:

1)    Use a Roth IRA Conversion calculator similar to the one offered by CalcXML.  This calculator is perfect, because it leaves no trace; your name does not appear, nor does the name of your client. Throw away the second page to avoid embarrassing questions about your input.

2)    Use a lower tax bracket in the pre-retirement, “accumulation” years than the post-retirement, “distribution” years.  This printout uses 25% and 33%.

3)    Since this client does not have $250,000 of ready cash to pay the taxes for the conversion, use “Option 2,” where the taxes are painlessly paid from the existing IRA funds.

4)    Sell a product that has a 25% premium bonus and explain that the bonus will cover the income taxes.

Informed financial professionals can instantly see problems with the above scenario:

1)    Ethical financial professionals never use calculators that omit their contact information, the client’s name, assumptions used, pertinent disclosures, and includes a sentence about seeking the advice of an income tax professional.

2)    A Roth IRA Conversion calculator that uses “Tax Bracket” fields can be manipulated to deceive the client as I did in the sample printout. As a minimum it should have an input for “Adjusted Gross Income” and use the income tax rates that President Obama proposed for 2010 and beyond.  Nobody who has $500,000 added to their income in a single year is in a 25% tax bracket!

3)    The software should take all income tax ramifications into account.  The sample printout does not take into account the fact that the client is age 56, and would incur an additional $25,000 tax penalty (10% early withdrawal penalty).

4)    Taking into account both of above mentioned potential tax issues, the income tax impact for this client is about $250,000 higher than what was disclosed!

5)    Products with premium bonuses may help offset current income taxes, however, a premium bonus is never “free.”  There is always a cost somewhere, often in the form of lower interest rates.

I recommend the following safeguards to protect consumers from tax penalties and financial institutions and their representatives from potential lawsuits:

1)    Insurance companies, marketing organizations, and broker / dealers should train their representatives about a how a Roth IRA conversion will affect a client’s current and future income tax situation, and how to determine whether it is suitable for their client.

2)    Insurance agents and registered representatives should insist that a licensed income tax professional review the tax calculations and assumptions of Roth IRA conversions over $100,000.  This may save the client tens of thousands of dollars in taxes, and a tax professional’s endorsement may shield against a future lawsuit.

3)    File a complaint with the appropriate supervising authority against any insurance agent or securities representative who uses the above unethical approach to Roth IRA conversions. 

4)    Financial institutions should review all calculations and reports, including the tax professional’s review, before implementing a Roth IRA conversion.

The other day in Costco I found the small book, Jeffrey Gitomer’s Little Teal Book of Trust: How to Earn It, Grow It, and Keep It to Become a Trusted Advisor in Sales, Business, and Life. Over the years, I have found that lack of trust, or credibility, is the number one reason people fail in the financial services industry. What is worse, your prospect won’t tell the salesperson that lack of trust is the reason they didn’t buy, but they offer an excuse such as, “I want to shop around,” “the rate is too low,” or a million other things. Here is an outline of Jeffrey’s book:

·         Tell the truth. This is the number one element of trust AND relationships.

·         Do what you say you will do. This is a test for being trustworthy and reliable.

·         Communicate in a timely manner. This shows you are responsible, on top of it, and that you care.

·         Bring value beyond your product or service. What you do to help others be more successful is a true reflection of your character.

·         Be on time. Being on time shows you respect the other person’s time.

·         Be friendly. Smiling people are the gateway to open communication.

·         Be sincere. This can only come from belief in what you do, loving what you do, and caring for others.

·         Show and say genuine thanks. Be grateful for the opportunity to be of service.

·         Be consistent. I believe this element of trust is the most difficult to master because it combines all the other elements.

·         Give trust. You become trustworthy by giving trust.

This may be the best $20 you will ever spend.  Buy it, and live by its principles.

I spoke yesterday with an agent who had just made a substantial annuity sale. I asked him which product he sold. I then asked him how he disclosed the fact that this Fixed Indexed Annuity product is designed primarily for income, the index growth only applies to the annuitization value, not the accumulation value, and that the cash surrender value of this product after 10 years would probably be less than the original premium.  He was shocked, and couldn’t believe his ears. He said that this particular product is one of the most heavily promoted and highest sold in the industry. Among other things, I told him to read the fine print in the six page disclosure.

I believe that there is a relationship between the number of complaints a company has, and the quality of the agent training, disclosures, and illustrations a company produces. Do you agree?  Jack Marrion’s Index Annuity website just released a list of companies that sell Indexed Annuities and listed them in order of the least number of complaints to the highest: 2007 Index Annuity Complaints

The company with the highest number of complains receives 20 times the number as the company with the lowest. Comment if you believe there is a correlation between the number of complaints and the quality of training, products, disclosures, calculators, illustrations, and other agent’s services that a company provides. Do the companies listed provide a calculator that discloses the guaranteed minimum surrender value, for example?  I know, for example, that the company listed at the top, Great American Financial Resources, provides an Indexed Annuity Illustration system that discloses everything – formulas, surrender values, guaranteed minimum surrender values, cost of income riders, hypothetical values both current and guaranteed.

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There are important lessons to be learned by those who sell financial products from yesterday’s FINRA News Release announcing that Morgan Stanley is ordered to pay over $7 Million in fines and restitution to clients. Here are the main points:

a)    Representatives made recommendations based on unrealistically high projections

b)    Morgan Stanley did not properly supervise their field force

People lost their jobs, the firm got bad press, and must pay a hefty fine. Why? Representatives promised more than they could reasonably deliver.

Each day I talk to agents who market fixed indexed annuities on the phone. Some want to illustrate their products at 6%, or even 8% interest.  They don’t understand that these rates are virtually impossible to achieve when the caps for indexed annuity products range from 6.50% to 9.40%. See the Index Annuity Product Comparison spreadsheet that I developed to help educate these agents.

The above FINRA News Release is a reminder that customers only complain when they feel like they have been hurt financially or when their expectations have not been realized.  If you sell Fixed Indexed Annuities I offer the following suggestions:

a)    Always show the guaranteed values, and put your emphasis there

b)    Always explain the tax benefits that annuities may offer

c)    Sell at least two annuities – one with a six year or shorter surrender charge so that your customer will have adequate liquidity if their situation changes in the future or if they have an emergency

d)    When discussing the potential values, explain that the primary purpose of Indexed Annuities is to prevent loss, not to create large gains

e)    When illustrating a hypothetical interest rate for Indexed Annuities, use a maximum of 5%, but half the cap rate is good rule of thumb.

Some agents disagree strongly with the above opinion. Examine the Index Annuity Product Comparison spreadsheet closely and you will see that I am right.

Remember annuities provide strong, after-tax values. Here is an illustration that compares a $100,000 Jumbo CD earning 3.73% interest with two index annuities, one illustrated as earning a 1.00% return and the other illustrated at a 3.00% return.

The main point: Be conservative with your promises and projections. This will keep you out of trouble, and if your products exceed your client’s expectations, you will have happy clients.

• Married, Joint Return
  1. Tier 1: $32,000
  2. Tier 2: $44,000
• Single
  1. Tier 1: $25,000
  2. Tier 2: $34,000

If your client has defined benefit pension or other fixed income above Tier 2, they cannot avoid paying taxes on Social Security. If they have no non-qualified money, they usually cannot avoid paying taxes on Social Security without reducing their income. However, here is an example of a married couple who filed a joint tax return and used annuities to reduce their Social Security and ordinary income taxes (2007 tax rates):

Helping someone save over $7,000 on their taxes may look “too good to be true” but it is actually well within the ability of most annuity producers:

1. $500,000 safe assets generates $15,000 in taxable interest
   1. Use $65,000 to buy a 5-Year Single Premium Immediate Annuity to generate $14,000 income per year
   2. Put $385,000 in several deferred annuities to provide future income
   3. Leave $50,000 in a money market fund for emergencies
2. The $40,000 this couple is taking from their 401(k) is higher than the Required Minimum Distribution (RMD) — reduce it to $25,000

Smart agents will work with the client’s accountant to work the above numbers and to create the ideal product mix. The key is to get the taxable income as close to the Tier 1 income as possible. This has at least four advantages:

1. The accountant’s OK adds credibility to your sale
2. The accountant will earn extra fee income
3. If product suitability is ever an issue, you have the accountant as a friendly witness
4. The accountant has other clients that need your help — excellent referrals

In summary, this idea created a $65,000 SPIA sale, $385,000 in SPDA sales, and opened the door for an IRA rollover from the client’s 401(k).

Annuity salespeople who complain about the strict suitability laws that have emerged since 2006 have it dead wrong – suitability is your friend. The heart of the suitability law is stated in the opening paragraph of the law in your state. It will be similar to Utah’s updated suitability law effective on February 1, 2009:

“The purpose of this rule is to set forth standards and procedures for recommendations to consumers that result in a transaction involving annuity products so that the insurance needs and financial objectives of consumers at the time of the transaction are appropriately addressed.”

Which agents do not want the needs and financial objectives of their clients appropriately addressed? Unscrupulous agents. Agents who focus primarily on their own needs (commission), not the needs of their clients. These agents are the ones that fuel bad press for the annuity industry, and are the ones you want to set yourself a part from.

Here is how suitability laws work to your advantage. Show your prospective clients a copy of the law, and highlight the following words:

“insurance needs and financial objectives of consumers”

“insurance producer . . . shall make reasonable efforts to obtain information concerning:

“(a) the consumer’s financial status;

“(b) the consumer’s tax status;

“(c) the consumer’s investment objectives;”

“insurance producers shall maintain or be able to make available to the commissioner records of the information collected from the consumer and other information used in making the recommendations . . .”

Tell each prospect, “As you can see, state law requires me to ask you a lot of personal financial questions, write the answers down, and to make a reasonable effort to match my products to your needs before making a recommendation. I have to keep these records for a minimum of [in Utah, 3, in most states 5, and in one state, as long as the policy is in force] three years so that if you ever have any questions, I can support the recommendations that I have made. Are you comfortable enough with me to give me your confidential, personal information?”

With information about all the client’s assets, risk tolerance, life expectancy, income needs, tax concerns, you are armed with the information you need to address the client’s financial concerns with solutions from your annuity product arsenal. You will very likely find that this means selling more than one product, making more sales, having a higher closing ratio, getting more referrals, and staying out of trouble with clients and regulators.

An agent in Tucson just emailed the following ad that appears the local paper by an Arizona Super-lawyer. One of her clients answered the ad, the law firm filed a lawsuit, the insurance company is investigating, and the agent faces a $78,000 commission charge-back for an indexed annuity sale made in January 2008.

The irony of this situation is that the indexed annuity was funded with stocks that would have lost about 40% of their value in the 11 months from January 2008 to December 2008 had the client kept them. The agent gathered a lot of information about the client’s financial situation. At the time of the sale the agent, the client, and the insurance company deemed this sale suitable.

I have several questions for the readers of this blog:

·         If you are an insurance agent, has something similar happened to you? Please share your experience on this blog.

·         Do insurance companies fight to keep annuity business on the books, or do they nearly always settle when confronted by these law firms?

·         In these situations, what documentation do insurance companies ask agents to provide about the nature of the sale and why it was deemed suitable?

·         Do clients often lose heart when indexed annuity products declare a zero percent interest rate in the first year?

·         This product had a 10% interest rate bonus – does this help or hurt a sale, since bonus products have much higher and surrender charges than non-bonus products?

·         This product had about an 8% commission – does this help or hurt when an insurance company has to defend a sale?

·         This was a one-product, one-company sale for nearly $1,000,000 – does it help or hurt to put all your money in one product if you have to defend a sale?

Please share your experiences and comments.

Seniors have heard the “high rate of return” story for fifty or more years. Most of them have been burned by this tale at one time or another and they are tired of hearing about it. Today most seniors are interested in four things:

1)    Safety

2)    Guarantees

3)    Tax Advantages

4)    Income

Why would they be interested in hearing about growth when millions of people just lost their shirt to this story?

It took 18 years for the market to recover from the 1929 crash – how many seniors can wait that long?

Obama promised to raise taxes on those who earn $50,000 or more – why not use this as a door-opener?

Forget accumulation values – focus on Income, Guarantees, Tax Advantages and Safety!

Closely examine a sample Flexible Income Stream illustration from ImagiSOFT.

Did you know that in most states that agents can lose their insurance license if they sell using illustrations that do not give the guaranteed values the same emphasis as the illustrated or hypothetical values? This illustration does just that – and I recommend that you spend the majority of your time talking about the guaranteed values and mention the illustrated values in passing, rather than the other way around.

If I were presenting to the 65 year-old John J. Smith, I would ask him this question, “Which would you rather have, an annual $9,000 after-tax income per year, guaranteed for only 5 years (his current certificates of deposit)    - or -    $11,700 after-tax income guaranteed for the next five years, guaranteed to increase to $14,200 for the next five years, guaranteed to increase in year 10 to $17,200? (See the second to the last page of the previously mentioned illustration.)  In short, which would you rather have, $135,000 of “maybe income” or $216,000 of guaranteed income over the next 15 years?

The last page shows the “Grow Back Account,” a fixed indexed annuity, illustrated at 5% interest, which may bring the account back to $303,000 after 15 years. Again, I recommend that you emphasize the guaranteed value of $189,500.  If the Guaranteed Lifetime Income Rider is elected, starting at age 80, this account will generate $33,765 each year for the rest of John J. Smith’s life.

In summary, why is this income strategy a suitable, high-quality sale?

·         John J. Smith is currently using $300,000 CDs for income to generate an income of $12,000 per year

·         This income is fully taxable. In his current 25% tax bracket, he must pay $3,000 per year

·         His primary goal is safe, dependable income

·         The interest rate is guaranteed at 4.00% for five years, and thereafter, renewal rates are uncertain

·         He is in good health with a family history of long life

·         Annuities lock-in a safe, dependable, predictable, guaranteed, income for 15 years

·         Annuities provide this income 90% tax-free

·         This annuity strategy guarantees an income increase every 5 years

·         After 15 years, the last component of this strategy guarantees $33,765 annual lifetime income. This is nearly three times the current income generated by the certificates of deposit – with an extremely high degree of safety

·         If John’s future goals change, this strategy offers three different surrender charge schedules – one as short as five years long

Focus on Income, Guarantees, Tax Advantages and Safety, and I guarantee you and our annuity customers will have a prosperous 2009!

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