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2020: B/Ds & Banks Sell The Most FIAs (8/15)
Underpants Gnomes & Agent Prospecting Methods  3/15
3 Reasons Why Low Cost Isn't Always A Good Thing   2/15
6 Reasons Why You Should Use An Annuity Instead (9/14)
Riffs On Risks (12/13)
You Earned Zero On Your Annuity GLWB – Great! (8/13) 
Why CD Rate Won't Be A Problem (8/13)

Vanguard Study Shows Annuities Needed (7/13) 
New Research Clues On How To Close More Annuity Sales (6/13)

To Sell More Annuities Use Pie Charts (6/13)
Where Is The Annuity Money? It’s In The Bank (4/13) 
GLWB: The Realistic Answer (3/13)
More Investors Like Annuities (3/13) 
New SOA Report On Retirement Is Required Reading (3/13) 

Referral Signal Strength (9/12)
99% of Failed Banks Haven’t Returned All Uninsured Deposits (8/12)

Immediate Annuity Sales Presentation (8/12)
The Close (7/12) 
Motivation For Buying Depends On Prospect's Age (7/12)

It’s Still True No FIA Has Lost Money Because A Carrier Failed (6/12)

Your Unique Selling Proposition Persona (5/12)
FIAs Replace Savings Bonds? (3/12) 
Selling: Setting The Stage For The Next Call (3/12) 

Failed Banks vs Failed Annuity Carriers Chart (1/12)

Seniors Can Adapt And Continue To Make Good Decisions (11/11)
Buy The GLWB & Death Benefit and I’ll throw in a free FIA (10/11) 
Annuities Are Not Illiquid (8/11) 
Barron’s [Heart] Annuities (7/11) 

The Grid - A New Way of Presenting GLWBs (5/11)

The Power of Annual Reset (2/11)
Surrender Charges Help Save America (2/11)
Aesop's Financial Fables (10/10)
Puffing Your Ad (8/10)
Don’t Predict, Sell Future Insurance (5/10)
How Agents Can Get Better Customers (and bigger sales) (2/10)
When your answer loses, answer a different question (2/10)
Looking For The Magic Phrase (9/09)

Coping With The Death Of Their Retirement (8/09) 
How To Deflect Damaging News (2/09)
The Index Annuity Paid Zero How Much Did Your Clients Gain? (2/09)

Want A Sale? Make Them Angry! (1/09)
The Timeless Marketing Message (10/08)

Objection Preemption (6/10)

Claim The Obvious Benefit (2/08)
Illusion of Validity (8/07)
Safety – Bank & Annuity Reality (7/06)

What’s Wrong With Index Annuities? (10/05)
Honest Hype (5/05)
2020: B/Ds & Banks Sell The Most FIAs (8/15)
3 Reasons Why Low Cost Isn't Always A Good Thing   (2/15) 
6 Reasons Why You Should Use An Annuity Instead (9/14)
99% of Failed Banks Haven’t Returned All Uninsured Deposits (8/12) 
Aesop's Financial Fables (10/10)
Annuities Are Not Illiquid (8/11)
Barron’s [Heart] Annuities (7/11) 
Buy The GLWB & Death Benefit and I’ll throw in a free FIA (10/11) 
Claim The Obvious Benefit (2/08)

The Close (7/12)

Coping With The Death Of Their Retirement (8/09)

Don’t Predict, Sell Future Insurance (5/10)

Failed Banks vs Failed Annuity Carriers Chart (1/12)

FIAs Replace Savings Bonds? (3/12)
GLWB: The Realistic Answer (3/13)

The Grid - A New Way of Presenting GLWBs (5/11)

Honest Hype (5/05)

How Agents Can Get Better Customers (and bigger sales) (2/10)

How To Deflect Damaging News (2/09)

Illusion of Validity (8/07)

Immediate Annuity Sales Presentation (8/12)

The Index Annuity Paid Zero How Much Did Your Clients Gain? (2/09)
It’s Still True No FIA Has Lost Money Because A Carrier Failed (6/12)
Looking For The Magic Phrase (9/09) 
More Investors Like Annuities (3/13)
Motivation For Buying Depends On Prospect's Age (7/12) 
New Research Clues On How To Close More Annuity Sales (6/13)
New SOA Report On Retirement Is Required Reading (3/13) 
Objection Preemption (6/10)

The Power of Annual Reset (2/11)
Puffing Your Ad (8/10)

Referral Signal Strength (9/12)

Riffs On Risks (12/13)
Safety – Bank & Annuity Reality (7/06)
Selling: Setting The Stage For The Next Call (3/12)
Seniors Can Adapt And Continue To Make Good Decisions (11/11) 
Surrender Charges Help Save America (2/11)
The Timeless Marketing Message (10/08)

To Sell More Annuities Use Pie Charts (6/13)

Underpants Gnomes & Agent Prospecting Methods  3/15

Vanguard Study Shows Annuities Needed (7/13) 
Want A Sale? Make Them Angry! (1/09)

What’s Wrong With Index Annuities? (10/05)

When your answer loses, answer a different question (2/10)

Where Is The Annuity Money? It’s In The Bank (4/13)
Why CD Rate Won't Be A Problem (8/13) 
You Earned Zero On Your Annuity GLWB – Great! (8/13) 

Your Unique Selling Proposition Persona (5/12)


2020: B/Ds & Banks Sell The Most FIAs 8/15 
In my 2010 study, Fixed Annuity Distribution In 2020, I said "wirehouses, banks and advisory firms will be the biggest distributors of annuity products." The current trend is in that direction because attitudes are finally changing.   A main reason for this interest in the advisory community is due to a growing acceptance that guaranteed income in retirement is a good thing and that only annuities can provide this. Their annuity vision is so far limited to immediate annuities and the occasional deferred income annuity. The admitted problem for them is they can't – or shouldn't - make money off the assets lost when they are used to purchase an annuity, thus an annuity recommendation takes money out of their pocket.  

Banks have always been big distributors of multi-year guaranteed annuities (MYGAs) when rates are high; for the last few years more banks have been selling more FIAs because the potential   interest is so much higher than with a MYGA. If interest rates in generally do bump up a couple of percent in coming years banks may go back to MYGAs, but for the foreseeable future banks will continue to be an increasing part of FIA distribution. The FIA guaranteed lifetime withdrawal benefit (GLWB) story has not been highlighted in the bank community as it has in the independent agent channel – FIA bank sales are mainly rate driven, not income driven – but this could change. Some bank marketing companies are doing training on GLWBs and this should drive bank sales even higher.  

The wirehouses are looking at both fixed rate and fixed index annuities as alternatives to bond vehicles and CDs in a rising interest rate market. The ones I've met with are in the early stage when it comes to FIAs, but the idea of transferring interest rate risk to a third party finds acceptance and a couple wirehouses are very active in selling FIAs. In addition, the availability of new FIA indexes that are similar to indices they are offering in securities products creates a comfort level that makes the transition to FIAs easier.  

An IRI 2015 study* finds 77% of B/Ds say FIA sales are growing with 31% experiencing significant growth. The broker/dealers are the fastest growing FIA channel and there are several reasons for this. One is the product is viewed as much less of a pariah, since both surrender periods and commissions have come down in recent years – no rep in the study said they would never sell an FIA. A second reason is the same as the banks – higher potential interest rates. Another is the reps that were big sellers of variable annuity GLWBs have found that option dropped or the benefits severely trimmed – by comparison, FIA GLWBs offer a much sweeter story. A third of the B/Ds say that FIAs with GLWBs are significantly replacing VA GLWBs and another third admit to some displacement. Even in non-GLWB sales two-thirds of B/Ds admit that FIAs are  and replacing what would have been a VA sale. Also interesting is roughly half say their reps are using FIAs instead of certificates of deposits and bonds at least some of the time.  

Together, these four channels represented 30% of 2014 FIA sales. This will continue to increase and I still predict that they will account for more than half of FIA sales within five years. This does not mean that overall sales in the independent agent channel will decline, even though the number of FIA policies sold has steadily declined since 2005 – the reason channel sales have increased is due to larger average sales.   The core of current independent agent channel sales are the result of 1035 exchanges – and these sales are declining due to the use of GLWBs and heightened suitability. However, a growing acceptance of FIAs by other channels means consumers will be hearing positive messages about FIAs and be more receptive. The independent agent will sell fewer 1035 exchanges, but they will sell more IRA rollovers and CD transfers.   I see all of this occurring with or without the DOL proposed fiduciary standards. If the DOL proposal does not go into effect, then the distribution patterns simply continue. If the proposal goes into effect, then FIA sales should increase because an FIA is often in the best interests of the consumer. All in all, I see a future of steadily increasing FIA sales.  

*2015 Fixed Indexed Annuity Distribution Trends. Insured Retirement Institute

Underpants Gnomes & Agent Prospecting Methods  3/15

In the second season of the show South Park the main characters confront the gnomes that have been stealing their underpants. When confronted, the gnomes say that it is part of their business plan which they outline: Phase 1 – Collect Underpants; Phase 2 – ?; Phase 3 – Profits. The problem is that question mark in phase two because it means the gnomes never figured out how to translate underpants into profits. I see a similar problem in trying to determine how effective different prospecting methods are, and by effective I mean result in actual sales. This is based on a small study asking agents to rank prospecting methods from most effective in generating sales to least effective.

Existing Clients: I once had the head of an annuity program at a large bank tell me that his reps never went back and talked to customers to whom they'd sold an annuity because these customers had no more money. Even if this was true, situations change; the customer might come into a windfall. More likely is the customer didn't tell the rep about every penny they had. Also likely is the customer may decide they like annuities and now wish to allocate more assets to them.   Several recent surveys show annuity buyers are generally happy they bought the annuity and   often express an interest in buying another one. Keeping in touch with existing annuitybuyers generates a higher frequency of new sales than many other prospecting methods.  

Referrals: I never had any luck with the advice to ask my brand new client to give me the names of three of their friends I could pester. However, I did have some success by being very specific and saying "if you know someone that....complained about what the bank was paying, needed more income...please feel free to pass along my name". Another referral source that has proven effective is a customer appreciation get-together. Have your clients gather for a lunch or picnic, encourage them to bring kids or a friend, and mingle. 

Seminars & Lead Cards*: Despite attacks on "free lunch seminars" and occasional state action on deceptive lead card marketers, both of these continue to be effective at producing leads. When it comes to lead cards, make sure they work (ask for results from multiple mailings and talk to other users). If your area is seminared-out (and many are) go to where the competition isn't – towns 50 miles away from the city may still be unspoiled.   *I was going to include cold calls, but I couldn't find any agent that does them.  

Professional Referrals: A reason an agent does not get referrals from lawyers and accountants is the fear the agent will do something that reflects poorly on the referrer. Another reason is the agent often is not reciprocating and not bringing new clients to the professional. Frankly, the only time I've seen an agent get lawyer/accountant referrals is when using an IMO that specializes in helping the agent build those types of relationships.   

Agent Web Site. An agent needs a web site mainly so prospects that hear of them can check them out. A simple web site with a brief bio, a picture of the agent, address and phone, and a description of the products or services provided is all that is needed. Don't waste time and money building an elaborate site with information pages and calculators thinking the site will attract actual buyers.   I've been involved with a couple of consumer annuity web sites. They were beautifully done and the SEO (search engine optimization) scores were high. In the ten years these were operational they generated three leads. To get truly meaningful leads you need 100,000 page views a day; if you're highly successful you might get 500 to 3000 a day. There's too much web competition, run a simple “this is me” site.

Ads: Ads showing yield can work; message ads, not so well. Get the ad in a place it will be seen by potential customers and show an approved ad touting a strong annuity yield. With the average 5-year CD rate hanging below 1% a 5-year annuity rate can be attractive. The carrier must have approved the ad or the agent will get in trouble.  

Radio/Television Shows: They're a bit expensive, they're complicated, they have huge compliance issues, they have a long lead time between when the shows begin and when the prospects begin to flow, but hosting a show works. Once again, using an IMO or other firm that specializes in helping agents do these types of shows is often needed.   Write General Press Articles: This doesn't mean articles for the agent's web site because no prospect will ever read them (see below). This is about writing articles that will appeal to consumers and ending with a little bit of a tease so they  will call you, such as "finding that one annuity   with the 3% yield is like finding buried treasure – that's why I have a map)". Due to the maw of the internet it is easier to find outlets for articles.   Start with telling the local media that you have an article that might be of interest to their readers and you can progress from there to writing for financial web sites if you wish.  

Web Social Media. Blog, get on Facebook, create YouTube videos, start tweeting, and you'll get dozens of new annuity customers...or will you? Coca-Cola was an early adopter of social media marketing and spent millions using Tumblr, Pintrest, Twitter, YouTube, and Instagram.. By 2012 they had almost 62 million Facebook fans alone. Their conclusion? All of this had "no measurable impact" on sales [].   I counted dozens of articles from the last couple of years in annuity agent trade journals touting the benefits of agents using social media (many written by social media consultants). They talked about being effective in getting page hits or re-tweets or increasing contacts, but I could not find one article that said "and the social media resulted in $Y in new annuity sales".

Consumers have to be able to find you to buy something, and having an account with LinkedIn or Facebook makes that easier, but I can't find any solid studies that say spending time tweeting, updating Facebook or creating YouTube videos is at all effective in generating sales, much less being as effective as other prospecting sources.  

Gnomes. There are prospecting methods that work and the results are measurable. The agent can generally count the number of sales that result from existing clients, referrals, seminars, lead cards and yield based ads. Hosting radio/television shows and writing consumer articles for the general press are generally not considered social media, but they are – what you are doing is creating an impression that will hopefully prompt someone to buy from you, which is what web social media is supposed to do – but is tougher to measure  effectiveness.   I cannot find good numbers showing that web social media produces annuity sales. I can find data on how many "followers" an agent has, but I can't find anyplace where it says "for every 700 followers an agent got 2 sales" or "the agent got 1 annuity sale per 423 friends".  The web social media ideas seem like the gnomes collecting   underpants. If anyone out there has hard data on the number of annuity sales produced directly by web social media, please let me know. I'm not against social media; I simply can't find where it has worked in selling annuities.   The goal is sales (profits). You need to use prospecting methods that have shown actual results and how activity translates into sales or you might wind up with only a pile of underpants.  

3 Reasons Why Low Cost Isn't Always A Good Thing   2/15
1. Low cost won't get people to do something they aren't already doing.
Marketing pitches for term life insurance often highlight the low cost and it's true, term life insurance premiums are lower than they ever have been. And yet, life insurance ownership is the lowest in 50 years. The same LIMRA data also says 83% of consumers say they don't buy life insurance because it's too expensive – they think the average monthly premium is $33 when it's really $12 – but I wouldn't be surprised if that answer is used by consumers to rationalize why they don't own insurance (if you were ready and willing to spend $12, would you not spend $20 more a month to protect your family?)   In life insurance it could be that the primary reason for low use is that over 40% of households, according to the U.S. Census, are dual income. This could mean the husband feels he no longer has to buy insurance to support the widow since the widow will be self-supporting; the same self-supporting logic could be used when children are involved. If believing that two incomes eliminate the need for life insurance, then the cost of the insurance is irrelevant because the need is seen as irrelevant. What is needed is an agent to show why there are still gaps in a dual income household that life insurance can fill. Low cost does cause people to shift existing buying habits, but is much less likely to create new buying habits.  

2. Low cost lowers margins which often narrow distribution.
What if the primary reason for low insurance utilization is because consumers no longer see agents? I have two adult children with children; neither of them remembers ever being contacted by a life insurance agent. Why not? I've been told by agents that it doesn't make sense to spend hours with a prospect where even if they buy, the agent only earns a couple hundred bucks. Of course, not all prospects buy, so the average    income per interview is much lower. As life insurance trends switched from permanent to term and premiums declined, so did the compensation, forcing agents to move to more profitable prospects, higher margin products, and meaning the mass market was no longer serviced.   This happened with life insurance and, I believe, will happen in the investment world if a fiduciary-only standard become the law. Commission-based compensation makes it distribution-effective to meet with clients that don't have sufficient assets to use fee-based services.  

3. Low cost only works well with high volume (which may not be a good thing overall).
If your fixed expenses are $100 and your net revenue per sale is $5 you need to sell 20 widgets to cover your expenses. If your net is $2, even if you now sell 40 widgets, you're not covering your fixed costs. To lower your fixed costs you can cut compensation, use more effective technology which allows you to layoff employees and decrease overhead, cut the quality of the product, or maybe all three. On the supply side, a low cost approach only benefits those that produce on a massive scale and harms many others. The cosmic question: Is it better for society if a person now pays $3 less on a product if it puts 10,000 other people out of work?  

Fighting Back Against Low Cost
Low cost may be desirable if you’re the buyer (although the previous reasons show even the buyer doesn’t always benefit) but it often is not desirable for the seller to compete on the basis of lowest cost. However, there are ways to fight back against a low cost competitor:   Try to determine whether the competitor's low cost is sustainable. Occasionally in the annuity world a competitor will offer a product or rate that is too good; the solution is to wait them out until the economics catch up (and they always do).  

Figure out if cost is really an issue. Based on my examination in the annuity arena it doesn't appear to affect the take-up rate of a buyer adding a guaranteed lifetime withdrawal benefit whether the rider fee is 0.4% or 0.9%. Let the competitor cut margins; you won't need to cut yours. If the buyer is somewhat cost insensitive – as it also may be with GLWB buyers – then increasing differentiation may be far more effective.   Enhancing the rider by offering a benefit the lower cost annuity does not have – say by tripling the payout if the annuityowner enters a nursing home – can be structured to be far less expensive than simply cutting rider fees to match the competitor.  

The classic marketing strategies are to compete on price (low cost) or competitive differences. Sometimes one has to focus on differentiation because it is impossible to gain a low cost advantage. The differentiation has to be meaningful;  highlighting your creativity or experience or product mix is meaningless unless it is important enough to the consumer that they will pay more.   Unfortunately, recognizing and creating differentiation is not easy. One proven way is to use group affinity and this has been recognized by carriers and fraternal insurers that market to a certain industry, members of a religion or a unique demographic. In addition to creating social utility (people wish to belong and follow what the group is doing) the affinity provides high referred signal strength (meaning the product is perceived as more valuable because their peers have bought it).

Agents and marketing organizations may use the same affinity utility.   Financial rating can be used to justify higher cost if the rating difference is big enough. Consumers will accept less from a carrier rated “AAA” or “A++” over one rated “BBB” or “B++” but not if one insurer is an “A” and the other is an “A-”.   Better service does not appear to be a differentiator for consumers. The probable reason is the interaction with the carrier is often so limited that it is hard to note the difference between excellent and not-unacceptable service.   A new sales story can create an excellent difference. In the index annuity space the new spice is usually the crediting method. Averaging with yield spread, monthly cap, and rainbow methods quickly captured market share in the past. However, although the first carrier gains an advantage with a new method it is quickly duplicated by others and the differentiation is lost.   A new index available in the FIA space may also gain a competitive advantage, but it has to have a story with unique elements. However, to maintain that advantage the carrier needs to ensure that the index does not become available to low cost competitors.  

Striving for low costs is generally a positive thing, but it won’t attract the price insensitive and can work to actually decrease the size of a market. If you can’t be the low cost producer you’ll need a competitive differentiator that is difficult to duplicate. The difference can be many things, but it needs to meaningful to the buyer.  

6 Reasons Why You Should Use An Annuity Instead

There has been much written on the effects of dementia on senior decision making, but dementia is only one factor (albeit a powerful one). The reality is as we get older it requires more effort to make good decisions because of our failing ability to rapidly process large amounts of data in our brains – a decline in our fluid intelligence. This does not mean that age in and of itself says a person cannot make good decisions, but it means that the focus and concentration required to do so may not be available due to issues of health or general stamina, even if the person is not cognitively impaired.   Due to this inevitable decline several studies have suggested that the use of annuities with life income benefits to generate retirement income makes sense because it eliminates the need for much of the future decision making regarding retirement assets.

A paper* published this summer by Professor Lawrence Frolik at the University of Pittsburgh explores this topic in depth. Aggregating what has been written previously about the issue, along with some specifics mentioned in this new paper, effectively creates a list of reasons to explain to a retiree why they should buy an annuity with a life income using at least a portion of their retirement assets.   Why You Should Buy An Annuity With Life Income Instead Of Managing Assets  

1. Because you don't have a pension
Unless the retiree worked for a government entity the odds are very strong the only predictable source of income they have is Social Security. Even if they worked for a company with a defined benefit plan they may have taken the cash instead of a pension. Unless the Social Security check is covering all of the retiree's essential costs there is merit in getting an annuity life income (especially a joint life annuity for when Social Security income dips after the spouse dies).  

2. Managed Asset Withdrawals
are a Hope not a Guarantee Wall Street uses retirement models to determine how much money can be withdrawn each year, but these are models, not reality, which is why the suggested "safe" withdrawal rate – safe meaning the odds are favorable that the money will last until the retiree dies – has varied from 2% to 5% since the turn of the millennium. If the model is wrong and the retiree runs out of money no financial advisor, target date fund or asset manager will say "oops, I was wrong, but tell ya what, I'll continue to pay you out of my own pocket." It's not going to happen.  

3. Diminished Physical Capabilities
Even if your mental faculties are as sharp as ever your physical parts may not be. As we age our hearing, eyesight and general stamina declines. Professor Frolik makes the point that you may not be able to read those IRA reports due to macular degeneration and hearing loss may mean you mishear important news your financial advisor is sharing. Finally, an octogenarian or nonagenarian may simply not have the endurance to actively monitor investments on a regular basis.  

4. Chronic Health Issues
As we age we are more likely to have ongoing health problems. The pills and therapies that treat the illness often leave the person still in pain, disoriented and/or fatigued and thus less likely to devote time to managing their retirement assets. As the paper puts it, the 80 year old going for dialysis treatment three days a week will probably not be spending the rest of the week worrying that her portfolio is overloaded with equities.  

5. Mental Impairment
The Plassman studies** found that for seniors in their 70s 1 in 5 had some cognitive impairment and that figure rose to 1 in 2 for seniors in their 80s and 3 in 4 for seniors in their 90s. Cognitive impairment includes both those with dementia and those where thinking is only slightly impaired. If we tighten this to only include those with dementia – which includes Alzheimer's – the results are  1 in 20 for the 70s age group, 1 in 4 for the 80s and 1 in 3 for the 90s. The reality is a significant portion of the people that begin retirement actively managing their money will at some point be unable to competently do so, at least at times. Put bluntly, the reason for using an annuity is there is much less loss if the retiree succeeds in wiring their monthly annuity check to a Nigerian bank account than if they wired their entire IRA.  

6. Guardianships & Powers of Attorney Have Limits
Something I faced years ago was my mother in the early stages of dementia which necessitated giving my brother power of attorney over her affairs, but due to her diminished capacity it was questionable whether she had the legal capacity to sign the power of attorney. We had her sign anyway, found agreeable witnesses, and crossed our fingers it wouldn't be challenged. We were lucky, it never was. Still, it was a heavy burden that my brother assumed, even though our mother's assets were few.   The guardian or agent has a fiduciary duty to do what is best for the retiree. However, even if they don't steal from the kitty or intentionally misuse their power what are their qualifications as an asset decumulation expert? Will they manage the assets to produce the maximum income prudent with reasonable risk? Will they try for riskier investments and lose the asset? Or will they put all the money into three month Treasury Bills to try to protect the principal, but generate too little a return so that the retiree still winds up impoverished in the future?   There is also the choice of the guardian/agent. The paper mentions the age 70 man naming his age 69 wife as agent and becoming incapacitated at age 85, but by then the wife is 84 and experiencing her own problems. An acceptable agent now may be less than ideal when needed; even a well intended guardian can make mistakes. Selecting an annuity with lifetime income before a guardian is needed helps prevent a future problem.  

The Answer Is An Annuity With Guaranteed Life Income
Previous Index Compendium articles have discussed recent studies that found using part of the  retirement assets to buy an annuity producing a guaranteed life income vastly improved the odds that the total income will last a lifetime, but although some financial advisors seem to have a difficult time accepting this, the use or non-use of an annuity is not a financial choice, it is primarily a behavioral one. On the advisor side a combination of two cognitive biases – overconfidence and hyper-optimism – work against recommending an annuity. In short, the advisor is confident that they can beat both the return expectations of the insurance company and the laws of probability in managing the retiree's assets. On the retiree side the biases of risk aversion,  availability and mental accounting often get in the way of buying an immediate annuity, because the retiree feels they will die too early and get cheated. However, the use of a fixed index annuity with a GWLB overcomes most of the retiree's biases.   To wrap up why an annuity with a guaranteed life income makes sense I'll quote three few lines from Professor Frolik's conclusion, "The assumption that retirees can successfully manage their IRAs during their declining years is a folly... It is time to admit that what most retirees need is a stream of income. Our nation’s retirees need and deserve the security of having a check arrive every month that does not depend upon their skill at managing an IRA during their declining years."

Frolik, Lawrence. 2014. Rethinking ERISA’s Promise of Income Security in a World of 401(k) Plans. University of Pittsburgh School of Law. Working Paper 2014-26.   ** Marrion, Jack. 2012. Addressing The Challenges Created By Cognitive Changes In Seniors. Advantage Compendium


Riffs On Risks (12/13)
Market Risk Over Periods
If you look at calendar year periods of the S&P 500 from 1959 through 2012 you find the average gain over a five-year period was 42%, but simply stating the average gain underweights the reality that over a quarter of the periods ended with losses. The reality for periods ending in 1973 – 1975, 1977, 1978, 2002 – 2005, 2008, 2009, 2011 and 2012 is that 100% of those investors lost as much as 26%. Even assuming that past market patterns repeat – and they don't with any precision – it would be misleading to use the average return unless you were going to invest in each of those periods. Instead, based on the past, from a risk viewpoint this should be framed as can you accept a possible 26% loss.

Longevity versus Bequest Risk
If you have $300,000 at age 65, start taking out $25,500 a year at age 70 and earn 3% a year your money runs out at age 87. This is not a problem for the 65% that died earlier. However, what if you are among the 12% that makes it to age 95. Not having hedged your longevity risk cost you $204,000 (assuming a 3% return). If you instead earned 6% you not only kept getting that $25,500 but your heirs got a check for $240,060. If you bought longevity insurance (GLWB) that cost 1% to get a net 5% return your heirs would only get $79,542. However, we need to understand the risk we're hedging. Longevity risk is running out of money before you die. An annuity guaranteed lifetime withdrawal benefit might cost 1%, but it protects you against the risk of living too long and earning too little and thus you should be indifferent to the cost from a longevity risk point of view. If your goal is to leave an estate then we are no longer talking about longevity risk, but bequest risk, and that is a different subject.

You Earned Zero On Your Annuity GLWB – Great! (8/13)  
The financial value of a guaranteed lifetime withdrawal benefit is not realized until the annuityowner's cash value is used up. Therefore if you are attempting to maximize the financial benefit of the GLWB coverage you would want to begin the income steam when you are as young as possible (to collect for the most years) and achieve minimal or even zero growth after payouts have begun to get the most bang for your buck (the greatest return on the rider fee).

It almost sounds bizarre – don't try to maximize the annual income you could receive and the remaining cash value that goes to your beneficiary! But from a pure return-on-cost insurance perspective you should maximize the total income and speed up eliminating the cash value. And from a pure insurance cost/return perspective I understand it, but I couldn't see how you make a lousy annuity cash return look like a good thing for the annuitybuyer...until now.

The twist is the GLWB is shown assuming no interest is earned – ever. You then show how long it takes to get back your premium using the GLWB payout and also compare the total payout with the initial premium. Here's an example using a hypothetical assumption.

At age 61 you put $100,000 into an annuity with a 4% GLWB bonus and a 6.5% roll-up rate. At age 70 you start withdrawals and if the payout rate is 5.5% your GLWB income is $10,000 a year (actually $10,082). So far, this is a standard GLWB presentation. The twist is you assume that annuity always nets a zero return. What you get is a spread sheet that looks like this.

The story to the customer is even if you earn zero you still always get back your original premium (ignoring surrender charges in my example) and after age 80 you're making money off the annuity carrier – "Ms. Annuity Buyer, if you make it to age 89 you've received $200,000 from your $100,000 premium. Heck, if you make it to 99 you'll have received $300,000. And all of this assumes you never earn any interest from the index annuity!"

Why I Like The Story
Many consumers are pessimistic and feel they are unlucky when it comes to money. If it's buying an index annuity where there's a possibility of earning zero index-linked interest, they figure they'll be the ones earning zero. If there's a lifetime income offered, they feel they'll be hit by a bus tomorrow and the annuity company wins. By presenting this as "let's assume you earn zero" you show the worst case at all times is they get their premium back (again, ignoring surrender charges) and that there is a real chance that they can win against the annuity carrier. This turns the reality that they could use up their cash value into a good thing because it means they become a winner and the annuity carrier a loser.
Cash Value
$  90,000
$  80,000
$  70,000
$  60,000
$  50,000
$  40,000
$  30,000
$  20,000
$  10,000
$          0
$          0
$          0
$          0
$          0
$          0
Total Income

The attractiveness of the story is due to certain elements of game theory and behavioral economics and involves the way that people react to gains and losses of both themselves and the other party in a transaction. However, the important thing is it works. The lesson here is that showing the annuity buyer a GLWB world that assumes a zero return where the cash value of the account quickly disappears creates a strong motivation to buy.

Why CD Rate Won't Be A Problem (8/13)
In every previous interest rate cycle short-term interest rates have responded more quickly than long-term rates. Since annuity rates are derived from long maturity bonds and CD rates come more from short-term lending this means CD rates go down faster when rates are falling – giving annuities a competitive advantage, and go up faster when rates are rising – causing problems for annuities. In past rising interest rate cycles this usually meant as bank rates were scampering up 2% the rates on fixed rate annuities may only have moved up 1%. Even though the FIA world was less affected – the caps were still higher than the CD rates – the rising bank rates made consumers think that bank rates would keep rising and this made them reluctant to tie up their money in an annuity, but this time it is different.

As the chart shows  ten-year Treasury yields have spiked up since the spring and are almost a full percent higher than they were 3 months ago; other bond yields are also sharply up. By contrast, CD yields declined during this period. My belief is that increases in bank money market account and CD rates will be modest in this rising rate cycle and not be the competitive threat they were in past times. Why?

The main reason is the 07-08 financial crisis caused regulators to demand that banks keep higher reserves and higher equity so they’d be less leveraged. Indeed, last month regulators proposed even more conservative standards for the 8 largest banks. Money kept in reserves and equity dilutes returns meaning less money is available. The other factor is over the last 15 years banks added on a number of customer fees – some junk, some legitimate – and over the last couple of years regulators have either ended or put limits on the fees that can be charged. Both of these events mean banks have less money to pay out as interest.  The final reason for modest bank yield increases is customers are not fleeing the banks. Quite the opposite, the amount in money market accounts is at record levels despite low rates.

 All of this means that fixed rate and fixed index annuity yields and caps will remain very competitive with banks in this rising yield cycle.

Vanguard Study Shows Annuities Needed (at least that’s my interpretation of the results) (7/13)
Released in June How America Saves 2013 is a report by Vanguard on their defined contribution plan data. Based on data involving 2000 plans and over 3 million workers it is an interesting look at the current state of the 401(k) world. Vanguard says the median plan account balance in 2012 was $27,843 and the average was $86,212. What this means is going by averages won’t work because the number is highly skewed by a few people with very large accounts. The reality is half of the employees have less than $27,843 in their 401(k) plan. The median employee contribution rate has been 6% for years (9.5% after including employer contribution); 76% of eligible employees contribute to their company’s 401(k) plan. The average annualized return from 2008 through 2012 was 3.9%. In 2012 96% of participants did not take money out of their 401(k) by making a hardship withdrawal (but 18% did have an outstanding loan with an average balance on $9,213). Not surprising, plan participation increases as people get older and/or make more money, but what I found interesting was increasing participation by the youngest employees.

  • Key Points

  • One-half of workers have less than $27,843 in their 401(k) plan

  • Since the 2008 crash the percentage of young workers contributing has dramatically increased: a decade ago roughly 1 in 4 under-age-25 worker contributed and now it’s 1 in 2

  • Vanguard predicts that 55% of 401(k) participants will use only target-data funds. Since target date funds are a wish rather than a guarantee of lifetime income I predict purchases of fixed annuities with GLWBs will explode as more workers become aware of how much better they are than target-date funds in making lifetime income a reality.

 Going back over the last 10 years the participation level of those between ages 35 and 65 hovered near 75% over the entire period. Looking at rolling 3-year averages the percentage of those between ages 25 and 34 contributing increased from 57% to 66%, a significant increase. However, even more dramatic was the participation in 401(k) plans by those under age 25 increased from 28% to 46% with the most dramatic increase occurring in 2008. Even though retirement is over 40 years away roughly half of these very young workers are saving for it. Granted, the increasing use of automatic enrollment has been a strong factor – the percentage of plans requiring an employee to “opt-out” of a 401(k) plan rather than “opt-in” increased from 15% in 2007 to 32% in 2012. However, this increase is also supported by other research I’ve conducted on Generation Y (the Millennials) that points out they don’t want to make the same mistake many of their parents made by not saving enough. Also, 68% were choosing target date funds to provide a lifetime income in 45 years. Gen Y may turn out to be the biggest buyers on annuities ever.

The survey finds that 27% of participant have all of their retirement plan money in a target-date mutual fund. Within a few years Vanguard anticipates that 55% of all participants and 80% of new enrollees – will eventually be in a target date or similar securities plan. As a refresher, a target-date fund is a mix of equities and bond funds that the retiree hopes – and hope is the key word here – will provide a level withdrawal rate to produce an income for life. However, unlike the GLWB there are no guarantees and the target date history in the 2008 market crash showed target date funds cannot be counted on in times of severe market stress.

My belief is the main reason these people are not choosing index annuities with GLWBs is that since they are almost never available in a 401(k) plan that the workers simply aren’t aware of them (also, since the average 401(k) participant earned an annualized return of 3.9% from 2007-2012 it may make workers wonder what a non-guaranteed future will look like ). The Vanguard study shows people are looking for what they believe will be dependable retirement income, but target date funds are financial formulas and not financial certainty. If 401(k) participants are shown a way to guarantee ncome growth without worrying about the vagaries of the market with a lifetime income promise that consists of more than “keep your fingers crossed and hope for the best” they will buy it.

New Research Clues On How To Close More Annuity Sales (6/13)
There are two types of knowledge. Objective knowledge is obtained from data – the capital of Minnesota is St. Paul. Subjective knowledge is what we feel we know – we think we can name most of the state capitals. An important new study shows that providing too much new data or too complicated data can affect our subjective knowledge and make us less to likely to take a risk. The results of these studies have strong implications in how we present annuities to consumers.

It does not come as a surprise that people tend to keep their money in financial places that they feel somewhat knowledgeable about and are less likely to put money in places they feel they don’t understand. Agents often work with consumers that know little about annuities and the agent’s job is to increase the consumer’s understanding and show why the annuity may be a good place for some of the consumer’s money. How the annuity is described affects the likelihood of purchase.0

Making the consumer feel less knowledgeable about annuities is a sure way to kill a sale

Finding: Too Much Data Kills The Sale
Consumers were asked whether they would stay with a safe investment paying 3% or move to a new investment where was a 4 out of 5 chance they’d earn 4% and a 1 out of 5 chance they’d earn zero (sounds like an index annuity, but it wasn’t). When the consumers were shown a table with 10 historic returns 60% chose the new riskier investment; when they were given 40 historic returns zero consumers chose the new investment.

Implication: This showcases why using annuity illustration spreadsheets can be harmful. It also shows why you need to tell the annuity prospect what they need to know instead of everything you know about the annuity. The goal is to increase the consumer’s subjective knowledge so the consumer feels they understand the annuity you are trying to sell them. However, if you keep piling on new information (objective knowledge) the consumer feels they really don’t know as much as they should and thus doesn’t buy.

This relates to a concept mentioned in previous articles that the goal should not be full disclosure – telling the consumer every possible aspect and implication of the annuity purchase, but fair disclosure – telling the consumer the aspects and implication that will most likely affect them (if they want the rest of the story they can still read the contract during the free-look period).

Finding: Too Much Technical Data Kills The Sale
This study used actual sales materials from life cycle (target date) mutual funds. Some participants were given this basic description of a life cycle fund; your money is split between stocks and bonds and as you get closer to retirement more money is shifted away from stocks and into bonds. Other participants were told the formula used to determine how the allocations were shifted, the fund’s Beta and how the standard deviation moved over time. When the life cycle fund was described in these more technical terms the consumers were half as likely to select it.

Implication: This should be a warning to those that talk about annual cliquets, Asian option strategies and use industry-speak with consumers. “This annuity has the potential to earn more interest than the fixed rate does if the index cooperates, but it could be less or even zero if it doesn’t.” This is the index annuity return story. The consumer’s concerns are can I lose my money, can I get my money, and what is the return on my money. These concerns need to be addressed as clearly and simply as possible.

Finding: Increasing Subjective Knowledge Helps The Sale
Going back to state capitals, if you ask a person what are the capitals of Massachusetts and Utah, they may well respond with Boston and Salt Lake City. Even though their correct answers may only be because those are the only cities in these states they can remember, they will feel as though they are more knowledgeable about state capitals overall. However, if you ask what are the capitals of Kentucky and South Dakota they may not respond with Frankfort and Pierre and will feel less knowledgeable about their ability.

Implication: For many consumers an index annuity is something new and they need to feel they are knowledgeable about them. The agent can reinforce this by repeating and emphasizing the main points. Saying for the third time that, “this annuity has the potential to earn more interest than the fixed rate does if the index cooperates, but it could be less or even zero if it doesn’t” has the consumers thinking “yes, I know this” and makes a decision to buy more likely. Saying for the first time, as the consumer is about to sign the application, that “the Russell 2000 and S&P 500 index choices have higher correlation than do the foreign indices” may well make the consumer drop the pen as they now believe they don’t understand annuities at all.

Finding: Testing Objective Knowledge Can Increase Subjective Knowledge
In a study on 401(k) plans some participants were asked Which is expected to yield a higher return over a period of 10 years, a savings account or a stock investment? while others were asked What was the annual change in the value of the Nasdaq 100 last year? The ones asked the first question were more likely to contribute to the 401(k). The reason is because they were able to answer the first question it reinforced their belief that they knew something about investing.

Implication: It might result in more sales if the agent formally tested the consumer on what they learned about annuities towards the end of the agent’s presentation, providing the consumer gives the right answers. You wouldn’t ask “calculate the guaranteed minimum return if the benchmark Treasury yield averages 3.25%” however, you might ask “True or false, this index annuity has a guaranteed minimum return”. A test shows the consumer that they have increased their objective knowledge – they have demonstrated that they know the facts about the annuity – and this makes them more confident in deciding to buy the annuity (subjective knowledge).

The decision to buy a financial product that is new for the consumer requires them to feel they at least have a basic understanding of the product. The consumer needs basic facts explained in a simple matter to gain this understanding. Unfortunately, some agents – and far too many regulators and “consumer advocates” – believe that piling on more and more data results in understanding, an approach these studies disprove. On a somewhat supercilious note this study also supports my long-held belief that hypothetical annuity illustrations for consumers are a horrible idea. Keeping it simple and not using industry jargon are not new concepts. What is new is the idea of actually testing the consumer’s understanding as a way to improve the odds that they will buy the annuity. Examining cognitive biases in decision-making (behavioral economics) has been around for over 30 years and it is now getting to the stage where its findings are being tested and applied. Now we are seeing ways to use this research with consumers in the annuity world.

Hadar, L., S. Sood & C. Fox. 2013. Subjective knowledge in consumer financial decisions. Journal of Marketing Research. 50; 303-316

To Sell More Annuities Use Pie Charts (6/13)
People often use the simple diversification rule of thumb of allocating assets equally between categories. Example: If four choices are available this one over n (1/n) rule puts 25% into each choice (1/4). I’ve written about this before (Feb 2007) and the suggestion was to not talk about annuities” (singular), but to talk about “fixed rate annuities” and “index annuities” – breaking them up by type – or “immediate income: and “future income – breaking them up by intended use. In this way an allocation model that was previously bank savings, investments, annuities – where 1/3 would be placed in each category – becomes bank savings, investments, fixed rate annuities and fixed index annuities – where 1/2 now goes into the category of annuities. New research has found that the effectiveness of 1/n is enhanced when pie charts are used and this has implications for annuities.

 Pie charts are more influential than a table of investment factors. Even if the consumer read the data from the table first and it contradicts the pie chart, consumers tend to follow the suggestions of the pie chart.    Asset Allocation Model

  $50,000   Bank Savings
  $70,000   Investments
  $40,000   Fixed Rate Annuities
  $40,000 Fixed Index Annuities

The research found that pie charts do a better job of connecting with most consumers and influencing their decisions than showing data on a spreadsheet. It also discovered that participants preferred pie charts with more equal slices of pie than fewer. What does this mean for the annuity producer?
Not Okay Better



The first conclusion repeats what I found previously, which is to present the annuity as more than one asset choice, if that is reasonable. If the intent is to use one annuity to pass along money to heirs and one to produce retirement income, then this becomes two choices. Or if you’re considering a deferred income annuity and one with a lifetime withdrawal benefit this could also be shown as two choices, even though they both are income solutions.

The second conclusion is the annuity producer is the one that needs to create the pie chart and the chart should have between 4 and 8 equal sized slices. If one piece is disproportionate, adjust it. As an example, perhaps it is important for a consumer to have at least a third of their assets in bank accounts because the money may be needed soon and the current pie is deferred annuity income, current annuity income, investments, real estate and bank accounts. If you set the bank slice at 33% the pie chart will show one big slice and four smaller ones, but pie charts with different sized slices are less influential. A solution is to divide “bank accounts” into “savings” and “money market” accounts. Now our pie contains 6 equal slices of 16.67% each and the bank ones represent 33.33%. Understanding how our minds use the 1/n rule of thumb and react to pie charts allows annuity producers to more effectively utilize annuities in working with consumers. 

Bateman et al, 2013. As Easy as Pie: How Retirement Savers use Prescribed Investment Disclosures. Quantitative Finance Research Centre. Research Paper 326

Where Is The Annuity Money? It’s In The Bank (4/13)
Fixed annuity sales were lower in the fourth quarter than in the third and the third quarter was lower than the second. Based on what I’m hearing first quarter 2013 sales will also be off. It’s not going into variable annuities; their sales have also dropped. Where’s the money?
In the 2nd 3rd and 4th quarters the Investment Company Institute shows that $212 billion went into bond mutual funds (even though we are at the bottom of the interest rate cycle and rising yields will cause the future values of these bonds to fall). However, investors also took $144 billion out of stock funds and I’m guessing most of that went into the bond funds, so, overall, about $91 billion was added to the mutual fund world. The big winner was bank money market accounts where deposits increased $460 billion during these three quarters – even though the average yield was around 0.25%.

Bank money market account assets have increased at a rate of 0.08% a month every month for the last six years. That may not sound like much of a spurt, but it means that these assets have increased from $4.5 in 2007 to $7.4 trillion today – $50 billion is being added to bank money markets every month. This money is completely liquid (these totals don’t include certificates of deposit) and is earning, for all practical purposes, a zero return (negative after taxes and inflation).The money is in the bank because these savers are concerned about safety (because it sure isn’t there for the yield). Perhaps many of these savers are unfamiliar with the benefits of fixed annuities. There’s no need to be greedy. Even capturing 10% of these wayward dollars would double the amount of fixed annuities being sold. The other line in the chart shows the amount of actual cash people have stuffed into their wallets and mattresses. Since the fall of 2008 the amount of currency people are holding onto has increased 39% or over $300 billion. This would indicate that promising career options in 2013 include mugger and burglar.


More Investors Like Annuities (3/13)
As the DALBAR studies have consistently shown the average investor does a lousy job of handling their own investments, basically earning a quarter of what they could have earned if they’d just stuck it all in index funds and left them alone. Perhaps because of this realization a new study shows 32% of investors would be open to a rule that
required them to buy an immediate annuity with part of their 401(k) money. 

Another strong point is while only 28% of the investors over age 50 liked required annuitization 37% of those under age 50 were in favor – 43% of those with incomes of less than $50,000 liked the idea of being required to annuitize. This attitude among younger workers is in line with other research findings I’ll be publishing this spring on Generation X & Y. It may turn out that consumers now age 30 to 50 will be larger buyers of annuities than any preceding generation.


Population  Breakdown

Number of People Self-Identifying As Fixed Annuity Prospects Based On Risk Tolerance

Under Age 35



Ages 35-49



Ages 50-64



Ages 65 & Over



The population breakdown is from the 2010 U.S Census. The third column multiples the population breakdown by the percentage of people in each age group responding that they would be unwilling to take investment risk or would accept below-average gain for below-average risk according to: America’s Commitment to Retirement Security: Investor Attitudes and Actions, Feb. 2013. Investment Company Institute

The study breaks out the risk tolerance of those that have IRAs or 401(k) plans versus those that don’t. Interesting fact one is risk tolerance has stayed pretty much the same over the last four years (unfortunately the first survey was taken during the 2008 Crash and there are no numbers for previous years, so we don’t know if risk tolerance was higher before the crash). Interesting fact two is the difference in risk tolerance between those that have retirement accounts and those that don’t is huge: Over half of those without a 401(k)/IRA said they would be unwilling to take any risk versus one fifth of 401(k)/IRA holders. The implication is if the consumer says they don’t have a 401(k) or IRA that from a risk perspective they are excellent fixed annuity candidates. The problem is the reason they don’t have these accounts is because they don’t have any money in other places either (roughly half of the extremely risk averse make under $25,000/year and are retired or unemployed).

GLWB: The Realistic Answer (3/13)
An article published last month1 looks at trying to produce a 4% income for a 65 year old couple assuming that 10% of the time the money runs out early (a 10% failure rate). What is found is a combination of stocks & immediate annuities is far more effective that combinations of stocks & bonds. His conclusion is worth noting, the evidence suggests that optimal product allocations consist of stocks and fixed SPIAs, and clients need not bother with bonds, inflation-adjusted SPIAs, or VA/GLWBs.”

The reason for using non-CPIed immediate annuities is because the non-inflation ones provide such a higher initial payout that it could take over 20 years for the inflation-indexed annuity to catch up; this additional money could be invested and used to self-insure inflation risk which is the point previously made. I also completely agree that life income annuities should be used instead of bonds, but I disagree that the evidence means you should ignore GLWBs and the reason why is because consumers haven’t done and won’t do what is suggested.

Actual Behavior Trumps Math Models
If a conclusive study came out tomorrow that guaranteed we could live to age 100 in good health if we immediately started eating only brussels sprouts and rotting fish very few people would adopt the new diet even if they agreed that the study was true. Since 1965 academic studies have time and again proved that annuitization/life inc
ome is the optimal solution for most retirees, but the results show only a very small percentage of retirees will voluntarily sell or convert an asset to buy an annuity income – we refuse to transform from millionaire to pensionaire. We know the math; we simply won’t do it. However, GLWBs don’t create the same behavioral objections because the asset remains under the control of the retiree. Are GLWBs a better solution than immediate annuities in providing a lifetime income? No, but they are a life annuity solution that the client will actually use.

1 Wade D. Pfau. Feb 2013.  A broader framework for determining an efficient frontier for retirement income. Journal of Financial Planning

New SOA Report On Retirement Is Required Reading 3/13

An exceptional study published this year by the Society of Actuaries (SOA) takes a panoptic look at retirement from a variety of concerns and metrics to calculate the assets required. I strongly encourage all agents to go the SOA website and download the complete report. Some Key Points: 

  • Many of the next generation of retirees are facing a big drop in their standard of living when they retire.

I reached a similar conclusion after doing research on trailing-edge boomers (born between 1955 and 1964). People hitting their early fifties are in worse shape than current retirees and older boomers. 

  • Half of retirees have less than $100,000 in   financial assets (excluding home)
  • To handle longevity risk with a 5% failure rate the assets needed are approximately $686,000 (excluding home) for those that made $60,000 the year before retirement.
  • The most effective way to increase the odds that you will have adequate retirement income is by delaying retirement.
  • Annuitization helps to meet income needs after other assets are gone, but must be balanced against having an adequate emergency fund. “[Annuitization] is not feasible for lower income individuals and those with low financial assets. It is most likely to benefit the middle and upper income retiree with more assets.
  • Shock events (prolonged poor returns due to stock market downturns or low interest rates, long term care needs, death of a spouse) can derail retirement.

The study also finds that the most middle market retirees cannot afford to purchase an immediate annuity to guard against longevity risk and an LTC policy and hedges against poor investment returns and life insurance for remaining spouse. The study has a significant omission in that they ignore fixed annuities with guaranteed living benefits (GLBs). Although it says there are combination products it completes ignore the reality that there are fixed annuities with riders available today that guard against longevity risk, provide additional income if hospitalization or a nursing home stay is required, protect principal against market loss while still making assets available in case of emergency, and can provide a death benefit. The innovative financial products the study says are needed are already here.

Perhaps the reason for the omission is because it would be nearly impossible to quantify the amount of remaining asset in the annuity at time of death, or the fact that not all annuities with GLBs offer all or two of these different benefits.

The study finds that buying an immediate annuity (or annuitization) always reduces the odds of having financial wealth at death. Part of this makes intuitive sense – after all, you’re converting part of your cash into an income stream leaving you with less cash. However, a second reason for the conclusion is they assume historic returns on investment assets – which were much higher in the past, and current rate returns on the annuities – which were much lower now. They basically tell the reader to disregard this part of the study saying “we do not feel that any strong conclusions can be made regarding the efficacy of annuitization strategies based on these results.” Frankly, I’m not sure how I would have handled this point either. My view is that future stock market returns will not be nearly as high as those used in most financial models and that immediate annuity rates will be higher in a few years from today’s levels. However, I might have lowered my investment return assumptions and shown an additional chart. 

Overall, it is an excellent study and a prime educational tool. The agent can use it with consumers to point out the shock events that need to be taken care of and it provides a third party view that speaks of retirement risks and what can be done.

Referral Signal Strength (9/12)
A yet to be published study found that buyers are twice as likely to buy a financial product if they discover someone they know already bought the same product. The study had customers of a brokerage firm invited in to attend a presentation on a new financial product. At the end they asked how many wanted to buy the product and 45% chose to buy, but when buyers were informed that a friend or peer had already purchased the product 90% elected to buy. This alone reinforces how powerful referrals can be getting a decision to buy and illustrate the “why” behind the power of the referral.

In the sales world a quality referral is when a client gives you the name of a prospective buyer and allows you to say the client suggested you get in touch, or even better, the client contacts the prospects and the prospect then calls you. We often find it is much easier to make a sale when the contact results from a referral instead of a cold contact, but why? Are all referrals alike? What influences the effectiveness of the referral?

1) Referral Signal Strength
Signal strength is the degree of influence the referrer has on the prospect and that depends on what the prospect knows about the topic being referred and what the prospect thinks the referrer knows. As an example: If your physician says he uses Acme Brain Pills because they work his declaration will have more impact on your decision to use them than if Wile E. Coyote makes the same claim. You assume the doctor knows more than the coyote. However, if you see your doctor popping pills and you are already very familiar with Acme the physician’s endorsement will matter little to you because you will weigh the buying decision based on your own experience. In this world an accountant suggesting that her client should buy an annuity would have more referral strength than a similar suggestion coming from, say, her butcher, unless the client was an annuity agent, in which case they would rely on their own knowledge. A referral has the greatest impact when a) the referrer is highly regarded in this area and b) the prospect knows little about the subject.

Social Preference/Social Utility
As the study showed, sometimes the discovery by a prospect that a peer purchased something can have the same power as a referral from that person. Even a sophisticated buyer can be
affected by social preference which is a desire to conform, be fair and not appear greedy to others. Even if you discount the informational value of the message (your accountant bought an annuity) because you already have an opinion in the area, the knowledge that a peer has purchased may influence you to purchase so you don’t feel left out; purchasing has societal weight beyond the simple decision to buy an annuity.

If your soon-to-retire accountant tells you she bought an annuity this would probably influence you to buy an annuity, even if you know a lot about annuities. One reason for this influence is the accountant is showing that smart people buy annuities so you should too (conformity). If a person we think is smart buys something we are inclined to make a similar purchase to avoid falling behind – in this instance buying an annuity results not from a financial need, but from a desire to “keep up with the Joneses.” Or, perhaps the accountant’s purchase may suggest to you that annuities are a beter way to handle retirement due to the longevity protection (fairness).

Another implication of the study is if the prospect discovers that many people are also buying annuities – even if there isn’t a personal connection – this can also have a favorable influence. Simple facts, such as telling a Floridian that $18 billion of annuities were purchased in Florida last year, demonstrate that many people buy annuities. Or, showing a prospect the recent AARP study wherein 4 out of 5 people participating in a defined contribution plan said they’d use at least half of this money to buy an annuity (July IC) influences buying behavior through the conformity effect of social preference. We know the referrals are effective, but even when a referral isn’t forthcoming, if your client will permit his or her name to be mentioned as simply being one of your clients it can have as much positive impact on buying as a referral.

99% of Failed Banks Haven’t Returned All Uninsured Deposits (8/12)
Since the start of the millennium there have been 478 bank failures, all but 24 of these occurring since 2008. If you go the FDIC website you can see a list of these banks
 plus two more that failed in late 2000 ( What you won’t see on the page is the amount of uninsured
deposits that have been paid back. However, if you do some digging you will find that only 5 banks (1%) have returned 100%...

33 banks (7%) have returned 80% or more

269 (56%) have returned 50% or more


112 (23%) have returned 0%...of the uninsured deposits

When FDIC closes a bank it will often announce that another bank “has assumed all deposits” of the failed bank. However, it appears that means only insured deposits, because if you track the FDIC status updates of the failed banks you find them reporting that uninsured depositors have now received back 23.16%....39.44% ...91.88% of what was once in their account. Overall, when it’s all said and done, the typical uninsured depositor usually receives 80 to 90 cents on the dollar, but it takes years and it can be much less. 

I do want to make it very clear that FDIC covered deposits have always been made available up to insurance limits within 24 hours, but the same cannot be said for uninsured deposits.

Immediate Annuity Sales Presentation* (8/12)
Findings from the AARP study were extremely positive regarding annuities. One of the strongest was when workers were asked what they intended to do with their 401(k) money at retirement 41% of those that had made up their mind said they’d buy a life annuity. This was significantly higher than those that said they’d take regular withdrawals (32%). This strong declaration is even more amazing when you take into account that 50% of workers admit they know little to nothing about annuities (just think how much higher the annuity choice would be with educated workers).

The study also showed that the way the question asked may drive the answer. For example, when workers were asked “Would you take $50,000 from your IRA to buy an immediate annuity income of $335 a month?” only 5% said they were very likely to do this and 32% said they were somewhat likely. Granted, having 37% of workers say they were very or somewhat likely to spend $50,000 of retirement assets to secure a $335 lifetime income with an immediate annuity is probably much higher than it would have been in the past, but I wonder whether the answer would have changed if it had been asked this way: 

“Would you prefer to use $50,000 from your IRA to buy a guaranteed lifetime income of $4000 a year, but the $50,000 is spent”
“Would you prefer to use $50,000 from your IRA to produce an income of $2,000 a year that is not guaranteed, but you keep control of the $50,000?”

Financial choices are never made in a vacuum but are between alternatives. Would the percentage of workers choosing the immediate annuity have increased if the alternative was a non-guaranteed income that was half of the guaranteed one? The other aspect I changed was the income was presented as $4000 a year rather than $335 a month. We tend to respond better to bigger numbers than smaller, so showing the income as annual instead of the monthly should have produced a higher preference for annuities. Tip: If the monthly income is less than $1000 a month show the annual income.

Presenting Immediate Annuities
The way immediate annuity quotes are presented often is less than optimal. I’ve noticed that agents tend to present the highest income first. Example: If a prospect had $200,000 and was looking at a lifetime income the agent might say that a life-only immediate annuity could provide $1186 a month guaranteed. But this often raises the question from the prospect “what happens if I die early” and the agent has to respond that the income stops, but that the prospect can buy a 10 year period certain so he knows at least 70% of the premium is paid back, but the income drops to $1146 a month. And the prospect responds with “but I want all my money back” and the agent says that with an installment refund feature at least the entire $200,000 will be paid out, but the monthly income drops to $1081 a month.

The problem with this presentation is the impression given is that the immediate annuity is something that is illiquid and the income keeps dropping the more you dig into it. That’s why it is better to start with the installment refund option.

“Mr/Ms. Prospect, with this annuity you will receive $1081 every month for as long as you live and if you die early the income will not stop until every penny of your premium is paid out”...

“You’d like more income? Your income will increase to $1146 a month if you choose to guarantee payments for the longer of 10 years or as long as you live – in the worse case this means at least 70% of your premium is paid out”...

“The kids have enough money, very well, the premium will be used so you can receive $1186 every month as long as you live.”

If you begin with the installment refund option the objection about dying too early is overcome and the other choices all add to, not subtract from the immediate annuity income.  

*For the behavioral reasons why this approach is more effective read the article on Separation & Bundling

The Close (7/12)

The Future Close “What are you going to do with that extra $500 in interest you’ll get next July from buying this annuity today?”

The Comparison Close “Would you prefer the 9.1% payout from the immediate annuity or the 6.5% payout from the GLWB?”

The Small Decision “Do you want the checks mailed or direct deposited? Okay your choice here (as you sign the $800k application)?”

The Authority Close “Make the check payable to XYZ Annuity and we’ll lock in that rate.”

Positive Choice “Do you want the annuity with the 5% bonus or the 10% bonus?”

Sense-of-Loss Close “I don’t know how much longer they can guarantee that rate, I need a decision.”

Motivation For Buying Depends On Prospect's Age (7/12)
At age 30 retirement is something abstract and distant, so what motivates us to take action are messages that reflect a retirement reward that is also abstract. To put a point on it, saying that proper retirement planning allows you to enjoy a retirement of dreams fulfilled will more likely motivate someone to buy a deferred annuity at age 30 instead of telling them they could receive $3,000 a month in 2052.

age 60 focus on the specific consequences of not buying.....age 30 be abstract and talk dreams that can be realized

At age 65 retirement is concrete and here, so the greatest motivators are messages that reflect hard reality, especially if it is an unpleasant reality. Such as... 

Place $170,000 in an immediate annuity and you will receive $1,000 as long as you live. Place $170,000 in one-year CDs and the $1,000 a month runs out at age 80 at current rates, which means your kids will be playing rock, paper, scissors to see who gets stuck with Dad & Mom moving in with them. 

As I write this the best jumbo 5-year CD rate I can find is 1.75%, so you could get $1,750 a year from the bank. As I write this I can buy a MYGA that will guarantee that $78,000 turns into $100,000 in 10 years. In addition, for the $22,000 that’s left I can buy a 10 year period certain immediate annuity that will produce $2,412 a year, but only $212 will be taxable. If you’re in the 25% tax bracket your net bank interest is $1,313. If you choose the split annuity your after-tax income is $2,359.

Do you want to give up $1,000 in income for each of the next five years. Think rates might go up? Just to breakeven with the annuity income the CD would have to earn 4.67% for the last 5 year period assuming tax rates stay this low.*

 If you put $50,000 in the index annuity fixed account paying 1% you’ll at least get $500 a year. With the balance in the index annuity side, if the index cooperates, you could make $2,000 a year. The CD yield on that $100,000 is $500 a year. Can you afford to throw away a possible $1,500 a year in extra income?

 As I write this the best jumbo 5-year CD rate I can find is 1.75%, so you could get $1,750 a year. As I write this I can buy a MYGA that will guarantee that $91,375 turns into $100,000 in 5 years. In addition for $8,625 I can buy a 5-year period certain immediate annuity that will produce $1760 a year, but only $35 will be taxable. If you’re in the 25% tax bracket your net bank interest income is $1,313. If you choose the split annuity your after-tax annuity income is $1,753.

Not only does the CD add $1,278 taxable income to the Social Security Benefit Taxation Formula that the annuity doesn’t but the CD costs you $440 in cash every year.*

 * In the 10 year example 4.67% at a 25% tax rate is 3.5% after-tax or $3,500 on $100,000. Putting in $100,000, receiving $1,313 for five years, then $3,500 for each of the years of the second five-year period – and still having $100,000 at the end of ten years – produces the same overall return as receiving $2,359 for ten years. Of course you need to make it clear why that annuity payout is tax-free and that taxes would be owed on the gain on the deferred annuity when cashed out.

The main points are:

  • Don’t talk to retirees or near-retirees about how an annuity can help maintain their quality of life or some other ethereal annuity feel-good story, instead tell them that not owning an annuity is a feel-bad story because it may mean being forced to move in with their kids, or giving up Sunday brunches or selling the second car. Use specific examples.=

  • Know your competition. What CD rate is the prospect’s bank paying? What rates will they find if they go online? What was the 5-year return of that investment they’re considering (with a 2007 start date it may not be very good).

  • Don’t present the annuity rate as a “how much more you make” story but frame the non-annuity choice as “how much you lose”

  • Use hard numbers – “you will lose $527 in annual income this year if you stay with that money market account instead of putting it into an annuity.”

Your Unique Selling Proposition Persona (5/12)
Over 15 years ago a couple of Canadian admen wrote a book called
The Persona Principle with the message that one should build an image based on ones unique selling proposition and persona so that you are different from anyone else. The problem with the book is it largely consists of generalized platitudes (if you want to read it, used copies are available on Amazon for a few bucks). However, the Marketing 101 message inside about needing a unique selling proposition (USP) is worth reexamining because by using one you don’t need to compete solely on rate. The question then is how do you do this?

=The book calls it the expert persona, but it means people do business with you because you are perceived as an expert and therefore buyers are less likely to quibble on price. Example: Saks Fifth Avenue is an expert on the upscale lifestyle. Kmart competes on price. Both sell blush brushes that appear to be made at the same Indonesian factory, but the Saks one costs $50 and the Kmart one sells for $11. The Saks image is they provide the correct products that show-off an upscale lifestyle and they aren’t questioned about the price. Kmart competes on price, so if Walmart has a similar blush brush for $10 Kmart loses the sale.

An expert is perceived as someone that has knowledge or skills that no one else has. An agent can do this by concentrating either on some aspect of the product or some aspect of the market and finding their own USP. How do you sell a 5-year multi-year “A rated” annuity paying 1.85% when a competitor has a similar one paying 2.00%. Find a USP:

  •  Your market USP could be you specialize in working with annuity prospects between ages 86 and 90. An 86 year old can’t buy the competitor’s annuity because they only write to age 85. You become known as the expert in the age 86-90 annuity market.

  • Your product USP is you provide the best combination of yield & financial strength. Although both carriers are rated “A” by A.M. Best your carrier is rated “AA-“ by S&P and the competitor’s is rated “A”. You become known as the expert that looks at ratings and financial strength and thus offers the best overall product, so of course you won’t always have the highest yield because the higher yield product may not measure up.

What you are trying to do is find a narrow niche that you can be a believable expert in. Saying you always have the best rates is not as believable as saying you have the best combination of rate and financial strength. The image you would project concentrates on your USP of providing the best combination of yield & financial strength and then defending it by showing, say, how you compute an overall ranking based on independent financial ratings.

If your USP is too broad it is meaningless. For example, defining your USP as being an expert in “index annuities” means you are competing with thousands. However, saying you provide “index annuities that provide the highest income for people planning to retire within 1 to 3 years” defines a more specific niche.

You can also approach this by being an expert in the market rather than the product. Saying you are an expert in “retirement income” is too broad. Saying you are an expert in “retirement income if you didn’t get a company pension” is narrower. Saying you provide “retirement income if you didn’t get a pension, will retire this year and are a pharmacist” is still narrower. Again, your claims need to be credible.

Developing a USP is not easy and it seems counter-intuitive because you are shrinking your prospect pool to get more sales, but it can work very well as long as your claims are believable and you market to your uniqueness.

 FIAs Replace Savings Bonds? (3/12)
Through the years a lot of parents and grandparents bought savings bonds for the children with the thought of having this money available for future college costs. Series EE savings bonds were convenient, paid decent but not great interest, and best of all you knew you couldn’t lose what you had (the adventurous might have used UGMAs & mutual funds, but the safety conscious liked having something in their hand that was guaranteed).

Effective on New Year’s Day the Treasury took away the convenience factor requiring people to open an electronic Treasury account and no longer printing tangible savings bonds, but they took away the decent interest part long before that. Since 2005 Series EE bonds have locked in a yield guaranteed not to go up for 30 years. Currently that yield is 0.60% which is why few people buy savings bonds anymore. However, the yields on those bonds purchased in years past don’t look that good either.

From 1995 until 2005 Savings Bond interest was indexed to paying 85%-90% of the 5-year Treasury yield. That means these old bonds are returning 1.12% - 1.19% interest. With the outlook for future interest increases unclear it makes one wonder whether linking to an equity index might make more sense than linking to a 5-yr Treasury.

Granted, Series EE bonds do offer some advantages. There is no 10% penalty on interest withdrawn under age 59 ½ and if the interest is used for college it can be tax-free. However,  run the actual numbers. Even if someone is in the 35% tax bracket and has to pay a 10% penalty all the annuity has to do is beat 2.16% on a pretax basis to provide more net interest after taxes.

A few thousand dollars sitting in old Series EE bonds could be used to start an index annuity, and one with a flexible premium would allow additions to be made. Granted, these probably won’t be big sales, but it is a way to open a conversation by asking consumers whether they have any old savings bonds sitting around because you might have something better and your annuity policy is on real paper they can put in their safe.

Selling: Setting The Stage For The Next Call (3/12)
An agent friend of mine was referred a 39 year old man that had had open heart surgery two years before. He had 4 young daughters and wanted life insurance, but he wasn’t optimistic about being able to get some based on his medical history. My friend said the man seemed desperate about being able to provide some protection for his family.That very day my friend made some calls to carriers. but initially it wasn’t promising. The first six carriers said they would decline the case. The agent made some more calls and found a carrier that would write the case with a Table 2 (higher than standard premium) rating, but they would issue it. The agent made some more calls and found a carrier that would issue a standard rated life insurance policy. Success!

Excited by his find the agent called the prospect that evening and said, “Good news, I can get you life insurance and you’ll pay the standard premium.” My friend said there was perhaps 10 seconds of silence and then the prospect responded, “That’s good to know, I’ll get back to you if I decide to do anything.” The agent was puzzled by the response. He asked me, “How does someone go from being desperate to have life insurance to indifference when they’re told they can actually get it? Did I do something wrong?” My answer was yes.

The framing point that the man was basing his decision on was that he felt he was uninsurable. He told the agent to go ahead and look believing he’d never solve the problem. He might have done this because he likes to jerk around agents, but a more likely answer is he thought of coverage as an unattainable goal and hadn’t gone far enough in his thinking to reflect on what he’d do if the goal was realized.

The first thing my friend should have done was to make the prospect confront the possibility that the goal might be reached saying something like “I’m not very optimistic about your chances, but what would you do if I found a carrier willing to sell you life insurance?” This would move the prospect’s anchoring point from “it won’t happen” to “it might happen” and cause the prospect to either decide he really didn’t want life insurance – and save the agent from making those calls – or decide he would buy life insurance  and essentially “pre-close” himself and mentally commit to making a purchase. Assuming the prospect told the agent he would buy life insurance if it was available the agent should have framed his answer differently.

By opening with “I can get you life insurance” and calling back the same day the prospect’s mental anchor shifted from “Nobody will sell me life insurance” to “everyone will sell me life insurance because look how quickly he found a carrier”. The sense of urgency was lost. Here’s what the agent should have done.

The agent should have waited two days before calling back. The prospect did not conclude that the reason the agent was able to get results so quickly is because he’s an expert in the industry and knows who to call and how to talk to underwriters. Unfortunately, people often do not equate quick results with expertise but with how easy the task must have been. By waiting two days the prospect believes the agent is spending many hours on this task making the results appear to be worth more.

The agent also should have told about the difficulty of the search before presenting the good news by saying, “I called company v, they turned you down. I called company w, they turned you down. I called company x, they turned you down. I called company y, they turned you down.” (Pause and wait for a response from the prospect, and then continue) “However, company z said they might take you, but we need to get the process started in case this turns out to be a mirage.”

By waiting two days and telling the prospect of the failures you’ve shown the prospect you worked hard and reinforced the “it won’t happen” anchor point. Now when you say you might have found a carrier that will take them he feels as if he was thrown a lifeline before going under for the last time, and by framing the lifeline as a surprise to the agent as well you’ve created urgency.

Setting the stage for the next call:

  • When you have a prospect that thinks something is impossible determine whether they would act if it was possible – if the prospect says he’d give you all his money if he could earn 4% interest, tell him that it might be impossible but if you could find it is he serious about making the move?

  • When you offer the impossible show how difficult it was to find it – when the prospect mentioned 4% you immediately thought of that index annuity with the 4% cap or the other annuity with the 4% first year rate, but instead of bringing those up you told the prospect you’d do some digging and try to get back to him in 2 or 3 days. When you sit down again across the prospect you begin by naming many annuities you found that didn’t have a 4% rate, and only mention your solution last.

  • It’s helps if there is real urgency, but it’s not essential – if the carrier is cutting the rate to 3% tomorrow then there is a specific reason to act today. However, even if a rate cut has not been announced it is helpful to review with the prospect what specifically has been happening to interest rates over the last few years and what happened to people that waited.

What about my friend and his life insurance prospect? I gave him a couple suggestions on what to say to reignite the urgency and the prospect did apply for the policy (variations on the take-away close). Now they’re both waiting to see if company z comes through on the underwriting.

Failed Banks vs Failed Annuity Carriers Chart (1/12)

In the Fall 2011 issue of Advantage Compendium my research revealed that 7 fixed annuity carriers have entered state receivership since 2000. With one exception it appears the carriers either reemerged from state control or the annuity contracts were fully assumed by another carrier. The exception was London Pacific Life where although annuityowners were fully protected up to state guaranty funds limits only 80 cents on the dollar was paid on balances over the limits. By contrast, look at the bank world. Since the millennium 446 banks have been taken over by FDIC. When an insurer comes under regulator control it may well reemerge. When a bank is taken over by FDIC you can pick the location for the wake because it is not coming back to life. However, one thing both FDIC and annuity guaranty funds have in common is that they have always protected consumers up to the limits of their coverage in the event of a failure. 

Where they differ is in their treatment of unprotected account balances. Of the 446 banks that have failed since 2000 over 350 of them have not yet returned 100% of the uninsured account balances. Every customer was protected up to FDIC limits, but if you had unprotected money you ultimately may have wound up getting as little as 66 cents on the dollar when the process ended.

Bank or annuity carrier failures are rare events. As a percentage, less than 5% of all banks have failed since 2000 and an even lower percentage of annuity carriers have entered state control. Since inception all of the annuityowners of failed annuity carriers received their full account value up to the limits of the state guaranty fund and all FDIC insured accounts have likewise been covered. However, it is a different story for uncovered amounts. Going back a quarter century I could only find 5 instances where those annuityowners with account balances above the guaranty fund limits received less than their full account value if they didn’t surrender their contracts. By contrast uninsured customers of hundreds of failed banks were not treated was well by FDIC.

Seniors Can Adapt And Continue To Make Good Decisions (11/11)  
Recently columnist Robert Powell mentioned the results of a study that concluded that our financial decision making ability begins to decline as we get closer to the end of life. What was discovered was that financial literacy decreases by 2% each year after age 60. Although this is the first study I have seen that attempted to quantify the decrease, there is a pile of research concluding that our decision-making powers decline with age. The biological reason is our working memory isn’t able to hold as much data at one time and we process the data slower than when we were younger. Even so, Powell’s column generated hundreds of comments, mainly from readers over age 60, stating that the research must be wrong because they weren’t stupid, but that is the wrong thing to take away from the study. 

Financial Illiteracy  
The study found that people in their eighties got about 30% of the financial literacy test questions right, thus showing a high degree of financial illiteracy. However, the study did not find that people in their thirties or forties were financial geniuses; on average younger ages only got 60% of the questions correctly. The reality is most people, regardless of age, make some boneheaded decisions because they don’t have the necessary knowledge to make good decisions.  

When I neared age 50 I found I couldn’t read fine print unless the sun was directly overhead, so I bought a pair of reading glasses. The change happened because I was aging, but I adapted.

Due to aging and lack of knowledge our ability to make decisions declines, but it doesn’t mean we have to make bad decisions:

Take your time – when seniors are given more time to study and remember new data they tend to perform as well as young adults.  

Keep the number of choices manageable – break the choices into manageable bits.  

Gain knowledge – the studies didn’t find that people went from making good decisions to bad as they aged, but went from bad to worse. When seniors learn they make better decisions.  

The reality is our physical and mental abilities decline as we age. It’s a fact of life that can’t be changed. However, rather than deny it is happening we can adjust how we do things to still make it all happen.

Buy The GLWB & Death Benefit and I’ll throw in a free FIA (10/11)
A 2% annual cap doesn’t work well. Based on history most of the time you’d earn 1.6% a year over 5 years
but a number of banks will give you 2% on a 5-year CD. When the caps gets to 5% and 6% you have a real story to tell, but it can to be tough to convince a buyer that caps will be going up. One answer is to concentrate on the rider story and ignore the annuity.

Annuities have been sold as a yield story for so long it can be tough to remember that their real value is in their guarantees, and that guarantee story resonates with consumers. With the benefit riders it’s a story that can still be sold. 

Only an annuity can guarantee to provide an income for life. Unlike a Wall Street retirement plan that hopes to give you an income you can’t outlive the annuity insures you will receive it. Not only that, the annuity will guarantee that the income you receive from the annuity will increase by 5%...6%...7% a year for every year you leave it to work.

What would you expect to pay for this benefit? The 1% to 2% that a Wall Street firm would charge for their “hope & pray plan”? No, today and today only you can purchase this protection for only 0.95% a year (or lower) less than a dollar to protect every $100 of annuity value.

But wait there’s more...If you die before you begin taking an income your heirs will receive the greater of your annuity’s accumulated account value or guaranteed death benefit growth of 5% (or more). In this 1% interest world your beneficiaries would receive a yearly 5% gain on their inheritance for each year you live and don’t croak ! Spread the word and you may start getting better treatment from your relatives.

By the way, the annuity is an index annuity, and that could be good for you too. Sign here to get your guaranteed income and death benefit plan.

The reality is there are many people that need a reliable income more than the chance to earn 1% or 2% more than the bank is paying. For them the rider benefit has greater appeal than the core product. Many producers are already focusing on the GLWB rider benefit, but they need to present it as income growth instead of a return. Telling someone they could receive $10,000 a year today or $12,000 if they wait 3 years is a strong story. And if a death benefit rider is offered, telling someone their heirs will get back not $200,000 but $230,000 or $240,000 if they die in 3 years is a strong guarantee in these uncertain times.

 Annuities Are Not Illiquid (8/11)
Annuity naysayers complain that deferred annuities are illiquid, but that’s not what they mean, because the statement “annuities are illiquid” is always connected to a comment on annuity surrender charges. However, paying a fee to get liquid and illiquidity are not the same thing.  

In most cases if I sell a share of stock I will incur a cost – a fee or commission – to get the cash value of that stock. Since there is a cost to get my money does that mean that stocks are illiquid? If the response is that stocks are liquid because paying a commission to sell the stock does not make them illiquid then the same logic applies to an annuity wherein paying a surrender charge also permits the annuityowner to receive their cash value. To get the cash value from many securities, certificates of deposit and deferred annuities the owner will incur a cost, but that doesn’t mean these are illiquid. It simply means that liquidity needs to be thought of as a financial expense, just like the paying of taxes on interest or gains, management fees or lost opportunity costs. When you look at liquidity from a cost viewpoint, it allows one to do a more rational comparison as to whether it is worth the cost. Here’s what I mean:  

As I write this there is a multiple year guaranteed annuity (MYGA) available paying 2.9% for 5 years. My credit union money market account pays 0.75%. The annuity surrender charge begins at 9% and drops 1% each year before ending after year five. The money market has no penalty. What this means is if I put $100,000 into each and surrendered them in a month that liquidity cost of the annuity is $9,000 more than the liquidity cost of the money market. After 3 years the cost to cash in the annuity is down to $6,537. However, because the annuity yield is 2.9% the annuity account value is $108,955 while the money market value – assuming rates don’t change – is $102,267. After applying the surrender charge the annuity produces a check-in-hand of $102,418. Even though the annuity “cost to get liquid” is $6,537, due to the higher yield the annuity produces $151 more in pocket ($102,418 - $102,267) after 3 years. 

The surrender charge is always higher with the annuity, but when you look at what really counts – what winds up in the consumer’s wallet – the 5-year annuity beats the money market after only 3 years. Although the annuity has a 5 year penalty the “liquidity cost” of buying the annuity turns into a gain after 3 years if the alternative was the money market account. Indeed, by the end of the third year the no surrender penalty money market incurs the liquidity cost because the consumer would realize more cash-in-hand with the annuity. Since liquidity is now framed as a cost it can be analyzed in that context... 

  • Is the cost likely to be incurred? – a cost not incurred is not a cost. 

  • Are there tax savings from annuity tax deferral (or from the penalty itself) that might offset part of the cost? – although the dollar benefits of tax deferral are more apparent as time passes and yields increase, the mental relief from knowing you won’t get a Form 1099 next year on the interest compounding inside the annuity may be a benefit. Also, a surrender charge that eats into principal might be taken as an itemized deduction on the annuityowner’s Form 10401. 

  • Is the possible maximum annuity liquidity cost of $9,100 offset by the fact that it effectively drops to $0 in 3 years, and results in $11,559 more interest in 5 years ($115,366 vs $103,807 cash value)?  

Viewed in this cost/benefit manner the emotional words of “illiquidity” and “surrender charges” are removed and the decision can be made looking at the financial considerations.

Index Annuity Cost Alternative Why Choose The Index Annuity
Surrender Charge MYGA     Higher Potential Returns  
  CDs Tax deferral, higher potential returns
  Bonds Tax deferral, higher potential returns, principal  value protected from interest rate risk, compounding of interest earned.
  Mutual Funds

Tax Deferral contrasted with securities taxes, principal and realized returns protected from market risk, lower liquidity cost hazard.

Liquidity costs are always comparisons, so the nature of the cost/benefits change as the alternatives change. If instead of a MYGA the decision was between the money market and an index annuity with a 10 year surrender schedule that began at 12%, you would still consider the odds of getting hit with a $12,000 liquidity cost for an early surrender, and the effects of tax deferral over time, but now the decision would focus more on the heightened return potential of the annuity versus the money market.

If the choice was the index annuity or a 5-year CD with a 2% rate the decision elements are similar, but the initial liquidity cost difference would now be 10% (12% penalty for the annuity minus the 2% surrender penalty for the CD). If the other choice was a mutual fund the decision element would now be between a known maximum liquidity cost of 12% for the annuity (assuming no market value adjustment) and an unknown liquidity cost for the fund that ranges from zero to 100%. Now the fund has the greater potential liquidity cost and the question would be does the return potential of the mutual fund offset the greater certainty of the index annuity.

This does not mean you should say that a deferred annuity is liquid because “readily convertible into cash” is a definition open to interpretation, but you can say that a deferred annuity is not illiquid since the cash value is available upon paying a liquidity cost. And many financial instruments charge a liquidity cost of one type of another.

1. Marrion & Olsen. 2011. Index Annuities: A Suitable Approach. O & M Ltd. p. 205

Barron’s [Heart] Annuities (7/11)
On 20 June Barron’s story was Special Report -- Retirement: With their steady income payments, annuities are suddenly hot. This positive article about fixed and index annuities has writer Karen Hube concluding “If you choose wisely, you'll end up with a nice income flow, relatively low fees and minimal risk of problems with the provider. That's saying a lot in these uncertain times.” The story is available at

The Grid - A New Way of Presenting GLWBs (5/11)  

“Could you use an extra $12,000 a year in retirement? Tell me your age, when you want the income to start, and where your fingers meet on this grid is the premium needed.”

That’s the entire grid concept. You make up a grid showing the different premium required at different ages to produce a certain income using guaranteed lifetime withdrawal benefits (GLWBs). The GLWB variables are the age payout factor, the roll-up rate assumed, and the number of years to wait. You fill in the boxes with the across column showing the age income begins and the down column showing the age the annuity is purchased. A 55 year old buying an annuity with an 8% roll-up with a 5% payout sees, based on retiring at age 65, that for $111,166 they’ll get $12,000 a year for the rest of their life.

Amount of Premium Needed Today To Pay $12,000/year In Future Income

Issue Age
65 66 67 68 69 70 71 72 73 74 75
55 111,166 102,932 95,307 88,247 81,711 68,780 63,685 58,968 54,600 50,555 42,910
56 120,060 111,166 102,932 95,307 88,247 74,283 68,780 63,685 58,968 54,600 46,342
57 129,665 120,060 111,166 102,932 95,307 80,225 74,283 68,780 63,685 58,968 50,050
58 140,038 129,665 120,060 111,166 102,932 86,643 80,225 74,283 68,780 63,685 54,054
59 151,241 140,038 129,665 120,060 111,166 93,575 86,643 80,225 74,283 68,780 58,378
60 163,340 151,241 140,038 129,665 120,060 101,060 93,575 86,643 80,225 74,283 63,048
61 176,407 163,340 151,241 140,038 129.665 109,145 101,060 93,575 86,643 80,225 68,092

The grid really isn’t new. I wrote about it in September 2009. However, due to road shows and webinars well over 500 agents have downloaded copies of their particular grids, and I’m seeing marketing companies developing their own grids. Here’s why it works:

1. It’s Simple. Where the client’s fingers meet is the premium needed.

2. It Builds Trust. The format makes the consumer feel in control and they see that there aren’t any smoke and mirrors. This isn’t some hypothetical puzzle showing what the consumer might get if God, Wall Street and Bernanke all agree and the creek don’t rise, this is a guarantee. 

3. It’s Tangible. This ties in with the trust part. The consumer can walk away with a piece of paper in their hands showing the income they get for their dollars and when they get it.

4. It’s Hard To Compete Against.  Pity the poor stockbroker the consumer sees next, when the consumer points to the grid and says – “They’re guaranteeing $12,000 in 10 years that will last as long as I live AND guaranteeing at least my original principal plus a little more will be there AND I have control over my money at all times.WhatdoYOUgot? 

5. It Can Be Altered To Fit. I used $12,000 because I wanted to use $12,000. But the grid can reflect what you believe the needs of your prospects are. If you’re hunting whales you could show what $50,000 in income would cost. Or you might position this as a one-pay vacation fund that will provide $5,000 a year in retirement for cruises and frolic, the grid can be designed for any goal.

6. It Shows The Cost Of Procrastination. Using the earlier example, it will cost you $111,166 at age 55, but it’s $120,060 if you wait until age 56. Often consumers will delay buying an annuity because the penalty for waiting isn’t spelled out, the grid makes it clear that not buying today is costly.

7. The Product Is A $12,000 Income. Most GLWB sales have been rate based. “I can get you 6%, 7%, 8% (roll-up rate)”. The problems are the roll-up rate isn’t a hard number, and when you compete on rate you can get beat by a higher rate. This changes the sale to a greed/need based one by asking – “I’m selling more income, could you use some?” It Hits The Behavioral Buttons. In the 2009 article I wrote that the behavioral reason the grid concept works is because it moderates several decision-making variables (ambiguity aversion, framing, heuristics, hyperbolic discounting, mental accounting) that work to result in a positive buying decision. The short note version of that is the grid triggers the psychological buying buttons; here’s one of the stronger influences.

8. Pulling Tomorrow Into Today. We usually see time in three ways: today, soon, and the future. We tend to pull the future in and treat it as the present, and this helps GLWB sales. By putting in $100,000 today at, say, age 60 the annuitybuyer can withdraw $12,000 a year at age 70. In their head the annuitybuyer is not thinking, “Well, that’s a $12,000 income stream based on the future value of the present value of my premium compounded over 10 years.”  No, what the annuitybuyer is thinking is “I’m getting $12,000 on my $100,000.” The grid brings the future benefit ($12,000) into today.  

It’s Another Story To Sell  
It can be tough to sell index annuities with 5% caps when the stock market is climbing.
The grid is a product sale; the product you’re selling is income. The grid gives you a new story, and a new way to tell it. 

I don’t make predictions, I make guarantees     I don’t predict the future, I only insure it will happen

The Power Of Annual Reset (2/11)  
If you compare the starting value of the S&P 500 on New Year’s Day 2006 with New Year’s Day 2011 you’re up less than 1% in five years, but an annual reset index annuity would have participated in a 64% gain. An even more powerful example is starting 1/1/01 and ending 1/1/11 because the S&P 500 finished 4.74% lower, but if you applied an annual reset approach, treating negatives years as zeros, the total gain shared in is 132.35%.
Yes, index annuities may limit your maximum return in a given year, but due to the reset feature still provide a very competitive return.

Fables: The Mountebank and the Teacher (2/11)
A large crowd of reporters and financial columnists had gathered to watch the new presentation by the famous Wall Street mountebank. As the beguiler walked to the center of the stage the crowd grew silent.

“Ladies and gentlemen,” began the beguiler, “we on Wall Street have created a level of protection never seen before in the financial world. The first is called a Return Enhanced Certificate that gives you a chance to earn up to 7% a year and will even cover you for the first 10% of loss if the index goes down (but the next 90% of loss would be borne by you). The second is the Digital Option Certificate that guarantees 5% if the index does not fall, and protects your principal (unless the index falls more than 50%). These safety instruments offer an unprecedented mix of earnings power and principal protection and show how much Wall Street cares about consumers.

These pronouncements were met with thunderous applause by the financial media and with murmurs of how wonderful it was for Wall Street to offer all of this safety with upside potential. As the applause died down, a teacher in the back of the crowd spoke up. “I’ll show you an instrument with a much better mix of earnings power and principal protection,” he said and bounded to the stage. “My safety instrument also gives you the potential to earn 5% to 7% each year, but unlike Wall Street’s offerings my instruments protect both the consumer’s principal and credited earning from loss regardless of how far the index falls.”

“That’s sounds great,” responded the media crowd, “what is your creation called?” 

Replied the teacher, “it is an index annuity.” 

“Boo,” yelled the media crowd, “we don’t like annuities, bring back the mountebank.”

The teacher stood even taller. “You fools,” he cried, “an annuity is what Wall Street keeps trying to build, but because Wall Street only understands risk reduction and not risk avoidance they will never be successful! The next time you in the media write a story about annuities judge the facts instead of reporting your prejudices!”

Moral: Do not denounce the genuine only to applaud an imitation

Surrender Charges Help Save America (2/11)
A two-part argument is sometimes made that annuity surrender charges are good for the annuityowner. The rationale behind the first part is that the charges permit annuity carriers to buy longer-term bonds and thereby earn higher returns based on a typical yield curve. The merits of this argument can often be demonstrated by showing the current yields on short-term and long-term bonds with the long-term bonds posting the higher rates. The second argument advanced is that surrender charges are good
because they work to force the annuityowner to keep the annuity preserved for future use rather than immediate consumption.

The argument is a bit like bringing a pie to a pot-luck dinner, getting hungry early, and having the host tell you that if wait you get to enjoy a feast, but if you eat now you get your own pie back minus a slice. You may argue that since it’s your pie you should be able to get all of it back without penalty, but the host could counter by saying if everyone took their food back early there wouldn’t be a dinner. David Laibson used a similar argument to explain that too much liquidity in financial markets was harming the future welfare of all retirees because too many people would not exercise self-control and by removing their “food” early everyone would go hungry later.

People view self-control as an admirable trait. We are generally pleased with ourselves when we choose the apple instead of the ice cream to maintain our diet regimen, or put money into an IRA rather than spending it. However, self-control is often not easy so we create commitments that result in punishments for not following through. We can eat the ice cream – but we must then spend an additional 30 minutes on the treadmill, we can forgo the IRA contribution – but we’ll need to come up with more in taxes. The financial arena has many facets where there are rewards for self-control and punishments for immediate consumption. Delaying the sale of an asset for a year rewards you with paying a capital gains tax rate, but selling too soon results in paying ordinary income tax.

Certificates of deposit, cash-value life insurance policies and annuity contracts also have penalties for early withdrawal so that a lack of self-control is penalized. Laibson calls these types of self-control instruments golden eggs, because just like keeping the fabled goose alive produces an ongoing stream of golden eggs, so do we benefit from allowing these somewhat illiquid assets to grow for the long-term. Laibson said our financial markets were becoming more and more liquid as new types of credit and investment innovations were unveiled. However, Laibson stated this ever increasing liquidity was a bad thing that would endanger the financial welfare of our nation. It comes down to something called hyperbolic discounting. We tend to overvalue the satisfaction we get from current dollars and dramatically undervalue the benefit from future dollars. Laibson’s concern was that increasing access to nstant credit, combined with a weakening of self-control commitment punishments, would “lower the level of capital accumulation.” He proved this with a series of financial algorithms finding that when “the current self no longer faces a self-imposed liquidity constraint” that “under most parameterizations the welfare of the current self is reduced.”

Another paper concluded the gap between our intent and our actions was evident in life-cycle savings, and annuities were specifically mentioned. The paper talks about the need for “precautionary savings” and providing strong incentives to exercise self-control and not spend tomorrow’s dollars today. Indeed, the paper proposes the surrender penalties on qualified plans be increased to 50% to improve the overall welfare of future retirees.

What this all means is agents have a strong academic foundation for arguing that surrender charges are a good thing for the annuityowner. Indeed, the research argues that the longer and larger the surrender charge the better it is for the consumer, because the consumer is more likely to maintain the self-control that is needed not only for his or her long-term benefit, but for the benefit of the nation.

Aesop ’s Financial Fables (10/11)

The Advisor Fox & The Annuity Cat
An Advisor Fox was boasting to an Annuity Cat about how clever he was. “I have a whole bag of tricks if danger is sighted,” said the Fox, “I can run into bonds or dash into put options. I can jump into stochastic models designed to minimize risk or balance myself with modern portfolio theory. Indeed, I know of a hundred ways to protect myself.” “How remarkable,” replied the Cat, “I have only one trick for protection.” Responded the Fox, “perhaps when I am bored one day I’ll teach you some of my simpler ones.”

Just at that moment a bear appeared at the clearing. The Annuity Cat scampered up the tree to branches too thin to support a bear and shouted “Protecting myself from bears is my trick. Which trick are you going to use?” The Fox sat down, pulled out his laptop, and tried to decide which of his many tricks to employ, but before he had selected one the bear was upon him, and that was the end of the Advisor Fox.

Moral: One good plan that works is better than a hundred doubtful ones.

The Retirees & The Robin
A retired couple struggled through the long cold winter and by February little food was left. But that day as they gathered firewood in the nearby forest was unseasonably warm and the sun shone so brightly that a robin was coaxed northward and gaily flew around them singing. “It looks like spring is here,” said the couple “Let’s eat the rest of our food today for we will surely find more tomorrow.”
Alas, during the night winter returned with a vengeance, vexing the world with blizzards and bitter cold. When they ventured out on the morrow no food could be found, just the robin frozen dead in the snow. Looking at the dead bird the couple exclaimed “It is your fault we are in this fix!”

Moral: Do not blame others when you choose foolish advisors

The Retiree And The Horse
The retiree loaded her horse with all of her worldly goods for a long pilgrimage through the land Retirement. As the retiree firmly cinched the straps she asked the horse whether he would prefer climbing up the Stock Market Mountain Road or tumbling down? The horse replied, “since they all arrive at the same destination I would prefer the level path on the annuity plain.

Moral: A level financial road is often best traveled.

The Advisor In Council
For decades the Boomer had been living in fear of retirement, more precisely, the fear of running out of money before he died. The Boomer invited a dozen financial advisors and a lone annuity agent to a meeting to decide how to handle the problem. There was much discussion. Finally, the youngest advisor stood up and with a confident voice began, “My advice is for the Boomer to fund a diversified portfolio of stocks and bonds that we will manage for a small yearly fee. Because of our expertise, the Boomer will be able to withdraw 4% of the portfolio’s value each and every year, and I base this on the certainty of the Ouija board algorithm my fellow advisors and I have created.” The young advisor sat down to thunderous applause from his fellow advisors. As the applause died down the older annuity agent quietly spoke, “My annuity solution is guaranteed to pay the Boomer and spouse a retirement income for as long as they live that will not end even if their money runs out. I have but one brief question to ask the advisors – if your algorithm is wrong and the Boomer’s money runs out, which of you will continue to pay the yearly income?” Not a murmur from the advisors was heard.

Moral: It is one thing to create and another to execute a financial plan.

The One-Eyed Regulator
A securities regulator was told by a crew of Wall Street pirates that index annuity agents living in the castle were evil. Although the regulator had lost an eye fighting a bear in a battle past, she resolved to use the pirates’ information to keep her good eye on those selling index annuities and so she warned the townspeople through proclamations and speeches to be wary of the castle, even though its strong walls offered protection from the pirates. Alas, with her attention focused on the annuity castle the
pirates were able to rob the townspeople and enrich their own pockets. After the townspeople’s wealth was looted by Wall Street they so loudly complained to the regulator that she finally turned her head and saw the damage her lack of vision had caused.

Moral: Trouble comes from the direction we least expect it.

The Investor And Her Portfolio
An investor was heading home after a meeting with her stockbroker wherein she had handed over her life savings. The stockbroker had spun tales of the wealth she would enjoy from his management of her assets, and so she began to think of what she would do with this money. “I shall buy a KFC franchise because much money can be made in the fast food industry,” she thought, “and it will be so successful I’ll open more of the Colonel’s restaurants until one day I’ll live in a mansion and throw parties and be the envy of all of my friends.” Just then her cell phone rang. It was her stockbroker telling her that the stock market had crashed and her life savings were gone. As the call ended it began to rain.

Moral: Do not count your chickens before they are hedged with a stop-loss order

The Crow and the Swan
A securities crow saw an annuity swan and noticed the whiteness and beauty of the swan’s plumage as it safely swam across the financial pond. The crow was envious that the annuity swan never sank beneath the surface, and was still able to fly into the sky. The crow attempted to scrub off his blackness with brushes made of target-date mutual funds and portfolio soap, but the crow remained black and when he attempted to swim, still sank beneath the surface.

Moral: You can’t change what you are.

Puffing Your Ad (8/10)
Puffery means saying something in an ad that sounds important such as
Brazzoo toothpaste now with Z-19 but Z-19 is ad code for fluoride.
Research shows this puffery works with people that don’t realize many toothpastes have fluoride but it can backlash with knowledgeable toothpaste buyers because they will view Brazzoo’s claim as an attempt to deceive. The same thing needs to be remembered in the annuity world.

A seminar advertisement for a New Lifetime Retirement Income Pension that doesn’t say it is an annuity presentation will not upset the consumer that is unfamiliar with what annuities can do because they have indeed received new information about a lifetime guaranteed income. However, a consumer that knows about annuities and came to the seminar hoping to learn about something truly new may react negatively. I attended an annuity seminar with a misleading name several years ago and 2 minutes into it a consumer stood up and yelled to the presenter “are you selling annuities?” To which a stammered yes was answered. The consumer then shouted “liar” and stormed out. I’m guessing the presenter didn’t pick up any good prospects from the seminar.

Carriers and marketing companies are not immune from a bit of puffing. When Call To Get Sales Secrets and the secrets are “ask for the order” and “overcome objections” or when the Miracle Prospecting System is lead cards the MO may recruit some rookie agents, but experienced hands will leave with a bad taste. And having the marketing department come up with a new way to say “averaging” will not bring new agents to the carrier.

A little bit of puffery is often viewed as acceptable. If you say your new index annuity has the revolutionary fresh start crediting method the seasoned pros will recognize it as the old annual reset, but give you credit for a clever name. And that upset consumer may have been mollified if the answer given was that the seminar was about guaranteed lifetime benefit riders on annuities, something which the consumer was probably unfamiliar. However, the best solution is to limit puffery and concentrate on conveying real benefits to make the ad effective.

Don’t Predict, Sell Future Insurance (5/10)
Monte Carlo simulations take past results, slice them up into many tiny pieces, and then shuffle the pieces to create many possible pasts. The number of times each possible past happens are added together to produce a “confidence level” of how often certain results will occur. The Monte Carlo method is supposed to produce richer (more and better) data than simply showing the average historical return. And it does. The problem is for the Monte Carlo method to produce useful data the past must repeat. And it often doesn’t, especially not in small timeframes.

If I used a Monte Carlo simulation of Duluth weather from 1910 to 2010 I might find that the daily high temperatures were over 60 degrees Fahrenheit a quarter of time, 20 to 60 degrees half of the time and under 20 degrees a quarter of the time. If we used only this data to predict the temperature for next July on Superior Street we’d say there was a 25% probability that we’d have days under 20 degrees. Now, even though summer by the lake can get chilly I don’t remember bringing ice skates to any 4th of July picnic. Attempting to use a large past is a major problem in using Monte Carlo to try to predict the near-term future.

If you take a month by month look at annualized Dow Jones returns from 1930 to 1950 you find 28% of the periods produced an annual loss of greater than 10% and Monte Carlo simulations would reflect this, resulting in a rather dismal forecast for the 1950s. But in reality only 2% of 1950s annualized periods had losses greater than 10% and the biggest annual loss was 12%. Indeed, 48% of the periods produced double digit gains in the ‘50s. However, if your portfolio allocation reflected Monte Carlo’s bearish outlook your performance would have suffered.

If you take a month by month look at annualized Dow Jones returns from 1980 to 2000 you find 59% of the periods produced an annual gain of greater than 10% and Monte Carlo simulations in 2000 reflected this optimism going forward into the 21st century (Dow 30,000 anyone?) However, we know this optimism was misplaced. I believe real data shows taking slices of the past to predict slices of the future does not work well. The results – whether based on the simple average return over the last 20 years or deduced by slicing up the data and performing thousand of iterations to produce confidence levels – are virtually worthless in accurately predicting the return over the next 20 years, and yet we continue to do this. I recently read an article comparing an equities/annuity approach to retirement that concluded the equities with annuity approach had a 96.8% success rate in retirement planning. Although it was nice to see annuities favorably mentioned, the basis for this conclusion was  stock and bond returns from 1988 to 2008. The authors did a wonderful job of predicting the past, but I can’t go back in time.

If you use a long enough future the predictions hit a little closer; the financial markets move in waves and shall continue to do so, but they are a lousy predictor of what will happen next year or next decade. And the predictions are completely worthless when the past does not repeat. I don’t remember seeing any Monte Carlo simulation from the ‘90s saying there was even a chance of the market finishing down three years in a row because their model data did not include that historical scenario. And what about the possibility of not being able to sell your investments because the markets were closed due to terrorism? Not even a consideration, until after September 2001.

Wall Street’s advisors persuade clients to give them money by telling them that they can predict the future (couching it in indirect terms), but they can’t, because humans don’t know what will happen tomorrow. Unfortunately, I have often seen advisors begin with the disclaimer that “past performance is no guarantee of future results” and then show an asset allocation model with a 98% confidence level of success or a 5-star rated mutual fund. The past is used because it is easier to show a number rather than present a concept and, frankly, we are all searching for the person that can predict the future, even though we realize the futility. However, there is a way to stand apart from the crowd of false soothsayers.

Stand Out By Not Predicting
Tell your clients you can’t predict the future because we live in an unpredictable world, and this is why you sell future insurance. Your future insurance locks-in a specified interest rate for a specified time period, just like a certificate of deposit, but unlike a CD they will at least earn a minimum rate of interest afterwards.
Your future insurance gives them a shot at earning more than the bank or bonds might pay by linking the interest to an equity-index, but guarantees they won’t be bear food in the next market crash. Of course, they have to pay for this insurance so they probably won’t get all the upside in good years – so unless they’d prefer their market risk was uninsured...

Your future insurance guarantees a minimum income they can receive for as long as they live and let’s them keep control of the money. You can tell them to the penny the minimum lifelong check they will receive starting in 1, 5 or 10 years. Of course it could be higher, but you don’t know what that amount might be because you don’t predict the future, you only insure it will happen.

How Agents Can Get Better Customers (and bigger sales) (2/10)
Thirty years ago the Swiss watchmaker Blancpain was on the ropes. Its watches didn’t use electronics or quartz, so $20 digital watches kept better time, and the company didn’t have the money to upgrade to the new technology. Jean-Claude Biver bought the rights to the name and came up with a new slogan “Since 1735 there has never been a quartz Blancpain and there never will be”. He then increased the price of this technologically inferior watch to ten times more than the digital ones, and only sent retailers 7 watches for every 10 they ordered telling them supply was limited. The result? Sales soared!

The scarcity of an item impacts its perceived value. Gold has intrinsic worth due to its physical properties such as conductivity and malleability, but it is its scarcity that makes it highly prized. An annuity producer has actual worth because he or she can help a consumer find an appropriate annuity for their situation, but the consumer often does not place a high value on this worth because the producer is perceived as readily available to one and all, and not that different from all of the other annuity producers asking for the consumer’s business.

Sometimes an agent will attempt to use the annuity itself as the “scarce value” and the reason to do business with them, but the reality is even if annuity availability is limited to agents of one carrier or a few marketing companies, the annuity itself is still available to the masses and is not perceived by the consumer to have a scarcity value. It is the producer that needs to have a scarcity value, but this is a problem. How can you be perceived as scarce when you need to be in the customer’s face asking for their business?

You do this by getting the consumer to value the one resource you have control over by limiting your time with the consumer. During the prospecting phase the producer hides behind other people so he or she is never seen nor heard. The seminar invitation is not from the producer but instead highlights the producer as a distant expert. At the seminar the producer is introduced to the audience by someone else. Indeed, after the seminar when asked for a business card the producer instead tells the consumer “Here is the number of the direct line to my personal assistant.”  When using direct mail the producer does not personally call and set the appointments. If the consumer mentions an appointment date without prompting the appointment setter says the producer is unavailable for that date but can meet with the consumer “next Thursday at 7:00.” The impression being built is that the producer’s time is much more valuable than any money the consumer might spend as a potential customer. The people you hide behind can also say things you can’t such as “the good news for you is thanks to a cancellation [producer] was able to find some time next week to talk with a new person” or “every year [producer] agrees to give a couple of pro bono presentations as a thank you to the community and luckily this one is in your neighborhood.”

The perception of value is significantly increased when the producer has a full-time assistant and an office. Consumers know that every important person has “people” they need to go through and no important person schleps out to a consumer’s house. Value is further increased by initially asking the consumer why are they in your office, as opposed to beginning with a pitch on why they need the producer. And you agree to work with a consumer and sell them an annuity not because you need the commission, but because you find their case “interesting.”

Jean-Claude Biver has now turned around three watch companies and made them valued brands because he created the perception of limited access to the product. Annuity producers can add value to their brand by creating a perception of limited access to their time.

 When your answer loses, answer a different question (2/10)
Last fall Verizon started running commercials showing two U.S. maps of cell phone coverage. The Verizon map had the country covered in red balls. The ATT map used blue balls showing many, many bald spots with no coverage. At first ATT tried to meet the lack of coverage issue head on by covering a map with postcards. The problem was Verizon does have greater network coverage and ATT loses on this point. Around Christmas ATT changed their approach by essentially stating ATT has better network coverage because with ATT you can talk on the phone and surf the web at the same time. Huh? ATT’s response has nothing to do with greater network  coverage...and that’s the point. ATT couldn’t win by answering the question asked so they answered a different question they could win.

The same approach can work with annuity questions. If asked, “Do you offer a 10% premium bonus like your competitor?” when you only offer a 5% bonus, a possible answer might be “Even better, our annuity offers a potential 12% first-year yield” (if there is a 7% cap on the index method offered)  Or to the query “Is it true your A.M. Best Rating is B-?” an answer of “Which is why we offer checkbook access to your account value” sounds like you’re answering the question, but instead you’re answering a question you can win at.

If you think answering, “How safe is this annuity” might result in an unwinnable discussion on policy reserves and the lack of federal annuity insurance a response of “This annuity contains no asbestos or carcinogens of any kind” addresses the issue of safety in a positive context. And the poser “What is your commission?” might best be responded to with “Annuity finders fees are paid by the carrier and do not require you to write me a check for my services.” The new ATT campaign is concentrating on answering questions where they beat Verizon and sidestepping the losing ones. It is a time tested marketing approach that often works.

Looking For The Magic Phrase (9/09)
When I finished my initial sales training many years ago I left the classroom with product knowledge, an understanding of the sales process, and not a clue as how to turn all of this into a sale with a real prospect. I knew the theory, but not the practical, so I asked the experienced associates what to say. They usually gave generalities as in “never mistake an excuse for an objection,” but even when they gave me a line they said worked for them...“I sold my mother the same thing” usually didn’t work for me because it didn’t sound like me and it sounded like a sales pitch.

It’s the same reason packaged sales scripts don’t work well. How often have you heard and dismissed pitches that talk about their “24/7 service” or respond to your comment that you can’t afford it with “you can’t afford not to buy...” and one of the more popular bad closes "What would it take to get you to sign today?" And yet these worn down lines are still used and the folks using them wonder why they aren’t selling more.

If you’re not closing as many sales as you’d like the first step is listen to what you are saying and figure out whether you’d buy from you. If you sound like a salesman then you need to spend some time figuring out why people buy and not how to sell them. I’ve researched and written about behavioral things such as loss aversion, framing, heuristics (rules of thumb) and a lot of other stuff, but what it comes down to is people are ultimately motivated by hope, fear or greed and getting the prospect to act on any one of these results in a sale. You need to determine which product features trigger which motivation, and which motivations are in play with the prospect.

An annuity product feature is tax deferral. What tax deferral means is you will have more interest compounding due to no current taxes paid (greed), and that means more money available for the future (hope) making it less likely you run out of money (fear). A guaranteed lifetime withdrawal benefit could give you a 2% higher income today and guarantee you don’t run out of income (greed and fear). The surrender charges mean you have a reason to tell your wayward son why you can’t give him another loan because your money is all tied and can’t be withdrawn (I’m not sure whether this would be greed or spite). Take some time to look at the product features and see what emotional motivations they address. And then you need to create your own lines because you have to believe them.

For example, I’ve heard you should tell a prospect that surrender charges are a good thing because they are an incentive for the annuity buyer to keep their money growing in the annuity, but I don’t believe that so I couldn’t say it. I am comfortable telling a prospect that surrender charges are a cost of doing business – if you want this annuity these are the surrender charges because that’s the way it is and does this still give you enough overall liquidity? However, if you believe surrender charges are a good thing then you should say that.

Now you’re sitting across from a retired couple – what are their motivations? Outliving their money might be one; that’s fear. Earning more interest might be another; that’s greed. Having their money grow so they can pay for a grandchild’s education down the road; that’s hope. You can take a look at their age, apparent lifestyle and try to determine what might motivate them to buy. Or, you could simply ask them: What are your concerns about money? Instead of saying here’s why you should buy an annuity, ask them what their concerns are with their money and what do they want their money to do for them. The prospect will tell you which annuity features will motivate them to buy and trigger the sale.

Coping With The Death Of Their Retirement (8/09)
An agent told me a story of a retired client that was withdrawing $200,000 a year to maintain his lifestyle from an adviser-managed investment portfolio that was worth a little over $4 million eighteen months ago, but by March 2009 that $4 million was only worth $1.2 million. The agent proposed solutions using immediate annuities and lifetime withdrawals that would get the retirement income close to $90,000 guaranteed, but the client kept going back to the adviser that was telling the client not to buy the annuities, to keep withdrawing $200,000 and to simply wait. 

The client is in mourning for the death of the retirement lifestyle they anticipated and is in denial. The agent needs to recognize the client is grieving and not treat this as simply another objection to handle in the sales process

The agent was frustrated, “Even if that adviser manages to return 10% a year the client still runs out of money in a decade!” The agent couldn’t understand why the client wouldn’t accept the safer solution he offered, and why in the world would the client keep going back to the adviser that caused the loss? The reason for the client’s behavior is his retirement died and he is in mourning.

Death If a consumer has lost some money in an investment and is reluctant to move to the safety of an annuity – because they hope the investment might quickly grow back – often pointing out the possibility of more investment losses will help them choose the annuity. It’s saying, “In the last year you lost $30,000 in the stock market. How would you feel if you don’t choose the annuity and a year from now your investments have lost another $30,000?” This relies on an economic behavior called loss aversion that says we try to avoid future losses. However, this doesn’t work if the loss is too big. The client that now has $1.2 million instead of $4 million has witnessed the death of his retirement. The retirement lifestyle based on a $200,000 income will need to be drastically curtailed. No more trips to Europe in the spring or enjoying the weekly dinner at Chez Expensive, instead it’s the Ramada in Tampa and Denny’s. Homes and cars may need to be sold, gifts to children and charities curtailed, and worst of all, the sense of safety and well being once felt are gone forever. The client is in the grieving process and that grieving needs to be acknowledged by the agent.  

Grieving The last stage of grieving is acceptance of what has happened, but the client isn’t there yet. For the most part they are still in denial, which is why they continue to listen to the adviser that murdered their retirement (the adviser is also in denial because they can’t accept that everything they believed about the financial world has been proven false). The agent can help the client by showing them reality and ending the denial, “Unless you plan on dying in the next 6-7 years you need to reduce your lifestyle to meet an annual income of $90,000.” The agent can be there to say it’s not the client’s fault, “You were betrayed and you have every right to feel angry “. And the agent can provide a way for the client to deal the new reality, “Altho this income is less than you were used to, we can make sure it will not go away and will be there for as long as you live.”  If shown the reality of their situation and ways to cope with the new reality there are many people that will be receptive to new solutions. The agent isn’t getting the sale because the client refuses to see the problem. The client keeps going back to the adviser to continue in their state of denial, but that is not solving the problem. The agent’s role is not to provide grief counseling in any shape or form, but to recognize that the client may be grieving. The agent can help by showing the client the reality that must be faced and then offering a “least bad” solution in this new reality.

The Index Annuity Paid Zero – How Much Did Your Clients Gain? (2/09)
You put some money into an index annuity last year and earned zero percent index-linked interest. Does that make you feel good or bad? The real answer on how we feel often depends on the comparison made. Earning zero is not a good long-term result, but it looks pretty good compared to the 38% we would have lost if we stayed in that stock mutual fund, and it really isn’t that much less than the 3% we might have earned in that bank CD.Your clients may not have earned index-linked interest last year, but they gained in other ways.

  • They gained peace of mind knowing their principal was protected from market loss. 

  • They gained a market advantage by resetting next year’s potential gain from a starting point that is roughly 40% below last year’s territory. 

  • They even gained a bump in potential retirement income, if their index annuity included a lifetime withdrawal benefit that automatically increased the lifetime account value.  

The index annuity. A safe money place that produces gains even when standing still.

How To Deflect Damaging News (2/09)
If the law of a particular universe is all index annuity sellers are crooks, and Jack sells index annuities in that universe, then Jack is a crook.
If this law of the universe is true, and you live in this universe, then the law applies to you (gravity affects everyone on earth, you are on earth, gravity thus affects you). And this is what the SEC thought NASAA and FINRA had proved about index annuities. But here’s what they really said:

Jack is a crook...Jack sells index annuities...All index annuity sellers are crooks.

The fault with this sequence is Jack is not the universe, but only a subset of the universe, so Jack’s laws apply only to Jack. This has the same lack of logic as saying Mary has brown hair, Mary is a girl, therefore all girls have brown hair. The securities regulators found a small number of index annuity agents that were acting in crooked ways and from this convinced SEC that all index annuity agents were crooks. And the few agents shown on Dateline NBC weren’t a random statistic representation of all index annuity agents, they were four agents specifically selected for the greatest entertainment value. The problem is people usually don’t bother to try to determine whether a statement is logical, especially when the issue is framed as morality. Often the greater the illogic of a position the more the promoter of the false position will present challenges as attacks against morality and goodness.   

The morality play presented by securities minions was that since all index annuity sellers are crooks, then anyone from the index annuity industry challenging the securities minions’ position must be a crook. Throughout history people have framed attackers of the illogical as morally evil, because it is an effective strategy, and this time around it was used to pass 151A.

Deflecting with Scooby-Doo
A way to deal with an illogical position that threatens you is get the decision-maker to reconsider. The way you get to present your case is to create a Scooby-Doo moment by saying something that makes the consumer stop thinking with their emotions and makes them lift up their head and essentially go “oorrrouh.” The  Dateline NBC show’s real message was index annuities are sold by liars telling lies, which was brilliant because if you said anything negative the consumer had been trained to expect this because you are a liar telling lies. So, here’s what you say if you’re asked if you saw Dateline.

“Yes I did, wasn’t that a wonderful show, I taped it to give to all my clients, they should win an Emmy, and thank goodness they found those bad agents because now the only agents left are good people like me.”

This works because you answered in a way that was unexpected you weren’t supposed to agree and the consumer has to stop and reevaluate their position. At the same time you said the law does not apply to you, so you must be the exception to the Dateline message. If the message is bad you need to separate yourself from the message by showing you are not “them”. 

A possible counter-attack NAIC could have tried on 151A was to say NASAA and FINRA are too soft on crooks – state insurance departments have kicked many more agents out of the business than NASAA has. Let NAIC supervise both index annuities and securities and they’ll make holding a free lunch seminar a capital offense! Now this would have given the SEC their Scooby-Doo moment.

Want A Sale? Make Them Angry! (1/09)
Fear is a proven marketing technique. Today, it might go something like: Show a picture of the stock market average in January 2008, show the stock market average in January 2009, show a white-haired, wrinkled person selecting a buffet dinner from a dumpster, reveal the current yield on the no-market-risk-to-principal fixed annuity; sign here. Fear causes consumers to make risk-averse decisions and this helps fixed annuity sales, but what if the consumer is too afraid?

The headlines of late may make consumers so fearful that any decision may be viewed as too risky. What emotions cause people to be less fearful, more risk-seeking, and thus open the way for a sale? Happiness one way – happy consumers are more optimistic and open to taking a chance – but it is tough to sell happiness when the TV is talking Great Depression II. However, anger is another emotion that causes people to be both risk-seeking and optimistic, and may result in a decision to buy. It may not sound right that anger and sadness are on opposite poles, but the reason is simple. Sadness is often triggered by a perceived loss of control. You feel you are powerless to change the situation, you are a victim, and everything is going downhill regardless of what you do. Anger is about taking control of the situation and deciding you will do something to “show them” and this makes one willing to take a chance.

Fighting Back
The annuity producer can tell the reluctant prospect that they should not accept what is happening to them, but that they can fight back. The consumer’s $100,000 IRA may now be worth $60,000 after the stock market’s drop – but the producer can find them a multi-year annuity that guarantees their $100,000 will be back in 10 years and reverse a losing situation! 

The consumer’s stockbroker offers no guarantees but is hopeful the consumer will not outlive their investment income if they start withdrawing 3% or 4%; the annuity producer will guarantee them a 5% or 6% lifetime income today – even more if they wait – and the consumer will always be in control and not dependent on the wiggles of Wall Street’s trend lines! The message to the reluctant consumer is to get mad, refuse to be a victim, and get back at “them” by using the keep-control-financial solution – a fixed annuity!

The Timeless Marketing Message (10/08)

  • Tell Benefit, Benefit, Benefit, Benefit: “but wait there’s more”

  • Make Them See The Need: “last April did you look at your 1040 and think – I’m paying too much in taxes” “when you got your CD renewal notice did you say – I need a higher yield”

  • Be The Expert: “with a decade of experience I understand annuities” “you may have heard me on the radio”

  • But Be Accessible: “I also felt lost the first time I looked beyond the bank” “these are pictures of my kids and my pet cow ”

  • Reassure: “this was a wise decision” “9 out 10 insurance company doctors recommend annuities” “now you can tell the next bear market – no thanks, I don’t do losses”

  • Be Passionate: “I sold my own mother an annuity” “I feel I’m on a mission to help people earn more interest”

  • Ask For The Order: “will this be in one or both names” “does this make sense, then let’s start protecting your money”

 Objection Preemption (6/10)
The typical book on sales skills talks about overcoming objections and often defines this as a battle between the salesperson’s powers of persuasion and the buyer’s reluctance to commit. But the “objection” may either be a request for more information – in which case nothing needs to be “overcome” – or a signal that the buyer has already decided not to buy.

Do not ask what their expectations are – tell them what their expectations should be

For example, if the buyer asks “how long is my money tied up in that annuity” they could simply be trying to decide where the annuity fits in with their other assets. In this case the buyer has subconsciously decided in favor of the annuity purchase and is trying to determine how large a purchase to make. On the other hand, the buyer may have decided not to buy the annuity and the question represents a psychologically acceptable way for the buyer to tell the salesperson no without turning it into a confrontation. I am afraid that much of the advice on how to overcome objections is often ineffective because its goal is to coerce the buyer into reversing their decision, and even when it is successful the final result may be a remorseful annuityowner.

Preempting the objection – meaning to address the objection before it arises – may be the best solution.

There are many times the consumer does not buy because the product does not help them achieve their goals. Rather than trying to “overcome” and sell the buyer something they do not want, the producer should move on to the next prospect. However, often the reason the consumer does not decide to buy is they simply do not feel they have the necessary facts to make a favorable decision. The consumer needs information that is relevant to them. This definitely does not mean the consumer needs to know everything the producer knows, but only those facts that are important for the consumer. By providing the needed information in a way that shows the consumer how the annuity will help achieve their goals the producer preempts future objections.

Preempting the objection is showing the consumer why the annuity fits their goals in spite of the negative aspects of buying the annuity. It is creating a favorable decision-making framework that raises and answers the objections during, or even before, the presentation. It is the exact opposite of the producer waiting until “the close” to find out what information is missing, which is often too late because the consumer has already decided not to buy based on what they know.The way in which the relevant information is presented, or framed, usually determines the decision outcome. The framing of the information helps the consumer determine whether the annuity will help them and should be purchased.

Safety (Liquidity) Preemptions
When I ask producers why consumers buy annuities the overwhelming response is because fixed annuities are safe. But what is safety? A producer often translates the concept of annuity safety into a lack of stock market risk, but this is not the typical consumer’s definition of safety. From my talks with consumers I believe their definition of safety is “can I get my money back?”

The consumer is asking – can I get my money back (is there market risk)?
The consumer likes the fact that fixed annuity principal and credited interest cannot be lost if the stock market goes down
, but this benefit is important only because it ties into the broader concept of “can I get my money back.” For many consumers this no-market-loss benefit is enough.

Objection Preemption: “In a fixed annuity both your principal and credited interest is protected from stock market risk of loss.”

The consumer is asking – can I get my money back (are the annuity funds FDIC insured)?
Occasionally a consumer will get hung up on what happens if the insurance company goes out of business. I found a couple ways that often preempt the concern.

Objection Preemption: If at the start of the presentation the producer shows on a piece of paper the words “CD, fixed annuity, savings bond” and then tells the consumer they will be talking about fixed annuities today, questions about fixed annuity safety often go away. The reason is because the annuity is listed between two places that the consumer already feels are safe; the consumer mentally transfers the safety to the fixed annuity.

Objection Preemption: “Do you know anyone that has ever lost money in a savings account or fixed annuity? No, because these are safe.”

What we are doing is framing the safety concern to financial reality. Because bank instruments and fixed annuities are mentioned together as very safe places – and the consumer reinforced that belief by not remembering anyone that had ever lost money in either – the consumer is less likely to challenge the safety of the fixed annuity. 

The consumer is asking – can I get my money back (what are the penalties)?
In our minds the behavioral impact of a 2% penalty and a 20% penalty are very similar. The deterrent effect of losing 2% interest on a 4% CD or 20% of the fixed annuity value appears to be almost the same in determining whether the consumer keeps the money in place (but the higher penalty does sometimes deter the producer from replacement). I believe consumers are relatively indifferent when it comes to the size of the withdrawal penalties. However, the length of the penalty is something else.
The consumer usually needs to believe the longer penalty period is justified by either greater return potential or that the longer penalty period is normal. In a multiple year guarantee rate annuity the greater return potential can often be expressed as earning a higher rate as the penalty years increase – an 8 year guaranteed rate pays a higher yield than a 6 year one. Or, it can be expressed as protecting a rate as the penalty years increase – an 8 year guaranteed rate pays a lower yield than a 6 year one because the insurer is sticking their neck out for two more years to protect the yield.

This same logic can be extended to index annuities – the 8 year penalty product offers greater index participation than the 6 year product. However, if the producer is presenting annuities with penalty periods of 12 or 15 years a more effective story may be that the reason this annuity has a 15 year penalty period is because this annuity is supposed to have a 15 year penalty.

Objection Preemption: “This annuity is for your legacy money”

If the annuity has a surrender penalty charge that is high or long or both the producer should be preparing the consumer during the presentation by talking about fixed annuities as the foundation of the retirement years, or the place for the serious money that the consumer will only touch after everything else is gone, or the fixed annuity is the consumer’s “legacy money” that is designed to be left for the next generation. Because the producer said a fixed annuity was “legacy money for the next generation” the consumer should be more receptive to a longer penalty period because mentally they have already determined they are not going to touch the money.

Objection Preemption: “What additional liquidity might you need from the annuity that would not be met by your other assets?”

The annuity will not be the consumer’s only asset. The consumer needs to be reminded that liquidity needs should probably be met by places with lower potential yields first. The producer can address other liquidity the annuity provides.

  • Liquidity means the annuity balance goes to the heirs without penalties.

  • Liquidity means the consumer can access the money if confined to a nursing home.

  • Liquidity means the consumer can access 10% a year without liquidity charges.

All of these “can I get my money back” concerns should be addressed before the product is introduced because then you will know which products will meet the consumer’s real needs.

Claim The Obvious Benefit (2/08)
Bayer® Aspirin advertises they have an ingredient that will help protect people from heart attacks. The ingredient is called aspirin and at my local drugstore they charge me 8 cents a tablet for Bayer brand Aspirin. The drugstore also sells generic aspirin at less than 1 cent a tablet. Bayer sold over half a billion dollars last year of a product that was available in generic form that provided the same identical benefit for heart attacks for a fraction of the cost. But the benefit claimed is BAYER helps to prevent heart attacks.

Once a stockbroker friend called me to lament that he had lost a $100,000 sale. He said the client didn’t want stocks and so he had discussed bonds and fixed annuities with her and then went on vacation with the understanding they’d do something when he returned. When he got back the $100,000 was gone from the account and so he called the client. The client said she’d bought a fixed annuity from another person. When my friend responded he could have sold her the annuity the client responded, “But THIS AGENT guaranteed I would earn a minimum return every year.”

Everyone in sales tries to gain a competitive advantage wherein a benefit can be touted that is unique to the seller. However, the advantage is not gained thru actual benefit exclusivity but thru the perception of exclusivity, and this can be accomplished by loudly and frequently claiming the obvious benefit as ones own.For example, all deferred annuities offer tax-deferral of compounding interest, and this is often stated as a benefit of owning an annuity. This does not mean a seller cannot run a full page ad stating, “MY COMPANY gives you FREE Tax-Deferral of compounding interest.”

Or, there is nothing to stop a producer from saying about the annuities represented that “MY ANNUITIES will pay out your annuity death benefit directly to your beneficiary giving you the ability to avoid probate at no additional charge

A feature common to all annuities is the ability to annuitize to receive a life income, but this could also be expressed as “MY COMPANY Will Put It In Writing that you can have an income for as long as you live.” While another annuity benefit that can be claimed is “THIS ANNUITY protects principal from stock market loss” with a strong emphasis on “THIS.”

The benefit claimed does not even need to be directly associated with the product as long as claiming it creates a positive perception. Saying “Everyone of OUR COMPANY Employees Has A Mother” or “MY COMPANY does not club baby seals” sounds silly, but then you start to wonder about why other companies are not making these claims.     

Claiming benefits is by no means a unique idea; the marketing world is full of attempts at branding the obvious, because it works. Annuity carriers and producers can be more effective by talking about what “MY ANNUITY offers” and claiming these benefits.

Illusion of Validity (8/07)
I was speaking at a function for planners and advisors awhile back and one of the planners
afterwards told me that he didn’t need to use fixed annuities because he was doing strategic asset allocation, and that based on his knowledge and his models that his clients were protected against market risk of loss.
When I heard this I had a flashback to the fall of 1999 when another young stockbroker/planner told me his clients didn’t need index annuities because he was using tactical asset allocation and thus they were protected against market risk of loss – and based upon what he described his typical client would have lost roughly half of the value of their “tactical” portfolio in the millennium bear market that followed.

The market has risen for four years. At the end of May the S&P 500 finally passed the old high set seven years before. The market exuberance is more tempered than the last time around. However, just as markets have never dropped to zero neither do they keep going constantly up. If you look back over the last 60 years the market has failed to increase. The problem for a lot of investors and advisors is if they’ve invested in the stock market for the last four years they’ve been right, and all of this “proof” results in something called an illusion of validity wherein we think we will be right in the future because we were right in the past. But, this all overlooks something my first manager told me years ago, which is never confuse brains with a bull market. Unfortunately, there are many people that believe the “new” stock market has two phases – up a little and up a lot.

If the market does what it has always has done in the past it will fall, and then rise again. If you are in for the long term and can emotionally handle the risk, it’s usually smart just to ride it out. However, every time a bull market extends its time in the arena it attracts folks and money that probably shouldn’t be there because risk of loss is not fully appreciated, and neither these folks nor dollars can truly handle a potential loss. For these people and this money fixed annuities with a stated or indexed interest rate can often make sense.

Safety – Bank & Annuity Reality (7/06)
Over the years I have seen annuity purveyors try to compare the safety of their fixed annuity offering with the bank. I’ve often heard agents talk about the “legal reserve system” and say that annuities have much higher reserves backing them than do bank accounts. I’ve heard agents tell consumers that “the bank only has $1.02 behind each savings account dollar while insurance carriers have $1.04 to $1.06 in reserves backing each annuity dollar”. However, from my conversations with actuaries and others it appears that this talk results from taking a part of an explanation someone created years ago to try to explain policy surplus and reserves and it has now become a kind of bastardized condensed urban legend that many agents use to try to compare banks and insurance companies.

Legal Reserves
The states require that an insurance company must keep enough money to cover the current and future obligations of the policies issued, plus a little bit extra. This money is referred to as policy reserves, statutory reserves or legal reserves.
On an individual policy basis what the carrier does is look at the greatest present value of all possible benefit streams, but never less than the cash surrender value of the annuity. On a statutory reserve or legal reserve basis this could translate into insurer reserves equaling anywhere from 100% to 106% or more of cash value. However, the concept of calculated reserves for the bulk of liabilities is possibly unique to the insurance industry. You cannot make an apples to apples comparison between insurers and banks because banks view their liabilities on an account value basis and not by reserve valuation.

Capital & Surplus
Because banks do not provide policy benefits another form of comparison would be to look at the capital & surplus of the insurer as a percentage of assets and compare this number with the capital & retained earnings of the bank as a percentage of bank assets.
I looked at the assets and capital surplus for 2005 of the twenty largest sellers of index annuities and computed their Capital Surplus Ratio. I used the NAIC definition of Capital & Surplus which is “the outstanding capital stock, preferred stock, paid in capital and unassigned funds held for policyholders (assets minus liabilities)” and divided this by the total assets.

The median capital surplus ratio for the twenty largest sellers was 5.9%. Ratios for the twenty carriers ranged from 3.5% to 16.2% (however if you drop off the two outliers on the ends the range drops to 3.8% to 10.6%). The capital required for a bank is determined by statute and regulator guidelines. Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view, it consists of common stock, irredeemable preferred stock and retained earnings. The capital ratio is the percentage of a bank's capital to its assets and would be a kindred measurement to the capital surplus ratio. To be well-capitalized under federal bank regulatory agency definitions, a bank must have a Tier 1 capital ratio of at least 6%. For 2005 the average capital ratio for all banks was 10.1%.

In 2005 the largest annuity carriers had capital ratios of 5.9% vs. 10.1% for the average bank

If you compare these index annuity carriers with the average bank the typical annuity carrier has 5.9 cents behind each dollar of assets and the average bank has 10.1 cents behind each dollar of assets. This ratio is on the high side based on bank history. For example, in 2002 there were between 6 and 7 cents backing each bank dollar.

FDIC & Guarantees
A few agents have told me they explain to their prospects how little money there really is at the FDIC – perhaps believing that bashing a federally insured instrument will make a non-federally insured instrument look safer. Let’s look at the realities of FDIC and state insurance guaranty funds.
FDIC is an independent agency of the federal government that was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Since the start of FDIC insurance in January 1934 no depositor has lost a single cent of insured funds as a result of a bank failure.

State Guaranty Funds were set up by the individual states to protect policyowners in the event of an insurer failure. In 1983 the state guaranty associations founded the National Organization of Life and Health Insurance Guaranty Associations (NOHLGA). If the insolvency affects three or more states NOHLGA coordinates the development of a plan to protect policyholders. NOHLGA states that when annuity carriers have failed "every holder of a covered annuity...has been given the opportunity to have the policy assumed by another healthy carrier or had the covered portions of their policies fulfilled by their guaranty association itself". 

FDIC covers up to $250,000 in deposits for one owner at one insured bank and there are different categories of owners that may allow one to increase coverage.Every state (plus Puerto Rico) provides $100,000 in withdrawal and cash values for all fixed annuities through their guarantee funds. Most states (and one District) have higher limits of up to $300,000.

The Deposit Insurance Fund (DIF) assesses banks based on their risk; the riskier the bank the higher the assessment. Assessments range from 0 to 27 basis points.
Guaranty Fund assessment levels are set by the individual states. The vast majority of the states may assess the insurer up to 2% of the premiums paid within that state for the guaranty fund. Five states (Alabama, California, Colorado, Florida and Texas) have a maximum annual assessment of 1%, Rhode Island has a maximum assessment of 3% and South Carolina has a maximum assessment of 4%.

Cash On Hand
The FDIC had $49.193 billion on hand during the spring of 2006 to cover $4 trillion dollars of deposits, so currently the FDIC account represents 1.24% of deposits, but FDIC has the authority to borrow billions of dollars more.
FDIC has $49 billion of cash sitting around in case a bank fails. How much cash do NOHLGA and the collective state guaranty funds have stashed away? The answer is zero, zilch, nada. In response to my specific question a director of NOHLGA wrote back “It's important to remember that unlike the FDIC, the guaranty system is not pre-funded. Instead, member companies are assessed by the associations only when funds are needed”.

The typical bank has a higher percentage of capital backing their depositors than an insurer does backing its policyowners. Although FDIC cash on hand covers only 1.24% of insured bank deposits, it has $49.193 billion more than insurer guaranty funds have sitting in their piggybank. I would say that an FDIC insured bank account is safer than a fixed annuity if the entity goes belly-up. But the real question is not which is safer, it is “are fixed annuities also safe?”

Every bank customer covered by FDIC and every fixed annuity owner covered by a guaranty fund have been made whole up to the limits of FDIC or the guaranty fund.From 1994 through 2005 there were 66 bank failures. Bank deposits within federal deposit insurance limits were protected, but the same did not hold true for account balances over the insurance limits in many of these banks and not every uninsured account was made whole. During the same period there were only a dozen failed carriers that did not provide all of the fixed annuity value for all of their annuity customers (by the way, no index annuity owner has ever lost money because the insurer failed). A fixed annuity should be presented as another safe money place.

Sources: Federal Reserve Board (June 2006),Federal Reserve Bulletin; FDIC (1998) A Brief History Of Deposit Insurance In The U.S; FDIC (May 9, 2006) Economic Conditions and Emerging Risks in Banking; htttp://  

What’s Wrong With Index Annuities? (10/05)  
I have written dozens of articles on what is right about annuities, let’s look on the other side of the coin. 

LiquidityIndex annuity surrender penalties can be as long as 18 years and may result in a consumer getting back as little as 75 cents on the dollar if annuity is cashed in 11 days after purchase. Some annuities cannot be cashed in and must be annuitized.  

You can argue that longer surrender periods help the carrier invest for the longer term and thus generate higher yields from which to work with. You can mention that the owner intends to annuitize the contract, so it does not matter that the full account value will never be received if the policy is cashed in. You can even mention the high surrender charges are a good thing because they impose discipline on the annuity buyer. You can mention all of this, as long as you can persuade a jury that your primary motivation in promoting the 12 year or longer double-digit surrender penalty product instead of the 5 to 7 year surrender period product was not due to the 9% to 13% commission.   

Tax StatusAnnuity interest is tax-deferred, not tax-free. Interest is subject to an additional 10% penalty if withdrawn before age 59½. Interest received is always taxed at ordinary income rates, regardless of holding period. There is no step up in account value basis at death.

The effect of these truths to a large extent depend upon the comparison made. Pure tax-free municipal bond interest often, but not always, tends to be less than the net after-tax deferral yield of a fixed annuity. Municipal bond interest, unlike tax-deferred interest, is included in calculating Social Security benefit taxation. Whether the 10% “under age 59½” penalty is a killer depends upon the respective yields. If both Annuity A and Non-Annuity B have a 5% rate, and the owner is under age 59½ and withdrawing the interest, the annuity is giving up ½ of a percent and netting 4 ½%. But what if Annuity A has a 5% rate and Non-Annuity B has a 4¼% rate? Annuity A then wins this heat. Tax-deferred ordinary income versus capital gains tax treatment is seldom simple. How tax efficient is the taxable choice? Will the Alternative Minimum Tax come into play? Will the ordinary tax rate be higher or lower when tax-deferred interest is received? Depending upon the assumptions used either side can be made to win. Usually if you are the beneficiary of an annuity your tax basis is the cost of the original owner; if you receive stocks due to a death your tax basis is the fair market value at date of death. The annuity loses this tax battle on an appreciated asset.

No Federal Insurance On AccountsFixed annuities are only backed by company assets, and as a last recourse, state guaranty associations funded by carrier assessments. 

Although some attempt to win this argument by bashing FDIC, you will almost never convince a consumer that a non-federally insured place is safer than a federally insured one. A fixed annuity is not safer than FDIC because by definition federal insurance trumps state guarantees. The point is not that CDs are unsafe it is that fixed annuities are also safe. It should be noted that no index annuity owner has ever lost money because the insurer failed.

Penalties Last Longer Than GuaranteesA typical index annuity may reset some aspect of interest crediting before surrender penalties end, and even policies that have minimum renewal rate factors have them usually set so low the policy would be uncompetitive at the minimum.

Over 90% of index annuities involve a “trust me” factor whereby some aspect of the crediting structure may change before you can withdraw your accumulated value without penalty. I believe annuities need this flexibility to cope with changing financial conditions, but that doesn’t obscure the fact that this flexibility is unilateral.

Opaque Cost StructureSales commissions, policy costs and profitability factors are hidden, and crediting method structures are often opaque, making it impossible for a consumer to truly compare the merits of one annually declared rate annuity with another.


No Stock Market ReturnsBecause index annuities do not include reinvested dividends and typically participate in only a portion of index gains they will not perform like the stock market.

Index annuities don’t perform like the stock market; sometimes they do better (but that is not the message I want to send). The main point is index annuities are not supposed to compete with the stock market. They should never be presented as “stock market returns without losses” because they are not designed to do so. Index annuities might produce 40% to 50% – with an outlier at 70% – of the index return in a strong bull market period (improved participation might result if bond rates soared and option prices remained low). In a rocky market period they might produce 100% to 200% of a stock index return. However, both comparisons are misleading. Index annuities are designed to compete with other fixed annuities.

Honest Hype (5/05)  
The role of marketing is to promote the advantages of a product. Unfortunately, this role is sometimes frankensteined into producing misleading sales hype. In the case of annuities the hype typically results in overstretching the potential returns. However, the benefits of annuities are real and this may be dramatically shown with a little honest hype.

If I could increase your income at retirement 46% without increasing your risk would you be interested?
Retirement planning instruments offer tax-deferral. Not only does the principal earn interest (simple interest at work), and the interest earns interest (compound interest at work), but the money that would have gone to the IRS also earns interest (tax-advantaged interest at work). 

Suppose we had $50,000 and were in a combined federal and state tax bracket of 33%. And say both a taxable account and an annuity are earning 6%. The annuity benefits from triple interest crediting and works with the full 6% interest. However, the taxable account produces an IRS Form 1099 every year that says part of the interest must be paid in taxes, whether it is being used or left for later, so we are left growing at only 4%.

The annuity advantage means we would an amazing 46% more interest from the annuity than we would get from the taxable account in twenty years. An annuity could mean the difference between enjoying retirement or just getting by.

Comparison - Interest Earned

After Year Taxable Interest Tax-Deferred Interest Deferral Advantage
1 $3,120 $3,180 2%
5 $3,650 $4,015 10%
10 $4,441 $5,372 21%
20 $6,573 $9,621 46%

If I could potentially double your interest income without increasing your risk would you be interested?  
As I write this my top local bank is offering 3.15% on their 1-year CD and the biggest bank in town credits 1.55% APY on their 1-year CD. What is the best 1-year CD rate in your town today?
If a consumer’s bank is paying 1.55% do you have a fixed rate annuity yielding 3.10% or better? If your top local bank is paying 3.15% can you find an index annuity with a cap of 6.3% or higher? You can offer consumers real or potential interests that is double what they are earning. My work with consumers implies they want 2% more interest to justify moving their money to an annuity – not hype of unsustainable double-digit returns – simply 2%. Although the rate differential between CDs and fixed rate annuities will continue to get squeezed this year, index annuities offer a viable way to get that 2%.

If I could reduce or eliminate owing taxes on your Social Security benefits without increasing your risk would you be interested?
When preparing the Form 1040 a portion of a retiree’s Social Security benefits, as well as all tax-free municipal bond interest, are added on top of the normal taxable income to determine if any Social Security income will be subjected to income taxes. Shifting some assets to deferred annuities may stop this taxation because annuity interest kept inside the annuity is not included in the Social Security Benefit Taxation formula.

If I could give you a friendlier minimum guarantee than you get with a Savings Bond...
If you buy a Series EE Savings Bond today you are guaranteed a minimum effective annual rate of 3.53%
IF you wait 20 years (If you cash in the bonds in 19 years there is no minimum guarantee). Although I am unaware of any fixed annuities with a similar minimum guaranteed rate I do not believe you ever need to wait 20 years to
receive the annuity guarantee stated in the policy. 

If I could show you a safe money place that has  outperformed CDs would you be interested?
Looking back at every possible five year period the average index annuity has delivered more
interest than the average CD, sometimes dramatically more interest.

If I could show you a way to possibly earn more interest without subjecting your money to stock market risk of loss would you be interested?
This is the index annuity story. You may earn significantly more interest with an index annuity than you would in the bank. No, you will not earn stock market returns – if you want stock market returns (and risks) buy equities. But you just might earn more interest over time with an index annuity without incurring market risk on your principal and what you have earned thus far.

If I could give you the power to determine when you pay taxes on your interest – you, not the IRS – would you be interested?
Annuities give a consumer tax control because they are not taxed on annuity interest they do not spend. An annuity lets you pay the taxes when you take the interest and not before.

If I could show you a way to end withdrawal penalties but still earn competitive interest would you be interested?
When a certificate of deposit renews a new interest rate is declared and a new penalty period begins. Even if that CD has been rolled over for 30 years there will still be a new “penalty for early withdrawal” in year 31. Fixed annuity surrender penalties – with a few exceptions – end at some point down the road. There comes a time when new annuity rates are declared without penalty.

If I could show you marketing that didn’t hype what it was selling would you be interested?
Annuities offer real advantages that do not need to be hyped.

















Copyright 1998-2013 Jack Marrion, Advantage Compendium Ltd., St. Louis, MO (314) 255-6531.  All information is for illustrative purposes only, does not provide investment or tax advice. No index sponsors, promotes, or makes any representation regarding any index product. Information is from sources believed accurate but is not warranted. Advantage Compendium neither markets nor endorses any financial product.