The Preventable Demise of the Fixed Annuity Business: Part Two of a Multi-Part Series

In part one I wrote about the authentic risk to the fixed annuity industry that it may fail to realize its full potential in Boomer retirement security. This would, in my judgment, constitute a tragic result for an industry which, due to its product set and its capacity to assume longevity risk, ought to be well positioned for success as millions of retirees and their $trillions in retirement assets transition to the income-generation stage.

Yet, the annuity industry is beset with multiple challenges which may appear to some industry observers as intractable. These include a negative public image driven by intensely critical press reporting, cautionary statements issued by regulators to consumers, class-action litigation, compliance and suitability concerns, poor sales practices, opaque and complex products and ineffective consumer-facing communications.

As they emerge and intensify, the industry tends to swat at these symptoms of underlying structural problems as if it was swatting at annoying mosquitoes. But what is attracting the mosquitoes?

I say this in the context of my own extensive personal history in the fixed annuity industry. After 30 years of involvement with both annuity agents and annuity product manufacturers as an agent, agent recruiter, agent trainer, marketing company principal, industry marketing consultant, public speaker, industry thought leader and communications technology innovator, I remain an unvarnished advocate for annuity products. I also continue to believe in their vital role in personal finance. All advocates for the industry should wish that it achieves its full potential in the coming years. However, that goal cannot be reached unless and until the underlying disease that is causing today’s painful symptoms is identified, acknowledged and cured.

Among the most important goals I have staked in introducing this blog is to galvanize industry leaders- both in the agent ranks and among insurance company leaders- to the urgency of caring for the patient before he expires. The fixed annuity industry ought to be a perceived as a vital and necessary institution, one with products that 78 million Americans seek out as they plan for their future retirement security.

Today’s Challenges Reflected in a 20-Year Old Mirror

In late 1987 I was asked to consult on a project with the Wall Street Firm PaineWebber (now UBS) that involved a sort of “reprogramming” of attitudes among stockbrokers. The goal was to alter the stockbrokers’ negative perceptions of life insurance products. I was offered this project due to my development of a hugely successful life insurance marketing program that had been introduced by E.F. Hutton Life Insurance Company in 1987, but was later expanded by that company’s successor, First Capital Life.

That life insurance marketing program, “The Alternative Plan”, highlighted the ability of universal life insurance to provide tax-free income (via policy loans) to policy owners. The attractiveness of utilizing life insurance to provide supplemental retirement income was greatly enhanced following the elimination of income tax deductions on many IRAs (Tax Reform Act of 1986). With “The Alternative Plan” I was able to demonstrate that the universal life policy became an arguably superior choice when compared to a non-deductible IRA – no tax forms, income-tax free access to cash value, and life insurance.

The PaineWebber project began with the identification of ten groups, each comprised of ten stockbrokers – one-hundred stockbrokers in all – that would participate in my 2½ day training seminars. These training meetings were held regionally over a three month period. What’s interesting to me as I remember working with these brokers is the fact that although they were selected for participation in the program because they had shown some degree of willingness to accept life insurance, they were still intensely and universally negative to the idea of being perceived by their prospects and clients as “life insurance agents.” In fact, their history of selling fixed annuities was their only historical involvement with insurance. I had my work cut out for me in breaking through their negative, pre-conceived views.

The training program was focused on the utilization of life insurance as a way to boost retirement security through the creation of income tax-free cash flow. The expression of this utilization that serves as the heart and soul of the training was a 45-minute seminar presentation that placed the value of the life insurance policy in a needs-based context. The most important goal with this training was for me to teach each of the one-hundred stockbrokers to deliver this presentation effectively.

For context, let me point out that this was in the period before the advent of PowerPoint and LCD projectors. The seminar presentation consisted of one individual – me – standing next to a flip chart holding only a Magic Marker. For 45 minutes I would speak and write down facts and figures on the flip chart. The verbal presentation was passionately delivered, highly conceptual, and decidedly emotional; i.e. after a section addressing the importance of saving money, “I just read a survey that said that EIGHT of the TEN LARGEST CORPORATIONS in the WORLD are Japanese! Why? The Japanese SAVE MONEY! WE DON’T. The Japanese save more than 12% of their incomes each year, the Germans, more than 8%. We Americans barely save 4%!” (This all sounds rather quaint in the context of the subsequent meltdown of the Japanese economy and the dramatic further eroding in the U.S. personal savings rate!)

My goal – and also my own measure of success in the PaineWebber engagement – was enabling all one-hundred stockbrokers to personally deliver the 45-minute presentation. I came darn close. More than 90% succeeded. And their life insurance (and annuity) production skyrocketed. In the process, these stockbrokers came to see life insurance differently; not as something to shun by definition, but rather as something to be appreciated for its special abilities and unique application in personal finance.

Importantly, there was no agenda in my training to diminish the importance of life insurance policy’s death benefit, nor was there any attempt to sidestep the acquisition process. Accordingly, I trained the stockbrokers on the unmatched financial leverage life insurance provides as well as the underwriting process and how to properly complete the life insurance application.

The Beginning of a Decades-Long Shift

In the period beginning roughly in 1980, most life insurance companies began to focus more intently on product manufacturing at the expense of recruiting, training, and managing life insurance agents. In Part One of this series I explained how the introduction of the personal computer ignited this shift.

One of the things that life insurers had traditionally taught, but by the early 1980s were abandoning, was the building among its sales people of the prideful belief in the worthiness of being perceived as a life insurance agent. It’s no accident that the movement toward marketing identities which camouflaged the producer’s agenda to sell life insurance and annuities took root during this period. Most life insurance agents at the time would have been able to describe to you how much they envied the far more attractive public perceptions of stockbrokers and “planners.”

As a result many insurance and annuity agents sought to co-adopt alternative, public-facing identities that projected a variety of specialties, i.e. “financial planning,” “tax avoidance,” “Medicaid planning,” estate tax reduction,” “safe money specialist,” “senior advisor,” etc. The movement among insurance and annuity producers to acquire newer and ever more timely and specialized marketing identities continues to this day. But now it’s collided with a regulatory and compliance paradigm that didn’t exist 20, 10, 5 or even just one year ago. Consequently the notion of hiding from the consumer a true agenda to sell life insurance or annuity products no longer “fits.”

Producers who continue on this track run the risk of regulatory sanctions and unwelcome adverse publicity. And depending upon how any one of thousands of consumer complaints that a regulator may choose to highlight is adjudicated at the carrier level, they too run the risk of unwelcome negative publicity.

Past is Prologue

In spite of the success of my training at PaineWebber and the subsequent production increase of my students, I reached only a tiny segment of the firm’s total stockbroker base. After my run ended some PaineWebber executives felt that it would be smart to engage thousands more stockbrokers on life insurance sales. They created a universal life policy they called “PaineWebber Provider.” It was limited to a $2,000 premium – just like an IRA – and it had no requirement to take a medical exam.
To the client, and to most brokers, the PaineWebber Provider looked like a “tax-free IRA.”

Unfortunately, most stockbrokers didn’t have a complete understanding of what they were selling and some of the brokers selling the PaineWebber Provider failed to mention that it was, in fact, a life insurance policy. This resulted in a class action lawsuit brought against PaineWebber.

PaineWebber paid a price in terms of defending a lawsuit for wrapping life insurance in an identity which at least partially camouflaged the product its stockbrokers were selling. This was 20 years ago. We haven’t learned.

The bottom line is that it’s all changing – and more quickly than many may realize. This is not the time to look back on “safe” strategies that in the past may have proven to be reliable. Life insurance companies and their agents must clearly communicate their agendas while explaining their value in a manner that is consumer-friendly, balanced and very, very clear.

©Copyright 2007 David A. Macchia. All rights reserved.