June 2007

New Interview Series Coming Soon: “America’s Elite Financial Advisors” Will Explore the Issues that are of the Greatest Concern to the Nation’s Best Retail Advisors

There are hundreds of thousands of financial advisors who serve consumers of financial products and services. The moniker “Financial Advisor” has come to be an umbrella term that encompasses segments of intermediaries that serve different markets in different ways.

Among the advisors who populate each segment- registered representatives, RIAs, insurance agents, financial planners, etc.- the participants in any one of these segments will acknowledge that there is a small, exclusive group that out-shines (and out-earns) all of the others. These are the “Elite” among financial advisors, and they wield considerable influence and power. In my experience they are also those that generally make the greatest positive impact on their clients’ financial lives. Did I mention that they also hold the most sway with providers of insurance and investment products?

To help readers better know these individuals I’ll soon be publishing in-depth interviews with the “best of the best” in the financial advisor world. The intent is to explore a wide variety of contemporary issues by gauging the perspective of these elite professionals. I want to provide them a platform to voice their concerns to other industry leaders in a manner that allows for very elaborate and detailed exploration. I expect this to yield some fascinating results. Stay tuned!

How Intuitive Should Retirement Income Products Be?

fg1François Gadenne has written extensively at this blog on retirement income issues including essays addressing the present and future activities of the Retirement Income Industry Association (RIIA).

In terms of today’s essay Francois wears a different hat. He writes from the perspective of his role as President & CEO of Retirement Engineering, Inc., where he is involved with developing next-generation retirement income products. Given that a significant percentage of my readers have a keen interest in retirement product development, I felt that it would be appropriate to share François’ essay with you:

What are the generic investment approaches available to investors today and how well do they fit the evolving needs of the retiring retail investor?

The financial industry, thus far, has focused primarily on diversification-based investment approaches. These were particularly appropriate during the Accumulation phase.

However, influential academics such as Professor Zvi Bodie will point out that insurance and hedging are important approaches to consider as well. These additional approaches become increasingly relevant as one’s focus moves from Accumulation to Retirement Income. To paraphrase, the three pillars of Finance include – diversification, insurance, hedging and it is better to use all three, rather than just one.

The purpose of this post is to present a high-level inventory of investment approaches, past and present, in order to see what the future may bring.

So what are the diversification-focused, products and processes that we have seen for some time? At a generic packaging level, these include:
- Diversification with Risky Assets resulting in probabilistic growth and income potential (i.e. actively managed mutual funds, index funds, etc.), and
- Probability-based income projection and illustration processes for asset allocation among risky assets, primarily differentiated by how well they disclose the variances of outcomes.

Since the turn of the century, the industry has moved incrementally to respond to both the slow demographic change caused by the Baby Boomers as well as to the more rapid volatility in risky asset values. These changes in product and process development include:
- Addition of Principal Protection features with a focus on the process of accumulation rather than the result of income,
- Marketing of guarantees (life as well as income) as optional riders in insurance contracts,
- Patented as well as non-patented extensions of earlier Accumulation advice processes such as Systematic Withdrawal Plans, using probability-based returns projections for asset allocation between risky assets and guaranteed products.
- Asset allocation processes turned into products, first in the form of target-risk funds and later in the form of target-date funds (for a recent discussion on this topic see http://audioevent.mshow.com/time/ ), and
- Distribution advice approaches such as Ladders using income illustrations for asset allocation between risky assets and guaranteed products.

What may be the next wave of product and process development?

At Retirement Engineering, Inc. (REI), our view is that it is time to bring to market products that combine the three pillars of finance (diversification, hedging and insurance) in a series of intuitively understandable retail packages that provide explicit floors under the investor’s retirement income risk. It is time to focus on products that talk to outcomes rather than only to inputs.

The time has come, because both the consumer and the industry have evolved sufficiently over the last five years and appear increasingly ready for it. We also believe that the time has come because REI was recently allowed the first of several pending patents with regards to Future-Income Denominated™ products and other inventions.

The development of new, consumer-focused and intuitive products that combine diversification, options and insurance solutions in one offering may start with smaller, process-focused steps including:
- Adding Income on the Statement – quantification of retirement income on the investment account statement, and
- Adding Impact-of-Consequences-based projection and illustration to probability-based processes/software to integrate risky asset diversification, hedging and insurance guarantees in investment management for retirement income.

At REI, we have a name for this next wave of product development. We call it “Future-Income Denomination™” and we develop Future-Income Denominated™ products and their matching processes.

Future-Income Denominated products and processes have intuitive appeal at the investor’s level because they distill the problem from complexity and intractability to letting the investor’s tolerance for retirement income variance set their allocation between less-risky and more-risky investment vehicles.

In addition to its Future-Income Denominated™ products including the Genuine Retirement Income Security (GRInS®) family of products, REI’s inventory of processes includes specific implementations of the initial process-focused steps, including:
- Future-Income Denominated approaches to allow the presentation of income on the statement, and the
- IncomeAtRisk™ Framework for planning software and income benchmarks.

Our clients are the financial institutions that manufacture and distribute products and processes. Information about REI’s products and processes is provided under mutual non-disclosure agreements. The mutual non-disclosure agreement is available here .

Now Playing on Vegas TV, “Bad Animals” Annuity Videos; Consumer Warnings Against Annuities Jump from Print to Digital

Nevada insurance regulators are portraying some sellers of annuities as people who are really “bad animals.”

National Underwriter Online Edition- June 19, 2007

Well, if annuity providers won’t use videos to compliantly communicate the value of their products then I guess regulators will use videos to stop their annuity sales.

Here’s the latest “development” in regulators’ continuing creative efforts to save consumers from, “… buying a faulty annuity for the wrong reasons.” According to the website Broadcast Newsroom: This new campaign titled “Bad Animals” simulates conversations between annuity “sales people” who are really “animals” underneath the surface.” OK, I’m sick.

National Underwriter reports that the Nevada Division of Insurance developed the “Bad Animals” advertising campaign to encourage consumers to check the licenses of annuity suppliers, officials say. The campaign includes 4 television commercials airing in Las Vegas and the Reno, Nev., area and 2 billboards, officials say.

Each ad represents a ‘simulated sales’ vignette shown from the perspective of the purchaser as they are coerced into buying a faulty annuity for all the wrong reasons,” officials say. “The ads creatively show a ‘sales person’ communicating with a potential annuity customer, then flashes to a photo of a predator that most creatively represents each salesperson, demonstrating how the customer is deceived through witty and coercive tactics.” The slogan of each ad is, “Check with us before you write a check,” officials say.

In the 1976 movie, Cool Hand Luke, actor Strother Martin famously said, “What we have here is failure to communicate.” In the annuity industry what we have today is failure to communicate compliantly. It doesn’t have to be this way.

Message consistency, fair and balanced product explanations, quality education of producers and consumer empowerment are anything but vague and unattainable objectives. The required tools and technologies to achieve these improvements are fully developed. What’s lacking is courage.
How many hostile consumer “warnings” can the industry absorb before it is irreparably harmed?

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

Moving to Tibet: The Power of Analogy to Convey the Differences Between Living in the Land of Accumulation vs. Distribution

In early 2004 Wealth2k was beginning to define its role in the Boomer retirement income opportunity. While we had learned a lot about the demographic shift and financial impact of the phenomenon, we realized that we needed to educate people on the magnitude of the challenge that’s faced when ordinary folks convert accumulated retirement assets into distributed retirement income. As successful storytellers we understood the power of analogy in helping crystallize unfamiliar concepts.

I felt that an effective analogy might be based upon the notion of a retiree moving to an exotic locale on the first day of retirement. The most exotic locale I could think of was Tibet. I then wrote the script for what became the narration of the movie I called Life in Tibet™.

The movie was showed many times in group settings and elicited generally enthusiastic responses. Most people though that it effectively demonstrated the economic contrast we wanted to explain. Some, however, didn’t like the intentionally dark ending- an elderly woman forced to seek financial assistance from her children (you’ve been warned).

In recent weeks a number of people have commented on the movie which we have kept continually available for viewing on the web. I thought you might like to watch Living in Tibet™ as the presentation retains its desired impact three years later. To view the movie click here.

As financial organizations seek to convey their own unique retirement income “value”, analogy can be very powerful tactic in creating necessary understanding and confidence.

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

New Blog Excerpts Book Available for Download: The Preventable Demise of the Fixed Annuity Industry

You may recall the four-part series entitled The Preventable Demise of the Fixed Annuity Industry. This series sought to identify the seeds planted years ago that have sprouted into the negative public image and distribution challenges facing today’s fixed annuity industry. It also led to an OpEd published by InvestmentNews.

The fourth and final installment presented my vision for tomorrow’s fixed annuity producer, someone who is better aligned to meet the needs of a wider range of prospects. The annuity agent of the future will be more successful- and busier. Reliance, in part, upon next-generation consumer-facing marketing technology creates greater productivity and leads to the ability to successfully market products that offer inherently greater consumer value.

The four parts of this series have been published in a book format you may download at no cost by clicking here.

François Gadenne: Must We Learn to Budget In-Flows Differently in Retirement?

With the second installment in his multi-part series on retirement-related behavioral issues, François Gadenne challenges us to think differently about how we will manage different sources of income when we’re retired.

Must We Learn to Budget In-Flows Differently in Retirement? So you think that a retiree’s Personal Income Statement looks like the one they had during their employment days? Typically, an employee’s major source of income comes from their Human Capital in the form of wages. Lest we forget, getting old is quite literally earned. Yet, where do your in-flows come from when you are retired?

During Employment Years

As an employee, we are used to seeing one major and often single source of in-flows in our Personal Income Statement: Employment income in the form of W-2 wages arising from the steady growth of our Human Capital.

The self-employed will see Human Capital in-flows in the form of 1099 Income. They may also see in-flows from Business Investments in the form of rental income, royalty income, etc.

Most of us will not see much income from our Social Capital during our employment years. While we may see the occasional gift or inheritance, Social Security and Defined Benefit Pensions only begin to pay monthly income after retirement. On the other hand, those of us with medical and/or disability conditions may see income from matching social or insurance programs.

During our employment years, we are also in the Accumulation phase with regards to our Financial Capital. During the Accumulation phase, we convert what we save from our Human Capital in-flows into Financial Capital. If we invest this Financial Capital well enough and do not lose it, it may even grow it at a compound rate that makes up for inflation and taxes.

Most of us do not see in-flows from Financial Capital on our Personal Income Statement during our employment years. Most of such savings are in tax-deferred investment vehicles, 401(k)s, IRAs, etc. and the investment vehicles are geared for Total Return and Capital Gains instead of monthly income generation.

During Retirement Years

This in-flows state of affairs changes during retirement. A retiree’s sources of income become more diverse and may include in-flows from Human Capital (part-time work, self-employment, income from hobbies, etc.), Business Investments (rental income, royalties, etc.), Social Capital (Social Security, Defined Benefit Plans, etc.) as well as Financial Capital.

To Summarize:

Income from Human Capital
o W2 Wages
o 1099 Income

Income from Business Investments
o Rental Income
o Royalties

Income from Social Capital
o Social Security
o Health and Disability
o DB Plans
o Children
o Church and Community Support
o Gifts

Income from Financial Capital
o Investment Income
o Annuity Income

Recent data from a recent CRS Report for Congress – November 7, 2005, Table 1, page CRS-4, Topics in Aging: Income and Poverty Among Older Americans in 2004, Debra Whitman and Patrick Purcell suggests that the median, annual in-flows into the Personal Income Statement of current retirees (age 65 and above) are as follows:

Income from Human Capital

o Wages: $15,000

Income from Social Capital
o Private DB: $6,720
o Public DB: $15,600
o Social Security: $10,399

Income from Financial Capital
o Annual Income: $952

These numbers are counter-intuitive for most of us in the Financial Industry. In particular, two questions come to mind:

• Is the median annual income from Financial Capital really this small?
Medians and averages can easily be misleading. Clearly market segmentation matters greatly and answers to this questions will vary depending upon your target market.

• Will the Baby Boomers display the same pattern since this data speaks to the prior generation?
It is very likely that they will not display the same pattern. Consensus suggests that they may not benefit to the same amount of Social Capital as the prior generation and there is evidence to suggest that much of the existing Financial Capital may be concentrated with the Baby Boomers. While time will tell, we are all making business decisions that answer this question one way or the other.

Independently of our answers, we can observe that this Personal Income Statement format is often not used in the Accumulation-focused advisory process. Looking at the difference between the Employee’s and the Retiree’s Personal Income Statement, we can understand why this is the case. However, we probably all agree at this point that it should be used in the Retirement Income planning process.

RIIA’s Education Committee is currently developing the Body of Knowledge, Curriculum and Learning Objectives for RIIA’ Retirement Income Expert (RIE) designation which will include the concept of the Retiree’s Personal Income Statement. If you have an opinion on this topic, let us know.

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

The Retirement Income Industry Association’s Evolving Membership Structure: What Do You Get for the Money?

fg1Retirement Income Industry Association (RIIA) Executive Director, François Gadenne, contributes regularly to this blog. Francois writes about retirement income-related issues as well as RIIA’s role in helping its members navigate through a variety of complex issues. Today he explains RIIA’s various membership categories and the benefits accorded to each.

Memberships cost money. Therefore, the first question – before joining any association -becomes: What does my company get for the money? In the case of the Retirement Income Industry Association (RIIA), the answer is simple: Your company gets something unavailable anywhere else: The View Across the Business Silos. This view gives members a unique perspective on the latest retirement income developments across most of the financial industry, including established institutions, academia, marketing, research as well as start-ups.

So, the second question is: Why is this valuable to me? The answer will be unique to you and your company because RIIA membership categories vary by type of business and are matched to the kind of organization you represent.

Institutional Memberships

Regular Members
are the core of RIIA’s membership. They receive the maximum value and member benefits RIIA has to offer. Regular members are firms that develop or distribute retirement income offerings or participate in the industry in such a significant manner that the Board determines that they should become a regular member.
Regular Members pay $10,000 in annual dues and have full membership privileges:

• Entitled to one vote on any matter put before the membership for a vote.
• Can be considered for election to the Association’s Board of Directors.
• May participate where appropriate on any and all Association committees.
• To get the maximum value from their membership, Regular Members are encouraged to actively participate in the life of the Association through service on the Board and the various Committees.
• Receive one free registration for the RIIA Annual Meeting and Awards Dinner and are considered for the annual RIIA Awards.
• May attend the Annual Managing Retirement Income conference and workshops at a substantial discount.
• Access RIIA’s training and educational program for the Retirement Income Expert designation.
• Receive RIIA’s proprietary Research reports for free and may purchase any extended research directly from third-party vendors at a discount.
• Access to RIIA’s Regular-Members-Only section of RIIA’s website
• May sponsor RIIA events.
• May use RIIA’s logo in marketing and communications.

Associate Members are firms that serve the retirement income industry such as law, accounting, research and consulting firms. These members have no vote on RIIA business matters, but are encouraged to contribute to RIIA’s mission through committee & conference participation. Associate Member firms pay a membership fee that matches the smaller size of their businesses and may become a regular member upon payment of regular member dues. No Regular Member firm offering retirement income products, services, and/or distribution may be an Associate Member.
• Associate Members pay $2,500 annual dues and receive these benefits:

• Opportunity to participate in or lead a Committee.
• Associate Members who chair a committee may serve on the Association’s Board of Directors.
• Receive one free registration for the RIIA Annual Meeting and Awards Dinner and are considered for the annual RIIA Awards.
• May attend the Annual Managing Retirement Income conference and workshops at a discount.
• Receive RIIA Research Reports at a discount.
• Are eligible to take RIIA education courses and receive the Retirement Income Expert designation.
• Access to RIIA’s Associate-Members-Only section of RIIA’s website
• May sponsor RIIA events.
• May use RIIA’s logo in marketing and communications.

Plan Sponsor Members are firms that sponsor qualified retirement and employee benefit programs. These members have no vote on RIIA business matters, but are encouraged to contribute to RIIA’s mission by sharing their real-world experience with a view toward benefiting all RIIA members.
• Plan Sponsors pay $500 annual dues and receive these benefits:
• Receive one free registration for the RIIA Annual Meeting and Awards Dinner and are considered for the annual RIIA Awards.
• May attend the Annual Managing Retirement Income conference and workshops at a discount.
• Receive RIIA Research Reports at a discount.
• Are eligible to take RIIA education courses and receive the Retirement Income Expert designation.
• May sponsor RIIA events.
• May use RIIA’s logo in marketing and communications.

Individual Memberships

RIIA created Individual Memberships in response to strong market demand.
Financial Advisor Members are licensed financial professionals who provide retirement income planning advice and services to individuals. These members have no vote on RIIA business matters, but are encouraged to contribute their real-world experience to RIIA initiatives, committees and conferences, with a view toward benefiting investors.
Financial Advisor Members pay $250 annual dues and receive these benefits:

• Receive one free registration for the RIIA Annual Meeting and Awards Dinner.
• May attend the Annual Managing Retirement Income conference and workshops at a discount.
• Are eligible to take RIIA education courses and receive the Retirement Income Expert designation.
• May sponsor RIIA events.

RIIA brings a unique perspective, insights, networking opportunities, research, training and thought leadership to its members. Just as important, the greatest value of participation in RIIA comes from bringing talented, knowledgeable people together as they solve a serious problem for millions of Americans while creating new opportunities in the retirement income business.
Active participation in the work of the Committees leverages this value far in excess of your basic membership benefits. If you want to get involved and want to know more about RIIA’s memberships and activities, please visit RIIA’s website where you can download a Membership Application and contact Board and Committee leadership.

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

Lincoln Financial Group’s Heather Dzielak to be Featured in Industry Leaders & Innovators Series

Senior Vice President, Heather Dzielak, heads-up the strategically important Retirement Income Security Ventures Group at Lincoln Financial. She is responsible for the strategic leadership of retirement income security strategy across markets, products and processes at Lincoln Financial. Dzielak reports directly to LFG’s COO, Dennis Glass. On November 13 of last year when announcing Dzielak’s appointment to lead RISV, Glass commented about her, “She is uniquely qualified to mobilize the company in the direction of its strategic intent, the retirement income security market.”

Dzielak is a dynamic leader with a bold vision. I look forward to exploring with her the progress the RISV group has made since its formation last year.

Introducing DB-by-INS™: Could Life Insurance Become the “Must Have” of Personal Retirement Security?

dm-turn2Is what I’m about to describe the next great life insurance sales opportunity? Is it possible to successfully market a life insurance policy designed to act as a personal defined benefit plan? Will individuals for whom limitations on retirement plan contributions make it impossible to fund adequate retirement incomes flock to a life insurance strategy that provides income at retirement that is tax-free?

In describing DB-by-INS™ I’m providing a framework for life insurers to look anew at the issue of retirement income funded by life insurance. I’m obviously not suggesting a replay of past initiatives, some of which were ill-conceived and misleading to consumers. That’s ancient history. Rather, I’m suggesting a way for life insurance to play a unique role in strengthening retirement security- for the right market segment: Affluent, aware of their future retirement security challenges and ready to try to meet them:

The belief that life insurance could be an extraordinarily attractive strategy for boosting personal retirement security may strike many as unreasonable. Yet a critical analysis reveals that for a number of reasons it may be highly desirable. These reasons include…

There is no cap on annual “contribution levels”.
Myriad investment choices within the life policy create substantial accumulation potential.
Pre-retirement, self-completion benefits are inherent, and,
At retirement the money comes out income tax-free…

These advantages should lead us to consider life insurance as potentially valuable to those who want to give their future retirement security some turbo-charging. Oh, did I mention that it can also serve as your personal DB plan?

Let’s analyze these claims to help you decide whether I’m describing the future “must have” of personal retirement security, or, if I’ve just plan flipped-my-lid (I’m confident I haven’t).

What’s in a Name?

Let’s call this personal retirement security strategy DB-by-INS™ (Defined Benefit by Insurance).

Defined Benefit because a specific retirement income objective is defined

By Insurance because the funding vehicle used to provide the retirement income benefit is Variable Universal Life insurance (VUL) or Indexed Universal Life insurance (IUL).

When thinking about the potential value of DB-by-INS™ it’s wise to have an open mind. Why?

1. It’s become clear to most observers that the massive shift to DC over recent decades has diminished the retirement security of millions. Retirement security is clearly strengthened when a pre-determined level of retirement income is defined and funded for.

2. The introduction of the Roth IRA and subsequent expansion of the concept validates the Roth-like income tax treatment of DB-by-INS™: Contributions (premiums) are paid-in after-tax, they grow tax-deferred and are received income tax-free (via loans against the policy’s account value).

3. There is no cap on the amount of money than can be allocated to DB-by-INS™. This is important to employees with higher incomes for whom limitations on pension plan contributions make it impossible to fund an adequate post-retirement income.

4. DB-by-INS™ offers an income tax-free life insurance benefit. This protection mitigates the risk to an employee’s family when an individual’s future earning capacity is lost due to untimely death.

5. DB-by-INS™ is not tied to an employer or plan sponsor; it is personal, flexible and custom-tailored to meet individual needs.

6. The VUL policy funding DB-by-INS™ offers numerous investment choices and significant growth potential. When IUL is used for funding, accumulation potential is achieved through linking cash value growth to an external index (i.e. S&P 500).

7. Unlike typical interest-sensitive life insurance policies, DB-by-INS™ has a higher probability of delivering on projected benefits. Why? It is linked to an administrative system that not only monitor’s annual investment performance, but also informs the policy owner annually over necessary adjustments to the annual contribution (premium) which will keep the policy on-track to deliver the desired retirement income benefit.

The mechanics of DB-by-INS™

When applying for the life insurance policy that will fund the DB-by-INS™ strategy, the applicant must make three decisions.

1. Identify a desired annual retirement income,
2. Select a retirement age, and,
3. Select an Assumed Investment Return (AIR).

Let’s look at an Example:

Ed Smith is a 45 year-old sales executive with an annual salary of $220,000. Ed and his wife Susan, a stay-at-home mom, realize that, due to the cap on how much of Ed’s salary may be deferred, his 401(k) plan is unlikely to provide sufficient retirement income.

Ed and Susan understand that their future retirement security is uncertain unless they supplement Ed’s 401(k) deferrals with additional after-tax savings.

Ed and Susan like the fact that DB-by-INS™ offers income tax treatment similar to Roth plans. They also like the strategy’s inherent ability to be flexible as their needs change over time.

They place a high value on the life insurance policy’s death benefit; Ed is underinsured and the additional coverage creates more pre-retirement financial security for Susan and their kids.

Ed and Susan also appreciate the admin system that wraps around the life insurance policy and is designed to keep them on-track to realize their defined retirement income benefit. They understand that investment performance varies and that the money paid into the policy must be adjusted downward or upward as often as annually.

How Much Life Insurance?

The purpose of DB-by-INS™ is not to maximize the amount of life insurance someone purchases based upon a given annual outlay. Rather, we would seek out the minimum (or very close to the minimum) amount of life insurance that would be required based upon the insured’s age and annual outlay.

Although it is easy to determine the minimum amount of life insurance needed to comply with tax guidelines that define the amount of insurance needed to preserve favorable income tax treatment, it is not a good idea to focus on the absolute minimum. The reason is that if the policy is issued at the minimum insurance amount, there will be no leeway to increase outlays in the future- a capacity that must be preserved when increases in outlay are needed in response to investment performance that is less than the AIR.

A good approach is to issue the policy at the minimum life insurance amount + 20%. This opens up a corridor to take in additional contributions in the future when they may be needed.

The Application Process

Issuance of a life insurance policy is not automatic and starts with a lengthy application. Information on the application, supplemented by reports from attending physicians, leads to an assessment of the applicant’s health status. There may be additional underwriting requirements such as a blood test and, or, a medical exam.

In addition to completing the life insurance application, an additional form must be completed related to the ongoing administrative oversight of the policy. The insurance company (or TPA) must know the income objective, the projected retirement age as well as the AIR.

Annual Monitoring & Compliance

The DB aspect to DB-by-INS™ stems from the annual monitoring and reporting functions that turn a life insurance policy into what is effectively a personal, defined benefit retirement program. I cannot stress strongly enough how important this characteristic of DB-by-INS™ is in achieving good compliance and quality sales in the context of the past, the present and the future of “real-world” sales and sales practices.

Since my first experiences with universal life insurance in 1980, I’ve seen the product consistently sold to thousands of consumers on the basis of policy performance projections made far into the future. I believe it’s a pretty sure bet that not a single policy sold over the past 27 years has performed exactly as it was projected to perform.

A steady downward trend in interest rates has wreaked havoc on fixed universal life insurance projections that were based upon 30 to 40 year interest assumptions as high as 12%.

Similarly, variable universal life insurance policies were often sold based upon projected investment results of 12% annually. Market downturns in recent years caused a large segment of VUL policies to under perform their projected results resulting in a plethora of negative consequences including policy premiums that didn’t “vanish” as they were projected to, investment losses on 1035(a) cash value rollovers, complaints against advisors, broker-dealers and insurance departments, litigation, arbitration awards to policy owners, etc.

Virtually all of this unpleasantness was a product of poor sales practices (and poor communications) including having no system to provide ongoing monitoring of life insurance policy performance. A characteristic of universal life insurance that is both important and inadequately understood is that when performance lags behind the projected level, immediate action to adjust premiums makes up for the underperformance and avoids a cascading multiplication effect that can overtake the policy entirely.

Just as compound interest works to our advantage, it also surely works to destroy universal life policies when the small annual adjustments needed to keep the policy in balance are neglected. This is because there are inherent costs in the universal life insurance policy in terms of “risk” charges- the actual costs for insurance deducted monthly from the cash value- as well as administrative charges. When the policy is in balance, when interest is being credited at its projected level, these costs are relatively inconsequential. However when interest crediting falls behind, even modest costs can consume the remaining policy cash value. Just a little bit more premium can make all the difference.

Speaking of Costs

The DB-by-INS™ strategy is all about balance. The amount of life insurance cannot be too high because the costs implied can become a drag on cash value growth. Neither can the life insurance amount be artificially minimized due to the need to maintain flexibility in being able to raise and lower outlays in response to varying investment returns.

As a general rule, properly designed DB-by-INS™ plans have modest costs for insurance and expenses. In addition, there should be no additional cost assessed to both monitor the policy annually and report on its investment results.

That said, DB-by-INS™ has costs. And these must be assessed in the context of overall goals for future retirement security. Some important questions:

Are the costs acceptable given that I will be able to access my money at retirement income tax-free?

The policy may have surrender penalties that may reduce liquidity should I need to reach my cash value before retirement. Is this an acceptable risk?

Is the ability to put away larger amounts of money inside DB-by-INS™ than would be allowed in qualified plans important to me?

There are critical questions that must be answered before starting the DB-by-INS™ strategy?

The Target Market for DB-by-INS™: Affluent Builders and Pre-Retired

For millions of American workers employee-sponsored retirement plans are insufficient to fund their income needs in retirement. According to research published in 2006 by the Retirement Income Industry Association, there are 5,590,000 households in the US categorized as Affluent Builders (ages 35-49) and 4,695,000 households categorized as Affluent Pre-Retired (ages 50-64).

Together these market segments make up 15% of households and control $5.8 Trillion in assets. The Affluent Builders and Pre-Retired stand above the Mass Market and below the Wealthy in terms of financial assets. Approximately 70% of Affluent Builders and Pre-Retired agree with the statement, “I am concerned about having enough retirement income.”

In terms of premium patterns that life insurance companies can expect from this target market, younger purchasers (35-49) will tend to favor annual or monthly outlays while older individuals (50+) will be inclined to supplement systematic premiums with lump sums. Of course, only after-tax dollars may be placed in the DB-by-INS™ strategy.

Marketing the DB-by-INS™ Strategy

The marketing of DB-by-INS is fraught with challenges that can be successfully overcome. As mentioned above, twenty years ago some agents and companies abused a similar concept and sold universal life insurance policies to individuals allegedly without mentioning to them that they were purchasing life insurance policies. Such actions led to expensive litigation, financial penalties, and regulatory reform. Moreover, a series of legislative actions systematically eliminated abuses of the favorable income tax treatment accorded life insurance. .

State insurance regulators developed a view that consumers must be provided a “balanced” view of what they are being asked to purchase. Consumers must understand that life insurance is an integral part of the concept, that it costs money to have life insurance, and that there may be limitations on liquidity. Insurance companies have created their own rigorous compliance standards which seek to ensure that purchasers understand what they are buying.

Following the abuses of the 1980s, I would argue that the industry over-corrected; it became afraid of the “retirement sale” for life insurance. Let me suggest that this was a mistake.

Over the past two decades the life insurance industry would have been better served if it kept its focus on retirement. It could have linked its universal life insurance policies to an easy-to-create administrative capability that would have provided the key piece of value policy owners needed in a declining interest rate environment: information. Insurers do issue an annual report to each policy owner that projects policy performance into the future. But they do not tell policy owners on an annual basis what changes to premium patterns would keep their policies on-pace with originally projected results. Adding this additional information would make all the difference.

Today’s web-based technology allows for DB-by-INS™ to be distributed in a way that assures consistency of message across multiple channels of distribution. A combination of streaming video, personalized advisor micro sites, real-time monitoring and dynamic disclosure generation create a capacity for large numbers of advisors to convey the “story” in a compliant manner.

Advisors/RIAs have the customers for DB-by-INS™. What they need is a marketing ecosystem that will allow them to effectively extend their influence into this new opportunity.


Twenty years ago retirement security in the US was more predicable than it is today. With the benefit of hindsight we now understand that the loss of “defined benefits” is sure to exact a cost to Americans’ retirement security. That cost may be exceedingly high.

Workers need to take stock and begin to focus their attention on creating their own “defined benefits.” The DB-by-INS™ strategy is one way that offers real attraction when retirement income predictability is what’s desired.

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

How Can We Feel Happy Investing Rather than Consuming?

Last Friday I featured part one of a multipart series on behavioral finance by RIIA Founding Chairman & Executive Director, François Gadenne. In today’s second installment, François asks, “Why can’t we be happy with what we have?”

One of the consequences of having evolved in a world of scarcity is that we are built to work day after day. We are built to keep striving no matter the accomplishments, no matter the setbacks. Those who worked like that survived and we are their descendants.

It is our evolved nature to never be satisfied and it can be expressed in the form of an equation: “ S = P – E ”. Alternatively, we can express the equation in words: “Satisfaction equals Performance minus Expectations”.

Sadness or happiness derives from the difference between what we expect and what we get. We are happy when we get more than we expected. We are happy when we acquire.

Based on this equation, it would appear that happiness does not derive from having a lot of things. Instead, it would appear that it comes from acquiring a lot of things. Continuous flows of things make us happy. Static stocks of things do not make us happy.

This would seem to answer an admonition that many of us must have heard before: Why can’t we be happy with what we have? Why can’t we just get along with what we have?

It is in our nature to never stop seeking. If we stopped, those who would continue would eventually have more resources to create the next generation. It is a good thing for the sake of our children that there is always something interesting around the corner and that we always yearn for more.

Consuming is a great way to feel happy. Hurray for Capitalism and its natural fit with our Human Nature. However and for most of us, consuming means buying liabilities more often than buying assets.

Liabilities are things that take money out of our pocket long after we spent money to acquire them in the first place. Examples of such liabilities include our residence, our cars, our consumer electronics… Can you see the pattern?

As we contemplate retirement, we need to consume less now so that we can save more for later. How can we redirect our natural thrill to acquire so that we buy assets rather than liabilities? How can we be happy buying things that put money in our pocket rather than buying things that take money out of our pocket?

The answer may come in two parts:
- Better communications: Present the asset acquisition opportunities in the context of a Personal Income Statement and a Personal Balance Sheet,
- Better products: Find assets that provide direct and regular reinforcement of the intended goals.

In preparation for the next post, let’s think about our Personal Income Statement: What assets, if any, do we buy to get our daily thrill of acquisition?

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