Transferable sales ideas and marketing concepts for the life insurance producer
Howard E. Sharfman
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What an honor to be with you today speaking to the best of the best—MDRT. Before I go on, I think it is important for you to know why I am here. I am here to give back, I am here to share, and I am here because someone else did the same for me many years ago. I learned from some of the greats in our industries, like John Savage, Ben Feldman, and Sid Friedman, and in exchange for knowledge, they asked me to learn and then share. I am here to share and ask you to drink the sharing Kool-Aid too. You see, sharing is an amazing thing. Scotty Brennan taught me that, unlike giving money—where if I give you a dollar and you give me a dollar, we still each have only one dollar—with sharing, if I give you an idea and you give me an idea, we now each have two ideas. How cool is that? Think about the clients we can help with all this newfound knowledge. I repeat, how cool is that?
I also want to warn you, I am not a professional speaker. I may not even be a good speaker, but I do love to share, and I do have some ideas that have generated a significant amount of revenue. So I may stand behind the podium too much and look at my notes, but know that I am doing everything in my power to leave you with:
- Attitude you need for success
- The thought process you need to achieve
- Some ideas that can turn into real sales
I am going to ask you to share in the following areas. Please start thinking about:
- What you tell your clients who have given you pushback on estate taxes going away
- What you are currently doing to provide flexibility in the planning for your clients
- Why some of your clients have told you that they have purchased life insurance
- What you see is wrong with the insurance business
- What your favorite success traits are and, in less than 20 words, why you have excelled in business
- A few power phrases you use regularly in your business
Let’s move on to growing our businesses. To grow our business, we need to change. The best statement I know about change was said by Chuck Hollander and Jack Welch: “If the rate of change on the outside is greater than the rate of change on the inside, the end is near.”
So the question is, What has changed externally in the insurance business?
- Interest rates
- Tax law
- PE firm ownership of our clients
- Product change
- Companies changing (ING/Aviva/Sun Life/John Hancock/Phoenix /Met—who is next)
- Our clients’ net worth
- Mortality rates
- Commission disclosure
- The cost of doing business
- Clients’ expectations
- Internet sales
But, while this is going on, what has changed inside your practice?
- Your value prop
- Your sales talk
- Product mix
- Prospecting methods
- Best practices
- Your knowledge
- Your pace
- Your technology and use of social media
- Some of the above
- None of the above
Have I convinced you there needs to be some change? Are you capable of making changes? Do you have the courage? Being able to reinvent yourself is an important skill set, and success is less likely if you can’t, so remember: “If the change on the outside is greater than the change on the inside, the end is near!”
Yes, that is a pic of me at 315 pounds, and, believe me, I have worse. [visual] Was it time to change?
Your market? Has it changed in the last five years? Has the place where money is made changed? Have you followed the money? When I started in business in 1987, we worked with and marketed to doctors, small manufacturers, screw machine shop owners, and floor traders on the CBOT and the Merc. I sold to printers, car dealers, and high-rise general contractors. These were my markets, these were my people, and life was good.
But, today, doctors are on salary at hospitals, there are few small manufacturers and screw machine shop owners left, there are no more “locals” or “market makers” at the CBOT or the Merc, printers are few and far between, and car dealers have all been rolled up.
If I didn’t change, I surely would not be here addressing this amazing audience, let alone be a member of Top of the Table for more than 20 years in a row.
Today, we work for hedge fund managers, private equity firms, system engineers, and proprietary traders. We work for web optimizers; 3D printing manufacturers; accountants, some of whom can make in excess of $2 million a year; and litigators, who can make in excess of $5 million a year. We now work for farmers whose land is valued in excess of $10,000 an acre and the John Deere dealer who services them. Let’s take a look at your market and see if you have successfully followed the money in your practice. Do you have to change?
If there is or isn’t an estate tax is a potential change, but you need to look at the rest of your business to successfully navigate the changing world of insurance.
Have I gotten your attention? Are you thinking about change?
Estate Tax—the Times It Has Been Repealed and the Rates
Let’s start with the estate tax and the never-ending potential change in the estate tax. Who thinks the estate tax is going to be repealed? Who thinks it isn’t? Who thinks it is and then it isn’t, and then it is and so on?
But let me give you some ideas of why the estate tax will probably stay around and some reasons why some people think it is probably a good thing. This may or may not be my personal opinion, and I am not making political commentary, but I bring this up to make you think and allow you to have a reasonable conversation with a prospect or client.
To prepare for speaking to a client about estate tax reform, we need to have our talking points regarding why having an estate tax is good public policy, good for our children, and good for America.
According to Forbes, the wealthiest 400 Americans are worth $2.2 trillion. If there were no estate tax, this group would save the 40 percent estate tax. This means that those 400 people would get an $880 billion tax cut, or an average of $2.2 billion each.
What would you give up to save these people their estate tax? Funds for the military? National defense? Child care? Roads and bridges? Is saving Paris Hilton and the Koch children from taxes more important than paying for the government? And how are we going to pay for Harvey, Irma, Maria, and other national disasters? So if we stop here, is the estate tax good public policy?
However, remember, the net estate tax rate for many is only about 15 percent. That is because if we have a 40 percent estate tax and a step-up in basis, we can save 25 percent in capital gains tax. So all of this fighting and lobbying is over 15 percent for the richest people in the country. Is that a good use of our Congress’s time? Is this our true priority?
So, again, I ask, is the estate tax good public policy?
But if we have the elimination of basis step-up at death, this harms those with family businesses versus clients with just investments. You see, the basis of a big, actively managed stock and bond portfolio is probably not very low, and liquidity is not an issue. However, a big, closely held business probably has a very low basis, and the family probably has low liquidity to pay tax. This is an issue. Also, without step-up, it’s difficult to calculate gains on old assets. Step-up provides a clean slate. Isn’t it easy and doesn’t it make sense?
Also, the middle class doesn’t benefit much from step-up anyway. Most of these people’s money is in retirement plans, which get no step-up, and they pay ordinary income tax rates. Wealthy people with most of their money outside retirement plans get a break from step-up. Is this fair? Again, who are we protecting here? The president has said that there won’t be a tax cut for the wealthy. I guess we will see what he supports or if he means what he says.
Charities will receive a lot less without estate taxes. Thus, the government will need to provide more services. Where is the money going to come from? Maybe your income!
The question again—is the estate tax a good public policy?
If gains are triggered on a gift, this may deter people from transferring or spreading wealth even among family. Isn’t it better to spread wealth among more people so that there are more consumers? Doesn’t this lead to higher GDP and faster GDP growth?
Again, the question—is the estate tax good public policy?
The tax system taxes the paycheck of Americans who get up and work every day for that money. Isn’t taxing an heir on money he or she inherits more fair than taxing one’s earnings? They will tell the factory worker his or her $50,000 income will be taxed, but Paris Hilton’s $100 million inheritance won’t. Should we question if this is good or bad public policy? What do Americans really think? AALU has pooled Americans, through a Republican pollster, and when presented with the question correctly, most everyone was in favor of an estate tax versus taxing people’s hard-earned income.
In the past 100 years, there has been one year without an estate tax. Our clients don’t play Russian roulette with a 1/100 bet.
Remember, it is easier to tax dead people.
The government needs the money. Just a thought: Divide your remaining mortality in years by four. This is the number of presidential elections we will live through. Are you willing to bet your clients will die during a nontax administration?
Personally, I believe that if the income system is fair and stays fair for a generation, then we should eliminate the estate tax. But I believe we can all agree that the income tax system in this country favors the very rich and has helped create massive estates like we have never seen. Make the income tax system fair for a generation, and the estate tax would not be necessary, but as long as the income tax system is broken, as long as the tax system has been bought and paid for by wealthy Americans, the estate tax system works as a reset.
You have seen the history of the estate tax, but can you count on the estate tax repeal being permanent? My clients say no.
But communication is the key!
We have to prepare for the possibility of an estate tax repeal. We do this by still putting planning in place, but making the planning flexible. We build flexible programs. This just can’t hurt!
Our clients are demanding this. We must create products and planning that are flexible. We must focus on the cash accumulation or “investment” value in life insurance or life insurance as an asset class, not just death benefit and estate tax. Examples of flexibility:
- High cash value policies have an exit strategy built in.
- Return of premium policies have an exit built in.
- Max funded IUL, VUL, or WL have an exit built in.
- We have an alternative illustration that shows dropping the DB and taking an income stream from the policy, which shows the flexibility of the coverage and clients like this.
- Consider life insurance in a qualified plan.
- Learn, understand, and explain the new policy split riders for survivorship coverage.
- One new rider allows a policy split:
- A final divorce decree has been issued.
- The federal estate tax is repealed.
- The unlimited marital deduction under federal estate tax law is eliminated or reduced.
- The amount exempt from federal estate tax is reduced.
- Federal estate tax rates are reduced by 25 percent or more.
All of this shows flexibility and answers the client’s objection before he or she asks the question. Isn’t that the idea—to answer the objection before the client asks the question?
Regarding representing life insurance as an asset class, here is what we do:
- We compare the IRR of cash surrender value to the illustrative rate of an IUL, PPVUL, or VUL. Compare the delta between gross and net return to taxes and money management fees. The explanation can be as simple as saying, “Mr. Client, we have illustrated this policy at a 6 percent rate on the IUL investment return right, but look at how much of that return we capture. In year 25, the policy has a cash-on-cash return of 5.5 percent. That means that there are only 50 bps of charges in the contract. That includes management, fees, commissions, and tax. What do you pay for your mutual fund management? And the broker who allocates the money there? What about the taxes? In my opinion, this is a very low-cost product!”
- We understand how to lower DB or paid-up WL to maximize tax-free cash flow to the client.
- The word non-correlated is very powerful—coverage is predictable and non-correlated. If the market goes down 50 percent tomorrow, my WL policy is still increasing in value. Clients like this.
- We use a piece titled “The Power of Long-Term Holding Periods for Index UL,” which shows the likelihood of achieving a 6 to 9 percent return in an IUL that has a floor of 1 and a cap of 11. Ninety-three percent of all returns fall in this range, while 100 percent fall in the range of 5 to 9 percent. How does this compare to other fixed assets? Clients understand and like this.
- Clients want simple, not fancy. Clients understand and like simplicity.
We have had some interesting clients allocate to life insurance recently. I share this with you because, when I tell you that the following list of people have purchased insurance coverage as a non-correlated asset, you might be able to push back a little harder when the dentist tells you that cash value life insurance is a bad investment and he or she wants term insurance. The following clients have recently bought into life insurance as a family asset. If these people think this is a good idea, should your clients think so too?
- PE fund manager with $3 billion under management and an average IRR on his funds in excess of 17 percent
- 40-year-old PE managing director, with an income of $10 million a year and a net worth of $100 million, and wanted an additional stream of $1 million of tax-free income at age 60 from the policy
- Republican director of the SEC and member of Trump’s inner circle, who wanted it for estate tax liquidity
- Hedge fund manager at BlackRock
- Vice chairman of a top 10 money center bank, who did not use premium finance
- Finance professor and author from U of C
- 55-year-old PE manager with a net worth of $5 billion+, who had never allocated to life insurance (He purchased an insurance company before he owned an insurance policy.)
The reasons these financial rock stars gave for purchasing coverage and allocating to insurance were:
- It’s another tax-effective bucket.
- The policy has great cash value growth and low charges.
- There is a guaranteed arbitrage between AFR and the policy performance if I die before 100.
- I can finance the coverage at a low rate and arbitrage while retaining my capital to invest.
- Asset protection.
- I believe I am paid an illiquidity premium on my money.
- My family will be better off because I did this.
- The policy can’t go down in value and the rest of my assets can.
- I love the predictability and the return.
Remember, we are in the stay-rich business, and if their guys allocate to life insurance, your prospects should too!
This is one of my favorite visuals, which shows why a lot of people buy insurance. People buy insurance because they hate negative numbers. They buy insurance because it is the place to save money. They buy insurance because it is about a return of principle with reasonable growth.
Estate tax is about leverage, timing, and discounts.
Let’s talk about estate planning and make it simple—like the clients like it.
Is estate planning complex or simple? Well, yes—it depends!
At the end of the day, isn’t estate tax planning all about:
- Using leverage and nonrecourse notes to transfer money from your estate to a trust outside your estate? Isn’t this what a GRAT does? Isn’t this what an installment sale to a defective trust does?
- Positioning the highest return assets into the right trusts? Picking the asset with the highest chance to outperform the AFR rate provides the easiest way to grow assets outside of one’s taxable estate and freeze the assets inside the estate.
- Being able to structure assets to take advantage of discounts? It can be as simple as wrapping assets in an FLP, an LLC, or an S corp and then selling or gifting a minority piece to a trust outside one’s estate.
- Owning life insurance in trust? Buying life insurance to provide liquidity, pay taxes, and come into the estate income and estate tax free. I can’t imagine a more perfect asset to use.
- Charitable planning? Finally, making charitable gifts with some of the remaining assets provides a deduction and lowers the taxable estate.
Don’t make it more complicated than this. People like simple, not complex. Ninety-five percent of all estate planning is done with the planning ideas above and life insurance.
Back to flexibility in planning: To provide flexibility, you have to set the stage years in advance. Think of a world where we have done a lot of planning. We have:
- Life insurance in trust
- Assets inside the estate
- Assets owned outside the estate in trust
With this planning in place, we can use the power of substituting assets and the legal language written into our irrevocable trusts to minimize income tax and maximize inheritance.
- The power of substitution is the key to flexible planning because it allows the power holder to change his or her mind at any time.
- When the power is held and exercised in a non-fiduciary capacity, it does not create a gift, an estate inclusion, or an incident of ownership.
- The power holder can be the trust’s grantor or someone else.
- In a step-up basis world, you want to die with low basis assets in the estate. But let’s say that the low basis asset in question is the stock in the family business and you want to make an installment sale to the trust to shift appreciation. You sell the stock to the trust and then, right before death, swap a high basis asset into the trust in exchange for the low basis asset. The DB inside the trust can then be used to purchase the now stepped-up basis asset from the estate, giving the estate the liquidity it needs to pay estate taxes.
- In a carryover basis world, you want the high-basis assets in the estate. So let’s say that the trust owns two single life policies versus survivorship. At the first death, the power holder can swap the low basis family stock into the trust in exchange for the DB/cash inside the trust. That gives the surviving spouse the liquidity needed to cover the capital gains tax on the disposition of the assets at the first death.
- The power to swap can also be exercised on the deathbed. As this isn’t a gift, there is no three-year contemplation of death rule. The only potentially delaying factor would be getting a valuation done on the assets to ensure that they truly are of equal value.
Premium Finance: The Good, the Bad, and the Ugly
Let’s make premium finance simple. I see a lot of premium finance. We place a lot of premium finance, and here is what I know:
- Premium finance only works when someone can pay the premium but chooses not to.
- People would make this choice to use premium finance under these situations:
- The premium is high and will cause gift tax issues. If there weren’t gift tax issues, the client would just pay the premium, but they use premium finance to limit gift tax exposure.
- The insured is 100 percent invested in other investments that have a higher yield than the cost of debt. This is called retained capital and is the best reason for using commercial premium finance.
- The insured believes that there will be a prolonged, but not permanent, arbitrage between the cost of a premium finance loan and the return on a well-structured policy.
- The client finances everything.
- The rest is all noise. If there is a collateral problem, the client isn’t a good candidate for premium finance, period!
- If the client is having difficulty getting a premium finance loan, he or she is not a good candidate for premium finance, period!
- If a client is afraid of leverage, he or she is not a good candidate for premium finance, period!
On the other hand, we have successfully obtained over $1 billion of premium financed death benefit for clients and have successfully paid off the debt, from cash value, from outside assets, and have even paid several death benefits on coverage that would have never been purchased if there was no premium finance. So again, is premium finance good or bad? The answer is yes when used correctly. It is very good, but like everything else, when something is overleveraged, it can be devastating.
What’s Wrong with the Insurance Business?
I love our business, and I have seen so many clients helped by life insurance. I am proud to say I am a life insurance professional, but we have to get better every day. I see the following when reviewing transactions and proposals, and I ask you to consider the following list when you are working with a new or existing client.
I don’t like it when I see or hear the following:
- One-product solutions
- Not enough stress testing
- Not spending the needed amount of time with the client
- Not having business succession but making 50-year promises
- Not owning our own products
- Everything right or wrong and not in the gray
- Term insurance thought of as a bad word
- Many agents not truly understanding the products they are selling
- Looking for a gimmick and not understanding the clients and their needs
- Not being as proud of what we do as we should be (Being hedge fund managers, PE managing directors, or investment bankers isn’t cool, but saving a family from financial disaster is truly cool. It is something to really be proud about.)
If you have seen me speak before, you know I collect what I call “habits of successful salespeople.” I have been doing this for years. About 20 years ago, I heard a speech where the speaker listed habits of success, and I have added and changed the list over the years. I would give him credit now, but I can’t remember who it was. Thus, memory is not necessarily a habit of successful producers. I observe pure salespeople, lawyers, and accountants—people who have created a big book of clients, financial advisors, and even doctors who have excelled in areas where others don’t. Here is what I have found:
- Great producers have grit like no one else. It is their number one quality.
- Great producers run marathons, not sprints.
- Great producers thrive on new activity, not old.
- Great producers move quickly away from lost causes and focus on developing opportunities.
- Great producers go beyond product to provide their clients with value, integrity, and trust.
- Great producers enjoy what they do.
- Great producers are on a mission.
- Great producers are disciplined and never present before they have an unfair advantage because they asked all the questions.
- Great producers start early, every day.
- Great producers are advising.
- Great producers return their most important calls quickly.
- Great producers know their product, their competition, and their market, inside and out.
- Great producers know what others don’t, and they will take the time to find out.
- Great producers don’t discover clients; they create them.
- Great producers fish in stocked ponds, not open oceans.
- Great producers conduct a formal client needs assessment before making product recommendations.
- Great producers are known within the industry and their community.
- Great producers aren’t consumed by what’s on their desk; they are consumed by what isn’t.
- Great producers are irreverent; they often say no but rarely hear no.
- Great producers play hurt and find success.
- Great producers have bad moments, not bad days.
Remind yourself what great producers do, and do it!
With a good attitude and great habits, the next 12 months should be the best 12 months of your career. Here are some reasons why. I call them my core beliefs:
- People will always owe someone or love someone.
- Our IRR is better compared to the alternative—we win the risk-adjusted, rate-of-return world.
- Our products are truly needed by families. A life insurance LTC hybrid policy is the most saleable product I have ever seen. Can you say something like this, “Mr. Client, we have a great new product that can be paid in a single premium, and it will pay four times your single premium in long-term care benefit if you need long-term care. If you don’t need long-term care and you die, it will pay your beneficiary one and a half times your premium. And if you ever want to change your mind and want 100 percent of your money back in 21 days, you can. Mr. Client, isn’t that better than earning 1 percent in the bank on that CD?”
- Finally, there are always classic reasons to place insurance:
- Family fairness issues
- Kids in and out of business
- Blended families
- Special needs planning
- Charitable planning
- Tax-free withdrawals
- Forced savings
- Tax-free death benefit
- Income replacement
- Estate creation
- Tax rates and trends are on our side.
- We have tax-deferred growth. We have tax-free death benefit.
- No investment tax on our products, and our income tax is historically low.
- The highest tax rate in 1946 was 94 percent; in the 1970s, the highest rate was 70 percent; and now it is 39.6 percent plus state tax! So I ask you, are taxes high or low, and which direction are they going?
- Asset protection is needed more today than ever before. We also have great ways to help the client with estate planning that also helps with asset protection. Asset protection is imbedded in life insurance and annuities in most states.
- The climate for planning and using insurance products has never been better. Interest rates are low, and the client’s percent of savings is increasing. We can provide legal and low valuation of assets, and we can justify strong discounts.
- Products have changed, and many people selling don’t truly understand what they are selling. Do they really understand:
- How the yield curves affect our product?
- The difference between new money and portfolio rate?
- How the new IUL products really work?
- What happens if you miss a payment on a GUL?
- What the term is really convertible to?
Look at who is selling our product. FAs at wirehouses, CPA firms, and part-time agents. Are these people trained like you, and can they really compete?
Remember, the rich are getting richer, and we do great work helping the rich. But don’t forget Middle America. Families who owe someone or love someone need insurance, and families who make decisions based on an income coming in need to protect that income with life insurance.
Words Have Power
We have spoken about change, flexibility, taxes, structure, mind-set, and reasons why this will be a great year. It is important to know it and to do it, but it is also important to say it the right way. Words matter; words have power.
Here is a list of some new and some old statements. Some can be found in your Power Phrase calendar.
- Insurance is sold to people who owe someone or love someone.
- Term is in force until it expires. Permanent is in force until you expire.
- People solve big problems, not small ones.
- Doing nothing simply transfers your problems to your family.
- The premium is not the problem. The premium is the solution to the problem. Cost is only an issue in the absence of value.
- I have never known an estate that couldn’t benefit from insurance.
- Being richer is better than being poor, which is worse. We are in the stay-rich business.
- Insurance isn’t sold with an illustration; it is sold through a conversation with a prospect.
- Our goal, Mr. Prospect, is to put your financial picture in focus today and keep it there so that whenever you die, your family will get the maximum of your lifetime and work, and the IRS the minimum.
- Sometimes the biggest price in the world comes from doing nothing. Let’s quantify the cost of doing nothing. Remember, people solve big problems, not small ones.
- People do what they want, when they want, with people whom they trust! Stuffy Singer taught me this. He also taught me that we need to make sure that what we do helps in one of the three areas:
- Did we make our client more money?
- Did we save our client time?
- Is our client able to have more fun?
It’s all about more money, more time, and more fun.
The following 11 great questions start with “Mr. Client” or “Ms. Client”:
- Does your estate plan reflect your current values?
- Is there anything that you can think of that will interfere with your plans? Do you think that these premiums I am asking for will interfere with your plans?
- Can you sell your business today at a profit? After your death, could your executor do the same? At the same price?
- I believe it has taken a lifetime to create your estate; isn’t it reasonable to take a few hours to save it? Does Monday at 2:00 work?
- How long would you like this process to take? When would you like me to finish?
- Does your current estate plan provide for your kids inside and outside the business in a way they will still talk to each other after you are gone?
- What have you done in your estate plan to protect your assets from the creditors and spouses of your children?
- Are you maximizing the exemptions the government gives you?
- Is it better to have coverage you don’t need—or need coverage you don’t have?
- Besides cash today, what are you doing to motivate, reward, and retain your key people?
- I learned this from my friend Jim Monteverde: Can I talk to you about a product I am working on and that is in development?
- It is not subject to creditors.
- There’s no tax recapture.
- It’s flexible.
- There’s no unknown commitments.
- It’s 100 percent liquidated at maturity.
- It requires small cash flow.
- There is no gift tax, income tax, capital gains, or estate tax.
- You should earn 300 to 500 basis points more than fixed returns of today with similar risk.
- It shows your values.
- It solves financial problems, immediately, privately, and when it is needed most.
Does this sound like something we should schedule a time to discuss?
Remember, words matter. Pick them and use them wisely.
Howard E. Sharfman is a 22-year MDRT member with one Court of the Table and 18 Top of the Table qualifications. As senior managing director of NFP Insurance Solutions, he has been recognized as an innovative leader in the insurance business for more than two decades. He is a board member of Life Happens and a former advisory board member of Partners Financial. He has placed or consulted in the placement of more than USD 17 billion of life insurance coverage in the last decade.