The Right Choice For The Right Reason
February 6, 2010 by Douglas E. Price
Have you ever had a good idea that you know is truly of value, but you just haven’t had the time or resources to act on it? An idea that someone else seems to have had just about the same time that you had it and they seem to do it just a little different than you would have…if you had ever gotten around to it?
This is not a new idea, but for many years I’ve thought about the psychology of an annuity buyer’s behavior. There are numerous studies about the science of investing and an occasional sales track about annuities, but most of the things out there today are the old “fear and greed” scenarios repackaged, retold and resold.
I just read a book by Jack Marrion entitled Change Buyer Behavior And Sell More Annuities. Marrion is known as an advocate of indexed annuity products, but his book was not specific to them. It was about people: what they really think, how they really feel, and what they really mean and want. I wish I’d gotten around to writing that book…but I didn’t. However, there are two “take aways” that can be shared.
Take Away One
If there is one point that summarizes Jack Marrion’s book, it is that we are just like any and all professions in that we overdo it. Every industry or group has a vernacular particular to their specialty or interest, and it is difficult for non-members to relate to and understand. The words may have a familiar sound, but they don’t necessarily relate to each other the way a client comprehends them or understands them. It would be the equivalent to speaking “teenager.” I’ve heard the words before but just don’t quite get the meaning anymore. Just what do “LOL” and “IDK” mean, anyway?
One of the most confusing terms we use in the business of annuities revolves around the annuitization of deferred annuities and/or immediate annuities. This may be the reason that so many agents/brokers either avoid them or never act on them, even though they are often in the client’s best interest. That term is settlement option.
A client might think of a settlement as a new place where people move to and an option as a choice. That means that the Pilgrims’ “settlement options” were probably Jamestown or Plymouth Rock. It’s not exactly what we mean when discussing annuities, but possibly what the client might hear.
Since by definition an annuity is a series of payments, all deferred and immediate annuities have language that specifically spells out what can be expected by the client when they “settle” or annuitize the contract and begin taking a series of payments.
The “options” are the various choices they have and the manner in which the income will be paid by the insurance carrier and received by the client. Plymouth Rock is not an “option” in an annuity contract. Therefore, I propose that we start using the term “income choices” instead of “settlement options” so that the meaning is perceived the way it is meant.
Following are a few of the more common “income choices” prepared for a male born January 1, 1945, for an amount of $100,000, from a highly rated insurance company.
• Period Certain (Only) Income. Using five years as our period certain in this example, monthly payments of $1,715.81 will be paid beginning March 1, 2010. Guaranteed income will be paid for five years; income will cease after the end of the guaranteed period. Should death occur before the end of the guaranteed period chosen, the guaranteed income will be paid to the beneficiary of choice for the number of years remaining in the guaranteed period.
• Life Only Income. Monthly payments of $648.72 will be paid beginning March 1, 2010. Guaranteed income will be paid during lifetime and payments will cease upon death.
• Period Certain and Lifetime Income. Monthly payments of $619.46 will be paid beginning March 1, 2010. Guaranteed income will be paid during lifetime for a period of 10 years. Should death occur before the end of the guaranteed period chosen, the guaranteed income will be paid to the beneficiary of choice for the number of years remaining in the guaranteed period. After the guaranteed period, the annuity payment is paid only if the annuitant is living on the date payment is scheduled to be paid.
• Installment Refund and Lifetime Income. Monthly payments of $596.83 will be paid beginning March 1, 2010. Guaranteed income will be paid during lifetime, but if death occurs before the income paid equals the initial premium paid, regular payments will continue to the designated beneficiary until the total payments equal the initial premium.
• Cash Refund and Lifetime Income. Monthly payments of $586.58 will be paid beginning March 1, 2010. The annuity payment is paid only if the annuitant is living on the date payment is scheduled to be paid. Upon the death of the annuitant, if the total income paid is less than the initial premium the difference will be paid to the beneficiary in a lump sum.
You may have noticed that the nuance in verbiage for the various income choices have a significant impact on the potential beneficiary and a rather small difference in income to the client.
Period certain is a specific measure of time, not of life expectancy, so there is no particular risk on the part of the client or the insurance company. Of course, since in the above example the period of time is very short (five years), the overall return is also very small. The other four quotes all measure life expectancy and some level of guarantee or risk transfer.
For some reason that is unknown to me, the most commonly requested quote is for lifetime income with a 10-year guaranteed period certain. As defined above, that means the client is guaranteed a lifetime income and either the client or the client’s beneficiary is guaranteed to receive a total of 10 years worth of income, or 120 monthly payments.
The lifetime with 10 years certain guaranteed monthly payment is $619.46. When multiplied by the 120 payments guaranteed, the actual risk that the client is transferring is $74,335.20 and the risk the client is assuming is $25,664.80. More importantly, the client is transferring the first 120 payments when he is the youngest and healthiest and assuming the risk for every month after the first 120 when presumably he becomes less healthy with age.
Would your client be willing to forgo $22.63 per month to insure that all of the money was either returned to him or his loved ones by using a lifetime with installment refund income choice instead of a lifetime with a 10-year certain guarantee? Would he give up $32.88 per month (about 5 percent) to leave any remaining funds as a lump sum of cash to his beneficiary? I would!
Take Away Two
It’s not always about the client. Often, the client is thinking about someone else when making personal choices. Be clear about how the choices being presented affect others. They will appreciate that you show an interest in those that they care about most.
Douglas E. Price
Price is senior vice president, sales and marketing, for Zenith Marketing Group, Inc., a nationally recognized brokerage general agency focusing on life insurance, annuities, long term care insurance and disability income insurance. In addition, he is senior vice president of ZMG Financial Services, a registered principal of and securities offered through ING Financial Partners, Inc. ZMG Financial Services LLC is a wholly-owned subsidiary of Zenith Marketing Group, Inc. ZMG Financial Services, LLC and Zenith Marketing Group, Inc., are not subsidiaries of nor controlled by ING Financial Partners, Inc. Price has more than 25 years of experience working with annuities and investment products. Price can be reached at Zenith Marketing Group, 8334 Pineville Matthews Road, Suite 103-113, Charlotte, NC 28226. Telephone: 888-850-8334, extension 221. Email: dprice@zenith marketing.com.