NAIFA Blog

Complacency

By Rob Smith, NAIFA President

NAIFA President Rob Smith

A March 5 NAIFA Blog post noted the favorable coverage that NAIFA’s grassroots government affairs  program received in the March 1 issue of InsuranceNewsNet (INN). INN editor in chief Steven A. Morelli sought input from real NAIFA members and lobbyists to showcase the historical role that NAIFA’s members and staff have played in creating and preserving the life insurance and annuity tax benefits that help financially secure 75 million American families. 

A read of the full article also introduces a phenomenon that can easily blunt any government relations program—complacency. One highly regarded industry observer was quoted in the article as saying:  “I have taken the view that until the dotted line is signed, it is nothing. Until they actually sign it in to law, I would not get too excited.”

For those of you old enough to remember former Dallas Cowboy quarterback “Dandy” Don Meredith and the early years of Monday Night Football, waiting until the “dotted line is signed” would be the equivalent of singing Dandy Don’s then famous serenade when the outcome of a game was assured: “Turn out the lights, the party’s over.”

It’s easy to assume that the current tax laws for life insurance and annuities are carved in stone and that to suggest otherwise is crying wolf. But, facing ever more difficult budget choices, Congress has been cutting back. A recent example is the Affordable Care Act’s 3.8 percent tax on the investment income—including annuity payments—of “high income” people. High income people today, moderate income people tomorrow. Annuities today, life insurance tomorrow.

Knowing that bad things can happen to good tax provisions, NAIFA is always alert to that possibility. The budget/tax situation has been growing (mostly) dire for over 40 years. For NAIFA to ignore the threat to life insurance and annuity tax policy would amount to association malpractice.

So, kudos to the NAIFA members who will be attending the April 8-9 Congressional Conference. And congrats to the key legislative contacts who recently made fly-ins to D.C. and regularly walk in to the district offices. For other NAIFA members, stay alert to the possibility of a general grassroots call to arms. Remember, a good offense is the best defense—in football and government relations.

INN Cover Story Highlights NAIFA Members' Grassroots Role in the Tax-Reform Effort

InsuranceNewsNet's March cover story provides a call to action for insurance advisors to use their grassroots influence with Congress to preserve the tax status of life insurance and annuity products.

The article provides a rundown of NAIFA’s historical involvement in the protection of life insurance, beginning in 1913 with passage of the federal income tax code. It then explains the present threat as Congress considers tax-reform proposals in 2013.

The article raises the point that advisors have heard about warnings about efforts to tax their products several times through the decades.

Diane Boyle, NAIFA vice president of federal government relations, explains that the industry’s success at protecting life insurance in the past doesn’t mean the threat this time is not real.

“Frankly, our products are on the line every year and we’re successful at having them taken off the table,” she told INN. “So it’s not so much crying wolf as it is being prepared and making sure that folks on the Hill understand.”

From the article:

“Members of Congress are having to deal with so many issues that they rely on their constituents who have an understanding in a given area to explain what the realities are with some of the decisions that they’re having to make. And that’s what our agents do. And that’s the value of bringing them in and having them share the story.”
-NAIFA Vice President Diane Boyle

“What I find useful is sharing situations of how our products have helped people here within the community – people within [the member of Congress's] own district.”
-NAIFA Member Hyatt Erstad

“I talk to [members of Congress] about the savings rate in America today, and how poor it is, and then point out that over 20 percent of the savings in America today is represented by our products. To do anything to discourage people from taking responsibility and using our products, all that’s going to do is further deteriorate the savings rate of Americans today.”
-NAIFA Member Bob Roach

The INN article reports that life insurance organizations, including NAIFA, formed SecureFamily.org to educate Congress and the public on the issue.

It also reports on NAIFA's Congressional Congress April 8-9, a grassroots event in which 1,000 advisors will visit congressional offices to discuss life insurance, annuities and tax issues.

Read the full article on the INN web site.

February 25, the 16th Amendment and You

There won't be many celebrations marking today as the 100th anniversary of the passage of the 16^th Amendment to the U.S. Constitution, giving Congress the authority to enact an income tax. No parades. No fireworks. Not many speeches by public officials.

It didn't even make History.com's "This Day in History" list (where it doesn't rate up there with such momentous events as Cassius Clay's knockout of Sonny Liston in 1964, the opening of the first drive-in movie theater in Miami in 1938, and the British surrender of Fort Sackville during the American Revolution in 1779).

Yet, the ratification of the Amendment and Congress's subsequent passage of the income tax code, called the Revenue Act of 1913, later that year are very important in the history of life insurance.

The 1913 Revenue Act was considered a major reform that was championed by Southern and less populated states and opposed by Northeastern states. (How’s that for a reversal of red versus blue?) For life insurance practitioners of all political stripes, the practical reality was that the Revenue Act’s income exclusion for life insurance encouraged people to purchase needed life insurance coverage. That need always existed, of course, and skilled life insurance professionals of the day were quite capable of selling the need. But the fact that the income tax code highlighted life insurance with a special provision helped spread the word about life insurance to people in all economic strata.

The tax treatment of life insurance and annuities has been around so long that it is easy to forget why it was created in the first place. This may be true for some current members of Congress and their staff. That’s understandable since none were around in 1913, and Congress has a lot on its current plate.

This lack of institutional memory will be one of the challenges facing the NAIFA members who will be attending the NAIFA-sponsored Congressional Conference April 8-9. The NAIFA members will have to bring the members of Congress to the sales table, so to speak, to help them understand how life insurance and annuities uniquely meet the needs that most people have for personal, family and business financial security.

Real life stories of how life insurance and annuities saved families, businesses and individuals from living too long or dying too soon or provided for cash-flow needs in between are very moving. Each Congressional Conference participant will have such stories. Tell them.

Dire Projections for Retiring Americans Highlight Need for Insurance and Financial Products and Services

A recent Washington Post article offers a grim assessment of future U.S. retirees' financial prospects. Drawing on a variety of economic data and reports, the article contends, “For the first time since the New Deal, a majority of Americans are headed toward a retirement in which they will be financially worse off than their parents…”

Some points from the article:

• The recent economic downturn destroyed 40 percent of Americans’ personal wealth
• Americans’ retirement savings are approximately $6.6 trillion below where they should be (that’s about $57,000 per household)
• 53 percent of employed Americans 30 and older will not be financially prepared to maintain their standard of living in retirement if they continue on their current paths, according to the Center for Retirement Research. This is up from 38 percent in 2001 and 30 percent in 1989.
• Americans from age 55 to 64 have a median retirement account balance of $120,000, which would fund an annuity paying only $575 per month in retirement
• Medicare premiums are likely to increase from 12.2 percent to 14.9 percent by 2030

What the Post Article Didn't Say

These figures demonstrate the importance of ensuring that financial planning services and products remain available and affordable for middle-market Americans. They highlight the role insurance and financial advisors can play in helping their clients secure their financial futures.  

At a time when personal retirement saving is falling well short of the mark, lawmakers face increasing pressure to reduce benefits paid by government programs like Social Security and Medicare. Life insurance, annuities and employer-sponsored retirement programs will have to fill the void for many Americans.

It is not a time for Congress to make these insurance and retirement products, which 75 million American families look to for financial security, less attractive or beneficial. Changing the tax status of life insurance or retirement savings products would do much more harm than good. It would damage the very products that often help keep Americans self-sufficient in their later years while reducing their reliance on government programs.

Congress Needs Money

In the late 1960s, Hollywood inflicted on the American public a low-budget science fiction film called Mars Needs Women. With a ludicrous plot and amateurish production values, it was widely panned by critics. Even Tommy Kirk, the film’s leading man, called it "undoubtedly one of the stupidest motion pictures ever made.”

This is not to say there are necessarily parallels to draw between the film and what is going on in Washington these days. In the nation’s capital, tax reform is serious business. And while the next few months may bring some proposals that seem to come from outer space, we can’t simply laugh them off like a corny sci-fi flick.

The future financial well-being of the American public is at stake. At least it is for those who hope to one day retire, receive adequate and affordable health insurance or provide for their families when they are no longer around to do so.

Much was made of the agreement reached earlier this month that steered our nation clear of the fiscal cliff. But in truth, that legislation does very little to address America’s mounting debt.

The products and services NAIFA members offer their clients emerged from the cliff negotiations largely unscathed, which simply means they are still on the table the next time around.

And the next time is likely to come sooner rather than later.

There’s never a good time for elected officials to take bad news to voters, but when faced with no choice the beginning of a new election cycle is the most palatable time.

Which means 2013 is shaping up to be a watershed year for tax reform.

Congress needs money. Unlike with the Martians in the movie, we can’t call up the U.S. Army and make them go home empty handed.

There are some $1.1 trillion worth of credits, deductions and exemptions in the tax code. Congress will be scrutinizing each one of them. According to a recent Associated Press article, they include:

• $181 billion in tax-free employer contributions to employees’ health insurance and expenses
• $165 billion in untaxed retirement plan contributions
• $23 billion in income from life insurance products

As insurance and financial advisors, NAIFA members know that there are very good reasons behind the tax treatment of insurance and retirement products. The tax-free death benefit and tax-deferred cash-value buildup of life insurance has been around since the permanent federal income tax came into existence 100 years ago.

Employee-sponsored health care and retirement plans are crucial to ensuring the long-term physical and financial health of Americans as they grow older. Life insurance allows people to provide for the financial security of their families, even if they are unable to do so themselves.

Without these products, and the incentives that encourage Americans to buy them, many more people would turn to government entitlement programs for help when they suffer financial setbacks, lack money for retirement or have health problems.

NAIFA and its members are hard at work, reinforcing the message with Congress that these products and their tax treatment are important. For many families and individuals, they mean the difference between prosperity and privation, success and failure, or even life and death.

Where Congress sees dollar signs, we are making sure they see people.

NAIFA members have a unique ability to tell lawmakers the story of a family able to provide for a sick child because of an employer-sponsored health plan. Or of a small company able to stay in business because its partners were protected by life insurance. Or of retirees able to keep their house and maintain their standard of living thanks to an annuity product.  

Unlike a cheesy Hollywood production, these are real stories. They are stories Congress needs to hear.

NAIFA's Hoffman on 'Countdown to Taxmageddon'

As Americans watch and wait while Congress and the Administration debate the issues surrounding the fiscal cliff, NAIFA’s Jill Hoffman told The American College’s Keith Hickerson that – for the immediate future - the Alternative Minimum Tax (AMT) should be top of mind for all Americans, followed by comprehensive tax reform in early 2013.

“If Congress doesn’t address (the AMT) by the end of this year, it’s going to hit about 30 million households in April of next year,” Hoffman said in an interview on the Wealth Channel. “As the negotiators look at these things, they’re looking at where the immediate hits are going to come from, who is it going to hit and do we need to do try to avert that crisis for those Americans and individuals and families. They are going to have to lay out some kind of framework for comprehensive tax reform in 2013.”

Hoffman said that “the single biggest threat” Congress is looking at for the insurance industry is what to do about the inside buildup of life insurance and annuities, and whether the inside buildup should continue to be a tax deferred build up.

Hoffman told Hickerson that NAIFA will host its first ever Congressional Conference in April 2013. She urged NAIFA members and all insurance advisors to join in our efforts to inform Congress about the benefits of life insurance products. “All the financial advisors who are selling life insurance and annuities need to pay attention, and we want you to come to Washington to tell your stories about your interaction with you clients. Talk about your real life stories and how our our products have helped save so many families from financial distress in the event that someone lives too long or dies too soon.”

NAIFA’s conference is scheduled for April 8-9, 2013.

Getting Everything You Want

By Rob Smith, NAIFA President

NAIFA President Rob Smith

The early response from NAIFA members committed to participate in the April 8-9 Congressional Conference is encouraging. It means that NAIFA members recognize the threat our country’s stark budget and revenue shortfall poses for the tax treatment of life insurance and annuities. We understand that difficult choices must be made and that no sector in the economy is safe from change.

For NAIFA members, change could mean that the tax treatment of core life insurance and annuity products is on the table, as they say in Washington. As never before, members of Congress and their staffs need to hear examples of how agents help 75 million families secure their future using permanent life insurance and annuities.

They also need to hear how the current life insurance and annuities tax structure in place since 1913 has helped fulfill Congress’ public policy goal of promoting financial security. There is likely no empirical study that shows what would happen if the tax structure was changed, although most NAIFA members know intuitively that doing so would be negative. What is known is that prior to 1913, only a small fraction of Americans owned life insurance. Now, 75 million Americans rely on life insurance and annuities. We also know that our industry pays out $1.5 billion daily while Social Security pays out $1.9 billion per day.  It is not rocket science to suppose that greater strain would be placed on government safety nets but for the products that allow families and businesses to provide for their own fiscal well-being.

“You can get everything in life you want if you will just help others get what they want.”
- Zig Ziglar

There is an offshoot to the debate over tax treatment for permanent life insurance and annuities that postulates the favorable tax treatment is really just a tax giveaway to the life insurance industry so it can make money. You may hear this on the Hill. Those who hold this view usually have no idea what it takes to “help” people set aside current dollars for future use. And, they are likely never to have heard the late Zig Ziglar’s eternal truth: “You can get everything in life you want if you will just help others get what they want.” 

This WIN-WIN-WIN philosophy benefits: 

• Our clients, who provide for their own financial futures
• Our government, which can allocate scarce resources to those more in need
• those who make a living in this great business, the people we employ, and the companies we represent.  

As a result of what we do more people are employed and are paying taxes, and fewer people are on the government dole, because businesses are continued and families remain intact.

Remember Zig’s thought. It’s OK to do well while doing good. If you haven’t registered for the Congressional Conference, please join your colleagues in April to help Congress understand the good the insurance industry does for 75 million Americans. Visit www.naifa.org/advocacy/caphill today!

Preparing for the Best-Case Scenario

The good news is that it’s likely we’re going to live longer than we think we are. The bad news? We probably aren’t financially prepared to do so.

A survey by the Society of Actuaries (SOA) found that many people don’t understand the meaning of “average life expectancy,” and more than half of retirees and those approaching retirement underestimate the number of years they are likely to live.

In the 2010, the average life expectancy for newborn Americans was 75.7 years for males and 80.8 years for females. What most people who consider these numbers fail to grasp is that men who reach age 65 in at least average health have a 40 percent chance of living to 85. Women in the same situation have a better than 50 percent chance.

This could have serious consequences for people saving for retirement who fail to account for the potential that they will live longer than expected.

The SOA study findings present a solid case on behalf of annuity products, which protect against instability in the stock market and offer a guaranteed income for life – even if you live longer than you think you will.

Yet, only a third of retirees and 27 percent of pre-retirees have a retirement product, either through an employer plan or an individual annuity, that will provide them with income for life and protect them against outliving their savings, the SOA notes.

Still, individual annuity contracts paid more than $45 billion in benefits in 2010, providing those who do benefit from them with a solid financial foundation to help them make the most of the years they may not have realized they had.

• See also, "Mary Beth Franklin: Clients short on understanding of longevity risk," in InvestmentNews.

Retirement Investors Looking for Stability, Open to Getting Help

Only 8 percent of Americans say that growing their retirement savings is more important than protecting them, while 35 percent say protecting retirement assets is a bigger concern. This and other results from a recent survey by Charles Schwab & Co. shows that U.S. investors have serious interest in limiting the risk in their retirement investments.

They survey found that risk management is particularly important to younger Americans aged 18-34, some 29 percent of whom said they plan to completely avoid investing in the stock market over the next six months, instead opting for more stable investments. Only 11 percent of older Americans said they intend to follow the same course.

A major takeaway message from the Schwab survey may be that investors’ concerns over market instability and asset protection presents opportunities for advisors who offer risk-protection products, such as annuities.

And this opportunity is heightened by the fact that a large segment of the public is open to working with financial professionals. The Schwab survey also found that 26 percent of Americans plan to seek to help managing their retirement savings within the next six months.

Interestingly, the survey found that 42 percent of investors are concerned about the potential impact of future legislation on their retirement accounts.

The Merits of Annuities

By Robert Miller, M.S., M.A.

It’s unfortunate when an isolated event could threaten the legitimate use of a financial product that has benefited and will continue to benefit so many individuals and families across the country.

Individual annuity contracts have paid more than $45 billion in benefits in 2010, providing Americans guaranteed income for life and helping them plan for their retirement. A significant portion of this total came from indexed annuities.

Yet, media coverage of the case of Glenn Neasham, a California insurance agent convicted of theft for selling an indexed annuity to an 83-year-old woman who prosecutors allege showed signs of dementia, has raised questions about the future of indexed annuities and the ability or willingness of agents to sell them.

Tax-deferred retirement products, like annuities, Individual Retirement Accounts, and 401(k)s, are the bedrock retirement products for the middle-income Americans served by NAIFA members, and indexed annuities are legitimate products that suit the financial needs of many investors. With the uncertainty inherent in equity markets and the prolonged depression of interest rates, indexed annuities have grown in popularity among consumers clamoring for stability and a guaranteed return in their retirement. Especially popular are the products’ protection of principal, guaranteed minimum interest rates and ability to benefit from market gains.

There are many instances in which indexed annuities are perfectly suited to fulfill the financial needs of consumers of all ages, including senior citizens. We can’t speak specifically on the merits of the Neasham case, but to address the infrequent occasions when unscrupulous salespeople have used annuities to scam unwary investors, NAIFA strongly supports a pair of NAIC model regulations that bolster consumer protection.

First, the Annuity Disclosure Model Regulation standardizes the product information insurance companies give to annuity customers and ensures that the disclosure materials are clear and comprehensive. The regulation requires customers to receive an annuities buyer’s guide, along with information on the riders, early withdrawal penalties, and tax treatment associated with any annuities they purchase.

Second, the NAIC’s Suitability in Annuity Transactions Model Regulation, requires advisors who sell annuities to receive special training and requires them to collect information from a potential annuity client, including the client’s financial situation, tax status, and investment objectives. The advisor must then analyze this information to ensure that the annuity being sold suits the needs of the client. Insurers also are held responsible for ensuring that any annuity transaction is suitable based on the collected information from the client.

NAIFA encourages insurance departments in all states to adopt both of the model regulations.

Help Is Available

Annuities can seem complicated to many investors, so that’s why it’s important for annuity customers to ensure they are dealing with professional, licensed advisors. Membership in a professional organization, such as NAIFA, can be a good indication that an advisor is reputable and dedicated to his or her profession.

An advisor can explain the differences between fixed, indexed and variable annuity products. An advisor can also address consumers’ common questions about annuities, such as potential tax benefits, investment options, payout options (including options that allow a client to receive an annuity and still provide for heirs), and limitations and restrictions.

Several online resources also are available:

CNNMoney’s “Ultimate Guide to Retirement: Annuities” - Answers to 36 common questions about annuities, including sections on fixed, indexed, and variable annuities.

The Earl E Bird blog – clever, easy-to-understand and entertaining blog for people who don’t mind learning about financial products from a cartoon duck.

The Securities and Exchange Commission Annuities page – the SEC regulates the sale of variable annuities.

The American Council of Life Insurers Annuities Page – Available publications include: “A Woman’s Guide to Annuities,” “Individual Annuities: Tips for Seniors,” and “Consumer Tips for Buying a Variable Annuity.”

“Annuities: Creating Guaranteed Income for Life” – a publication by NAIFA, ACLU, AALU, and NAILBA.

Robert Miller is president of the National Association of Insurance and Financial Advisors, based in Falls Church, Va. NAIFA comprises more than 600 state and local associations representing the interests of 200,000 members and their associates nationwide.