Best Practices for Effective Plan Enrollment Communications

The Enrollment Challenge

Retirement readiness decisions are a daunting task for most employees. According to a 2012 Participant Engagement Study conducted by Lincoln Financial:

• 41 percent of employees are only somewhat engaged or fully disengaged from any retirement plan
•  7 percent of employees only are fully engaged and interact with their retirement plan on a regular basis.

Plan communication and education can provide people with the financial knowledge needed to better understand their employee benefits and make better enrollment decisions to achieve better outcomes.

Communication Is Key

The U.S. Employee Benefits Security Administration’s ERISA Advisory Council published a key report in 2010 on how plan communication practices and design options impact participation and contribution rates. They researched strategies for tailoring communications to different subgroups of employees through direct communication, and their effectiveness in influencing participants of diverse demographic market segments, including segments categorized by income level, household status, generation, gender, and ethnicity.

The report then provided recommendations of best practices for enrollment that are statistically proven to be effective, including education to plan sponsors on specific proven techniques and communication practices. In evaluating what communication methods are most effective in encouraging participants to save for retirement, the following considerations were made:

• Cost: an effort was made to balance the need for comprehensive plan communications against cost.
• Delivery: A variety of methods were explored including the use of current and emerging social media.
• Plan Design: The study reviewed how plan designs relate to increasing participant enrollment and savings. In particular, the Council studied the use of automatic features. Automatic enrollment plans automatically choose the employees’ contribution percentage and enroll the participant in an investment vehicle. This raises participation rates to close to 90 percent. However employees enrolled at low contribution rates of 3% or less tend not to deeply consider or increase their contributions.

9 Recommendations and Best Practices

The Council found that effective plan communication and education can provide people with the financial knowledge needed to understand their employee benefits, make better financial decisions, and achieve better outcomes.

Given that the most successful plan communications make use of many channels from print to external websites, online tools, social media, and creative marketing, the Council highlighted best practices that balance personalized, targeted content to help employees evaluate benefit offerings with cost efficiency. They highlighted specific techniques and communication practices that have been statistically proven to be effective in increasing the involvement of employees in saving for retirement. The following are 9 recommendations:

1. Communications tailored to particular segments drive results
2. One-on-one or small group meetings increase participation
3. Immediate “on the spot” communication is most effective
4. Short, simple and focused communication drives participant response
5. Multiple “touches” with various creative formats increase participation
6. Increased technology use is effective and cost efficient
7. Behavioral economics and “social norming” can increase participant involvement and savings
8. Incentives given by sponsors and “gamification” help trigger participant involvement
9. Responsive marketing principles may assist plan sponsors in improving communications

Here is a brief synopsis of these 9 practical recommendations and some best practices:

1. Communications Tailored to Particular Segments 

The Council found that communications that target participants based on their interests, background, and/or economic status were more successful than the “one size fits all” approach.

Understanding the culture and background of the workforce being targeted is key. For instance, since Hispanics will soon constitute one-third of the US population, Council member Donna MacFarland of Lincoln Financial Group stated that in her experience education materials typically are translated from English to Spanish, whereas she recommended that sponsors design the material using the reverse approach, developing  materials first in Spanish to address specific cultural needs and language differences.

Human Resource professionals also have found that allowing employees to map out an action plan rooted in realistic scenarios is an extremely effective tool. Some plan sponsors have successfully used a “three-pronged” approach to reach out to their participants by combining simple income replacement projections, behavioral finance strategies and a personalized message. For example, JP Morgan developed 36 different personas based on three age groups (younger than age 30, age 30-50 and older than 50). The firm also targeted participants based upon their regional median income (e.g., Kansas’ median income is $30,000 while in New York City it is $70,000). The basis for this approach was to enable these groups to compare themselves against their peers and take the appropriate action toward saving for retirement.

By narrowly tailoring their target audience on behalf of the plan sponsors that retained them, JP Morgan subsequently monitored whether employees opened their email communications and took action toward saving for retirement. If the individual took action, that person was considered “active,” while someone who opened the email but did not take action was considered “interested.” Based upon the action taken by the individual, the participant received specifically targeted information. This technique resulted in three to four times the response rate of participants who were not targeted.

However, some witnesses advised that there is a general concern regarding the use of targeted communications because complex data collection may provide gender or ethnic identification. Thus, there is concern over whether specific segments identified based upon race or gender could raise discrimination or deferential treatment issues. The Council heard testimony from Donna MacFarland of Lincoln Financial and Thomas Ryan of Fidelity that the use of particularly sensitive demographic information causes concern among plan sponsors. There are also practical concerns about housing information technology. Nevertheless, the overwhelming opinion received during testimony was that targeted communications work.

Branding helps targeting through the use of communications that include a unique positive image that is the group can relate to.

Here are some best practices of participant-centric communication methods:

• Best Practice 1 – The Power of Example: Trustees of the Elevator Constructors 401(k) Plan used materials featuring the story of three employees who made different savings decisions during their careers. The narrative of the three employees was used throughout one-on-one sessions with printed materials to demonstrate how a 401(k) contribution would benefit participants in a variety of circumstances including temporary layoffs, hardships and early retirement. As a result, plan participation rates increased from 26.56 percent to 29.82 percent in 2011. The plan also experienced an 85 percent increase in plan activity from meeting attendees.
• Best Practice 2 – Employer/Employee-Centric Content: M.A. Mortenson Company, an international construction firm, employed construction-related themes in its financial education to engage participants and foster pride in the company. Financial education was made mandatory and workshops were divided by career stage, age, and gender. The plan sponsor focused on participants’ preferences by surveying them after the workshop and making recommendations based on their feedback to yield desired results.
• Best Practice 3 – Bilingual: Consolidated Citrus Limited Partners wanted to 1) increase attendance at plan educational meetings, 2) increase plan participation, 3) increase deferral rates and 4 encourage participants to maximize their match. Ninety percent of the workers spoke only Spanish, and the majority of their day was spent in the orange groves. An in-language campaign was initiated. The company’s Spanish speaking leaders met with small groups in the orange groves. Straightforward collateral in both Spanish and English Collateral were available on site, including announcement posters. By bringing the meetings to the employees, 95 percent of the targeted group attended the meetings. Plan participation increased from 40 percent to 75 percent and deferrals expanded from 4 percent to 8 percent.
• Best Practice 4 – Branding: The Animation Guild 401(k) Plan was implemented for artists working at Southern California animation studios. The sponsors worked with the Guild’s representatives to obtain insights and develop a branded communication urging participants to remember to enroll. The response rate increased over eight percent from the previous year, with 135 new enrollees. Another employer cited in the research increased participation by 30 percent by keeping the message fun, simple and “cool” to target younger workers.
• Best Practice 5 – Multicultural: The Four Seasons 401(k) Plan needed to convey an important plan change to an employer profit sharing employer matching contribution. The sponsor obtained feedback from bilingual meeting presenters in designing the campaign, and provided materials tailored to Hispanics and presentations also were created in Spanish designed to be culturally and linguistically accurate. As a result, the average deferral rate of the targeted group rose from 2.9 percent to 5 percent, and significantly increased beneficiary designations.

2. One-on-One or Small Group Meetings 

After a study by Lincoln Financial found that 66% of participants prefer one-on-one guidance, Lincoln made it a component of its financial education model. They found that the need for individualized information is particularly acute for groups with low participation rates, including women and minorities.  Various studies have shown good enrollment and contribution results when employees request in-person group workshops facilitated by financial experts.

• Best Practice for One-on-One Meetings:In 2012, MassMutual representatives spoke with 150,000 employees in face-to-face meetings. Forty-six percent of these individuals took action to improve their retirement readiness and, in one-on-one meetings, 75 percent of employees took action.
• Best Practice for Small Group Meetings: Costs and timing may prevent plan sponsors from providing one-on-one meetings, but small group meetings and audience segmentation have also been successful. The FINRA funded Nurses Investor Education Project had small group meetings for well-educated nurses interested in taking action toward their retirement. They found that generally, the nurses’ lack of basic knowledge, or their perception that they did not know enough to attend these sessions, prevented them from attending their plan sponsor’s meetings. As a result of using small group meetings as a forum, the nurses perceptions changed and attendance at their employer’s retirement plan sessions improved.

3. Immediate “on the spot” Communication 

The ability for participants to take action at the time they are thinking about retirement savings is more effective in increasing enrollment. For example, having computers in the room at the time employees are learning about the plan would allow them to sign up and take immediate action.

• Best Practice: A US Army mandatory financial management course found that providing the enrollment forms for the Thrift Savings Plan during the financial management course resulted in a sizeable increase in participation, with soldiers signing up for the Plan before leaving the classroom.

4. Short, Simple, Focused Communication 

Behavioral studies show that the most effective communications use simple, straightforward language specific to a participant’s personal situation.

• Best Practice: Time constraints mean that any impediments to action should be identified and mitigated. For example, on a website, any extra step, such as the need to retrieve a PIN, may prevent employees from taking action. Solutions include sending the PIN directly to their email account or a mobile number, or mailing a postcard with the website’s uniform resource locator (URL).

5. Multiple Touches With Various Creative Formats 

Consistent, continuous and on-going meaningful communication can be achieved by repeatedly sending out simplified mailings. Social media can help alleviate the cost of additional touch points, and yet, few companies use social media channels for retirement information.

• Best Practice: The Council’s Professor Madrian cites a company in which the third mailing of a simplified reply form requiring the checking of a box to enroll doubled enrollment from 22 percent to 45 percent of non-participating employees.

6. Cost Effective Technology 

Every demographic group is now using the Internet as a preferred source of information, via home computer or mobile devices. In addition, electronic media provides the ability to track responses, which is unavailable when the communication is sent through printed materials and regular mail. Another cost effective technological advance is Dynamic Page Publishing,  reviewed at the conclusion of this article.

A Deloitte study in 2012 that found:

• 93 percent of Americans place Internet access as the most valued household subscription;
• 54 percent of Americans own smartphones, and the rate is increasing 29 percent annually.
• One of three Americans over age 50 has downloaded an application to a smartphone, and 28 percent access their bank accounts via smartphone.

Engaging Millennials: Electronic media is the most effective method of communication to engage younger generations in retirement planning, including Generation X (born between 1965 and 1979).  In order to combat inertia caused by competing financial priorities, such as student loan debt, it is important for this group to be engaged through “YouTube” videos, Facebook forums, Twitter, email and mobile delivery, including providing “one click” transactions and incorporating elements of “gamification.”   Millennials also demand simple, personalized, and action-oriented communications, and prefer human contact for complex tasks.

• Best Practice – Email: Thomas Ryan of Fidelity Investments testified to the Council that Fidelity makes all channels of communication accessible, and finds that email communications have generated higher response rates than direct mail.
• Best Practices for Engaging Millennials – Fidelity: Fidelity has studied the preferences of Generation Y, or “Millennials”  for using electronic communication, and found that this group tends to rely heavily on the Internet to interact with representatives from Fidelity, although they appear to be the least engaged when it comes to the frequency of contact. Millennials serviced by Fidelity have the lowest 401(k) participation rate, at 58 percent, compared to 67 percent for all other populations. Design changes made to simplify online interaction with Millennials resulted in a 40 percent increase in web utilization by this group.
• Best Practices for Engaging Millennials – Putnam: Lori Lucas of Callan Associates discussed Putnam’s roll out of a plan primarily for Millennials that encouraged participants to bring their tablets to an nteractive meeting to log on to the benefits website. As a result, 40 percent of attendees increased their deferrals within 90 days after attending the meeting.
• Best Practices for Engaging Millennials – MassMutual:: Offering enrollment and savings increases using iPod Touch devices in group meetings resulted in action rates of 85 – 90 percent among those attending. The use of targeted and tested mail and email campaigns resulted in $150 million in new deposits over three years and a 3.9 percent increase in action rates.

7. Behavioral Economics and “Social Norming” 

The way certain information is presented can have a resounding impact, including the way choices are presented to the participant, a method referred to as “anchoring”

Presenting options in a different order or with a higher default percentage has increased deferral rates. While communications traditionally list contribution percentages in ascending order from one to five percent, studies have shown that reversing this order so that the first option shown is five percent markedly increases enrollment in the five percent option. This method is referred to as “placement.”

 “Social Norming” reflects the fact that people tend to benchmark themselves against their peers. Statistics from the Bureau of Labor Statistics show that participants tacitly compete against peers in similar socioeconomic conditions.

8. Incentives and “Gamification” 

The use of games (gamification) is an effective tool in reaching  individuals who may not be easily engaged in retirement decisions (“non-savers”). Gamification can be used to reward people if they engage in the correct behaviors. Plan sponsors may also use incentives to provide rewards to participants with who exceed a certain benchmark contribution amount. Other techniques include raffles.

• Best Practice 1: The NFL’s “Play 60” campaign  incorporates the use of the NFL brand to incentivize children to play a game for at least 60 minutes a day.
• Best Practice 2: A rug manufacturer in northern Georgia had a series of meetings for people working multiple shifts, giving away lottery tickets to encourage attendance, and experienced standing room only for the meetings.

9. Six Marketing Principles Improve Communications

Communications that are uninspiring and difficult to understand leave employees confused, bored and unmotivated. The communicator’s “curse of knowledge” is a bias in which the communicator’s knowledgeability makes it difficult to demonstrate it from the perspective of lesser-informed people. The Council highlighted six principles of communication that plan sponsors should consider when drafting documents or presenting to their participants that will inspire action:

1. Show Empathy

To  determine the relevance of a message to an audience, it is necessary to engage them and ask questions that the content of the presentation or the communication should then be tailored to answer. For example, an energy company developed a program to help consumers understand and lower their energy bills, using this computerized question:

Can I help you with your bill?

1. Yes, help me understand my bill.
2. Help me save money.
3. Both of the Above.
4. I’m Here for Something Else.

By showing empathy to what the consumer cared about and giving information and tips to help them feel more in control, these questions presented helped raise consumer satisfaction.

2. Use Metaphors and Analogies

Communications also reference a metaphor or visual picture to help the recipient relate to the message. For example, when Ridley Scott presented the screenplay for Alien to his producers he used the popular movie Jaws as a reference, and the metaphor “it’s like Jaws in space,” to frame a concept that the producers easily understood

3. Use Storytelling

People tend to forget facts that are presented but usually remember a story. Stories are easy to absorb when people are overwhelmed with information. They also eliminate extraneous facts to capture the recipient’s interest and relate to him on an emotional level.

4. Use a Conversational Voice

Using overly technical information, compliance or legal jargon can loose an audience. For example, it is difficult to convey the benefit of voluntary life insurance individual and spouse buy-up options in which election of coverage for a spouse can equal up to half an individual’s buy-up,  depending on the desired level of coverage. An effective way of communicating this is as follows:

“The company is going to buy life insurance for you. If you want, you can buy extra life insurance. Whatever extra life insurance you buy for yourself, you can also buy up to half that amount for your spouse. Now, depending on how much additional insurance you’d like, one or both of you may need to answer some questions about your health to see if you qualify for it.”

5. Surprise the Recipient

Unexpected methods of engaging the recipient get the individual’s attention when a subject is ordinarily challenging and abstract. The use of humor, as shown below, can be considered an example.

6. Use Humor

Using a little humor in the message will keep the audience engaged and make the message easier for audiences to relate to.

 

Plan Design Considerations

Automatic Enrollment

A study by Brigitte Madrian and Dennis Shea shows that automatic enrollment increases average participation rates from 65 percent to 85 percent. It is particularly helpful for low-income workers with annual wages under $20,000, where participation increased from 27 percent to 82 percent. Average participation for employees under age 30 doubled from 41 percent to 82 percent, and the best improvements have been among the segments that had the lowest participation rates.  This was corroborated in as presented in the testimony of Lori Lucas.

Mandatory Contributions and Automatic Escalation

Defaults that are too low can  impact workers who would otherwise have contributed more. Since studies have shown higher default contribution rates have not increased opt-out rates, employers should consider recommending higher default contribution rates.

One solution is a stretch match (increasing the maximum amount of pay that can be matched and decreasing the percent matched, to keep the employer’s costs flat.

Another way to increase savings is automatic escalation in which sponsors automatically increase a worker’s contribution rate by one to two percent  of salary at each pay anniversary until a cap, such as 12 percent of pay.

Best Practice – TIAA-CREF: David Richardson of TIAA-CREF found that 403(b) plans typically have much higher contribution rates, ranging from 10 percent to 15 percent of pay compared to 5 percent to 7percent for all 401(k) plans, due to mandatory contributions from both employers and employees as a requirement of employment.  The 403(b) plans TIAA-CREF administers experience much higher annuitization rates — 40 percent compared to 4 percent for all 401(k) plans.

 Conclusions and Implications

The Council found that continuous, simplified, personalized communication using multiple channels, connected with humor and empathy, are effective ways to communicate with plan participants to encourage participant engagement.

Benefit Program Marketers seeking to increase employee plan participation need to be more flexible, customizable and responsive than ever to introduce, present, promote and clarify the particular offerings and choices the employer has agreed to sponsor. Dynamic Publishing platforms are becoming a key tool in executing this strategy DPP is a way of designing publications in which layout templates are created which can contain different content in different publications. In cases where the same content is being used in multiple layouts, the same layout is being used for several different sets of content, or both, dynamic page publishing can offer significant advantages of efficiency over a traditional system of page-by-page design. Future articles will explore Dynamic Publishing in greater depth.

Related Blog Article:

• Behavioral Economics Can Improve Health Plan Enrollment Decisions

 

How Business Communication Patterns Differ by Culture

“When Cultures Collide”

Thanks to Rod Rothwell – an Aussie doing business in Korea – for bringing this to our attention.

According to  “When Cultures Collide“ by British linguist Richard D. Lewis,who has mapped out leadership styles and cultural identities, cultures have different approaches to communication in business negotiations.

Lewis speaks ten languages, so he realistically warns of the danger of cultural comparisons and generalizations. However, he finds that there are also “national norms:”

By focusing on the cultural roots of national behavior, both in society and business, we can foresee and calculate with a surprising degree of accuracy how others will react to our plans for them, and we can make certain assumptions as to how they will approach us. A working knowledge of the basic traits of other cultures (as well as our own) will minimize unpleasant surprises (culture shock), give us insights in advance, and enable us to interact successfully with nationalities with whom we previously had difficulty.

Lewis’ communication diagrams follow these conventions:

• Wider shapes show greater conversational range
• Obstacles are marked in gray
• Cultural traits are also noted.

Vive la Différence!

How do the different nationalities compare? Here’s how they tend to communicate:

• Americans tend to launch straight into negotiations, respond to discord confrontationally, and resolve with one or both sides making concessions.
• Canadians, while similarly direct, can be more low-key, and inclined to seek harmony.
• English may avoid confrontation in an understated, mannered, and humorous style
• French often engage vigorously in a logical debate.
• Germans rely on logic, while amassing more evidence and laboring their points more than the British or French.
• Spanish and Italians “regard their languages as instruments of eloquence and they will go up and down the scale at will, pulling out every stop if need be to achieve greater expressiveness.”
• Scandinavians can have entrenched but often reasonable opinions formulated “in the long dark nights.”
• Swiss tend to be straightforward and unaggressive negotiators, obtaining concessions by expressing confidence in the quality and value of their goods and services.
• Hungarians value eloquence over logic and are unafraid to talk over each other.
• Bulgarians may take a circuitous approach to negotiations before seeking a mutually beneficial resolution, which will often be screwed up by bureaucracy.
• Poles often have a communication style that is “enigmatic, ranging from a matter-of-fact pragmatic style to a wordy, sentimental, romantic approach to any given subject.”
• Dutch are focused on facts and figures but “are also great talkers and rarely make final decisions without a long ‘Dutch’ debate, sometimes approaching the danger zone of overanalysis.”
• Chinese tend to be more direct than the Japanese and some other East Asians; however, meetings are principally for information gathering, with the real decisions made elsewhere.
• Hong Kongers negotiate much more briskly to achieve quick results.
• Indians speak English in a way that “excels in ambiguity, and such things as truth and appearances are often subject to negotiation.”
• Australians tend to have a loose and frank conversational style.
• Singaporeans generally take time to build a relationship, after which they can be shrewd negotiators.
• Koreans tend to be energetic conversationalists who seek to close deals quickly, occasionally stretching the truth.
• Indonesians tend to be very deferential conversationalists, sometimes to the point of ambiguity.
• Israelis tend to proceed logically on most issues but emotionally on some.

 

 

 

 

 

Does Diversity Really Work?

The Flip-Side of Cultural Diversity?

A study conducted by Harvard political scientist Robert Putnam finds less civic activity in diverse communities.

The study is the largest ever on civic engagement in America, based on detailed interviews of nearly 30,000 people across America. Putnam surveyed residents in 41 US communities, sorting residents were into the four principal categories used by the US Census: black, white, Hispanic, and Asian. They were asked how much they trusted their neighbors and those of each racial category, and questioned their civic attitudes and practices, including their views on local government, their involvement in community projects, and their friendships.

The Findings: Lower “Social Capital”

The study found that the greater the diversity in a community, the fewer people vote and the less they volunteer, the less they give to charity and work on community projects. In the most diverse communities, neighbors trust one another about half as much as they do in the most homogenous settings. The study found that virtually all measures of civic health are lower in more diverse settings.

Putnam has studied the problem of declining civic activity for quite some time, finding that the US has experienced a pronounced decline in “social capital”  – which refers to the social networks — friendships, religious congregations, neighborhood associations and so on.  He states that when social capital is high, communities are better places to live, neighborhoods are safer, people are healthier, and more citizens vote.

Putnam writes that those in more diverse communities tend to:

distrust their neighbors, regardless of the color of their skin, to withdraw even from close friends, to expect the worst from their community and its leaders, to volunteer less, give less to charity and work on community projects less often, to register to vote less, to agitate for social reform more but have less faith that they can actually make a difference, and to huddle unhappily in front of the television…People living in ethnically diverse settings appear to ‘hunker down’ — that is, to pull in like a turtle.” 

These findings challenged the two dominant schools of thought on ethnic and racial diversity, the “contact” theory and the “conflict” theory. Under the contact theory, more time spent with those of other backgrounds leads to greater understanding and harmony between groups. Under the conflict theory, that proximity produces tension and discord. But Putnam’s findings reject both theories: In more diverse communities, there were neither great bonds formed across group lines nor heightened ethnic tensions, but a general civic malaise, with levels of trust lower even among members of the same group.

The “Diversity Paradox”

In a nation that is inexorably becoming increasingly diverse, how are we to interpret these findings?  

First, it is important to note that there are also some very positive recent findings about diversity, While ethnic diversity may, in the short run prove a liability for social connectedness, other research suggests it can be a big asset when it comes to driving productivity and innovation. In high-skill workplace settings. Scott Page, a University of Michigan political scientist and  author of “The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools, and Societies”  finds that the different ways of thinking among people from different cultures can be a distinct advantage:

Because they see the world and think about the world differently than you, that’s challenging. But by hanging out with people different than you, you’re likely to get more insights. Diverse teams tend to be more productive.”

Page calls this the “diversity paradox.” He thinks the contrasting positive and negative effects of diversity can coexist in communities, but we must be wary of civic engagement falling off too far.

Putnam’s Take

When he published a detailed analysis in the journal Scandinavian Political Studies, Putnam argued that the negative effects of diversity can be remedied, and that history suggests that ethnic diversity may eventually fade as a sharp line of social demarcation.

In the final section of his paper, Putnam discusses how social identity can change over time, stating that experience shows that social divisions can eventually give way to “more encompassing identities” that create a “new, more capacious sense of ‘we.”

He also points out that increasing diversity in America is not only inevitable, but ultimately valuable and enriching. To help reduce divisions that hinder civic engagement, he suggests programs such as expanding support for English-language instruction and investing in community centers and other places to foster meaningful interaction. Putnam states: 

I think over the long run, as we get to know one another, and as we begin to see things that we have in common with people who don’t look like us, this allergy to diversity tends to diminish and to go away. So this is not something that I think as an argument against immigration. On the contrary, actually, I think in the long run we’ll all be better. But I don’t think that progressives and integrationists like me do our cause any service by hiding from ourselves the fact that it’s not easy.

Putting It Into Perspective

I believe it is important to remember that social diversity is a rather recent phenomenon, and the American consciousness is still evolving as is plainly demonstrated by the obvious dog whistle racism of the anti-Obama crowd.

What is also important to note is that Putnam does not extrapolate some universal principle that heterogeneous societies have any less potential for social cohesion than homogeneous ones -only that it takes time for people to look past their differences, and the American experience demonstrates that over time society can change.

For example, one of the remarkable aspects of the study is that it focuses on diverse communities. In fact, 50 odd years ago diverse neighborhoods were unheard of. I recall the changes in my old neighborhood, Bedford Stuyversant, Brooklyn. There was “white flight”following the construction of the subway line between Harlem and Bedford in 1936, as African Americans left overcrowded Harlem for more available housing in Bedford–Stuyvesant. But today, my daughter lives right near my old home in Clinton Hill, which is now a diverse neighborhood.

So it would not be fair to overgeneralize based on a study of diversity given such a short time frame.

Our Polarized Society

I believe that it would also be mistaken to lay off the problems of American polarization on attitudes about race on the part of the members of society themselves. To put this in perspective, bear in mind that even as America’s oligarchical structures have tightened over the  past few decades, society as a whole has nonetheless managed to trend toward a more diverse perspective.

This has occurred despite increased political polarization. When there is a demonstrative and concerted effort by the wealthiest class – including the media and politicians it controls- to manipulate people’s thought processes such that they devolve into a divisive, polarized mental framework, we should avoid the temptation to simply cite racial attitudes. While this is a contributing factor, alienation has much deeper roots, and It takes a great deal in such a divisive environment to take the bull by the horns and overcome the mental conditioning that is damaging the cohesiveness of American society,

I observe that change is inspired by trauma and shock. And given the increasing disparity in wealth distribution, mistrust of our leaders, expanding unemployment and the decline of the American middle class, we have a very interesting opportunity as a society today to evolve – together.

The key is to see past our differences, and Putnam agrees with me here. The only thing holding us back is that we submit to the mechanisms of control.

 

Is your Organization Capturing the Power of Mobile?

By guest blogger, Mark Weishaar

 

 

Today’s smart, marketing-focused organizations realize the value of communicating with their customers using the channel of their customers’ preference. More and more, that preference is mobile.

It’s commonly reported that over 87% of Americans (90% of Canadians) own a cell phone, and most of them won’t leave home without it. For many, checking their mobile device is the last thing they do at night and the first thing they do in the morning. Almost 80% of smartphone owners use their device more frequently today for mobile email and texting than to actually make phone calls. Mobile marketing is dominating the media landscape, and mobile users are lapping it up.

• 82% agree it’s a good way to learn about new products and brands;
• 80% believe it can influence them to investigate a product or service;
• 71% accept that it can change the way they think about a product or service; and
• 65% report that it has the power to influence them to BUY a product or service.

Given this proliferation and mainstream acceptance of technology solutions, one would think that insurance companies and financial services organizations would be among the first to provide their customers and prospects with cutting-edge, lightning-fast applications. But one would be quite wrong. The fact is, only about one-third of marketers report having a defined strategy for mobile marketing! And the insurance industry, in particular, is lagging at the back of the pack when it comes to offering engaging mobile experiences. This sector must explore mobile websites, mobile applications and SMS text messaging campaigns to effectively respond to emerging consumer behavior.

Maximize the efficiency of your Customer Service efforts

One of the easiest and highest-ROI considerations should be your company’s website. Google reports that a good 50% of mobile users become frustrated when they encounter a site that is not mobile-friendly. It seems unnecessary to say that annoying your clients, especially those who may be experiencing an emergency, is not very smart. A mobile application is essentially a tool to make it easy for your customers to connect with you. It can be fun and useful, informative and interactive; it can be a short-cut to service. A Customer Service-specific mobile app might feature

• Talking to a live agent
• Dealing with an accident on the spot
• Requesting a live call-back
• Filing and managing a claim

Implementing these mobile options can help reduce support costs and call center overhead, reduce customer churn and even increase customer lifetime value. An app can enhance brand advocacy and promote upsells and cross-sells. What’s best, all of these benefits are entirely measurable in terms of ROI.

Building a Useful Database

The success of a mobile marketing strategy is going to depend on the power of your database. No program is complete without an Acquisition Model to cost-effectively harvest and manipulate prospect information. An advertising plan combining online, SMS and traditional channels is vital to drive traffic and promote downloads of a mobile app, with a clearly defined conversion funnel from prospect to customer.

Growing Pains specific to Mobile Payments for Insurance and Banking

Although Juniper Research reports that mobile payments are expected to reach $630 BILLION by 2014, remittances such as insurance premiums are not included. The issue does not lie with the technology of the Mobile Application, but rather with the capabilities and guidelines of mobile carriers, such as AT&T, Verizon and Sprint, among others.

Bill-to-Carrier US Obstacles

1. Each carrier must approve each program based on their own guidelines. They demand a 2-3 week beta test, during which they review an online-hosted version of each app for flow, usability, bugs, and terms of use acceptance.Your customers choose from among many Carriers, so you need to be compliant with all of them. The degree of speed, complexity and cooperation varies from one Operator to the next; they are however consistent in requiring 20-30% of each purchase amount.
2. Operators are strict and favor big brands; legitimacy is important given the number of bill-to-carrier scams. As a alternative, they look for a guaranteed minimum of $50,000 in monthly bill-to-carrier revenue, proof that is often first generated in Canada or Europe.
3. US Carriers prefer micropayments to the tune of $2. They are reluctant to approve monthly fees of $15 or $20 due to the higher risk of complaints or accidental enrollment by children.

Their preference for lower price points, non-recurring fees and virtual goods over outside services can all be hurdles for monthly insurance premium billing.

In addition to carrier complexities, success can depend on the various device operating systems. Currently, only Android supports bill-to-carrier within a native application. iOS will only use its IAP API (In-app purchase) using iTunes to make a purchase.

Retention and Loyalty – in a Mobile Environment

It is possible to truly integrate mobile into your existing strategy and better measure increased retention and loyalty from your customers. It’s all about convenience and real-time communication. Give them instant fingertip access to source and share critical data:

• Review the latest product and service offerings
• Manage personal “MyAccount” files on the go
• Provide 24/7 emergency access to processes and forms on a handheld device
• Enable immediate accident claims reporting and supporting photo uploads

These are just a few of the exciting, dynamic Mobile solutions that will propel your further differentiation from the competition – with measurable results.

Yet there are many complexities surrounding the development of mobile apps and mobile websites for insurance premium payment processing and lead generation. Any such strategy requires an in-depth understanding of the various Carriers, government regulations, operating systems, user demographics and data availability. This calls for the experienced insights of seasoned experts.

Today’s technology does not allow “catch-up” time. But it’s never too late to adjust your marketing focus onto those channels that are proven to build connections with your customers. They will reward you with interest, participation and brand loyalty.

Mark Weishaar is VP, Business Development with Direct Access Marketing, based in Burlington, Ontario, Canada and Philadelphia, PA.

 

 

Study: The Need for Financial Planners Has Never Been Greater

A Huge Disconnect

Paula Vasan in Financial Planning magazine highlights a striking FINRA Investor Education Foundation report about consumer attitudes toward, and need for financial literacy. The findings show a huge disconnect between consumers’ perceptions vs. reality when it comes to financial planning:

• 75% of Americans have “positive perceptions” of their own financial knowledge and math skills.
• Yet just 14% were able to correctly answer five financial literacy questions compiled by FINRA’s investor education foundation.

These startling findings are based on surveys of more than 25,000 adults conducted across the US between 2012 and 2009, in which an online test was used to evaluate the financial knowledge of participants. You can view the full results of FINRA’s quiz here.

Who’s Most At Risk?

FINRA’s survey found that financial capability varies by geography and demographic groups:

Geographical Disparities: The Coastal States Do Better

• Citizens of California, Massachusetts and New Jersey were the most financially capable, ranking in the top five in at least three of five measures of financial capability.
• Mississippi was the least financially capable state, placing in the bottom five in four out of five measures, while Arkansas ranked in the bottom five in three out of five measures, and Kentucky ranked in the bottom five in two out of five measures.

Generational Disparities: Younger Americans at Risk

• Younger Americans, especially those 34 and under, are more likely to show signs of financial stress, including taking a loan or hardship withdrawal from their retirement account or making late mortgage payments.
• Younger Americans are more likely to have unpaid medical bills. The breakdown is as follows:
  • 31% of those aged 18-34.
  • 17% of those aged 55 or older.

Gender Disparities: Women at Risk

Other studies have shown women to be at risk.  A report by workplace financial education provider Financial Finesse, 2012 Gender Gap in Financial Literacy Research, shows women still lagging in in key areas of financial planning, and, further, the report identified that the gap between the genders is widening in nearly every area of financial planning.

A Widespread Societal Problem

Despite these disparities, the national averages show a serious across-the-board need for financial planning help.  Of the five basic financial literacy questions tested, the national average was just 2.88 correct answers.

• Only 41% spend less than their income.
• 26% report having unpaid medical bills.
• 56% do not have sufficient savings to cover three months of unanticipated financial emergencies.
• 34% paid only the minimum credit card payment during the past year.

Unfortunately, these are not isolated findings, but have been corroborated by numerous studies over the years. For instance:

• A 2012, the SEC report on financial literacy concluded that “American investors lack essential knowledge of the most rudimentary financial concepts: inflation, bond prices, interest rates, mortgages, and risk.”
• 69% of 1,664 participants in a 2010 Northwestern Mutual Life Insurance study to determine Americans’ general financial knowledge  failed the quiz.
• In a 2008 study of high school seniors, only 36.2% knew that “retirement income provided by a company” is called a “pension.”
• An Ariel study of 401(k) savings disparities found that African-American and Hispanic workers in the U.S. have lower 401(k) balances and participation rates than their white and Asian counterparts.

Serious Economic Implications

This paints a grim picture of the state of American financial literacy. The implications of the financial literacy disconnect are twofold:

1. Consumers who are unable to understand their financial planning needs are unlikely to realize their full financial potential.
2. An uneducated public lowers the bar for financial planners, leaving consumers at risk.

Ms. Vasan interviewed fiduciary advocate Ron Rhoades, program chair of the Alfred State Financial Planning Program. He emphasized the need for a strong fiduciary standard of conduct requiring planners to act in the best interests of the client. According to Mr. Rhoades:

Sadly, 80% or more of ‘financial advice’ and ‘investment advice’ provided today is not provided in the best interests of consumers, but rather is — often unknown to the consumer — designed to sell expensive investment products to unsuspecting consumers.

A 2009 National Financial Capability Study found that only 15% of respondents indicated that they had “checked an advisor’s background or credentials with a state or federal regulator, ” and an alarming 43% of investors in a 2007 MoneyTrack/IPT Investing Secrets Survey demonstrated a susceptibility to fraud.

An April 9, 2012 Op Ed by Time Business and Money titled Improving Financial Literacy is Essential to Our Nation’s Economic Health written by Roger W. Ferguson Jr., president and CEO of TIAA-CREF, and a former vice chairman of the U.S. Federal Reserve, sums it up well:

Why It Matters: People with low levels of financial literacy suffer from that lack of knowledge at every stage of their lives: Another study from the TIAA-CREF Institute shows that people with a high degree of financial literacy are more likely to plan for retirement, and that people who plan for retirement have more than double the wealth of people who don’t.

Conversely, people who have a lower degree of financial literacy tend to borrow more, accumulate less wealth, and pay more in fees related to financial products. They are less likely to invest, more likely to experience difficulty with debt, and less likely to know the terms of their mortgages and other loans. 

The cost of this financial ignorance is high, leading many people to incur avoidable charges and fees from things like making late credit card payments or paying only the minimum amount due, overspending their credit limit, and using cash advances.

Calling All Planners

Consumers Need Help: The problem is likely to become worse as Generations X and Y head into middle age. And the educational response has been negligible. 26 states have no financial literacy requirements at all in their K-12 education systems, and only four states require students to take a personal finance class in high school.

The Disconnect Makes Financial Planning a Hard Sell: A more complex financial environment coupled with an enormous disconnect between consumer needs and attitudes creates a huge challenge for financial planners. The services of Financial Planners are more needed than ever, but getting people to face these sensitive matters remains a hard sell.

What Planners Can Do: Given this disconnect, astute financial planners can help to bridge the gap between need and perception by offering to conduct financial planning classes at local schools, civic groups (like Lion’s and Rotary), local businesses and other public forums.

A Business Development Opportunity For Planners Too

Not only does this meet a vital need, but it provides invaluable opportunities for financial professionals to increase their business in the community. Financial literacy classes can help financial planners to :

• Introduce and advertise their practice.
• Differentiate themselves as credible, trusted professionals in a crowded field.
• Network within community-based associations and organizations where they can increase their visibility, gain referrals, and become trusted, influential resources.

Financial literacy classes provide an entry point for planners to get involved with community organizations and expand their influence, and can open up opportunities that can lead to networking, referrals and sales, by:

• Serving on organization committees.
• Buying tickets or a table for their functions.
• Buying adds in their programs.
• Submitting an informational article to their newsletters.
• Assisting in or sponsoring events.

A financial literacy program provides opportunities for planners to be seen as thought leaders and trusted resources, making organization members receptive to a request for a networking meeting or an appointment to explain the services they provide. At the same time, planners will gain great confidence that they are helping consumers to make better financial choices, starting with the choice to engage a trusted advisor for the support they need.

Related Posts

• Study: Gender Gap In Financial Literacy Widens
• Seven Steps To Overcome Women’s Top Money Fears

 

Time to Take a Fresh Look at Universal Life

The Life Insurance Choice Dilemma

Today’s tumultuous economy and changing consumer attitudes make the life insurance purchase decision challenging. Both term (temporary) coverage and permanent coverage have their relative advantages and disadvantages. Here, in brief are the choices:

Term Life? This provides an affordable entry point, but  coverage is temporary. The cost of insurance increases over time as the insured’s life expectancy decreases, eventually making coverage less affordable.

Permanent Life?  Permanent policy options can be complex and confusing:

• Whole Life provides protection to at least age 100, but tends to be more expensive, difficult to understand, and inflexible.
• Variable Life allows for improved cash value potential, but exposes the buyer to market risk.
• Universal Life is interest sensitive, and policies purchased during high interest rate periods  suffered adverse performance as rates declined.

What Consumers Want: Control, Clarity and Value

Given all these choices, how can consumers decide which product is best suited to their own needs, circumstances and priorities?

A recent study by LIMRA and LIFE Foundation  can help shed some light on consumer priorities. While individual circumstances will vary, the study shows that general consumer insurance buying patterns and  priorities have changed over the past 15 years.

The study’s  findings strongly suggest that life insurance shoppers, influenced largely by the internet, tend to seek these 3 things:

1. Control/Flexibility

• 26% say they prefer to purchase life insurance by internet, mail or phone.
• 64% still prefer to buy from an insurance or financial professional face to face (although this is down from 80% in 1996.)

2. Clarity/Simplicity

When asked what factors matter most to them in buying insurance, consumers cited:

• #1: Understanding what they’re buying (36%.)
• #2: Obtaining the proper coverage amount (22%.)

3. Affordability/Value

Although the cost of basic term life has fallen by about 50% over the past 10 years, consumers are still concerned about the price of coverage:

• Cost is the top reason people give for not owning enough life insurance.
• Men place value getting the best price more than women: 17% vs 11%.

And in the wake of the 2008 recession and the weak recovery, there is also increased sensitivity to risk and volatility, making the stability of guarantees more important.

How Guaranteed Universal Life Fits In

Responsive life insurance companies are addressing consumer demand for control, simplicity and value with a new generation of guaranteed Universal Life policies.  These new products are designed to meet consumers’ needs while overcoming the challenges that the older generation of Universal Life policies encountered. Here’s how:

1. Clarity/Simplicity: Universal Life (UL) is based on a comparatively simple and transparent design (as illustrated below). It provides a clever way to combining term life insurance with a saving plan:

• a portion of your premium pays for the cost of insurance.
• a portion is reserved as cash value that can be used in the future to reduce the cost of insurance and provide cash when you need it.

2. Control/Flexibility:

When times are hard, the cash accumulation fund provides a cushion that can allow you to skip premium payments, and when times are good, there is flexibility to increase your premium payments to enhance that savings element. You can decide how much of your premium dollars go to savings to generate more significant cash values that accrue tax deferred and can be used for contingencies such as:

• Unpaid medical bills – Few people anticipate the need for additional money during a prolonged illness. Cash value in the policy can be withdrawn, or borrowed, to pay medical bills.
• Higher education – College funds are built over a sustained period of disciplined saving. While funds are not accessible in the early years of the policy, cash values are available when children are ready for college.
• Retirement supplement – Additional income during the retirement years can be helpful when other sources are not available.

It is possible to arrange to pay a premium for a certain number of years only – such as 10 or 15 years while still guaranteeing lifetime coverage. UL policies also allow for a choice among death benefit options: a Level Death Benefit, in which premiums and interest primarily increase the cash value, or Increasing Death Benefit, in which they are also used to increase the death benefit over time.

3. Affordability/Value: UL provides cost control and value in the following ways:

• Affordability: While more expensive than term life insurance, UL is less expensive than whole life insurance.
• Value: Guaranteed Universal Life (GUL) provides the value of guarantees, so that both the coverage and premium level will last to a certain age regardless of current interest or economic conditions. In response to increased life expectancy, some policies provide coverage up to age 121. Policies also provide a guaranteed minimum cash value.

Buying Life Insurance is About More than Price

Under the right circumstances, Universal Life Insurance can provide permanent coverage that stays in force as long as the premiums are paid or beyond. Proper management of the savings component enables the funds to grow tax deferred at a steady rate until the money is needed. Additional standard or optional benefit features provide additional value and flexibility, including:

• Self Completion: an optional Waiver of Premium benefit will waive the premium payments in the event of disability, allowing the policy to stay in force.
• Accelerated Death Benefit: This standard benefit enables the policy holder to receive cash advances against the death benefit if diagnosed with a terminal illness.
• Partial Surrender Benefit: This standard feature lets you take a portion of your cash value out of the policy instead of surrendering the entire policy for the full value, lowering the death benefit by the amount you withdraw.

In today’s volatile economic environment, changing consumer attitudes and priorities have created a need for simple, transparent, affordable, flexible products that provide solid guarantees. Unlike the older Universal Life products that were sold when interest rates were high and lost value as rates declined, today’s Guaranteed Universal Life products have been designed to provide sound guarantees during a time of low interest crediting rates. And with interest rates at their current historic lows, there’s room for future growth over time.

For consumers who are seeking affordable, customizable permanent coverage, it may be time to take a fresh look at Universal Life.

 

Grandparent Power: Leave a Bigger Legacy with an Intergenerational Dynasty Trust

Q&A: Maximize Your Legacy for Your Grandchildren

You’re a financially successful grandparent who wants to leave a big legacy for your grandchildren. You would like to maximize the legacy you leave them while minimizing taxes. Here are some questions you’ll need to consider:

Q. Will the Generation Skipping Transfer Tax (GSTT) limit what I can give to my children?

The IRS imposes a transfer tax at each family generation:

• If an asset passes from a parent to a child, and then from the child to a grandchild, estate tax is imposed in both the parent’s and the child’s estates.
• If a parent passes the asset to the grandchild to try to bypass the child’s estate and avoid estate tax,  it may be subject to another transfer tax, the generation-skipping transfer tax.
• This tax is particularly onerous because it is imposed in addition to the estate tax incurred in the parent’s estate and is assessed at a flat 45% rate.

As a result, when the GSTT applies, it may result in more than 75% of the assets passing to the grandchild being consumed in estate taxes and generation-skipping taxes.

Q. At what amount does the tax kick in?

The IRS provides each individual with a “GST exemption” of $5.25 million. In other words, each individual may engage in generation-skipping transfers of up to that amount without subjecting those assets to the GSTT.

Q. Can I leave even more without losing much to taxes?

Many individuals who might otherwise leave their entire estates to their children allocate their generation-skipping exemption – currently $5.25 million – to generation skipping trusts for the benefit of their children and grandchildren.

Q. Would a trust help if I don’t have that many assets?

The trust advantages go beyond tax savings. Using the generation-skipping tax exemption offers two important advantages:

• The trust will escape all transfer taxes when the children die and will pass to the grandchildren tax-free.
• The trust may be protected from the claims of creditors and, to some degree ex-spouses. (some states protect inheritance in divorce proceedings.)
• Gift, estate and generation skipping tax laws are constantly changing. The exemption amount has been as low as $1 million and the tax, as high as 55%.

Historical Generation Skipping Transfer Tax Exemptions and Rates

Year	GST Exemption	GST Tax Rate
1997	$1,000,000	55%
1998	$1,000,000	55%
1999	$1,010,000	55%
2000	$1,030,000	55%
2001	$1,060,000	55%
2002	$1,100,000	50%
2003	$1,120,000	49%
2004	$1,500,000	48%
2005	$1,500,000	47%
2006	$2,000,000	46%
2007	$2,000,000	45%
2008	$2,000,000	45%
2009	$3,500,000	45%
2010	No generation skipping transfer tax	N/A
2011	$5,000,000	35%
2012	$5,120,000	35%
2013	$5,250,000	40%

In view of the uncertainty in tax laws and of the erratic nature of lawmakers in the United States, any grandparent with assets totaling more than $1 million should consider funding an irrevocable dynasty trust to take advantage of the current $5.25 million gift and GST tax exemptions. Even individuals with $1 million or less should consider placing high-growth assets in a dynasty trust, where they can grow insulated against creditors and against future estate taxes.

Q. How Do I Set Up a GSTT Trust?

1. Establish a trust. Appoint a trustee

2. Fund it up to the GSTT exemption.

3. Leverage the trust assets through life insurance.

The example below provides a brief summary of what a Dynasty trust can do for you. Please note that states may limit the term of the trust:

Leverage Your Legacy

If you and your spouse are healthy and qualify for life insurance, the trustee can also purchase life insurance on you. The advantages:

• The death proceeds go to your children and grandchildren, exactly according to your wishes.
• The proceeds are generally received by the trust both income and estate tax free.
• You can provide for multiple generations – including both children and grandchildren.

Speak With a Planner

Estate and GST taxes can be avoided using other useful techniques. For example, interests in a family limited partnership (FLP) or family limited liability company (FLLC) can be transferred to succeeding generations by simply gifting the assets to family members. Valuation discounting of family business interests can lower exposure to gift taxes. Under circumstances, a personal residence can be efficiently transferred using a qualified personal residence trust (QPRT). These other techniques, however, do not offer the asset protection and long-term wealth preservation and management possible with an irrevocable dynasty trust.

Takeaways

• The uncertainty of tax laws means that any grandparent with assets over $1 million should consider funding an irrevocable dynasty trust to take advantage of the current $5.2 million gift and GST tax exemptions.
• Grandparents with $1 million or less should consider placing high-growth assets in a dynasty trust, where they can grow insulated against creditors and against future estate taxes.
• If you are healthy enough to qualify for life insurance, it can greatly multiply the amount that you leave to future generations.

Note: 2013 Changes to Estate Tax, Gift Tax, and Generation-Skipping Transfer Tax Laws

Under ATRA, the federal estate tax exemption has been indexed for inflation and  increased from $5.12 million in 2012 to $5.25 million in 2013, but the estate tax rate for estates valued over this amount has increased from 35% in 2012 to 40% in 2013. In addition, the lifetime gift tax exemption has also been indexed for inflation and increased from $5.12 million in 2012 to $5.25 million in 2013, and the maximum gift tax rate has increased from 35% in 2012 to 40% in 2013. The generation skipping transfer tax exemption has also been indexed for inflation and  increased from $5.12 million in 2012 to $5.25 million in 2013, and the maximum generation skipping transfer tax rate has increased from 35% in 2012 to 40% in 2013.

Warning & Disclaimer: This is not legal advice.

 

Insured Buy-Sell Rewards a Business Owner’s Life Work

Is There a Ready Market for Your Business?

According to The Complete Guide To Business Brokerage By Tom West, the number of small to mid-sized, privately owned businesses for sale in the United States is estimated to be approximately 1 million – or 20% of them at any given time. But only a small number of them get sold:

• 1 in 5 small businesses sell
• 1 in 4 small to mid size businesses sell
• 1 in 3.5 mid-size companies sell
• 1 in 3 large companies sell

Shut Happens

There may be no ready buyers for your business, and you may lose your most hard earned asset. Consider this example.

Example: You and your partner  are 50/50 partners.  Your partner dies, and his wife or child inherits his share of the business.

• Do you have the right or the obligation to buy them out? 
• If so, for how much and on what terms?  
• Can you strike out on your own, or are you stuck with the baggage of the old one? 

What if you die instead of your partner?

• Will your partner pay your family a fair price for your share of the business?
• Will he just walk away and start up a new business on his own?

The 3 Problems of Business Continuation

1. No buyers offering a fair price – There may not be a ready market for your business in even the best of economic times, and unforseen events like death or sickness can force a fire sale. You may work hard all your life to build a business, but have nothing to leave your family.

2. Forced Partnership with a spouse or child – If you don’t have the cash to buy out your partner’s interest,  you may find yourself in business with a spouse or child who may actually be a drag on the profits and viability of your business.

3. Can you leave a family legacy? – If you die before your partner, what assurance do you have that your surviving partner will pay your family a fair price for your share of the business?

Robert W. Wood, who writes about taxes and litigation issues for Forbes, sums up why a  buy-sell agreement is so important for anyone who owns any kind of business:

Without it, a closely held or family business faces a world of financial and tax problems on an owner’s death, incapacitation, divorce, bankruptcy, sale or retirement…A buy-sell agreement can ward off infighting by family members, co-owners and spouses, keep the business afloat so its goodwill and customer base remain intact, and avoid liquidity problems that often arise on these major events.

Creating a Market for Your Business

Business-succession specialists and financial planners often recommend an insured buy-sell agreement to ensure that your family can receive a fair value for the business you worked so hard to build, and allow you to buy out your partner’s share and continue the business as a going concern. It does two things:

1. It creates an immediate market for your business (your partner or a successor employee.)
2. It  can create immediate funds for a fairly valued buyout through insurance.

The 5 Guarantees of A Properly Structured Agreement

A properly-structured agreement will guarantee the following:

1. guaranteed purchaser
2. guaranteed sale
3. guaranteed price
4. guaranteed time
5. guaranteed funding

1. Guaranteed Purchaser

Who will buy?

• the surviving partners must buy

2. Guaranteed Sale

Who will sell?

• the estate of the deceased partner must sell

3. Guaranteed Price

What is the price?

• have a formula or outside valuation

4. Guaranteed Time

When to transact?

• automatically at time of
  • disability
  • retirement
  • death

5. Guaranteed Funding

How to pay?

• selling personal assets
• borrowing from a bank
• paying in installments
• using a life insurance death benefit (see Corporate Uses of Life Insurance)

Implementing A Simple and Cost Effective Solution

Cross Purchase vs. Redemption:  One type of agreement is a cross-purchase:  If you or your partner/successor dies, becomes disabled, goes bankrupt, etc., the other can buy his share.  With a redemption style agreement, the business itself would make the purchase so the owners don’t individually go out of pocket.

With either type of buy-sell, there’s lots of flexibility.  The price might be fixed, determined by appraisal or formula.  The price might be paid in cash or installments over time.  There can be different terms for different events, one price and terms for retirement, one for disability, one for death.

Insurance:  Insurance features prominently in many buy-sell agreements.  You don’t have to use insurance, but it can ensure there’s cash available when the time comes.  For example, whether you or your partner/successor dies first, a life insurance policy on each of you can fund the buyout so your business stays afloat and the spouse/heirs are bought out as agreed.  A buy-sell agreement is funded with life insurance on the participating owners’ lives can guarantee that there will be money when the buy–sell event is triggered. Using insurance to fund the buy/sell agreement has these advantages

• funds are available when needed
• least expensive solution
• new owner does not incur debt when buying the business

Reciprocal Planning:  While you may find it difficult to face these issues and to make some of the decisions, any buy-sell agreement is better than none.  The best thing about buy-sell agreements are that they are reciprocal.  No one knows for sure if you or your partner will be the first to go by death, disability, retirement, or for other reasons, and this reciprocal nature makes negotiating and agreeing on these issues easier to do.

How to Get Started

You’ll need a business or tax lawyer experienced in buy-sell agreements to draft it.  However, these agreements can be surprisingly simple and cost effective. Whatever you pay for it and the insurance premiums on an insured arrangement will be small in comparison to what it can save you. 

One of the best starting points is a financial planner or insurance specialist. They may have prototype documents to recommend to your attorney, but, more important, they may have invaluable experience and can give you guidance in thinking out the key decisions before you meet with an attorney to get it done, which will save you time and money.

Additional Resources:

• Making the Breakup Much Easier
• The Eight D’s of Buy-Sell Agreements
• Buy/Sell Agreement Checklist
• Sample Buy/Sell Agreement

 

 

Is Permanent Life Insurance the New Gold?

Gold Didn’t Pan Out

April 2013: Gold dropped to its lowest level in two years – on top of a 10% fall over the past six months.

Gold was supposed to be a secure investment in an uncertain time – so much so that an April 2011 Gallup poll found that 34% of Americans thought that gold was the best long-term investment, more than another other investment category.

Then,  two years after its price reached a new high, it plunged to its lowest level in over two years, falling 19% since late 2011. This is the greatest decline in 33 years, amid record-high trading.

According to the New York Times, the crash of a golden decade of rising prices caught many investors by surprise. Morningstar reports that $5 billion  had flowed into gold-focused mutual funds between 2009 and 2010, bringing those funds to a peak value of $26.3 billion in April 2011. These funds lost half of their value:

It is a remarkable turnabout for an investment that many have long regarded as one of the safest of all. The decline has been so swift that some Wall Street analysts are declaring the end of a golden age of gold. The stakes are high: the last time the metal went through a patch like this, in the 1980s, its price took 30 years to recover.

In a time of plunging global interest rates, why did investors flock to a traditional  inflation hedge?  Why were they willing to buy at such high prices? It seems that many investors mistook gold for a product that could provide them significant protection against economic risk – more in line with an insurance product.

What’s A Safe Investment?

It’s certainly understandable that people would seek a safe haven at a time when many are losing faith in their political and economic systems. However,  given that there are few safe investments to turn to considering the low returns that interest-bearing products have been offering, the allure of gold was perhaps understandable:

Investopedia’s “4 Safest Investments Right Now” – which includes TIPS, I-Bonds, Short Term Bond Funds, and Bank CDs –  have such modest returns that they essentially just aim to preserve principal. Investopedia states:

Any one of these options represents a low-risk low-return solution to preserving principal. You won’t earn much in returns with these securities though. In most cases it will be just enough to keep level with inflation. If you need capital appreciation over the long term, you’ll have to take on more risk.

A Different Approach to Wealth Preservation

One financial vehicle that has recently been enjoying a resurgence of interest is permanent life insurance.  

2012 was a very big year for permanent life insurance sales according to research and consulting firm LIMRA, :

• Total individual life insurance new annualized premium grew 6% — the third straight year of growth.
• Total individual life premium grew 12% in the fourth quarter — the largest growth recorded since the downturn.
• Life insurance policies sold grew 1%  — the second consecutive year of positive annual policy growth.

The fourth quarter of 2012 was the biggest quarter for life insurance sales in a very long time – in fact, there hasn’t been a quarter in which all of the major product lines experienced growth since 2006. And the last time individual life insurance policy count increased two years in a row was back in 1980-1981.

Creating Certainty In An Uncertain World

Why the sudden resurgence of interest in life insurance? LIMRA’s Product Research senior analyst Ashley Durham attributes growth to a few different factors, including a continued attraction to guarantees and growth potential. What differentiates permanent life insurance from other financial vehicles are 3 unique benefit features:

1. Competitive Return Potential

In today’s volatile markets, secure financial vehicles that provide competitive returns are hard to find.  In an environment of such low returns, permanent life insurance’s cash value provides an interesting alternative.   William Byrnes and Robert Bloink put it this way in Advisor One:

Considering the premium placed on stability in recent years, investing in a permanent life policy might be the best bargain on the market.

2. Lifetime Guarantee

In addition to providing a cash value savings element, permanent life insurance provides a feature that other financial vehicles do not: lifetime guarantees.

Given increased life expectancy and declining health over time, there is no guarantee that the money you put aside for your beneficiaries will ever reach them. You are likely to need it first for medical or other expenses. However, if you own permanent life insurance, you can access policy cash values without surrendering the death benefit. There is also little chance of outliving a permanent life insurance policy, because permanent life policies can remain in force to age 100, and with some policies, to age 120. And, although you may be living on a fixed income as a retiree, life insurance premiums remain fixed for life, or can be paid up in advance.

3. Potential for Explosive Growth

A Wealth Multiplier: The transfer of risk is essential to life insurance. The risk of  a payout to you at death isn’t retained by you alone, but  spread out among all policyholders that the insurer does business with. All customers contribute money to the general account, which is invested, and then claims are paid from it when an individual dies. As a result, the  annual or monthly premium you pay is a small fraction of the benefit that will be paid to your beneficiaries at death.

Example: The chart shows a 65-year-old man who purchases of a policy with a $1,000,000 death benefit for a $26,000 annual premium. In the year of his life expectancy the adjusted Internal Rate of Return (IRR) of his death benefit is 5.88%, or, since he is not taxed, 8.17%.

If he passes away earlier, his IRR will be higher – as high as 108.28% at age 79.  

• In other words, you don’t have to be a big saver to leave a substantial legacy to your beneficiaries. The death benefit paid to your beneficiaries can be many times what you paid into it.

Tax Efficient Transfer: The policy proceeds bypass the often lengthy and costly probate process, and are released to your beneficiaries immediately – which is when they are likely to need it the most – without taxation.

Short on Glitter – Long on Performance

This resurgence of interest in life insurance is a reminder of the uncertainty of our times, and an indicator of changing consumer attitudes. Consumers are more knowledgeable, and LIMRA research indicates that more knowledgeable people are on the subject, the more likely they are to own life insurance. LIMRA found that:

Respondents who knew the most about life insurance. citing multiple sources of information attributing to their understanding of life insurance, either owned life insurance themselves or had heard about it through work, a seminar or financial planner. Most were older, more educated and viewed life insurance as important.

It seems that the smart money is leapfrogging gold.  Life insurance may lack the psychological appeal and rich associations of gold – no pirate ship ever went down with universal life insurance contracts in their hold – but what it lacks in luster, it makes up for in substance and performance:

• Many gold investors bought high and sold low. However, life insurance is actuarially designed to be bought low and sold high – the premiums represent just a fraction of the proceeds.

• While the price and value of gold fluctuate subject to general economic conditions and investor sentiment, permanent life insurance usually offers a guaranteed level premium and a guaranteed death benefit.

• For your beneficiaries, life insurance represents “inevitable gain” tax free.

A dull, plodding performer, life insurance nonetheless provides dependable benefits – it provides down payments to help young families buy their first homes, college educations to launch bright careers, hard cash to pay bills when the earner is not there to provide.

Gold certainly may have a place in your portfolio. Financial planners typically recommend that you allocate a small portion of your portfolio to it to serve as a hedge against financial risk. However, consider how much more protection investors would have by placing a portion of that into permanent life insurance.

 

Monetize your Orphans: Revitalizing Lapsed Customers

NewLink Consulting, Toronto found: 29% of U.S. life policyholders lost contact with the agent/financial planner who had sold them the policy, and 41% if the policy was purchased from an agent/broker.

Guest blogger Mark Weishaar

An orphan can be defined as “One who lacks support, supervision or care”.
How many do you have in your CRM database? How many customers have simply become dormant and shuffled into an inactive or unassigned category?

In a recent conversation with my client from a major life insurance carrier, I was appalled to learn that her company had well over 100,000 orphaned policyholders. In insurance-speak, these are folks who originally purchased a policy from an agent, but were never re-assigned after that agent left the company.

Many industries have a similar category in their database. Inactive bank accounts, infrequent flyers, one-time visitors… the list goes on. It gets me thinking: how many organizations could use a shot in the bottom-line? This category represents a huge untapped asset:

1. Orphans are never contacted. You have forgotten about them, and they have forgotten about you. How likely are they to ever upgrade or buy another product or service from you? 
2. If your competition is effectively marketing – and you know they are – how many competing offers can your orphans resist? Retention rates suffer when customers are ignored. 

The ROI of Marketing to Orphaned Policyholders

Let’s put some dollars and sense behind a simple illustration exercise: 

With the potential for this scope of increased revenue, it makes no sense to me that so many insurance companies do not devote any attention to their orphaned policyholders. Political turf issues over account re-assignment? Possibly. “Don’t rock the boat” and “Let sleeping clients lie” mentality? Maybe. Inertia? Most likely. 

Case Study: A short while back, I worked with a major hotel chain to develop a multi-pronged marketing campaign. Our objective was to revitalize their “dormant” clients: those who had not booked a room within the previous 24 months. Of the many successful initiatives we launched, the highlight was going back to the dormant customers.

After modeling their data against the frequent guests and re-soliciting a predictive-modeled group with an offer, we generated an ROI of 1,090%!

Unheard of? Yes. But true. And I could predict similar successes in your own organization.

So take a look at your entire customer file. Find those pockets of orphaned customers who have been ignored for whatever reason. Develop a strategy to solicit them with a product offering using a predictive model-driven approach. The incremental revenue generation and low acquisition costs are likely to amaze you, and will demonstrate once again the truism that:

Your Best Customer is Your Current Customer.

Mark Weishaar is a veteran financial services direct marketer and senior executive delivering broad range of leadership responsibility, experience and accomplishment across brand strategy, marketing, loyalty programs, customer data analytics, distribution, CRM, and social media on a worldwide basis.  He has directed the sales & marketing of a wide variety of financial services products and programs and held senior level roles in start-ups and  Fortune 100 companies in direct marketing environments, and  traditional agent/advisor companies. He has a unique ability to analyze and develop actionable marketing and sales programs with measurable ROI improvements.

Want to chat with Mark? Reply to him here or leave a comment on the blog.