This Month:
Timing is everything with SS benefits
Group Benefit Sales - Changing strategies with changing times
Healthcare costs rise, employees bear burden in down economy
Things looking up for voluntary benefits
Voluntary benefits remain flexible to serve recessionary marketplace
Benefit offerings do matter to employees
Communication key to employee appreciation of benefits package
One size does not fit all in executive carve out coverage
Effects of financial crisis shake employers into action
Health Savings Account enrollment reaches 8M
Legacy of 2008 market meltdown
Increase "value-added" to win and retain corporate clients



Timing is everything with SS benefits

by Paul Silva, CLU, ChFC

Paul Silva is affiliated with National Long Term Care Brokers, Clifton Park, N.Y. He can be reached at psilva@NYLTCB.com.

Sometimes the most obvious way to improve your business is too obvious. Think of all the potential and existing clients who don't know how to figure out when the best time is to start collecting Social Security benefits. The opportunities are all around us.

Maybe we don't take advantage because we think the problem doesn't really bother any one. Perhaps we learned about how Social Security works so long ago that it has stopped being interesting. Even if you do know all about it, do your prospects?

My opinion is that the importance of Social Security benefits has been downplayed for so long, we've become immune to discussing them. There have been two recent developments that have changed the landscape.

Remember when your clients used to say, "Oh, I don't think Social Security will be there for me, so I just plan as if it doesn't exist."? Have you noticed they don't say that any more? All the bad press about the system becoming insolvent was very effective in undermining public confidence.

While still a concern, it has been lessened by predictions of the system remaining solvent until 2047. Now it's a different ballgame. This is mostly because of the psychological impact of the combined recession and market correction.

Now you are more likely to hear clients express concern about when to collect, because the benefits represent a larger proportion of their expected retirement income. (See Pie Charts)

The trend away form defined benefit pensions put more responsibility on the shoulders of the workers to save for retirement. The market correction made most people more aware of the limitations of relying on huge growth rates.

The result? Like it or not, the public is taking a new, longer look at what proportion of their retirement income will be coming from Social Security. That reality causes a greater concern about making the most of the benefits available.

Since we can't really impact the rate of return on this important source of retirement income, we have few options available. The most important, in terms of public awareness, is deciding when to start collecting.

The "Good Ol' Days" advice was to collect as early as possible. The thinking was, who knows how long the benefits will be available? Currently this thinking may no longer be appropriate. As Social Security benefits have grown in relative share of income from retirement income sources, their certainty of being supported has grown as well. What I mean by that is whatever tax increases it will take; it will be funded. There will simply be too many collecting and dependent upon benefits to politically allow the collapse of the system.

So the question becomes is it worth it to defer benefits to avoid taking a reduced amount? Again, the proportionate importance of these benefits having grown means taking a cut for early collection may be less advisable. A breakeven analysis will show how long a person would have to live to come out ahead by deferring.

Two aspects of the recent changes in the economic landscape will impact on this decision. People are living longer now. I'm assuming people will continue to enjoy improving longevity as medical improvements continue to accelerate. Of course it remains to be seen if "enjoy" will be the right word to use in connection with this lengthened life span. It further could be argued that pending health care reform may make some medical improvements unavailable.

Nonetheless, the scene has shifted. People are now much more open to considering the financial effects of living "too long". Deferring collection of Social Security benefits has also been made more attractive by the market correction. It can easily be shown that putting off collecting raises the monthly benefit by eight percent per year. Now it is harder than it was a couple of years ago to imagine getting a guaranteed risk free return in excess of eight percent on any investment. When taxes are considered, this eight percent increase becomes even more attractive.

Another crucial, but under-appreciated factor exists. It is the Cost of Living Adjustment applied to monthly income. Deferring the collection of benefits actually increases the total number of dollars received. By starting out with the higher monthly income figure, all subsequent adjustments are made on a percentage basis to that larger number. Barring a premature death, this is advantageous to both the worker and the spouse.

Calculating the effect on the higher amounts collectable by the spouse must include the COLAs he/she would qualify for. It is suggested to use 2.8 percent in your estimates. I know this year throws a monkey wrench into the whole COLA issue. This is the first year the system has not had an increase. The drop in gas prices wiped out the inflation for the period measured by the Social Security Administration. How often is that going to happen?

Failing to calculate either the potentially larger benefits payments available to those who defer, or the COLA enhancements sacrificed will be viewed as malpractice. Failing to consider the potential effects of the lost survivorship benefits is unfortunately more the rule than the exception.

Helping people make educated decisions about how to handle the benefits they have earned and paid for will endear you to them in a meaningful way. You can hardly imagine the scenario where this service has been provided that the conversation will not reveal a sales opportunity.

Back to Top




Group Benefit Sales

Changing strategies with changing times

by Larry Blanchard

Larry Blanchard is Vice President of Group Sales and Operations for Security Mutual Life Insurance Company of New York. He can be reached at lblancha@smlny.com.

The marketplace for selling group employee benefit products today is changing rapidly and may require you to re-examine your strategies for selling group and other insurance products.

The group employee benefits marketplace has always evolved in terms of new products, services and technology, but are we on the verge of more radical change? Many experts believe we are and they are predicting major changes in the very near future.

Many factors are poised to cause this radical shift, including higher levels of government intervention, a competitive shrinking global economy, changing consumer needs and demands, changes in the typical family structure, new insurance competition and trends that influence the way individuals research and purchase insurance products.

Few would claim to know what the ultimate impact of pending federal healthcare legislation will be on the employee benefits marketplace. In an extreme scenario, a single-payer government health plan would radically change the benefits landscape in terms of compensation, broker influence and opportunity. While that type of radical health insurance reform is unlikely to be adopted in the short term, it should cause all insurance producers to re-examine and broaden their role as an employee benefits adviser.

Even if there is little change in health insurance reform, a rapidly shrinking global economy and an aging employee population will continue to put pressures on employers that will demand new employee benefits strategies and advice. The employer in Boston, Mass., who used to compete with an employer in Syracuse, N.Y., is now competing with employers from across the globe, global employers that may have lower cost structures and employees who expect far less from their employers in terms of wages and benefits.

The American work force is also aging, which is driving up costs at all levels and across all product lines. How can employers continue to offer incentives to older loyal workers while attracting new younger employees who typically have more diverse needs and demands?

These new challenges demand new strategies and bold ideas. New products like "Tenured DI" offer long-term disability benefits that are tied to an employee's length of service. A combination of core group, buy-up, voluntary and worksite products can also reduce an employer's costs while addressing the diverse needs of all employees, from young to mature.

The demand for more diverse benefits will also cause a demand for better administrative systems and more robust employee education and communication systems. The days of carrier-based legacy systems may be numbered. Those systems are likely to be replaced by specific employer-based administration systems that will consolidate billing, employee eligibility, electronic enrollment and day-to-day administration. Commonly known as HRIS (Human Resource Information Systems), these systems are available today and are being marketed by brokers, consultants, insurance carriers, HRIS companies and payroll vendors. Human Resource Information Systems currently offer a wide range of capabilities, but are likely to become more standardized over time. In the short term, you should at least understand their basic functions, costs and availability. If you do not, others will, and you can quickly lose control of additional sales opportunities as well as your existing clients.

These new specific employer administrative systems are critical to many new benefits strategies. For example, the advent of more voluntary benefits needed to address employer cost and employee choice issues will demand more employee education and ease of enrollment. Today's HRIS can address both issues by reducing employer administrative expenses through automated enrollments and by educating employees about the value and availability of their employee benefits through customized employee benefit summary statements.

Ultimately, many believe that we will see a shift in the employee benefits market from today's "defined benefit" model to a true "defined contribution" model. We have seen that kind of transformation in the retirement world over the last few decades, and it has great appeal to employers offering benefits today. A defined contribution model fixes an employer's annual cost, gives employees greater benefits flexibility and helps employees become more actively involved in both the benefits decision-making and funding process.

As employees become more involved in benefits funding and decision making, a host of new sales opportunities should open up for you. Few would dispute that Middle America is currently underserved by the financial services industry. Tapping into that underserved market through employers and payroll deduction should lead to significant new life, disability, health and other insurance sales opportunities.

While new opportunities should abound for those who adopt and promote new benefits strategies, new competition awaits those who do not. To take charge of your destiny, you must provide cutting edge advice to your clients. Today's benefits adviser has an edge based on experience, reputation, connections and expertise. In the future, however, benefits advisers are likely to see strong competition for their benefit clients from banks, mutual fund companies, payroll companies, Internet providers and others. While these competitors may lack deep benefits experience, they do have good strategies, dedicated employees and, in many cases, deep pockets. If you ignore new technologies, benefit strategies and emerging potential competitors, you do so at your own risk.

So how do you build your new benefits strategy? First, educate yourself on all current benefit enhancements available today. Seek out carriers and other partners who are looking to the future and can help you and your clients craft a better, more cost-effective benefits program. You can no longer afford to be passive in terms of quoting the "in-force plan." A better, progressive benefits strategy will help you write new business and allow you to retain your current clients.

Your carriers and benefits partners should also be open minded about new products, product combinations, administrative interfaces, employee communication, education and enrollment support. Strong progressive benefits partners are critical to your success and the success of your clients' benefits programs.

The future design of employee benefit plans may be uncertain, and change will certainly abound. At the same time, sales opportunities will be plentiful for those who embrace new benefits strategies.

Have you crafted yours?

Back to Top

Healthcare costs rise, employees bear burden in down economy

Against a backdrop of prolonged recession, U.S. employers will see an increase in their medical benefit expenditures of seven percent in 2010. The cumulative effect of ongoing cost increases combined with the current economic climate are creating significant affordability challenges for both employers and employees.

According to data from Towers Perrin's annual Health Care Cost Survey, many employers are preparing to take action by embracing new approaches to benefit management that have the potential to fundamentally transform the current model of health care delivery.

The seven percent rise in 2010 medical benefit expenditures, although marking the sixth consecutive year of single-digit percentage increases, will mean record-high costs for both employers and employees. The average annual per-employee spend will, in 2010, cross the $10,000 mark, and while employers will continue to fund 78 percent of that amount, the actual dollar burden on employees has grown due to the ever-increasing cost base and the added impact of benefit design-related increases in out-of-pocket costs.

Employee premium contributions, on average, will rise by 10 percent, or just over $200, during 2010, a bigger jump than the eight percent increase seen in 2009. This additional burden is exacerbated by indirect cost shifting through benefit design changes such as increased copayments, which add significantly to the overall cost for employees.

The Towers Perrin Health Care Cost Survey has been providing an in-depth, prospective (versus retrospective) look at health care costs for employers for more than 20 years. The 2010 database includes detailed information on the health benefit programs provided by approximately 300 of the nation's largest employers. These companies provide health care coverage to 5.2 million U.S. employees and dependents, collectively spend $29.4 billion on health care every year and, as such, represent a significant force for change in the health care marketplace.�

Analyzing the 2010 data by coverage level, the average reported cost of medical coverage is $5,124 annually ($427 per month) for active employee-only coverage, $10,500 annually ($875 per month) for employee-plus-one-dependent coverage and $15,084 annually ($1,257 per month) for family coverage.

Employers continue to shoulder most of the burden. However, despite ongoing employer support, the affordability gap for employees continues to grow as wages lag significantly behind health care cost increases.

Health care reform looms large

Will health care reform alleviate the growing affordability challenges facing both employers and employees? Data suggest that reform, as evolving, has the potential to actually increase the cost burden for employers and that those additional costs would be passed on to employees, further widening the already pronounced affordability gap.�

For example, one of the most recent, and controversial, provisions of reform proposed by the Senate Finance Committee is an excise tax that would apply, beginning in 2013, to health programs with combined coverages (medical, dental, vision, flexible spending accounts, etc.) valued at more than $8,000 per year for individuals and $21,000 for families. Although these caps sound high, as the chart above shows, more than 50 percent of companies will hit the caps within the next three years if current cost trends continue, and the impact of the caps will increase over time, even with indexing on the tax thresholds after 2013.

Another potential impact of health care reform could be further increases in the prevalence of account-based health plans (ABHPs). To reduce their costs, many employers in recent years have adopted ABHPs, which feature tax-favored savings opportunities for employees. Because these plans have lower actuarial value than traditional health plans, they could actually help employers delay hitting excise tax cap limits by up to two years.

ABHPs continue to gain ground

Employer adoption of ABHPs has risen significantly over the last five years, from 20 percent to 60 percent of companies, as employers recognize and embrace the value of these plans in controlling their health care costs and reducing the employee affordability gap.

These plans provide both employers and employees with a clear cost advantage. Premium costs for a traditional ABHP are $8,927 per employee annually, which is 13 percent less than the average traditional plan and unused account funds roll forward to defray future out-of-pocket costs. The lower cost of these plans also provides employers with a solution to hold family benefit values below the proposed $21,000 excise tax cap.�

Because these programs are fundamentally different from traditional plans, however, employers have had varying degrees of success with them. High-performing companies, in particular, have had more success meeting their objectives:

High performers achieve financial advantage, insulation from reform cost hikes

The survey identified wide variations in the costs faced by high- and low-performing companies, with high performers paying 16 percent less, roughly $1,800 per employee, for their health benefit programs. This cost differential means that a high-performing organization with 10,000 enrolled employees would spend, on average, $18 million less annually than a low-performing competitor.

The survey revealed some other important characteristics that differentiate high from low performers, which point to future trends that all employers will begin to adopt to keep their costs down while continuing to deliver health care value.

Employer actions point to new directions for health programs

With the convergence of ongoing cost increases and the growing recognition that new health management programs can slow and even reduce the rise of chronic disease, employers seem far more receptive to taking steps in new directions to evolve health care delivery in ways that better address these growing challenges. Furthermore, health care reform proposals evolving in Congress would support many of these new and innovative health care delivery platforms.

The data show employers adopting a range of bold changes aimed at influencing employee behavior and decision making, adopting leading-edge technologies and taking other innovative actions that hold the potential to disrupt, for the better, current delivery models. Employers are eyeing a number of new directions including:

Employee incentives

High-performing employers will, over the next few years, expand their use of incentives to engage employees in health and wellness initiatives, such as health risk assessments, wellness programs and biometric screenings.

Behavioral economics

Employers are beginning to leverage the potential behavioral economics holds to improve consumer decisions about health and health care, with 15 percent of high performers using this innovative decision design model today and 48 percent expecting to do so by 2012. Also expected to grow are related programs that promote good decisions and offer convenience as an incentive, including on-site biometric screening, promotion of healthy foods and access to retail clinics.

Personalized health management and care delivery

Just as doctors are taking steps to personalize treatments to individual needs and preferences to improve outcomes, employers are moving toward segmenting their employee populations and using a broad range of personalized approaches to influence employee behavior and decision making. New directions in customization include:

Back to Top




Employees turn to employers for LTCi education and perspective

by Henrik Larsen, MBA, CLTC

Henrik Larsen, MBA, CLTC, is VP, Marketing of Advanced Resources Marketing, a national distributor of Long Term Care insurance, Boston, Mass. He can be reached at 800-269-2622 or at hlarsen@armltc.com.

On Oct. 14th, the U.S. military reported that all four services had met or exceed their yearly recruiting and retention goals, as well as their overall quality goals for 2009. This was the first time that had been accomplished since the end of the draft, more than 25 years ago. This probably comes as no surprise as employment numbers have been trailing the recent recoveries we have seen in the stock markets and other economic indicators. And when asked, the recent military recruits responded predictably that their primary reason for entering the service was job security, and benefits.

There is no doubt that most of the population has been and is very concerned about their overall job situation. The concerns take three successive forms:

  1. Do I have a job?
  2. How secure is my job situation?
  3. I need to take a closer look at understanding and managing my benefits.

It appears that a majority of employees currently find themselves somewhere between two and three.

Despite the overall long term care insurance (LTCi) industry being down some 15 to 20 percent year-to-date, we have experienced an increase of 12 percent in our employer group LTCi production year-to-date (Q1-Q3) compared to the same period last year. Equally interesting is the fact that this increase pertains to both contributory/employer funded plans (up 14 percent) as well as non-contributory/voluntary plans (up 11 percent). This increase can be attributed to some interesting trends holding great promise for the months ahead.

TRUST

As we have all seen our qualified retirement plans and other investment portfolios being "impacted" by the economy, employees are increasingly turning to their employer for not just financial products but to a larger and larger degree also for independent advice. Many employees are, rightfully or not, to some extent blaming their financial planners or stock brokers for the decline in their investment portfolios. Add to that, the same employees have a sincere appreciation for simply having a job, and the result is a newfound respect for their employer in general and their benefits package in particular.

Case in point - In May 2009 we enrolled a non-contributory LTCi program to a company with about 800 employees. The enrollment was postponed by six weeks as the company went through layoffs of close to 100 employees. Our participation came in at 20 percent and premium results exceeded estimates based upon census demographics by 87 percent.

EDUCATION

While employees are looking to their employers for advice, similarly they are looking for education and perspective. Employees are seeking not just information about a particular benefit but also how it relates to their overall benefits portfolio. Other than a qualified retirement plan or a pension, LTCi is generally the only benefit an employee will port into retirement. We have found that this represents a unique educational opportunity. LTCi needs to be positioned as retirement income protection.

Much like STD, LTD, and DI provides for income protection during working years, LTCi provides income protection during retirement. This concern is increasing in importance among employees. A MetLife survey conducted in late 2008, showed that second most important retirement concern was providing for spouse's/partner's long term care needs and the importance of this concern had increased between August 2008 and November 2008 by more than any other retirement concern: 17.3 percent.

Case in point - We recently enrolled a non-contributory LTCi program to a company with approximately 1,500 employees. During the first two weeks of the open enrollment period, we conducted 12 one-hour educational seminars. We had an average attendance of 35 employees per session for a total of 420 attendees. This exceeded the attendance for the roll-out of their qualified retirement plan by over 20 percent. Overall participation exceeded estimates based upon census demographics by 35 percent.

Interest Origin. When I started in the LTCi industry in 1995, the average age of my client at time of purchase was 71. As we have all seen, the average age has dropped significantly over the years as we are marketing LTCi to younger and younger consumers. Currently, the industry average is around 57 and in the employer group market it is closer to 50. This trend has had an interesting effect on participation and how multi-life cases originate:

The uninsurable "buyer"

Eight to 10 years ago, we often heard from employers who wanted to put a plan in place to cover an older uninsurable employee.

The affected buyer

As the average age of the LTCi buyer dropped, this trend was replaced by employees who had seen firsthand the devastating effect the need for long term care can have on a family's financial and emotional wellbeing. Their experience was with a parent or other family member.

The affected buyer II

Lately, as a natural consequence of the prevalence of LTCi, we have now seen employees who have seen the remarkable effect existing LTCi can have in situations were long term care is needed for parents or other family members.

Case in point - We are about to enroll a non-profit company with about 100 employees. The President of the company has decided to fund significant coverage for 11 (executive) employees and strongly promote the plan among the rest of the employees. This will be the first discriminatory contributory plan of its kind within the company. The reason? Both the CEO's parents are currently receiving long term care reimbursed by insurance.

Executive compensation

This last trend pertains to executive carve-outs where we have seen an unexpected increase in production due to an interesting factor: bonus offset. We have enrolled four cases year-to-date where the employer for various reasons decided not to pay bonuses in 2008 but wanted the executives to have something.

Most interestingly though, in conversations with the decision makers we posed the question for obvious reasons whether the carve-out plan would be sustained when/if the economy is better and bonuses conceivably return. The answer was affirmative as key decision makers are aware of the renewed attention to and appreciation for benefits. One CFO expressed it best, when she said that employer provided (executive) benefits are better tools to communicate job security than are bonuses.

Back to Top




Things looking up for voluntary benefits

by Ron Fields

Ron Fields is Territory Sales Manager for the Maryland/Delaware/Washington, DC offices of Colonial Life & Accident Insurance Co. He can be reached at RFields@ColonialLife.com.

During strong economic times, it's human nature to think things are okay and they're going to remain okay. It's when times are tough that we tend to reflect more deeply on what we stand to lose. That's why today's economy actually holds promise for brokers and financial advisors.

With job losses, reduced benefits and foreclosures weighing heavily on the minds of your clients and their employees, everyone's more open to solutions to help combat the aftermath of the recession. So there's no better time than now to position voluntary benefits as a viable option to your clients' most pressing benefits concerns.

Clients Are Struggling

Managing finances, getting credit, reducing expenses and improving cash flow are just a few of the worries employers face right now. Today's economic realities and an unrelenting competitive environment have forced companies of all sizes to rethink the way they handle their operations. And with human resource departments stretched to the limit, companies are looking for ways to manage employees' concerns about hiring reductions, layoffs, salary or wage freezes and changing benefits packages.

Financial Safety Nets Are Eroding

Employees are also wrestling with the effects of a downturned economy. Every day, families are faced with tough choices between making payments on mortgages or credit cards, purchasing basic necessities, paying utilities or continuing to carry insurance, especially health coverage. Living from paycheck to paycheck means an unexpected medical expense or the sudden loss of income can quickly send families spiraling into debt that's difficult or impossible to pay off.

Changes made to benefits plans, such as increased premiums and deductibles, larger co-pays and reduced coverage, are also placing employees at increased risk. In fact, a recent survey by Colonial Life showed that 68 percent of employees feel their insurance may not provide adequate coverage.

Benefits Are More Important Than Ever

In the midst of today's economic challenges, benefits are the mainstay of an employee's financial security. That's why strengthening an employee benefits package with voluntary benefits makes sense right now. Integrating voluntary benefits with core group offerings allows your clients to help employees protect themselves against increased financial exposure and help alleviate the economic pressures so many businesses are now experiencing. Voluntary insurance plans also allow your clients to offer a cost-effective, expanded benefits package at little or no direct cost to them. They're especially helpful in the following situations your clients deal with during poor economic times:

Voluntary Benefits Offer Many Advantages to Your Clients

Employers gain many benefits from offering voluntary benefits, according to recent research by LIMRA. Companies see value in the following areas:

Choose a Benefits Partner Wisely

Brokers have a variety of voluntary carriers with whom they can choose to partner. But not all carriers are the same. To find the carrier that's right for your agency, evaluate a partner based on the following criteria:

Take a Proactive Approach

Most brokers are spending an abnormal amount of time right now hanging on to the business they have. Voluntary benefits allow you to deliver a message that's more palatable to your client. By being proactive and offering voluntary benefits as a solution, you'll be ahead of the curve and can address your clients' needs at a time when they need you most.

Back to Top




Voluntary benefits remain flexible
to serve recessionary marketplace

by Barry Petruzzi

Barry Petruzzi is 2nd vice-president for Group Life/DI with Guardian Life Insurance Company of America. He can be reached at barry_petruzzi@glic.com.

In a recessionary market, even as employers and employees scrutinize every dollar they spend, sales of voluntary life benefits have held up quite well.

There are some very clear reasons for this. Voluntary benefits, and life coverage in particular, have bucked the economy's slide because they offer value and make very good sense in an uncertain climate. Employees understand that critical protections are a foundation to any personal financial plan through good times and bad. They look to their workplace for protection, even if offered on an employee-pay all basis. Employers, for their part, see that benefits play an increasingly important role in recruitment and retention, particularly at a time when payrolls are pinched and headcount and employee morale may both be down. But let's not overlook the important role carriers have played in this scenario as well. New, flexible plans have helped to drive home the message that voluntary life insurance is a smart move, particularly now.

Creativity to meet the challenge

Creative insurers have risen to the occasion to offer value at a time when the economy's direction seems quite unclear. In some cases, carriers have set up re-enrollment options that allow policyholders to increase benefits at a regular annual rate without a medical exam, a feature that acts as a hedge against inflation (which we all hear could possibly ramp up in the next few years). Insurers have taken other steps as well to make life insurance coverage more flexible. Some now allow employees who enroll in voluntary benefits the option of increasing coverage in the first few years of their policy without undergoing an additional medical exam. In a labor market where salaries are constrained, that move allows employees, and young workers who are starting off careers in particular, a chance to elect coverage at a reasonable initial price point and build upon a foundation of basic protection over time.

Our industry needs to keep up efforts like these, considering the fact that voluntary benefit solutions play an important role. After years of steady premium sales growth, group and voluntary plans offered on the job have in many instances become the primary or sole source of critical protections such as life insurance for millions of people. While 50 years ago, a majority of those same workers might have also been in contact with an insurance agent, today less than half have come in direct contact with an advisor. That comes at a time when industry surveys have shown that Americans feel they are underinsured.

Employer solutions - The case for voluntary benefits

Voluntary life coverage and other workplace options have filled in as a perfect solution. Voluntary benefits give employers an opportunity to sponsor a valuable benefit. By providing a voluntary life plan, companies offer a rich selection of essential protection options to employees who in turn benefit from their company's purchasing power by having choices they might not be able to afford on their own. That's an important point at a time when salaries are being frozen and payrolls cut. In many cases, fewer employees are now asked to take on more work at the same or lower pay. And, don't overlook the fact that voluntary benefits make sound financial sense as well. Current tax codes exempt from employee income the premium on the first $50,000 of employer-paid group life coverage. Add that base to a voluntary supplement and small businesses can fashion a very attractive group of benefits at a good price.

Benefits for employees - Providing protection when needed most

There's an equally compelling case to be made for voluntary life coverage from an employee's standpoint. To many workers these are times of tough choices. Household budgets are squeezed and people of every economic stratum are facing a challenge to get the most out of limited resources. Consumers are postponing or cutting expenditures in order to make ends meet. At first glance, the notion of expanding life coverage might seem counter-intuitive under circumstances like these. Our message to the consumer marketplace is for people of all ages and walks of life to step back and consider just how much value they get from their life policies. Voluntary plans offer relatively inexpensive protections to cover very large sums of money: a policyholder's income over time in the event of a crisis. Life coverage provides invaluable comfort to loved ones and beneficiaries, all for about the cost of a cup of coffee for a week.

Focusing on value

In the current economy, neither employers nor employees can afford to slash away at expenditures blindly. Instead, it's important to remain focused on value and just what plans are the best at the best price. There are several things employers should focus upon when shopping for coverage and employees should consider:

Carrier commitment-Employers and employees are busier than ever. Their time is precious. It's imperative, therefore, that insurers provide a lot of support to clients. A carrier can simplify choices for company management by reaching out to employees, who are often overwhelmed with choices and confused about the decisions they must make. Guardian surveys have in fact shown that many workers would rather spend time shopping for presents than sift through benefit plan choices. An experienced carrier will have brochures, websites, flyers and a team of advisors, all at the ready to step in and guide policyholders before, during and after enrollment.

Carrier stability-In these times, it's important for employers to seek out a strong, stable carrier as well. That's especially true for life and disability coverage which require long-term financial commitments. It's important to look for a company that has not only established a track record of providing benefit solutions, but has been recognized as steady and resilient by industry rating agencies such as A.M. Best. Objective sources like these are able to examine an insurer's capitalization with regard to long-term obligations.

Employee concerns-Employees should examine how much insurance they can get under a guaranteed issuance without additional underwriting or medical hassles. Because they need to keep up with inflation and the exigencies of their changing lifestyles over time, it's important to sign on with life insurers that can accommodate by allowing them to increase coverage automatically or when policyholders choose. Finally, flexibility is a key concern in an era when we can expect members of the workforce to change jobs regularly. The ability to transfer coverage from one workplace to another helps policyholders maintain protection throughout their careers.

Rising to the Challenge

Yes, the challenges we face today in the current economy are formidable. The solutions offered under voluntary life coverage, however, can make them more manageable. We're providing stability in a world of uncertainty, a safety net that can put our clientele at ease. Our ability to fashion creative, flexible options can help steady employers' and employees' nerves in a turbulent time.

Back to Top




Benefit offerings do matter to employees

by Marc Warrington

Marc Warrington is senior vice president of sales at Assurant Employee Benefits, Kansas City, Mo. He can be reached at marc.warrington@assurant.com.

 Small businesses can face significant challenges when competing against larger organizations, particularly when it comes to things like price points, technological capabilities and even employee benefits offerings. Still, their size and nimbleness can allow them to innovate and, when the economy allows, create new jobs at a faster rate than their larger competitors.

Because many small businesses have no dedicated human resources professional on staff, employee benefits often become one more burden that business owners are forced to take on. While employers may not welcome the challenge that choosing benefits can present, this scenario provides a great opportunity for brokers to partner with their small business clients and demonstrate both their benefits knowledge and value as trusted advisors.

Industry statistics indicate that smaller businesses generally offer less extensive employee benefits plans than their larger counterparts. As a broker, you can show them how large the gap is and why it's important to shrink it. Here are a couple of startling findings from the 2007 National Compensation Survey:

Why was there such a difference between the benefits offerings of smaller businesses and larger ones? Were these smaller employees overwhelmed by the options available in the marketplace or under-informed about what's available? Perhaps they were intimidated by the potential cost of offering employee benefits.

There are many choices and price variations out there and you can help them make sense of it all. According to many industry studies, first-time buyers in particular are significantly influenced by their broker's opinions when deciding what benefits to buy and when. Without you to educate these employers about the value of providing employee benefits, they might never compete with larger competitors for the top-quality talent they need to keep their businesses successful.

According to the Employee Benefit Research Institute's November 2004 Issue Brief, 79 percent of workers reported that the benefits a prospective employer offered were very important in their decision to accept, or reject, a job. Another 16 percent indicated that benefits were somewhat important to their decision to take or leave a job. Clearly, benefits matter to employees. And in a down economy, when many employers are unable to provide pay increases, benefits can be more important than ever to help keep employees engaged.

A particularly important benefit for employers to offer is disability insurance, but many small business owners may not realize just how likely disability really is.

The Council for Disability Awareness, a non-profit group established to help the American workforce become aware of the growing instances of disability and its financial consequences, is an excellent resource for both employers and employees. It offers the following information for you to share with your clients:

While many people think that disabilities are typically caused by freak accidents, the majority of long-term absences are due to back injuries and illnesses, such as cancer and heart disease.

Given these alarming statistics, it's no surprise that employees are attracted to companies offering options beyond traditional health insurance. You can advise your small business clients on how to find plans that are right for them.

An increasing number of carriers are developing ancillary products specifically with the small business community in mind. Many offer the choice and flexibility typically provided by much larger companies. While it may be difficult for smaller business owners to provide the same level of benefits that many large companies offer, there are affordable disability, dental and life insurance options available that can help make them more competitive against larger organizations.

When working with small business clients, customize your pitch by finding carriers that focus on this segment of the market. LIMRA International and JHA, among others, are excellent resources for determining major players in the small business market. As their trusted benefits advisor, your clients depend on you to know which products and carriers are the best fit for them. As you put together your pitch, consider the following:

DISABILITY INSURANCE

With so many Americans living paycheck to paycheck, income protection in the event of disability is a valuable benefit for all employees and their families. Both short-term and long-term disability plans can easily be customized to provide the level of protection employees need and want. And disability benefits can also protect employers if one of their highest income-generating employees becomes unable to work due to disability.

DENTAL INSURANCE

Everyone needs regular dental care, as it can help improve overall health as well oral health. While dental plans may appear to be the same on the surface, features such as multiple free cleanings each year or a large provider network can be particularly important to smaller employers.

LIFE INSURANCE

Life insurance is an affordable and attractive benefit that can enable employees to protect their family members even after they're gone. Life insurance policies vary and can be customized based on an employee's income.

VOLUNTARY COVERAGES

Voluntary group benefits are a flexible and affordable option for smaller employers with tight budgets. Because they are 100 percent employee-paid, cost to employers is reduced to only administrative expenses. At the same time, employees are able to purchase benefits they want and need at favorable group rates through convenient payroll deduction.

Small businesses fuel the U.S. economy and there are many insurance carriers dedicated to assisting this segment of the market. An investment by brokers in educating their small business clients and providing creative options that meet their needs can result in significant financial benefits. When you partner with your clients to help them be more competitive in the benefits arena, you can continue to build and strengthen your relationships with them as they grow and add to their benefits packages.

Back to Top




Communication key to employee satisfaction with,
appreciation of benefits package

by Donna K. Owens

Donna K. Owens is Director, Multi-Life Segment Strategy, for Berkshire Life Insurance Company of America, Pittsfield, Mass., a wholly-owned stock subsidiary of The Guardian Life Insurance Company of America, New York, N.Y. She can be reached at donna_owens@berkshirelife.com.

An employer can take great care to structure a first-rate benefits program. But if that same employer doesn't take just as much care to communicate those benefits, employees may not even appreciate the effort.

That's what a 2005 Watson Wyatt Worldwide Study proved. In organizations with rich benefits but poor communications, only 22 percent of employees reported being satisfied with their benefits. But in companies with less attractive benefits but better communications, 76 percent of employees were satisfied. Benefit advisors, take note: regardless of the benefit strategy you suggest to your clients, communications are crucial.

In this challenging financial climate, it is vitally important that employers ensure that every dollar spent providing benefits is maximized; benefits are not only understood by employees, but also valued and appreciated. This is especially true as employers are looking for ways to enhance benefit plans to increase employee morale and retain talent.

Case study: Education makes the sale

Consider the recent experience of a human resources director at an industrial real estate development and property management company. With eight regional offices, more than 200 employees and assets in excess of $894 million, this firm has a reputation for providing excellent benefits to attract and retain employees. However, when the HR director's financial advisor uncovered a significant exposure in her disability income insurance coverage, she also uncovered a major exposure for her company. To say the least, she was very surprised to learn how significant the gap was.

Although the real estate firm's long-term disability plan was good, including a generous $15,000 a month benefit cap, it only covered base salary. "I think that was the biggest eye opener for me," she said. "I'm in an organization where bonuses and commissions can make up a large percentage of an employee's total compensation. I was amazed that a significant portion of employee income would not be protected."

This is where a disability income provider focused on the worksite market can make a meaningful difference. Based on the company's profile, we developed a voluntary supplemental disability income insurance program that met all of the company's needs, including a guaranteed standard issue $5,000 monthly benefit, along with riders covering modified own occupation, basic residual and a three percent cost of living adjustment.

Working with the employer, the team was able to customize a funding solution that worked for both the employer and the employees, essential in this economy when both are looking for ways to manage expenses. The real estate firm further demonstrated its commitment to the voluntary program by promising to fund 50 percent of premiums for employees (up to $50 per month).

When benefits are offered on a voluntary basis, education is crucial. So key to a successful implementation of this particular enrollment was helping employees understand their current coverage and how accepting the voluntary offering could help fill any gaps. The team not only developed a detailed implementation timeline and communication strategy to guide the financial advisor and HR director through case set-up activities and into enrollment, it offered hands-on consultation and tools to communicate the program's strengths, as well as other tactics for increasing participation.

Technology played a role, too, in enhancing the employees' appreciation of the value-added benefits available to them. Our online enrollment web site combined personalized education and income scenarios based on each individual's situation with actionable navigation that made it easy to begin the application process.

Voluntary benefits not a one-size-fits-all proposition

That same technology-enabled flexibility not only allowed each employee to select the coverage option that best fit his or her needs and budget, it also gave the HR director the ability to design variations for different employee groups within the company.

The end result: we enrolled 87 of the 110 eligible employees, an amazing 79 percent acceptance rate. Not only did this strategy fill the gap of the existing group LTD plan, it also educated the employees on exactly what their benefits cover. For the financial advisor, the case resulted in more than $135,000 in premium; it also opened the door to nearly 90 new client opportunities for personal planning.

But the education didn't end with the enrollment. As the HR director explains,"Even after the enrollment was completed, the team helped me by providing a one-page report I could use for employee exit interviews to explain the product's portability." Going forward, the carrier will provide the HR director with targeted engagement tactics for new hires, employees who may have declined coverage earlier and those eligible for coverage increases, underscoring the notion that customized education is an ongoing imperative for a voluntary benefits program to be truly effective.

Bridging the divide between employees' awareness of the need and their appreciation of their benefits requires a more customized communication program, which is why the most effective supplemental disability insurance communications are customized four ways:

These are just a few of the supplemental DI program attributes that financial advisors and their benefit manager clients should expect from carriers to engage employees in learning about, and taking greater advantage of, the supplemental disability benefits offered by their employers.

After all, a person's ability to earn an income is one of the most valuable assets he or she has. It's time employees see their employer's protection of that asset as one of the most valuable benefits available to them.

Back to Top




One size does not fit all

Customization essential in executive carve out coverage

by Dianna Duvall

Dianna Duvall is senior vice president - risk operations at Assurant Employee Benefits, Kansas City, Mo. She can be reached at dianna.duvall@assurant.com.

When it comes to group employee benefits, one plan doesn't necessarily fit all, especially when an employer is seeking to protect multiple classes of employees, including high-earning executives. The good news for you and your clients is that it's possible to structure coverages that can work for every employee in a group and at the same time provide the higher levels of financial protection that executives need and expect in a benefits plan. The key is customization.

Finding flexibility in disability insurance plans

Let's start with group disability insurance plans, which can be customized to accommodate different benefit schedules for different job classes or titles. As an example, an employer can opt to implement one level of coverage for executives, another for salaried employees and a third level for hourly employees.

For most executives, it is as important to protect their ability to continue working in their chosen occupation or specialty as it is to protect their income. Incorporating a different definition of disability that includes an own occupation or own specialty test into the executive portion of a group disability insurance contract can help ensure that protection.

An alternate earnings definition can also be implemented for executives to ensure that any disability benefit they may be paid is based on their total income, not just base pay. The definition can be expanded to include commissions, bonuses, deferred compensation, other pre-tax contributions such as employee contributions to 401(k) plans and other retirement plans, which make up a significant portion of many executives' overall compensation.

Equally important to consider with executive disability coverage is a higher benefit maximum. Long-term disability insurance contracts typically pay a benefit of 60 percent of pre-disability pay, to a set monthly maximum, often $3,000, when an insured experiences a qualifying disability. While that would cover someone earning up to $60,000 annually for a full 60 percent of their income, most executives would be severely underinsured under such a plan. A higher monthly benefit maximum is crucial to properly protect high-earning individuals.

Employers seeking to provide added protection at the executive level should be aware of a disability policy's offsets and how they are applied, as this can significantly impact the benefit paid to an insured. Insurance carriers typically reduce their disability benefits by the amount of other income an insured may receive, such as Social Security disability benefits, but it's possible to reduce or eliminate such offsets. Doing so would result in larger benefit amounts for insureds.

In addition to providing for the financial protection of executives in the disability contract itself, employers can help ensure that this group of employees receives the maximum benefit possible by adjusting the way the premium for disability insurance is paid. When an employer pays the premium, any disability benefits an employee receives are taxable to that individual, which means he or she ultimately receives less benefit overall. To ensure that employees receive the entire benefit amount to which they are entitled, employers can either pay the disability premium and increase employees' taxable pay by that amount, or increase employees' taxable pay by the amount of the disability premium and then deduct the premium from their salaries. That way, the premium has been taxed, which makes any benefit paid tax free.

Protecting key employees and the businesses they benefit

An employee is not the only one that can suffer due to disability. Many small businesses in particular would suffer as well if certain key employees, including executives, were unable to work, even for a short time, because of a disability. As a result, some insurance carriers offer optional benefits in conjunction with their disability coverage that are designed to help businesses minimize financial loss when a key employee becomes disabled.

With this type of benefit, policyholders can generally specify a set number of revenue-generating or key executives whose disability and subsequent absence would result in the business sustaining a substantial financial loss. The policyholder is typically paid an amount equal to a disabled employee's benefit amount to help the business maintain financial stability while waiting for the employee to recover and return to work.

High earners require more life insurance

Group term life insurance is among the most common benefits provided by employers to their employees. It can be easier and less expensive to obtain than individual insurance, particularly for older employees or those with health issues, and is another coverage that can easily be customized to appeal to executives. As with disability insurance, these high earners need higher amounts of life insurance to effectively protect their family members, and sometimes help ensure the continuation of a family business, in the event of an untimely death. The higher guaranteed issue amounts they require can be incorporated into the executive portion of a group term life insurance plan that covers all of a business's employees.

Options for dental insurance

According to research released by LIMRA International in 2003, employees rank dental insurance as the second most important employee benefit after health insurance. Fortunately, a number of group plans are available for employers to offer in the workplace on either an employer-paid or employee-paid basis. While most executives are unlikely to be particularly concerned about the premium cost for group dental insurance, there are dental coverage plans that have been created to meet a wide range of dental care needs and budgets. For employers who offer such a plan, the impact can be somewhat similar to the customized disability and life options discussed earlier. There may be no specific benefits included especially for executives, but that group of employees has the opportunity to select a comprehensive dental plan if they choose to do so.

While the financial protection needs of executives may be considerable and complex, the solutions don't have to be. In many cases, group insurance plans can effectively address the requirements of your clients and the individuals that lead their businesses. By working closely with your clients and carrier sales representatives, it's possible to craft options that result in a winning situation for everyone involved.

Back to Top




Effects of financial crisis shake employers into action

As the crisis continues, employees' growing concern seems to be not how they will finance their future, but how they will finance their present

As the financial crisis continues, it appears U.S. employers view the situation as significantly more serious than they did just six months ago. A follow-up survey conducted by the International Foundation of Employee Benefit Plans in May 2009 found that the crisis has forced both defined benefit (DB) plan sponsors and defined contribution (DC) plan sponsors to make changes to their retirement coverage and plan design.

"Six months ago, many retirement plan sponsors reported they were 'taking the long view' of the situation," said Sally Natchek, Senior Director of Research at the Foundation. "Now, employers seem to view the crisis as more severe. There's been a jump in the number making changes to their offerings, categories of employees covered, asset allocations and employer matches."

DB plans change asset allocations and reexamine offering pension benefits

The survey found that the financial crisis has prompted 42 percent of DB plan sponsors to make changes to their strategic asset allocation, more than double the 20 percent who reported having changed allocations six months earlier. Of the DB plan sponsors who changed asset allocations as a result of the crisis, the most common changes are increasing fixed income assets (37 percent), reducing U.S. equity allocations (17 percent) and increasing alternative fund investments (13 percent).

In addition to changing their asset allocations, DB plan sponsors are reexamining offering a pension plan at all. More than a quarter of DB plan sponsors (27 percent) have discontinued offering pension benefits for all or some employees and 21 percent have closed their plan to new participants. Respondents from the corporate sector are the most likely to have implemented these changes with 40 percent reporting they had discontinued offerings to some or all employees and 34 percent stating they had closed their plan to new participants.

DC plans change product offerings and reconsider employer matches

As of May, 13 percent of DC plan sponsors have changed their investment product offerings, almost double the seven percent who reported executing changes six months earlier. Of the 13 percent who have implemented changes, 21 percent added more low-risk investment choices, 18 percent increased diversification, 16 percent added life cycle (target-date) funds or money market funds, and 15 percent added government-backed options.

Besides impacting investment offerings, the crisis is also having an impact on the employer match. Sixteen percent of DC plan sponsors reduced or eliminated employer matches as a result of the economic situation. Of those who report having changed their match, 44 percent have reduced the amount of the match and 52 percent have suspended the match all together; corporations are the most likely to have taken this action.

"Although the number of plan sponsors who have reduced or eliminated their employer match is relatively small, the number is still significant since any change tends to result in the employee lowering his or her contribution," said Natchek.

Impact of the crisis causes employees to alter their DC plan contributions

The ongoing crisis appears to be having a substantial impact on employee efforts to save for retirement. A large percent of DC plan sponsors, 44 percent, report a decrease in participants' overall amount of contributions. This is a sharp uptick since October 2008 when just 28 percent of plan sponsors reported this trend. Even more notable, 40 percent of DC sponsors report an increase in the number of participants completely stopping plan contributions.

Hardship withdrawals and loans from DC plans are also on the rise with 42 percent of plan sponsors reporting an increase in the number of participants making hardship withdrawals and 40 percent reporting an increase in those borrowing from retirement accounts. This is in contrast to six months ago when 29 percent of plans sponsors reported an increase in hardship withdrawals and 28 percent indicated an increase in loans.

"It's important for employees to keep contributing to their 401(k) accounts to ensure a secure retirement, however if the crisis continues we're likely to see these numbers increase even higher," said Natchek. "This could have a potentially devastating impact on the retirement future of many Americans."

Job security ranks as employees' number one concern

As the crisis continues, it appears that employees' main concern has shifted from retirement worries to anxiety about their job security. Plan sponsors report decreased job security as the major concern of their employees given the current crisis (48 percent). This is in contrast to six months ago when job security ranked fourth among major concerns at 34 percent, while delaying retirement topped the list.

"As the crisis continues, employees' growing concern seems to be not how they will finance their future, but how they will finance their present," said Natchek.

It seems that employees' worries are justified as half of employers (50 percent) have already implemented layoffs or reductions in their workforce and an additional 11 percent expect to take such actions in the next 12 months. In addition, 52 percent of organizations have a hiring freeze in place.

Finally, the survey found that employees' view of the severity of the crisis may differ based on whether they are enrolled in a DC plan or a DB plan. DC plans sponsors (47 percent) were more than twice as likely as DB sponsors (23 percent) to think a majority of their participants view the long-term impact as severe. These findings are noticeably higher than just six months ago, when 31 percent of DC plan sponsors and 19 percent of DB plan sponsors reported that a majority of their participants viewed the long-term impact as severe.

The survey includes responses from 1,305 U.S. pension plan sponsors. Respondents represent a cross section of employee benefit sectors: corporate plans, public and governmental plans, multi-employer plans and others with pension plans.

Back to Top


Health Savings Account enrollment reaches 8M

Eight million Americans are covered by Health Savings Account (HSA)-eligible insurance plans, an increase of more than 31 percent since last year.

These are the findings of a new census released by America's Health Insurance Plans (AHIP). Health Savings Accounts were authorized starting in January 2004. Since then, AHIP has conducted a periodic census of its members participating in the HSA/high-deductible health plan (HDHP) market.

Another report found HSA account holders have a broad range of incomes across the country. The report, Estimated Income Characteristics of HSA account holders in 2008, used a geo-coding technique to estimate the income characteristics of HSA account holders.

"HSA plans provide coverage to a number of consumers of all ages and incomes across the country, and they represent an important choice for employers and individuals when looking at the portfolio of coverage options available," said Karen Ignagni, President and CEO of AHIP.

Key findings from the census:

Key findings from the income characteristics analysis:

For more information about the 2009 census and the income report, visit www.AHIPResearch.org.

Back to Top


Legacy of 2008 market meltdown

by Kenneth Ambos

Kenneth Ambos is Senior Managing Director, employee benefits consulting, with Equity Risk Partners, New York, N.Y. He can be reached at kambos@equityrisk.com.

The year is 2016...

As President Barack Obama enters the final year of his second term in office, a look back at how the health care coverage landscape in the U.S. has evolved during his presidency is in order. was the dire economic turbulence of 2008, which triggered the demise and/or material restructuring of many financial and insurance institutions previously thought invincible, a facilitator of, or hindrance to, the President's health care system reform intentions? Evidence supports the premise that the distressed financial market conditions of 2008 were a major catalyst for systemic changes that have begun to redefine the U.S. health care paradigm.

NOVEMBER/DECEMBER 2008

Obama's large margin of victory over Republican candidate John McCain was seen as a mandate for his Democratic "Change" platform, which included major health care reform initiatives intended to improve affordable access for all Americans, increase efficiency/reduce waste in the health care delivery process, and rein in the hyper-inflationary growth of associated system costs. The financial markets turmoil that continued to worsen as Election Day 2008 neared gave Democrats the rallying issue needed to regain control of both houses of Congress, paving the way in Washington for real movement on national health care reform that either eluded or was not a top priority of previous administrations.

First Term (2009 - 2012)

Health care coverage market conditions following Obama's inauguration were reflective of the U.S. economic crisis that was negatively impacting all aspects of the business community at that difficult juncture:

  • Carrier market consolidation continued, further reducing the number of viable options available to plan sponsors country-wide but better ensuring the remaining players' financial stability. However, insurers were caught in the squeeze of needing to raise premiums in the face of declining investment earnings and ever-rising health care costs, in direct conflict with their customers' heightened sensitivity to absorbing such increases.
  • Employers of all sizes, but particularly the embattled small/middle employer market, showed an increased willingness to change carriers and reduce coverage levels for any meaningful price savings. Correlated employee cost-sharing ratios were increased materially to further offset any gross cost escalation employers could not abide.
  • The rate of employer group uptake of "Consumer Directed Health Plan" (CDHP) designs ramped up notably, less in support of their conceptual belief that spawning "educated health care consumers" would lead to long term cost stabilization than for the immediate affordability gains.
  • A marked increase in smaller employers abandoning their group health plans was evidenced, triggering a correlated uptick in sponsorship of voluntary programs.

    • Overt change on the legislative front of the health care coverage battle was difficult to see in the initial haze of a government pressed to first wrestle with global economic and international security issues. However, during this critical foundation-building period, several important developments helped establish the framework for the Obama administration's vision of health care system evolution:

  • The government's ability to allocate billions of dollars for financial market bail-outs alerted the taxpayer to the relative "affordability" of funding health care reform initiatives that had previously been deemed beyond government resources. In turn, legislators (particularly the controlling Democrats pre-disposed toward system change) were empowered to pursue solutions with grass roots support never before seen.
  • New guidelines for health care insurance industry regulation were signed into law, requiring carriers to provide guaranteed issue coverage. Pre-existing conditions could no longer be used as grounds for exclusion and/or "laser" pricing. The insurance industry's willingness to make this concession, signaled publicly by representative trade groups in late 2008, opened the door to cementing the subsequent approval of regulations requiring the phase-in of an individual coverage mandate for all U.S. citizens by 2015, landmark legislation that forms a basis for universal coverage to start taking root.
  • Legislation aimed at health care providers and plan insurers/administrators was enacted, requiring their specific investment in and implementation of medical data technology system enhancements that adhere to an established set of uniform parameters. The objectives were clear, and critically important: to facilitate process administration efficiency gains; to enable best treatment practices sharing among medical care providers; to reduce the quantity and impact (human, and financial) of medical errors; to improve multi-specialty care coordination during acute episodes; and to weed out inadvertent health services redundancies.
  • Meaningful malpractice insurance reforms were ratified and scheduled for rapid implementation. These reform measures were designed to address the heavy toll of defensive medicine practices that have long burdened the system.

    • Second Term (2013 - present)

    With the noted building blocks in place, and with re-election momentum in his pocket, President Obama's primary objective of structuring a federal government managed "National Health Insurance Exchange", inclusive of a Medicare-like government sponsored plan option along with qualifying private insurer alternatives, was ratified in late 2013. The target kick-off date was established as January 1, 2015. This ambitious platform was formulated with the stated intent to build upon the prevailing employer-based private insurance system, augmenting it with a government-run program to address the many categories of uninsured and/or under-insured Americans left exposed in the employer-centric model.

    Key features of Obama's plan included:

  • Individuals and small businesses would be able to purchase a private or government-sponsored plan through the new Insurance Exchange.
  • Such plans would need to adhere to a minimum standard coverage level, and be portable so that worker movement from job to job would not be hindered.
  • Participating private insurers would not be able to turn down applicants or target price the sick; their plans would need to meet federal quality and efficiency standards.
  • Access to existing government health plans focused on the neediest (i.e. Medicaid, SCHIP) would be expanded; other needy population segments would be helped in affording Exchange participation via subsidies and/or tax credits.

    • As this major endeavor was taking shape, health care inflation trend lines began to align more closely with the CPI for the first time in many years. This phenomenon was thought by some experts to be caused by reduced utilization of medical services by economically challenged people avoiding expensive treatments. Others attributed this trend stabilization to the impact of CDHPs, given their growing market share. Concern began to emerge that momentum for Obama's broader system changes well underway would dissipate under the typical blizzard of special interest lobbying that would press for maintenance of the now "manageable" status quo. However, the majority coalition of change proponents held together on the strength of:

    Statistical indications that the technology mandates on both health care providers and insurers/administrators were beginning to have a positive effect on trend.

  • Widely publicized warnings from health care policy wonks that the trend toward moderation recently evidenced would be compromised longer term by an explosion of acute care episodes resulting from missed chances for early detection.
  • Emerging signs of the overall economy's recovery from recession, allowing lawmakers opportunity to assure their taxpayer constituents that big-ticket economic bail-out activity was no longer an issue. Further investment in the health care system overhaul could therefore continue with less worry about draining Federal coffers and causing major new taxation burdens.

    • With that challenge neutralized, the balance of 2013 and 2014 was spent in preparation for rolling out the new system's core elements, which required a tremendously complex project management process to orchestrate the necessary private market regulation changes, to develop the Insurance Exchange and government plan infrastructure, and secure the managerial talent to run the various new agencies overseeing the initiative going forward.

    The January 1, 2015 target date for the new structure's roll-out was predictably delayed, mainly due to: difficulties in gaining consensus on the underwriting process regulations to be followed by private insurers; lengthy debate over what would ultimately constitute the "minimum standard" health plan coverage levels; and assessing the extent to which subsidies/tax credits would be made available to those in financial need.

    An informal assessment of the inaugural enrollment process, as measured via post-enrollment participant surveys provided anecdotal indications of typical benefits enrollment snafus, confusion and frustration. However, comments also reflected a general sense that an undertaking this big and this important should be expected to have its challenges, so patience was surprisingly and generally in evidence.

    Recently published government reports of enrollment outcomes are giving new life to a concern that detractors of Obama's plan have long harbored. Initial data suggests a higher percentage of employers than anticipated appear to have opted to cease providing their private health plans for employees, and chosen instead to pay into the Insurance Exchange and get out of the health care coverage provision "business". Is this an unintended consequence to be monitored and addressed going forward, or an intended backdoor path to gradually move toward a single payer, government-run system? Obama administration officials of course claim the former, but skepticism may mount if this original market reaction snowballs in subsequent enrollment cycles and no action is taken to arrest it.

    We are now well into the 2016 election season, which will play out in part as a referendum on President Obama's legacy. With regard to the health care system, his specific legacy will have been borne to a substantial degree of the 2008 market meltdown, and will undeniably be deemed consistent with his original campaign's call for change: most Americans are now enrolled in some basic form of health coverage; health care cost escalation has begun to show alignment with general inflation; legislated medical data technology improvements have begun to demonstrate measurably positive impact.

    The evolution of a system so enormous will never be "finished" or perfect, but the current administration has overseen the largest scale health care system overhaul since the advent of Medicare. Whether history will view that as an overall successful achievement remains to be seen; however, indications to date suggest that the private and public sector balance Obama's program relies upon may indeed have staying power in the battle to tame the health care monster.

    Back to Top


    Increase 'value-added' to win and retain corporate clients

    by Ian S. Gerrior and Deb Nelson

    Ian S. Gerrior is an Investment Adviser Representative and Deb Nelson is a Marketing Coordinator with John Hancock Financial Network - Independence Financial Partners in Rhode Island. They can be reached at igerrior@jhnetwork.com and djnelson@jhnetwork.com..

    Establishing a relationship with a solid business client is the goal, but providing a product or employee benefit is only part of the story. The key to making that relationship last is to deliver something of added value to the employer and the employees.

    We have had the opportunity to work with a large health insurance organization and have participated in annual employee benefit fairs, but we wanted to strengthen that relationship while getting in front of additional qualified prospects.

    To accomplish this goal, we created a special "Lunch & Learn Seminar Series" for the company's employees. Our approach to the company was to focus on their desire to provide better benefits to their employees, without paying more.

    Selling the Idea

    To help us sell our idea to the company, we did some research on what employees are most concerned about and what they want. Based on MetLife's 6th Annual Study of Employee Benefits Trends in 2007, the top employee concerns are all money-related. Plus, almost half of employees (49 percent) want access to financial advisers at the workplace. Financial education is not an area that employers want to address and we have found them willing to bring an outsider in for credibility purposes. When we talked to the company, we revealed this research along with exactly how our Lunch n' Learn briefings could address these concerns.

    Our contacts with this large company are primarily with the VP of Human Resources, the Benefits Manager, the Benefits Coordinator and the Training Department. If we were working with a small company, we would work with the individual who handles benefits, but we'd have to sell the decision-maker, usually the business owner, on the entire program first.

    The Employer's Role

    Once the idea is sold, the employer plays a critical role in its success. We like the employer to take the lead in promoting the seminars because they know how to get their employees to attend. Some will use their company intranet; others will use a combination of employee newsletters, flyers and posters. Of course, the best situation is when the employer makes the meetings mandatory. Through the materials we use, we can easily provide employers with sample power point presentations, posters, announcements, ads, email reminders, invitations, and flyers. Financial representatives can typically access high quality marketing and promotional material from their affiliated carrier and various mutual fund companies. To increase your credibility, it's important to have all of this supporting material available to show the employer.

    Choosing Topics and Keeping It Lively

    Working closely with the employer to choose the topics they feel are most relevant to their employees is also essential. In this case, we chose topics around proven strategies for a successful financial future, taking loans from a 401(K) plan, history lessons in investing, retirement planning, college funding, gifting strategies, and perhaps most timely, staying optimistic in a volatile market. We found the most popular topics from the employee point of view to be: Proven Strategies for a Successful Financial Future, Saving for College, and Retirement Planning. What we learned is that the employees are not interested in explanations on what is happening in the market. They can get this information from newspapers, the internet, and the cable financial shows. They do care about how it affects them in terms of reaching their specific goals which is what we focus on when presenting the information.

    Our seminars are brief, no more than 30 minutes and with 10 minutes for Q&A. Remember, this is the employees' lunch hour and many don't get a full hour so you have to keep it fairly short. We use a tag team approach, where Deb is the moderator and Ian is the presenter. Deb introduces Ian and sets up his credentials as the financial representative. In addition, the moderator processes the hand-outs and evaluations, and offers additional materials. We also bring four $5 gift cards to a popular coffee shop and interject multiple choice questions four times during the presentations to keep it lively.

    It also helps to have either a man and woman team or an older rep teamed with a younger one. The contrast keeps the audience engaged. When you think about it, what we are competing against as presenters is the TV. Our "show" must be short, engaging, and interactive or else we'll lose the audience quickly. It's a good idea to personalize the talk as well. For instance, when talking about a college funding concept, discuss how different it is to save for college when you have a 13 year old versus a 13 month old. Personal stories or situations related to the topic are also shared.

    The tag team approach is a good way to keep the presentation moving. While Ian is talking, Deb can gauge the room to see if the audience is interested or lost. If some interactivity is needed, Deb can suggest a quiz or a question at the right time. As the moderator, Deb also helps facilitate the Q&As making sure Ian doesn't misinterpret a question or get too technical.

    Developing the Schedule

    A monthly schedule is recommended as it gives the representative time to prepare and arrange the schedule around other appointments and commitments. It also gives a little "breathing room" between topics so that the employees don't feel like they are always using their lunchtime to learn about finances.

    With regard to cost, there is none, other than when we pay for lunch. All the seminars, promotional materials, and handouts have either already been developed by the fund companies or come from our affiliated company.

    In terms of attendance, the training room we use holds 20 people so if we have at least 15 people sign up and more than 10 people attend we consider this strong. However, success is not measured by total attendees, but by those who want more information. By that measurement, we have had over 43 employees request additional information, generated a number of sales, and continue to gain additional appointments.

    Follow Up Equals Success

    Follow up for these seminars is a major factor for success. The challenge is to have every participant fill out an evaluation form. This form is the key way to obtaining leads. It tells us and the company how well we are doing in presenting the seminars, what other information interests the employees, and it provides us with the contact information we need.

    Back to Top


    Worker expectations for comfortable retirement plummet

    The recession has cast a pall over the retirement expectations of the vast majority of Americans, leaving a record-low 13 percent this year able to say they are very confident of having enough money to live comfortably in retirement, according to the 19th Annual Retirement Confidence Survey (RCS) released by the Employee Benefit Research Institute (EBRI). Among workers, those feeling very confident about retirement has tumbled by one-half in the last two years.

    Because of the economic downturn, many workers say they expect to work longer, the survey found, and more workers say they are planning to supplement their income in retirement by working for pay. Not surprisingly, workers overall who have lost confidence over the past year about affording a comfortable retirement most often cite the recent economic uncertainty, inflation, and the cost of living as primary factors. In addition, negative experiences such as job loss or a pay cut, loss of retirement savings, or an increase in debt, almost always contribute to loss of confidence among those who experience them.

    Overall, the percentage of workers very confident about having enough money for a comfortable retirement continued a two-year decline, falling to 13 percent this year, down from the previous low of 16 percent in 2008 and 27 percent in 2007. This is the lowest since the question was first asked in the survey in 1993 and represents a 50 percent decline in worker confidence since 2007.

    Among current retirees, confidence in having a financially secure retirement also dropped this year to a new low, with only 20 percent saying they are very confident; that's down from 29 percent in 2008 and 41 percent in 2007.

    Expected Retirement & Working in Retirement

    The survey made two significant findings concerning workers' expected retirement date and work in retirement:

  • Workers apparently expect to work longer because of the economic downturn: 28 percent of workers in the 2009 survey say the age at which they expect to retire has changed in the past year. Of those, the vast majority (89 percent) say that they have postponed retirement with the intention of increasing their financial security. Nevertheless, the median worker expects to retire at age 65, with 21 percent planning to push on into their 70s. The median retiree actually retired at age 62, and almost half of retirees (47 percent) say they retired sooner than planned.
  • More workers are also planning to supplement their income in retirement by working for pay: The proportion of workers planning to work after they retire has increased to 72 percent in 2009 (up from 66 percent in 2007). This compares with 34 percent of retirees who report they actually worked for pay at some time during their retirement.

    • Meeting Expenses in Retirement

    The survey includes a wealth of other findings about attitudes toward retirement. For example, workers who say they are very confident in having enough money to take care of basic expenses in retirement dropped to 25 percent in 2009 (down from 40 percent in 2007), while only 13 percent feel very confident about having enough to pay for medical expenses (down from 20 percent in 2007). Among retirees, only a quarter (25 percent, down from 41 percent in 2007) feel very confident about covering their health expenses.

    Other key findings

  • Cutting back, working more: Among workers who have lost confidence in their ability to secure a comfortable retirement, most (81 percent) say they have reduced their expenses, while others are changing the way they invest their money (43 percent), working more hours or a second job (38 percent), saving more money (25 percent), and seeking advice from a financial professional (25 percent). Among all workers, 75 percent say they and/or their spouse have saved money for retirement, one of the highest levels ever measured by the RCS.
  • Little planning for retirement: Many workers still do not have a good idea of how much they need to save for retirement. Only 44 percent of workers report they and/or their spouse have tried to calculate how much money they will need to have saved by the time they retire. An equal proportion (44 percent) simply guess at how much they will need for a comfortable retirement.
  • Retirement contributions/savings: A large majority of workers participating in a work-place retirement savings plan (72 percent) state that they have not changed the percentage of their salary contributed to the plan in the past year. However, 18 percent say they increased the percentage contributed and 11 percent decreased the percentage. Of the 22 percent of workers eligible to contribute to an employment-based retirement plan but not doing so, only one in five reported that they had been contributing before October 2008.This translates into less than five percent of eligible workers, indicating that the economic downturn did not cause many eligible workers to stop contributing to their work-place retirement savings plan.

    • Back to Top


    Many employers maintaining benefits during recession

    Most employers are retaining the benefits offered to their employees, according to a LIMRA survey of more than 1000 small, mid-size and large employers, which was conducted in December 2008 and January 2009.

    "At a time when companies are looking for ways to cut costs and save money, we were surprised that more than 95 percent of employers said they plan to continue to provide the same group, health and retirement benefits to their employees over the next 12 months," said Jennifer Parmelee Witt, assistant research director, LIMRA Group Product Research. "Employees have come to rely solely on their company-sponsored benefits to provide for the health and retirement needs as there is less public assistance available. Employers understand this and are committed to sustaining them."

    In the report, A Subtle Shift: Examining Employee Benefits in the Midst of Economic Uncertainty, LIMRA researchers found that only two percent of employers surveyed had dropped a group insurance, health care or retirement benefit within the last 12 months. Smaller companies (less than 100 employees) were less likely to have cut benefits than larger companies. Of those who had dropped a benefit, 25 percent eliminated their 401(k) plan, 11 percent cut their life insurance and almost 10 percent had dropped their medical insurance.

    When asked about the next 12 months, only three percent of employers surveyed planned to drop a group insurance, or health care benefit. Life insurance, short- and long-term disability and medical benefits were the most frequent benefits that employers planned to cut. At the same time, the trend in the market has been shifting from non-contributory (100 percent employer paid) to contributory and voluntary (100 percent employee paid).

    The survey found that eight percent of employers are planning to add a benefit this year, although this is down from 11 percent in 2007. Dental, vision and short- and long-term disability were the most mentioned benefits being considered.

    Almost none of the employers surveyed plan to eliminate any of their retirement and savings plans within the next 12 months. Just five percent of employers with 401(k) matches plan to cut or suspend their matching contributions in 2009. Only five percent of companies that offer a defined benefit plan said they plan to freeze it and none of the companies indicated they would eliminate their defined benefit plan in the next 12 months.

    Back to Top


    Voluntary insurance offers employees high value during low economic times

    by Ron Agypt

    Ron Agypt is Vice President of Broker Sales at Aflac. He can be reached at ragypt@aflac.com..

    Veteran agents and brokers know the story all too well: when times get tough and working Americans look to cut everyday expenses, adequate insurance coverage frequently goes on the chopping block. But the reality is that in times like these, when Americans are just looking to protect their families' finances and lifestyles, adequate insurance coverage is more important than ever.

    That means your customers need you more than ever.

    One of the best roles insurance agents and brokers can play in times like these is the role of financial educator. Increasingly, workplace decision-makers and employees are looking to us for guidance and education about how insurance coverage can play an integral part in each of their financial planning practices.

    Employees are undoubtedly anxious about how they're going to protect their families and their finances. If they are hurt and miss work, how will they provide for everyday expenses? At the same time, their employers want to do what they can to help ease that anxiety, so they can keep employees focused on being productive during the downturn and be prepared to recover if there is an unexpected accident or illness.

    That's where agents and brokers step in to collectively save the day. We have the information, tools, knowledge and products that can help ease the fears of employers and employees alike.

    First, there is a myth to debunk before we are seen as heroes. While it might be easy, as a salesperson, to let the anxiety that's rampant in today's marketplace discourage you, remember that you are providing a service by educating consumers and entrepreneurs to help them take care of their families and businesses. It's about more than just the sale. It's important to remember the critical role that you can play in relieving anxiety.

    Insurance is truly a critical part of the answer to help ease the fears that many people feel today, and it's our job to educate our customers and clients about exactly how our insurance policies and services can help them.

    Today, consumers worry about safeguarding their income, particularly against unexpected health events. Likewise, employers want to avoid losing quality workers, and they're looking for cost-efficient ways to bolster their benefits packages. The same is true for companies of all sizes, and during these lean economic times, it is essential that we are there to help small, mid-size and large companies further their businesses.�

    Now more than ever, employers and employees are more likely to consider voluntary insurance because these economic conditions have created a heightened awareness of the need for security. People want to protect their businesses, finances and loved ones. It's a great opportunity for brokers and agents to collaborate and ensure that voluntary insurance policies are included in their portfolios to help assuage some of this overwhelming anxiety. Not only can voluntary insurance products help brokers diversify product offerings and generate new revenue sources, they can also provide a great service to your clients by addressing specific financial needs during a time when employees and employers need it most.

    Here are some tips that can help brokers select the right company for voluntary insurance:

    Choose a trusted brand

    If you type in the word "trust" and search for synonyms, a number of words may populate your computer screen, including confidence, reliance, responsibility, dependence and protection. Presenting coverage from a company with a strong, trusted brand is very helpful in building trust between a broker and client. A voluntary insurance provider that has a solid foundation and whose sales, customer service and reputation defy the current economic situation is an added value for any broker.

    Choose products that provide income replacement

    According to a 2005 Harvard study, 50 percent of U.S. bankruptcies are due to medical expenses, and 68 percent of those who filed for bankruptcy had health insurance. Astonishing, isn't it?

    As businesses continue to look for ways to provide a bigger benefits package to their employees without breaking the bank, voluntary insurance plans become very attractive. They are usually available at no direct cost to the employer and complement major medical health plans. Voluntary coverage can help protect an employee's family and finances in the event of a disabling illness or injury because benefits can be used toward routine living expenses, such as house payments or car payments.

    Voluntary insurance like accident and short-term disability policies can be valuable financial planning tools for employees who have inadequate savings but still want to protect their families' income against unexpected health events. These plans can help alleviate some of the financial stress that being out of work due to an injury or illness can cause. Providing voluntary coverage is also a tool that employers can use to keep their most valuable people from looking elsewhere.

    Choose an insurer with a strong infrastructure

    Look for a voluntary insurance provider that has the infrastructure in place to support ongoing, quality service to your clients. Strengthen your client relationships by working with a company that has the right organizational structure, one that includes top-notch enrollment solutions that integrate seamlessly with your systems and a dedicated team responsible for managing customer service.

    Understandably, workers and business owners are constantly evaluating their finances during this challenging economic time. Brokers and agents have a unique opportunity to help provide the peace of mind that both are looking for. You have the opportunity to educate your customers and counsel them about how to help protect their income, help protect their families and help them feel more secure in a tough environment. Now is the time to step in and save the day because business owners and consumers need your help and advice, now more than ever.

    Back to Top


    Executive planning: handcuffs, parachutes and pots of gold

    by Alan Protzel

    Alan Protzel is the Director of the Life Insurance Division of The Marketing Alliance, a national network of Independent Brokerage General Agents, St. Louis, Mo. He can be reached at 314-275-8713 or aprotzel@themarketingalliance.com.

    A colleague taught me that each legislative action that seemed to inhibit the sale of one life insurance concept, invariably created a new life insurance sales opportunity, a real life application of the optimist's, "when one door closes, another opens".

    A case in point is the once popular and often sold Executive Bonus Plan (162 Bonus). The most significant problem with the traditional Executive Bonus Plan involved the lack of control the employer could exercise over the employee's use of the policy and or its values. Once the company deducts the premiums as compensation and includes those premiums as income to the executive, the employer loses control of the policy.

    With no ability to control the asset, the employer lost any leverage created by the Bonus Plan, beyond continued premium payments, to give the employee incentive to stay. The value of the Plan as a "golden handcuff" was severely diminished.

    The solution is to add an endorsement that limits the employee's access to the policy for a specified period of time. This Restricted Executive Bonus Plan (REBA) is only more effective than the traditional Executive Bonus Plan for the duration of the restrictive endorsement. However, in many cases, the enticement for the employee to leave during that time, may disappear or be greatly diminished.

    The Fundamentals

    The traditional Executive Bonus Plan generally allows an employer to provide life insurance protection and cash values for a specific, selected employee. The premiums are tax deductible to the employer under the IRC Code Section 162, and can be included as current income by the employee. If the employer so chooses, he may relieve the employee of the tax burden by enhancing the Bonus Plan with a "Double Bonus". This "Double Bonus" is an additional payment to the employee equal to the amount of the tax and the additional bonus.

    The typical restrictive endorsement will state that the policyowner/employee requires the written consent of the employer to:


    The endorsement must have a limited life. The employer indicates a date, after which the restrictions are terminated and the employee has full control of the policy.

    This restrictive endorsement gives the employer a clear measure of control over the employee's use of the policy. Restrictive endorsement aside, the employee does have the valuable life insurance protection and cash accumulation, as well as a predetermined date, after which complete control of the policy will pass to him/her.

    Taxation

    So long as the bonus constitutes reasonable compensation to the employee, taxation of the REBA should not differ from an ordinary Section 162 Executive Bonus Plan using life insurance. The premium (or double bonus) should be deductible.

    IRC Code Section 264 would disallow the deduction of the bonus if the employer had any interest in the policy. As the restrictive endorsement does not confer any policy benefit or interest to the employer, it is unlikely that the addition of the restriction would cause the loss of the deduction to the employer. Additionally, the endorsement does not change current taxation of the bonus to the employee because the employee continues to be taxed currently on the bonus.

    An example

    A typical scenario utilizing a REBA is the case of a high level product developer working for a small or medium sized company where his skills are critical to the maintaining the competitiveness and development or sale of the product.

    Erica is 40 and currently earns $250,000 per year. To tie Erica more closely to the company, her employer wishes to enhance her compensation package. The employer's advisor has suggested a REBA funded with a permanent life insurance policy (UL).

    In general terms, the employer will agree to pay a stated premium for the next seven years, if Erica will agree to the restrictive endorsement during that time. Furthermore, the employer will continue the payments beyond the eight year restrictive period through Erica's age 65, so long as she remains with the company.

    Erica receives the life insurance protection and the cash accumulation in exchange for her continued employment. The employer ties Erica more closely to the company and exposes minimal compensation should Erica leave after seven years. After the restrictive period ends, if Erica's services are still highly valued, the employer can continue or increase the bonus amount into the Plan (avoiding a MEC), until Erica's age 65 or her departure.

    Summary

    Most business owners have at least one key employee without whom the business may struggle to maintain profitability or even exist. The addition of a "bonus plan" that includes life insurance not only gives the key employee's loved one's additional protection, the cash accumulation that is available for other financial needs (college expense for a child, retirement, a second home, etc.) makes this "perk" more valuable than "a raise" to many employees. It will also make it more difficult for a competitor to lure that associate away. When the possibility of that employee's departure keeps the business owner up at night, REBA could be the solution.

    Another common business owner problem is the efficient transfer of their business to the next generation. The Intentionally Defective Irrevocable Trust (IDIT) is a unique planning tool for owners of S corporations.

    The opportunity to maximize the transfer of assets to the next generation while minimizing gift or estate taxes is not an uncommon objective for affluent clients. It is particularly difficult to transfer the income producing business. An IDIT can be an effective way to "freeze" the value of the business and remove future appreciation from the parent's estate.

    Background

    IDITs are treated as grantor trusts, and as such the transfer of an asset such as a family business results in enhanced income tax leverage for the benefit of adult children. This occurs because both parents are treated as owners of transferred assets for income tax purposes while the trust is treated as a separate taxable entity for gift and estate tax purposes. Thus, the parents pay all income taxes attributable to the trust without these payments considered as gifts to the trust beneficiaries. This helps to "spend down" the grantor's estate without having to use the grantor's annual exclusion or gift tax exemption. The IDIT may then accumulate more wealth for the beneficiaries than would have been possible if the trust were responsible for payment of taxes. The result is an effective "estate freeze", as all income and appreciation is used to enhance the inheritance for the grantor's heirs.

    The Enhancement

    An IDIT is more effective if combined with an interest-only installment note. The IDIT may contain a family business, which the grantor wants to preserve and pass on.

    The IDIT is initially funded with "seed money". The seed money (usually 10 percent of the value of the asset sold to the trust) ensures the trust is deemed a bona-fide purchaser of the transferred asset. The grantor sells the property to the trust in exchange for an interest-only note. The grantor incurs no capital gains tax on the sale, while a nontaxable income stream is secured from the trust. The asset (and its appreciation) remains outside of the estate.

    Importantly, an interest-only installment note allows the trust sufficient cash reserves to purchase life insurance on the parent equal to the principal due on the note. This is a very tax efficient way to pay off the balloon payment without spending down trust assets.

    In the case for the S corporation, the grantor can recapitalize the corporation into voting and non-voting shares. This will not create a prohibited second class of stock so long as the difference in voting rights doesn't create unequal distribution and liquidation preferences. A portion of the non-voting shares is transferred to the IDIT as the seed money.

    The IDIT then purchases the remaining non-voting stock in exchange for an interest- only installment note. The non-voting shares may obtain discounts for lack of control and lack of marketability. The result is an installment note based on the discounted value of the shares but the growth of the S corporation within the trust is based on the non-discounted value. This creates leverage to pay the note and apply excess earning to purchase life insurance.

    The parents remain in control of the business through their voting shares. They could control their own taxable income by adjustment of dividend distributions. At the parents' death, life insurance proceeds pay off the note and the remainder of the family business and the voting shares pass to the adult children free of estate taxes.

    An IDIT may be the perfect solution to transfer an income producing asset to adult children. The estate freeze potential of a grantor trust coupled with the unique nature of the S corporation makes an IDIT a viable estate planning solution to an otherwise difficult business transfer dilemma.

    Back to Top