Their brethren from the non-qualified, non-structured annuity life markets have been developing some of the most important annuity products in over 15 years. The settlement industry is on the verge of having a significant portion of premium dollars directed into non-qualified variable annuity contracts and hardly anyone is paying attention to what's happening outside our insular little industry.
What I'm referring to, for the vast majority of you who do not have the appropriate licenses or broker dealer relationships, is the tidal wave of flexible, powerful, guaranteed variable annuity products that have been launched in the last 9 months by the likes of AXA, Pacific Life, SunAmerica, Lincoln Financial and other life company giants. In case you've missed it, which I'm sure most of you have, these are the features being offered by some or all of the companies I've mentioned:
1. Fully guaranteed fixed yields on variable portfolios of either 5% or 6% during the entire accumulation period.
2. The ability to lock in equity gains in excess of the 5% or 6% guarantee each year, thus creating a situation where the floor is guaranteed, but the upside is limitless.
3. Sophisticated allocation portfolios managed by the company investment advisors and rebalanced quarterly.
4. Tax deferral during accumulation.
5. Guaranteed death benefit riders that grow at guaranteed fixed amounts, or lock in at market rates. Important because a death benefit paid out of a variable annuity is income tax free to the beneficiary, both principal and gains.
However, the most worrisome threat to the structure market is the latest enhancements on payout of the annuity, which is typically where the structured annuity held it's greatest advantage.
1. The new products have guaranteed minimum income benefits for the life of the annuitant. You lock out downside risk.
2. They have options that allow the annuitant to stay fully invested in equities, obtain a guaranteed minimum, again at 5% or 6%, and again lock in the portfolio gains over time in excess of those yields and increase their income during payout. You lock in market gains automatically.
3. They have joint and survivor income for husbands and wives for life with the same benefits as listed above. Both husband and wife are protected for life.
4. No investment restrictions. The client is free to be more aggressive in their investment posture knowing their floor income is locked in.
5. Complete liquidity and ownership of the contract. Plaintiff control, plaintiff ownership and plaintiff liquidity. Write a check at settlement and your done. If you change your mind, get your money back less any surrender charges or tax withholding required by the company or government based on age and company policy language. Keep in mind most if not all sell these with no front or back end load options on them, so don't think the surrender charge argument is going to save you.
6. All of this offered by the bluest of blue chip financial institutions with the money and muscle to make good on their promises over time.
Now, I know what the industry mavens will say. Mark, this is a non-qualified contract and we offer totally tax free income that is payable in a structured guaranteed format. To which I respond, right on. That's what I sell, that's what I offer and that's why i'm in this business for the last 25 years, but lets look at what our products strength and selling points have been for the last 25 years and see how they hold up against the new reality of today's products and markets. Also, so my compliance department at my broker dealer doesn't have a heart attack, I must qualify what i'm about to type by saying this is in no way an endorsement of the variable product, an offer to buy, a solicitation for sale of the product or in any way shape or form an attempt to sell them to anyone for any reason. Welcome to the world of annuity sales post Eliot Spitzer.
1. The structured settlement annuity is totally income tax free on both the state and federal level assuming it qualifies under section 104 of the IRC. Well, with out a doubt this is the hook we hang our hat on every day and the one edge that makes our product the most appealing and attractive to our potential clients and helps us sell against our competitors. NSSTA and our friends in Congress have worked long and hard to protect this status and they should be commended, as in my experience the tax free nature of the payments is the single biggest attraction to most plaintiffs in deciding initially to consider a structure. However, lets keep in mind that for the lower levels of income, say $15,000 a year or less, most recipients aren't paying the higher marginal tax rates on income anyways, and that the principal from the award is always a tax free cost basis. What matters to most plaintiffs is cash flow, not tax benefits. So a variable annuity with an exclusion ratio of 50%,to use a simple example, paying an income of $15,000 would only report taxable income of $7500 each year, which for most people would put them in a no tax or insanely low marginal tax rate. Sure there is a tax advantage, but how real is it at low income levels, at low yields and in a low marginal tax environment such as we are currently living in.
2. The structured settlement annuity gives you a fixed, guaranteed yield on the funds that can never go down for the duration of the contract. Hell of a deal if your at 10%, not so rosy if the yield is 5% or less as has been common the last 5 to 7 years. Besides, as mentioned above, the new contracts provide the exact same fixed guarantee on the accumulation accounts so our historic edge in that area is about to vanish.
3. The structured settlement annuity can provide precise lump sum amounts at future dates tax free. This is still our products strongest edge in my opinion. The ability to design college funds, retirement lump sums, sinking funds, etc using future lump sum amounts is clearly one of our single strongest selling points. In my opinion no other product can match this single feature and gives our industry a decided edge.
4. The structured settlement annuity allows for substandard underwriting and guaranteed life time income for annuitants. For years, this, along with the tax free payments, was our largest edge in competing with alternative products. However, we now are faced with variable annuity products that offer life time income for one or two annuitants, guaranteed yields, and the ability to participate in growing equity markets. We have just lost our biggest advantage in my opinion. Now, you will say, but wait, we can underwrite annuitants medically and rate their age, thus enhancing their yield and payout, to which I will heartily agree that is a huge feature. However, how long do you think it's going to take the life markets, with billions of dollars and expertise to stroll across the building to the medical director in the settlement department and ask them for some of that good stuff? We are naive if we think that faced with the aging of baby boomers and the huge push to annuitize assets to think the non-qualified side isn't going to tap the 25 year expertise of the settlement medical directors in underwriting annuitants on these new contracts. There is simply too much money at stake for that not to happen.
5. We provide unique creditor and asset protection via the section 130 assignment, preventing the liquidation of the clients funds. Oh really? Three words. J.G. Wentworth. The spendthrift argument barn door was left open a long time ago and the horses haven't just left that barn, they are so old they have been turned into glue. I could reasonably argue, and other even less reasonably, that a client is better in a variable annuity since the cost of getting out of it is a fraction of what someone would face in trying to factor out of a structured annuity. As we all know, if someone wants to cash it in, they will find a way, regardless of the arguments against it.
So, I have summed up the five most common selling points for our product. To my analysis we have one and a half arguments left under current and future market conditions, with medical underwriting a soon to be certain casualty in the competitive analysis. I'm sure many will argue or dispute it and I welcome your thoughts and opinions. I want to make one thing perfectly clear, as Nixon would say, I sell structured annuity contracts and firmly believe that are the foundational product that needs to be purchased by the vast majority of injured parties contemplating their future. However, I don't have my head in the sand and I can see every day the in roads alternative product providers are making and our day of reckoning is approaching quickly.
Why do I bring this up? Largely because I can't believe we as an industry continue to fight the battles of 15 years ago over commissions, approved broker lists, approved markets, controlled accounts, 468b and other inter-industry issues when the massive non-qualified insurance and investment industry is taking dead aim at our products and is ready to pick us off like a bunch of coyotes fighting over what is left of a rabbit carcass. In the short term, I could personally care less as I'm licensed and appointed to sell all of these products and my entire clientele is plaintiff attorneys and their clients. I don't need 468b to control assets, I've got trusts, managed accounts and annuity products that get control of assets better then any 468b device could ever hope to. No, my future is pretty secure no matter what I'm selling.
However, our industry has got to wake up to these outside threats, and begin to mend fences with the end consumer of our product, i.e. the trial lawyer and his clients, end the unseemly commission battles, and start to talk about what is best for the plaintiff instead of jamming the same product down their throat and hoping that they buy it. That business model is what got us the factoring industry in the first place and trust me they aren't going away any time soon either and are growing a lot faster then the settlement industry is at the moment.
Why did Genworth leave the market? I'm not Einstein but I'm guessing they stopped making money at it, they saw little future for growth, and decided to do the responsible thing and redeploy assets elsewhere. Unless we get on the stick and start marketing and educating our end consumer, a lot of settlement brokers and life markets are going to be making the same decision Genworth did sooner rather then later and that ultimately will be to the harm of injured claimants who badly need the expertise that we as an industry have to offer.