David R. Evanson

Annuity Selling Guide, Winter, 2006

When the conventional wisdom of well established insurance and investment products are challenged, skepticism is merited. Sometimes however, closer examination reveals that a simple, yet fundamental change will deliver substantial benefits not just to investors, but also to the agents that serve them. This is the case with the development of a secondary market providing liquidity for annuities. And as history has shown, the early adopters of fundamental changes can sometimes be the big winners once the idea catches on broadly.

Really, Really Big
When we say big winners, we mean really big. Here’s why: By our estimate there are between $50 and $100 billion annually of annuities that could be sold into the secondary market in any one year. This estimate owes itself to the success of annuities as a financial product to begin with. Presently, there are $1.6 trillion [italicize trillion] of assets backing annuities, and among annuities holders, there are a myriad of factors which might cause them to become “restless” resulting in a need or desire to sell their annuity. These include:

• A change in investment strategy
• A change in retirement and/or estate planning strategy
• The inheritance of an annuity where there is significant divergence between the financial objectives of the original annuitant and the heir
• Change in needs for a life policy where the annuity payments were financing the life premiums
• The purchase of a second home
• Sudden and significant medical expenses
• A regrettable initial decision

While these factors will continue to drive demand for annuity sales in the secondary market, the overall scope of the market is tempered by certain features of annuities. Specifically, annuities must have a non qualified tax status to meet the criteria for sale the secondary market. Those with so called qualified tax status – i.e. retirement vehicles – cannot be sold. In addition, while specialty finance firms that buy annuities in the secondary market may be different, at our firm, J.G. Wentworth, annuities available for sale must have some form of a guaranteed payment option. And finally, demand may be tempered by the tax implications issuing from the sale of an annuity. While these implications are the same as if the annuity was surrendered to the insurance company, they may nonetheless diminish the desire for liquidity among some clients.

Win Win for Agents
The emergence of a secondary market for annuities confers almost incalculable benefits on insurance agents and brokers. Parenthetically, it also offers a big boost to the insurance industry at large, and may help drive another trillion in annuity sales. More on this later. For now however, we’ll explore why a secondary market will help agents build revenues, enhance client relationships and strengthen their marketing efforts.

New Revenue. Helping clients sell their annuities offers agents two new commission opportunities. Of these, the lowest hanging fruit comes from clients who are restless and want liquidity for their annuities. All these clients need is to be made aware of the fact they can sell their annuity. While this will not be every client in an agent’s existing book, it’s important to note these sales represent extremely high margin business, with little or no investment in prospecting, acquisition, relationship building, closing and handholding.

Another plum which requires just a little more reach comes with the use of proceeds from the annuity sale. Many scenarios in which clients want or need liquidity many of them will likely result in the need for additional [italicize additional] financial products and services which offer additional commission opportunities. Agents and brokers who take a proactive and holistic approach to their client’s annuity sales can position themselves to realize these opportunities long before the actual sale of the annuity takes place.

Client Retention. Helping clients sell their annuities offers agents the opportunity to strengthen their relationships with existing clients and fortify against encroachments from other financial services providers.

At the most basic level, the existence of a secondary market for annuities enables agents and brokers to reach out to all of their annuity clients, especially those who may have purchased an annuity years ago, and who have been resistant to subsequent entreaties about other products or services. This outreach, which explains what amounts to a product improvement, offers a new opportunity to develop a deeper and more productive relationship.

For agents with clients who go one step further – that is express interest in selling their annuities and hearing options – the retention and relationship building benefits go even deeper. Specifically, because the decision to purchase an annuity is often a complex one, involving significant interaction, the decision to sell one can require the same kind of commitment on the part of the client. However, it’s this commitment that offers the agent the opportunity to understand the client’s current financial profile and not only suggest new products and services, but to develop the rapport which enables them to make the sale. In this sense, whether or not the client ever sells his or her annuity is almost irrelevant. What is relevant is the trust agents can develop by proposing new solutions and new alternatives.

Improved Marketing. Leading with the notion that clients can sell annuities instead of just buying them, can improve an agent’s return on their marketing investment.

The popularity of annuities is, with respect to marketing, a double-edged sword. The marketplace is muddled with promotion, and it’s difficult for clients and prospects to differentiate between agents and products. Thus if your marketing materials and your key messages resemble anything like “Annuity Product Specialists” you’re likely to get lost in the clutter. By contrast, selling the notion, “Cash For Your Annuities Now,” is new and provocative, and for many consumers the kind of solution they have been looking for.

There’s one other, extremely important marketing benefit with annuity sales: the opportunity to cherry pick your competitors’ clients. Face it, buyers of annuities are likely to go back to the well and use the same agent when they are ready to buy another annuity. But sellers are a different animal. They’re restless, and looking for a solution, that owing to the newness of the secondary market, may not be offered by their existing agent or broker. Thus brokers who can facilitate liquidity have a unique message that may appeal to even the best customers of their competitors.

These are compelling benefits and it’s worth noting that agents and brokers can access all of them without any licensing requirements. Again, while the specialty finance companies that buy annuities may have differing risk tolerances, our current interpretation of the insurance regulations in New Hampshire, Tennessee and Utah are that a life settlement license may be required, and as a result, J.G. Wentworth is not pursuing business in these states.

Parenthetically, it merits mentioning that a secondary market may be good for the insurance industry at large. Only Rip Van Winkle is unaware that regulators have been taking aim at the annuity market and cracking down on agents and insurers alike for sales practices. The basis of many problems associated with annuities, perceived or otherwise, is the lack of liquidity, and the attendant problems this causes many individuals who own them. Thus, a secondary market for annuities is very much in the interest of insurance companies because it will enable the continued sale of a profitable product, while providing consumers with more options and regulators fewer headaches.

This newfound liquidity for annuities however, is in no way analogous or related to the life settlement business. There are several reasons for this. First and foremost, several features of life settlement transactions can conspire to undermine the profitability of the insurer, which in turn can provoke resistance from them. By contrast, buying an annuity from its original owner has no P&L implications for the insurer. Second, many life settlement companies provide a gross offer — in effect an MSRP — where brokers or their Brokerage General Agents decide their own commission. This arrangement creates a conflict of interest between brokers and clients. Within the secondary market for annuities, the compensation to the BGA and the agent is predetermined which in turn removes a significant conflict undermining the client’s interest in the transaction. Thus the quote issued to the client, just like the quote for a stock or bond, is the market value of the annuity,

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The Look & Feel
Someday annuities may be traded on a floor that looks like the New York Stock Exchange, or through competing market makers like the NASDAQ, today however, the secondary market is very much a specialty insurance product distributed through Brokerage General Agents (BGAs) and funded by specialty finance firms such as ours, J.G. Wentworth (JGW). Here’s how a typical transaction might work:

• Agent or broker sends annuity contract and/or benefits letter to JGW through their BGA
• JGW develops several customized annuity purchase options which are communicated to the investor by the insurance agent via the BGA
• The investor consults with their advisor to choose option, the agent submits the executed annuity purchase agreement to JGW through their BGA
• JGW advises the insurance company of the change of ownership or assignment of payments on the annuity policy
• Investor receives cash proceeds on average two to four weeks after completion of application for contract

There are several reasons why the secondary markets works best through the BGA distribution channel. First, since the secondary market is quite new, Brokerage General Agents can provide the broad-based education that agents and brokers will need to understand the secondary market. In addition, BGAs can provide promotional and collateral materials that agents and brokers will need to market the program to their clients. And finally, BGAs can perform an important repository function helping to ensure the flow of information between end clients and the specialty finance companies which buy annuities is uniform – which in turn is a key element of liquidity.

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Getting Down to Cases
Now let’s take a look at the secondary market where the rubber hits the road: with actual brokers and their clients. Only the names in the case studies below have been changed. Nonetheless, see how liquidity solves difficult financial problems:

Funding Education. Bruce, an agent in Poughkeepsie, NY sold David a Single Premium Immediate Annuity, 30 Years Period Certain, to provide a guaranteed stream of income after David sold his business at age 45. Unfortunately, David died prematurely, leaving his wife, Cheryl, with two children about to start college. Cheryl needed to fund their tuition over the next four years. David’s annuity was funded with a $600,000 premium and annuitized with a monthly benefit of $2,842.85.

“How can I fund a college education with $2,800 a month, when I am facing a tuition bill for $28,000?” she asked David. Cheryl had already been receiving payments from the annuity for 14 years, but David suggested that she sell 10 years worth of payments for $244,844. “This was what my client needed to meet her immediate needs,” said agent David. “In addition, there was also a need to park the proceeds in safe and liquid investments which we were able to help her with so she could draw down as needed for tuition and ancillary expenses as they arose.”

Starting a Business. Susan, an agent in Phoenix helped her client, Jim, a widower, with his retirement planning. Working together they selected an annuity that would offer monthly payments of $7,865 guaranteed for 20 years or the rest of his life for a premium of $1.2 million. “His other investments, and the monthly payment gave Jim a margin of safety for increases in the cost of living he might experience,” said Susan.

But life changes, and unexpectedly Jim found himself in a new business venture with his son, for which he needed $137,000 to fund equipment purchases and leasehold improvements. “I would get paid by the new business, but since this was a start-up, my pay would be modest, so I needed my annuity still, just not all of it,” said Jim.

By accessing the secondary market, Susan crafted a unique solution for her client that enabled him to sell 5 years’ worth of partial payments — $2,713 of his $7,865 monthly payment — for the required $137,000. During this 60 month period, Jim would continue receiving $5,151a month from the annuity, satisfying his need for ongoing income. After the five year period was up, Jim will again begin receiving the full $7,865.40 monthly payment.

“I’m hoping the new venture will work out and I won’t need the full payment,” said Jim. “But knowing it’s there gives me the piece of mind and as a result, I am working smart instead of working scared.”

These are just two of a myriad of case studies which underscore how a simple yet fundamental shift in a product feature can deliver new and important benefits to consumers. But since marketing insurance is a business that prospers when clients win, their victories are sure to deliver similar successes for agents and brokers. While someday liquidity for annuities will be commonplace, today it’s an emerging market and the early adopters are most likely to reap the greatest rewards.