Explore your options before faced with a crisis
BY PHIL CALHOUN AND DAVID ETHINGTON
Passing along wealth to survivors is often a complex process.
Beneficiary designations may fit for some planning situations and not for others. The question leads to a deeper look into the planning process brokers have available. This process is similar to the process a business owner would use. The common planning terminology used in business exit planning or succession planning applies to brokers and their commissions. The common goal for this type of planning is to sort through and select the better exit or succession plan, one that includes all of the owner’s assets — the value of their business as well as their personal assets.
From our work with brokers it is clear there is confusion about how carrier beneficiary agreements work. A deeper understanding is important since commissions are the product of a broker’s life work. Protecting and passing this value to loved ones is important. The key message is that commissions are of great value to the broker while alive as well as for loved ones when they pass. Brokers are no different from any other business owner that builds their business value over time.
Brokers create significant value in their commissions. This article explains the beneficiary designation option and contrasts this approach with a written Commission Protection Plan as part of a comprehensive planning approach.
Shortfalls of carrier beneficiary agreements
The “beneficiary agreement” offered by a few carriers has several key shortfalls. The main difference is how the options impact loved ones financially and impact their client’s health plan changes and service needs.
To begin with, most CPAs and estate planners suggest a comprehensive planning process as a best practice when planning time is available. The beneficiary designation can be a fit for the smaller books of business as it only addresses death of the broker and is only offered for certain types of policies and by only a few carriers. Comprehensive planning covers all types of health commissions from all carriers and in all life events.
We can stop there, as planning which addresses a broker’s individual needs while alive and after they pass away, and further addresses all of their book of business, is clearly a better planning solution than a plan that has a limited focus — only on a broker’s death. The details outlined here provide the opportunity to see how a comprehensive plan works.
Benefits of comprehensive planning
Since only a few carriers offer a beneficiary designation option to protect a broker’s hard-earned commissions, this option would only fit with a couple of carriers. As a result this is not considered a best practice solution if the goal is to retain and pass on maximum value. Beneficiary designations apply only when a broker dies, and only covers DOI policies such as Individual & Family Plans (IFP) and Medicare Supplement lines of business. Other lines of health insurance are not eligible for this designation.
The value of the designation is restricted to the designated person only. The broker files for a carrier’s beneficiary designation. The surviving family member is not allowed to sell these commissions.
With most commission protection plans, a family member may sell the commissions, often through a pre-arranged agreement with a pre-selected successor broker. The steps to accomplish this type of plan are included in most succession planning processes and in written documents. This planned sale would likely yield a higher payout.
Best practice is a properly written commission protection plan designed while the broker is alive and in consideration of their family and/or loved ones, leaving questions answered. We can stop with these limitations on beneficiary designations and just advise brokers to complete a comprehensive commission protection plan that will address all of their lines of health insurance business.
For brokers who would like to consider designating their commissions as a viable solution, there are two main concerns brokers may have in regard to planning.
First, the sale of commissions takes full advantage of the “selling at the peak concept.” Commissions always drop when a broker slows down. Since most planning takes place when a broker is semi-retired, the more lightly-aligned clients are now susceptible to be lured to a new broker who may offer more service or new plans to consider.
Brokers know that every year many of their Medicare Supplement clients look to move to a less expensive plan, sometimes an MAPD. In all of these situations, brokers can work with clients and provide shopping advice leading to retention. If you think about a client currently paying high premiums, they are in need of an active broker’s help to shop and compare. A Medicare Supplement client moving to an MAPD is not paid out under the beneficiary designation option.
We suggest commission agreements include payment of both plan and carrier changes during the payout period which increases the total commission payout to retired brokers and their loved ones.
Second, retention is critical and becomes a challenge under a beneficiary designation because loved ones count on the carrier to retain clients. Moving to a commission protection plan addresses the trends common with aging brokers. Many commission protection agreements include methods to assist brokers with the service their clients need. This addresses the risk that some clients may look to find another broker’s help when relying on the carrier for this valued client service role.
Without a plan, upon the broker’s death, the commissions drop in value. Without a licensed and certified successor ready to pursue a pre-planned client retention effort, history shows client retention will drop and lead to reduced payouts. This shows how commission retention is important and why a beneficiary (often a non- licensed friend or family member) is unable to do the job necessary to help retain clients. They rely 100% on the insurance carriers to do this service work, which is a recipe for retention failure.
When using a family member or friend as the unlicensed beneficiary, the assumption is commission retention will work without great effort. However, the carrier in these situations is now 100% responsible for all service and support for clients. Since the carrier is now responsible for all client retention, including during open enrollment, clients seeking information and making plan changes to find a better plan will have an impact on retention. The eventual result is rapidly declining commissions.
Overall, the beneficiary designation places clients at risk for three key reasons:
1. Open enrollment requires personalized assistance. Clients need help to shop for the best coverage, compare options, and enjoy personalized attention to address their needs. Carriers will never provide options offered by competitive carriers.
Even when contacted, most carriers will not be easily accessible compared to an active broker. And finally, the carriers are unable to act as advocates for clients and as a result fall far short of the support a broker provides their clients. Relying on a carrier for client and commission retention will quickly lead to lost clients in situations where clients must rely on an impersonal 800 number for all servicing, combined with an inability to compare or enroll in plans with other carriers.
This approach to succession planning effectively eliminates retention management and will lead to a shorter than desired payout period, leaving a survivor’s unlicensed beneficiaries with a shorter than expected payout period. According to agency experts, on average 70% of clients will move to another carrier or broker within three years. IFP and Medicare Supplement clients do shop plans often and are heavily marketed directly.
2. Logistics are complex. When working with any carrier that offers a beneficiary designation option, the broker must place the request while alive and use the carrier’s formal process. Any request must be approved ahead of a life event so when the timing is last minute, which is often the case, mistakes can bemade due to urgent time- sensitive decisions. Carriers can have completion timelines that if missed the option for the designation will close. Staying current with carrier agreements is important as well since carriers can change the terms of the agreement over time.
A review of carrier agreements shows carriers have the right to change their broker agreement to modify commission amounts and conditions of payment at any time. History shows carriers do make these decisions. Also accounting for which clients are included and then monitoring that the carrier payment made when due can take time and some expertise. In a traditional commission transfer between a seller and buyer the carriers rarely get the commission transfer correct 100% of the time. This requires proactive review of statements and active management each month.
While the beneficiary option is better than nothing, the best practice is a comprehensive plan for 100% commission protection to gain the highest possible retention.
3. Final thoughts on Beneficiary Designation Agreements. A key goal in commission protection is to pay loved ones out when retiring or after death. This is due to the fact that commission protection planning uses a best practice approach that will create a much better solution. A $200,000 book of business could sell for two or three times, yielding $400,000 to $600,000 with a viable successor. This result is compared to a beneficiary arrangement where a slow financial draw down happens as clients change plans and move to brokers who can help them.
While the payout may last a year or two, the business will quickly vanish as clients experience impersonal service and go through open enrollment with limited rather than objective assistance.
Ask yourself if the majority of your clients will stay with the same carrier and same plan for the next several years. If the answer is a yes for 80% of clients, the beneficiary designation could fit your needs for your IFP and Medicare Supplement policies.
Before you make a final decision on your planning, consider talking with a broker centered commission protection planning professional.
PHIL CALHOUN and DAVID ETHINGTON operate a health insurance education program designed to assist brokers to learn how to protect, grow and sell their commissions. Both are active members of theOrange County Health Underwriters (OCAHU).
“The Health Insurance Broker’s Guide: How to Protect, Grow & Sell Your Commissions” is available at www.healthbrokersguide.com