Reporting NonFinancials aspect of Business Value - Key Performance Indicators for Competitive Value, Management Value, Human Resources Value

Competitive Value—Brands, Customers and Markets

Brands
Key Performance Indicators:
Brand portfolio Turnover of key brands for last three years
Market share Market shares of key brands (%) in major regions
Competitor overview Major competitor brands and market shares
Investment volume Investment in individual brands for last financial year + investment plan for next three years
Brand perception Market research ratings of key brands during last financial year
Brand ranking Valuations of corporate brand by independent agencies for last three years (Interbrand/Landor/Core Brand, etc.)


CUSTOMERS
Key Performance Indicators:
Customer base Number of customers drilled down to region and to type (individuals, small businesses, etc.)
Sales breakdown % of sales attributed to different customer groups over last three years
Customer satisfaction Index based on results of surveys of last three years and related to market average
Complaint track record Number of complaints launched in last three years and time frame for resolution of complaints
Employee commitment % of salary pegged to customer satisfaction, positive/negative trends of last three years
Cross-selling rate Number and breakdown of products per customer for last three years


MARKETS
Key Performance Indicators:
Market size Size of the market(s) covered by company products for last three years
Market position Market share in % for last three years, classified according to product/service and region
Growth rate Rise/fall in turnover and net profit for individual products/services
Marketing investment Investment classified according to product and region and according to advertising/direct mail, etc.
Return on investment Margins of various products and breakdown of net income


Management Value—Strategy, Governance and Outlook

STRATEGY
Key Performance Indicators:
Growth Growth rate of the last three years (turnover and net income)
Profitability Earnings per share/return on investment for last three years
Innovation rate % of new products/services developed in the last three years
Internationality % of non-domestic business, classified regions in
Efficiency Cost/income ratio


GOVERNANCE
Key Performance Indicators:
Management control List of committee meetings with documentation of attendance by Board members and major decisions taken
Remuneration Breakdown of salary components and pension fund provisions, in particular performance-bonus link and stock options or LTIs
Board composition Qualifications and background of Board members
Governance ratings/rankings Company performance in ratings/rankings published by S&P, ISS, GMI, etc.


OUTLOOK: FORECASTING AS THE ULTIMATE CHALLENGE
Key Performance Indicators:
Growth in turnover Growth rate for next three years, broken down by division
Earnings Prognosticated ROI/ROE or earnings per share for next three years
Efficiency Forecast of cost/income ratio for next three years
Investments Figures and breakdown of planned investments for next financial year
Valuation Share price/book value or market cap target


Human Resources Value—Productivity, Motivation and Potential

PRODUCTIVITY: PROMOTING EFFECTIVITY AND EFFICIENCY
Key Performance Indicators:
Headcount Full-Time Equivalents (FTEs) or equivalent figure for last three years
Personnel costs Breakdown of salaries and social benefits (health insurance, pensions etc.) of workforce for last three years
Incentive ratio Variable component of salary as a % of total salary with breakdown at different hierarchic levels
Productivity ratio Per capita turnover and net earnings for last three years with breakdown on divisional level
Turnover rate % of employees leaving the company for the last three years and comparison to industry average (if available)
Absenteeism Rate of absenteeism in last three years and breakdown of causes (sickness, family issues, strikes, etc.)
Employee hierarchy rate Proportion of managers to normal staff on divisional basis
Line/Staff ratio % of employees in divisions, after-sales-service units, etc., in proportion to employees in staff functions (book-keeping, legal affairs, communications, etc.)


MOTIVATION
Key Performance Indicators:
Employee commitment Results of satisfaction and motivation surveys including highlights and improvement areas
Code violations % of employees against whom action has been taken for violations of the Code of Conduct, number of cases of whistle-blowing
Work/life balance track record % of employees working part-time, flexi-time, job-sharing, taking sabbaticals, etc.
Volunteering involvement % of employees active in corporate volunteering, breakdown of major areas of involvement (social work, expert advice, etc.)


POTENTIAL: PROTECTING PROPERTY AND HARNESSING TALENTS
Key Performance Indicators:
Training investment Total budget with breakdown of types of training (on-the-job, orientation courses for new employees, etc.) and as a % of total HR costs
Intellectual property Number of patents registered and gained
R&D quota R&D as a % of turnover
Idea management Results of idea management programmes:
number of ideas submitted and acted on during the last three years
Diversity performance and targets % of women and members of ethnic minorities in management positions during the last three years + targets for gender parity, etc.



For more Information:
Business Value Center
Achieving Business Value from Technology, Intangible Assets, EVA and Value-Based Management, Creating Value With Knowledge

Reporting NonFinancials aspect of Business Value - Key Performance Indicators for Competitive Value, Management Value, Human Resources Value

Buy or Sell? What are excellent signals for investment? Find out whether we are in Bull or Bear Market?

How to find out where we are in the investment cycle?
What are good signals for buy or sell?



An investor does not need to be an economist to find out where we are in the cycle. There are many signals given by business and the public. Those signals from business indicating a raging bull market and the time to sell may include:
 PER ratios and forecast increases in profit are very high
 institutional cash holdings are very low, stock market indices are beginning to falter and are far above the norm
 a mania for a sector, investment style, asset or geographical area
 bad news is dismissed and good news is a catalyst for action
 new issues are oversubscribed and trade at a premium
 the stockbroker’s phone is always engaged
 inflation and interest rates are beginning to increase but are dismissed as blips
 dividend yields are at record lows

Signals from the public indicating a raging bull market and the time to sell may include:
 media and pundits are overwhelmingly optimistic
 doomsters are few, ignored or fired
 consumer and government borrowing and spending are high
 speculation in shares and housing is rampant
 advertisements abound for foreign holiday homes
 dinner party talk is boastful of success in the markets
 few can see any reason for a change
 political stability seems unending
 empty restaurant and trains seats are rare
 sudden appearance of new cars in the neighbourhood
 investors think they are geniuses, complete novices show interest in risky investments and their ‘success’ is highlighted in the press
 investment conferences are packed and the circulation of publications like Investors Chronicle is at a peak
 conspicuous consumption of luxury goods, such as fireworks, champagne and cigars at Christmas and New Year parties

The indicators of a bad bear market are the reverse and are excellent buy signals.


Buying Guide
Buying is easier for an investor to do than selling, although today is always the worst time to buy a share from a psychological viewpoint. If a share has met the strict criteria laid down in this book, then go ahead and buy. Do not be put off by a recent lower price, as that is no longer relevant and, in any case, may signify lack of support in the market. What is relevant is the expectation that the price will rise from here. By all means, monitor the share and choose the moment to buy, especially if it is over-bought and a correction is anticipated. Be aware of the normal market size of trades in the share and the number of market makers, as it is very important to be able to buy and sell unhindered. Take great care to avoid being stuck in a falling share that cannot be traded due to its illiquidity.

Selling Guide
Selling is one of the hardest investment decisions. If a share falls in price, the hope is that it will recover but, if it is sold now, then an unnecessary loss will be realised. One way to take out the emotion is to set a stop loss of, say, 20% and strongly consider selling if this is triggered. A wider stop loss may be preferred for more illiquid shares, as they can be more volatile. Many shares in a portfolio may have the stop loss breached if there is a sudden market wash-out. Nevertheless, the principle still holds and selling them will prevent suffering further falls. It is worth remembering that a stop loss at 20% means that the next share you buy has to rise from 80 to 100 to make good this loss, a rise of 25%. Without a stop loss, hanging on to a share which falls 50% in value means that the next share has to double from 50 to 100 to make good the loss.

Sell when the story changes. If the reason why a share is bought no longer holds then the share should be sold. For example, if there was a promised roll out of a consumer franchise, such as a restaurant chain, of 25 new outlets a years and this has now been scaled back to say 10, then the story has changed and the share should be earmarked for disposal.

Sell when there is a better opportunity. Investors should constantly be on the look out for upgrading the quality and prospects of a portfolio and selling a share for a better one is the way to achieve this. Do not be tempted to continually add shares to the portfolio but keep the number steady at around a dozen shares spread across at least five sectors. If you want to add a share to your portfolio then do so on condition that an existing share is sold.

Set a price that you would sell any share in the portfolio. Monitor the shares and when the pre-set level is reached strongly consider selling in the light of prospects. Do not be greedy and, when you have achieved your goal, sell, even if the prospects look good. Do not try to squeeze the last bit of performance from a share but instead leave something for the next investor.




For more Information:
Shares or Stock Trading Resources
Optimal Trading Strategies, Investment Intelligence from Insider Trading, The Stock Investor’s Pocket Calculator, How to Profit in the Stock Market Using Volume and Stop Orders

Buy or Sell? What are excellent signals for investment? Find out whether we are in Bull or Bear Market?

Why Good Managers need to learn from Good Mothers? Strategies and Wisdom for Succeeding at Work. Balancing Your Family and Work Life.

Do you know that some Family and Work Skills Are Complementary?
Why Good Managers need to learn from Good Mothers?

Good mothers and good managers share five important qualities:

1. Wisdom.
A wise mother provide guidance for her children. Similarly, a leader at work needs both vision and technical competency. She must be good at what she does in order to bring out the best in her people and make a profit for her company.
Understanding, direction, vision, guidance, and proficiency are qualities that you will find in both wise mothers and wise leaders.

2. Trustworthiness.
A mother must earn her children’s trust in order to be able to provide them with a nurturing and supportive upbringing. Similarly, A leader must earn the trust of her people, or they will never believe in her vision. If they don’t trust her, they will spend their working hours looking for another job, instead of focusing on their current one.
If the leader is not trusted by her bosses, investors, or stockholders, she will not be able to fulfill her vision. Her superiors will interfere and attempt to micromanage her. If she delivers an inferior product or poor service, she will be distrusted by her customers and sales will fall.

3. Benevolence.
Equip your army with nutritious food and ample supplies and position them on sunlit high ground, free from disease, instead of dark, wet low ground where disease multiplies. When you take good care of your army and they are happy, they will win battles for you.

Benevolence is not being a doormat; it is about radiating personal power and showing an ability to embrace differing opinions. It short, it is a quality that comes from inner strength.

The benevolent mother accepts and understands her children’s viewpoints. The mother who mercilessly imposes her values and rules upon her children becomes toxic and abusive.

A benevolent leader is not threatened by criticism; instead she feels indebted to a staff that is honest and direct. A benevolent leader instills a sense of equality among her management team and workers; duties may vary, but opportunity and basic human dignity are equal. She makes people feel good about working for her.

Of course, in your quest to become a benevolent leader, remember not to reward your troops too frequently. As Sun Tzu said:
Too frequent rewards to your troops indicate that you are at the end of your resources; too frequent punishment of your troops means you are frustrated with your condition.


4. Strictness.
A mother can’t expect her children to be disciplined if she tolerates bad behavior. At first, strictness may seem in conflict with tolerance and benevolence; it is not. Of course, when you are strict without compassion, your child will rebel. But if you are not strict at all, you’ll spoil your child.

Good mothering, like good business leadership, lies in balancing paradoxical forces: benevolence with strictness, wisdom with ignorance, and courage with fear.

If the guidelines you set as a leader are clear and rigorously enforced, then people will perform. Strictness is not something that applies only to your staff but also to your relationship with your bosses, partners, customers, and especially to yourself.


5. Courage.
It takes great courage for a mother to trust her kids and raise them in the way she believes to be right. It is no different for a leader.
A good leader is always willing to consider something new. However, it takes courage to act this way. When you make changes, you face risks and uncertainty and potential failures. That takes guts.
Leaders cannot lead without courage. Whether called on to reach personal goals or your company’s objectives, bravery is vital to success. Otherwise, strategic planning is like playing war games on paper. It may be entertaining, but it is not productive.
A courageous leader is not without fear; rather, in spite of her fear, she faces her challenges and does what must be done.

While it is true that leaders cannot lead without courage, you shouldn’t accept a leadership position unless you are very competent in your field and you can give affirmative answers to these questions:
? Do I possess the ability to be decisive?
? Do I have the guts to complete the necessary tasks?
? Am I willing to take calculated risks?
? Do I have the stomach to handle the unpredictable setbacks?
? Do I possess an uncrushable strength?
? If my plan fails, am I resilient enough to bounce back?
? Do I have the ability to bear humiliation?
? Can I endure trying times?

If your answers to all of these questions is yes, you have the right temperament to become a leader. If the answer to any of these questions is no, you have some work to do before you accept the challenge of leadership.

Mental strength is vital to the success of every working woman, whether you are trying to attain personal goals or your company’s objectives. If you cannot handle the pain of setbacks, don’t take on a leadership role in the battlefield of either business or life.
The superior leader is one who can deal with a number of challenges simultaneously—from understanding the people she deals with daily to creating a vision—and have them all come together into a seamless whole.

A good leader at work: plans strategies, translates them into tasks, delegates, supervises the execution, and finally checks the results. She then seeks out areas that need improvement and alters her strategies to provide for a more effective execution in the future.

A leader leads by leading. And that is true whether the leading occurs at work or at home. Of course, the attitude and tone of voice you use will be different in speaking to your staff and your kids, and odds are you won’t be writing your children many memos (or maybe you will), but the principles of nurturing, empowering, correcting, and disciplining are the same.
By the same token, if you learn to cultivate your staff ’s talent and help them to complete projects successfully, you will be able to transfer this experience to child rearing.
Obviously, you must also give your employees the proper training, but when you take care of your people as if they are your children, you will gain their respect and loyalty.




For more Information:
Business Strategy and Management
The Essential New Manager's Kit, Sun Tzu and the Art of Business, Strategies for Highly Successful Organizations

Why Good Managers need to learn from Good Mothers? Strategies and Wisdom for Succeeding at Work. Balancing Your Family and Work Life.

How to Solve Common Project Problems - HANDLING RESPONSIBILITY BEYOND YOUR AUTHORITY and REDUCING THE TIME TO MARKET - Project Management Essentials

Solving Common Project Problems

HANDLING RESPONSIBILITY BEYOND YOUR AUTHORITY
When projects span organizational boundaries, you can suddenly find yourself relying on people over whom you have no authority. They work for neither you nor your sponsor. How will you enlist them as accountable, enthusiastic team members you can count on?
 Charter. Ask your sponsor to publish a charter for all the stakeholders. Make sure that it strongly designates your authority on this project.
 Statement of work. Explain the reason behind the project, and give them the background necessary to understand its importance to the organization.
 Communication plan. Involve them in setting up your primary means of communication. If they are outside your organization, you’ll probably need a
formal means of keeping them up- to- date. Make sure that this is a two- way medium so you’ll know that they are up- to- date and involved.
 Small work packages with strong completion criteria. Make assignments easy to understand and track. Involve them in estimating the cost and duration of tasks and in defining completion criteria. The more they are involved in developing the plan, the more ownership and commitment they’ll feel.
 Network diagram. Show them how they fit into the project; emphasize the importance of their input and the probable impact on the project if they fall behind on their schedule. If they have tasks with a lot of float, you can let them set their own schedule, but be sure to let them know that you expect them to meet the planned start and finish dates.
 Project status meetings with an open task report. Give them updates on the project even during times when they aren’t actively involved. Invite them to status meetings when their tasks are near enough to appear on the open task report. Hold them accountable to the schedule and to the rest of the project team.
 Sponsor. Develop a strong relationship with your sponsor by keeping him or her informed of your plans and your progress. You may need the sponsor’s help in overcoming organizational obstacles.


REDUCING THE TIME TO MARKET
Speed counts in your industry. The pace of change demands that your next release of a current product have a development time 20 percent less than that of the previous release. Between now and the deadline, you have to take your product through requirements, design, and construction, while building in the maximum functionality.
 Statement of work. Fast, focused performance demands a solid foundation. Getting agreement on authority, decision structures, and responsibilities among the participating groups will ensure that you don’t waste time fighting organizational battles during the project.
 Fixed- phase estimating. Since you’ll be working through the entire product development life cycle, there’s no point in generating a detailed schedule from start to finish. Instead, choose several review points where you can reevaluate the functions of the product against the available resources and deadline. These review points constitute phase- end milestones. You can determine the duration of these phases using performance data from previous development efforts. You will need to stick to these review dates; for the team to meet the deadline, it must meet every phase- end milestone.
 Project plan. Develop a detailed plan for every phase. Using a network diagram, identify all possible concurrent tasks. The concurrent tasks are the opportunities for performing more work at the same time; these are the places where adding people to the project can compress the schedule. You can use this technique to determine the largest number of people who can work on the project productively. (Don’t forget the resource- leveling guidelines, though.) Just remember that compressing the schedule by adding people may result in higher project costs.
 Completion criteria. Build quality checks into the project every step of the way. Although it may be tempting to skip some of the early quality- related activities in order to save time, you need to stay the course. It really is faster to do it right the first time.
 Project status meetings. Be clear about responsibilities and track schedule progress rigorously. Create a culture of schedule accountability by having strong completion criteria, and show clearly that falling behind, even by a little bit, is not acceptable. Build enthu siasm and a positive attitude by celebrating victories all along the way.



For more Information:
Project Management Guide
Defining the Project, Understand The Project Planning Process, Controlling the Project, Project Portfolio Management

How to Solve Common Project Problems - HANDLING RESPONSIBILITY BEYOND YOUR AUTHORITY and REDUCING THE TIME TO MARKET - Project Management Essentials

Project Management Fundamentals - What Makes a Project Successful - The Diamond Approach to Successful Growth and Innovation

What Makes a Project Successful

Success: Multiple Dimensions, Multiple Viewpoints

We see project success as a multidimensional, strategic concept. Every project needs more than one dimension for assessing success, and those dimensions vary in importance and significance, depending on the project.

Measuring organizational effectiveness on different dimensions is not new. It has evolved in recent years at the corporate level, as companies have realized that assessment based on traditional financial and accounting measures is not enough. Kaplan and Norton developed the corporate Balanced Scorecard concept to address these issues. It includes four major dimensions: financial measures, customer-related measures, internal measures, and innovation and learning measures. Typically, organizations choose fifteen to twenty submeasures that reflect their specific needs and environments. Other studies have suggested adding yet another dimension, for a total of five: financial, market related, process quality, people development, and preparing for the future.

But how does all this apply to projects and their success? Clearly, any collection of measures should address more than one need and should represent the concerns of more than one stakeholder group. But above all, success measures must reflect the strategic intent of the company and its business objectives, for three reasons. First, if a project does not serve the organization, why do it at all? Second, it should encompass success at different times: what may
seem well done in the short run may end later in disappointment, and short-term setbacks may turn into long-term rewards. Project success should therefore be observed with different time frames in mind. Finally, success measures should reflect the interests of various stakeholders who will be affected by the project’s outcome.


The Five Main Dimensions of Project Success
Based on research study, they suggest that a comprehensive assessment of project success in the short and the long term can be defined by five basic groups of measures:
 Project efficiency
 Impact on the customer
 Impact on the team
 Business and direct success
 Preparation for the future

Other dimensions may also be relevant, but these groups represent a wide spectrum of project situations and cover a great majority of cases and time horizons. Each dimension includes several possible submeasures, as listed in figure 2-1.

Figure 2-1: Specific success measures


The first dimension, project efficiency (or meeting planned goals), represents a short-term measure: whether the project has been completed according to plan. Was it finished on time? Was its spending within the budget? As we mentioned, meeting resource constraints probably indicates a wellmanaged, efficient project, but it may not guarantee that the project will ultimately succeed and will benefit the organization in the long term. However, with increased
competition and shorter product life cycles, time to market may be a critical competitive component that cannot be ignored.

The second dimension, impact on the customer, represents the major stakeholder whose perception is critical to the assessment of project success. This dimension should clearly state how the project’s result improved the customer’s life or business and how it addressed the customer’s needs. For example, if the customer is a service provider, success in this dimension might be defined as follows: “The product will enable the customer to cut in half the response
time to its own customers, and reduce errors by 60 percent.”

The third dimension, impact on the team, reflects how the project affects the team and its members. Good project leaders energize and inspire their team members and make the project a memorable, exciting experience. Other projects may be remembered as demanding and exhausting experiences. This dimension assesses the cumulative impact: team satisfaction, morale, the overall loyalty of the team to the organization, and the retention of team members after the project is completed. But this dimension also assesses the indirect investment the organization has made in team members. It measures the extent of team learning and team growth and of team members’ newly acquired skills and new professional and managerial capabilities.

The fourth dimension, business and direct success, reflects the direct and immediate impact the project has on the parent organization. In the business context, it should assess sales levels, income, and profits, as well as cash flow and other financial measures. In short, this dimension should relate to the project’s commercial success and answer one simple question: did it help build the bottom line?
In many cases, this dimension is represented by a typical business plan that outlines future expected sales, growth, and profits from the resulting product. In other cases, this dimension may involve an investment benefit analysis plan, which ties the investment to expected returns. However, this dimension might also include business-related measures for internal projects not aimed at new products for external markets, such as reengineering projects for restructuring business work flows. In such cases, this dimension often includes measures of costs saved, improved production time, cycle time, yield, and quality of process.
This dimension may also apply to nonprofit organizations. For example, when a charity foundation initiates a project to improve its services, shorten its processes, and serve more customers more cost-effectively, assessing the success of such an improvement project should include measures designed to reveal the direct impact of the project on benefits to the public.

The final dimension, preparation for the future, addresses the long range benefits of the project. It reflects how well the project helps the organization prepare its infrastructure for the future and how it creates new opportunities. Future infrastructure may include new organizational processes and additional technological and organizational competencies. Typical measures might include creating a new market, creating a new product line, or developing a
new technology.

Key Points and Action Items
 Project success cannot be judged by the triple constraint alone. Time, budget, and performance are short-term dimensions that do not reflect longer -term success. Project success is a multidimensional, strategic concept that should consider both the short- and long-term success of the project and its product. It should focus on business success as well as the efficiency with which the project is run, and it should consider different stakeholders’ points of view.
 Five dimensions are typically sufficient to plan and assess project success: efficiency, impact on the customer, impact on the team, business and direct success, and preparation for the future. Each of these dimensions is then reflected in detailed measures for each project. Additional dimensions may be needed in specific cases.
 Different projects have different success measures. These measures depend on the point of view, the time frame, the project uncertainty, and other variables. The relative importance of success dimensions depends on the time of the observation and the type of the project.
 Success dimensions are determined as part of the project plan and should drive project execution. They should be defined together with possible failure criteria for “what can go wrong.” It is the responsibility of the project manager and team to make sure that a project is executed so that it meets all the success dimensions.
 Success dimensions may also change during the project’s life cycle, as new information is gathered and as the environment changes.
 Executives should implement a system in which all projects, as a first step, define the relevant success dimensions in the project plan. Project reviews should include progress reviews along all success dimensions and, if needed, approve changes in success measures.
 Your organization’s culture should reward project managers and teams for more than meeting time and budget goals. Give greater responsibility to project managers, and make sure that they are rewarded when the product performs well in the market and when customers are really happy with the outcome.


For more Information:
Project Management Resources
Enterprise Programme Management, Achieve PMP Exam Success PMBOK® Guide, Global Project Management Handbook, Program Management, Portfolio Management

Project Management Fundamentals - What Makes a Project Successful - The Diamond Approach to Successful Growth and Innovation

Creating a Customer Culture with Key Account Management and Strategic Customer Relationship Management. Service Management Excellence.

Creating a customer culture

Internal and cultural changes required in an organisation to support a focus on customers leading to an environment that puts customers first.

Learn about the factors you can influence that make customers satisfied:
 Your impact on your environment extends at least as far as the people you work with and your internal customers.
 The factors you can influence include, vision, attitudes, training in marketing and customers, understanding customers, hiring employees and employee rewards.

Evaluate your understanding of your own and your customers’ values
 Companies are radically rethinking the way they ‘promote’ their images. They are looking at new ways of appealing to customers through values.
 The values that your organisation and your customers share are the most powerful ones.

Understand the importance of key account and customer relationship management
 Key account and customer relationship management are founded on improving your knowledge of your customers.
 Targeting and segmentation of customers will become more accurate and longer term relationships with customers are facilitated.

Assess relationships between customers and suppliers within partnerships
 Partnerships are set up to support long term relationships and offer benefits to both suppliers and customers.
 Partnerships demand more than just logistical fit. They are supported and made successful by shared cultural and behavioural values.


Key account management and customer relationship management

Key account management is a business process with three main elements that allow an organisation to explore and capitalise on their valued customers. The three elements are:
 an approach to customer segmentation
 the basis for customer retention
 a strategy for growth and development.

A) Customer segmentation
The starting point for key account management is to understand the values espoused by the target market at a minute level. Whether key accounts are individuals or corporate buyers, the foundation for customer focus is to know their characteristics.

Do you know:
 what elements of your service your customers value?
 what elements of your products/ service cause most difficulty for your customers?
 how much each of your key customers spends with your company?
 what proportion this is of their total spends for this product or service?
 how financially healthy are your key customers?
 what are their strategic plans?
 what processes your customers use to purchase, sell, manufacture or use products or services?
 what else your customers buy?
 what they buy from your competitors?
 how they rate your services/products?
 how much it costs to look after key accounts?
 the profitability of key accounts?
 how much it costs and what period it takes to replace a major new account?

B) Customer retention – supplier and customer relationships
The principles of key account management are based on meeting the needs of special customers more precisely. Recognising the value of key accounts and identifying the high costs associated with replacing key accounts will help to direct efforts towards retaining customers for longer and with a higher value.

Customer retention is achieved from the seller’s point of view through the development of loyalty and customer satisfaction. It will involve tailored strategies for constructing and developing individual and corporate relationships.
Practical ways of retaining customers include loyalty cards, financial benefits, membership privileges and preferential treatment in terms of access to services or special offers. Many organisations email promotions and information, which serves to keep their brand at the top of a purchasers mind. It is easy to over reach with this kind of promotion, handled sensitively customers may see it as an important source of information.

Structural ties are another way to retain customers. The intention is to provide a range of services associated with the purchase that mean it would be more difficult for a customer to move to a competitor. Facilitating payment arrangements, legal agreements, use of protected patents and intellectual property are some examples. Offering groups of products which make the offer relatively unique can create a structural tie that a customer may not be inclined to break.

Reinforcing the purchasing decision and getting customers to understand the value of the service or product they have brought may also discourage defection. Customers may well feel a ‘buyers remorse’ or cognitive dissonance having made a large capital purchase. They need to realise the benefits of the purchase or the relationship quickly with after-sales attention. Recognition in the wider community of the good purchase decision is also a powerful force in overcoming cognitive dissonance. So, whatever positive messages an organisation can get out into the community around the time of a large sale will be appreciated by the purchaser and contribute to a long term relationship.

C) Growing and developing customers

Understanding the potential for growing key accounts and retaining their custom is central to key account management. This demands, in some instances, some fairly complex customer and market analysis.
The dimensions that are commonly explored in customer analysis as:
 who constitutes the market?
 what does the market buy?
 why does the market buy?
 who participates in the buying?
 how does the market buy?
 where does the market buy?

This analysis provides some detailed information about the types and range of consumer buying behaviour likely to be encountered. It may include habitual purchases, impulse buying, limited decisionmaking and complex buying decisions.

The process then needs to focus in on particular customers across the continuum from high value, high volume to lower value, lower volume customers. The kind of information required at this stage includes:
 actual current value of sales
 profitability of current sales
 cost of provision – services and distribution
 external factors such as overall market profitability, trends and developments, competitor developments and activities
 customer developments and capital growth areas
 predicted future demands
 predicted future demands can be assessed using a number of tools such as:
– surveys of buyers’ intentions
– market research
– sales force opinion
– expert opinion
– analysing past data.

Growth predictions need to take into account any diversifications in business or operations, new product developments, technology changes and demographics. There are so many variables that absolute accuracy should not be attempted. The principle aim is to grow and develop customers without expanding the organisation’s cost base so significantly that the strategy becomes infeasible.


Customer relationship management is a technological system to support the management of relationships with customers or a business philosophy that supports the development of long-term, sustainable and valued relationships with customers. This concept moves on from the transactional sales model adopted for shortterm gain.

The generally accepted purpose of Customer Relationship Management (CRM) is to enable organisations to manage their customers through the introduction of reliable systems, processes and procedures for interacting with those customers. CRM is normally envisioned as a set of technology tools.

A wider definition includes relationship marketing that brings in attitudinal and behavioural aspects of the relationship and forms part of the culture of the organisation. Relationship marketing focuses on improving feedback mechanisms with the customer and developing customer loyalty through knowledge and long-term contacts. Relationship marketing and CRM work well when operating together.



Develop Service Management Excellence and Build a Customer Culture with Key Account Management and Strategic Customer Relationship Management.

For more Information:
Account Management and Customer Relationship Management
Build Better Relationships with Your Customers, Customer Care Excellence, Successful Global Account Management, Managing Strategic Accounts

Creating a Customer Culture with Key Account Management and Strategic Customer Relationship Management. Service Management Excellence.

Interpersonal Relations - Ego Defense Mechanisms, What Hurts People and What Makes Them Feel Good. Personal Learning and Development.

WHAT HURTS PEOPLE
(Negative Feedback, Aversive Stimuli, Negative Strokes, “Cold Pricklies”)

1. Not being liked
2. Not being understood or accepted
3. Not receiving approval or affection
4. Not being respected
5. Not being trusted
6. Not being included or involved
7. Not being allowed to express oneself
8. Not being listened to
9. Having ideas or opinions questioned, disbelieved, argued with, or rejected
10. Being treated coldly or impersonally
11. Being treated discourteously
12. Not being given time or attention
13. Being ignored (not having one’s presence acknowledged)
14. Being avoided
15. Being rejected or scorned
16. Receiving insincere flattery
17. Being criticized
18. Being blamed or made to feel guilty
19. Not having one’s efforts acknowledged
20. Not being thanked
21. Being teased, poked fun at
22. Being treated contemptuously or disdainfully (being insulted, called names, or the subject of sarcasm)
23. Being reprimanded or punished (for making a mistake or causing a problem)
24. Being reminded of past mistakes
25. Having one’s weaknesses pointed out or emphasized
26. Having one’s strengths be unacknowledged or ridiculed
27. Being put on (made to look foolish)
28. Being lied to
29. Being deceived, cheated, taken, or conned
30. Being manipulated or used
31. Being intimidated or threatened
32. Being gossiped about
33. Having a promise broken
34. Being betrayed
35. Not being supported or backed up
36. Being stereotyped
37. Being condescended to
38. Being the subject of a double standard
39. Being physically mistreated or abused
40. Not being given privacy
41. Having one’s possessions mistreated, damaged, or stolen
42. Not having desired status or role conferred
43. Not having one’s status or role acknowledged
44. Having one’s status decreased or withdrawn
45. Having one’s role withdrawn
46. Being ostracized (from a group)
47. Being excessively directed (by a superior)
48. Being helped
49. Not being informed (not being told what’s going on)
50. Not being given cooperation
51. Being the subject of revenge
52. Having any of the preceding actions done to loved ones



WHAT MAKES PEOPLE FEEL GOOD
(Positive Feedback, Reinforcers, Positive Strokes, “Warm Fuzzies”)

1. Being liked, shown friendship
2. Being understood, appreciated, or accepted
3. Receiving approval or affection
4. Being shown respect
5. Being shown trust or confidence
6. Being included or invited to participate
7. Being allowed to express one’s thoughts or feelings
8. Being listened to
9. Having one’s ideas or opinions acknowledged, accepted, and fairly considered (if not agreed with)
10. Being treated warmly and considerately
11. Being treated with respect or courtesy
12. Being given time and attention
13. Having one’s presence acknowledged
14. Being sought out or approached
15. Being approved of or accepted
16. Receiving a sincere compliment
17. Being praised, recognized, or complimented
18. Not being blamed; having mistakes understood
19. Having one’s efforts acknowledged or appreciated
20. Being thanked; having an act reciprocated
21. Being shown sensitivity or respect
22. Receiving deference, respect, or consideration
23. Having mistakes or problems discussed honestly, tactfully, and constructively
24. Having mistakes forgiven and forgotten
25. Having weaknesses accepted, tolerated, or excused
26. Having strengths acknowledged or emphasized
27. Being made to look competent or sensible
28. Being told the truth
29. Being dealt with honestly and fairly
30. Being treated as trustworthy or depended on as a group member
31. Being treated conscientiously or unthreateningly
32. Being spoken well of (behind one’s back)
33. Having promises (to one) kept
34. Being shown loyalty; having one’s confidences kept
35. Being supported or backed up
36. Having one’s individuality acknowledged or accepted
37. Being treated as an equal
38. Being treated equally, justly, and fairly
39. Being made physically comfortable or secure
40. Being given privacy (personal time and space)
41. Having one’s possessions treated considerately
42. Having desired status or role conferred
43. Having one’s status or role acknowledged
44. Having one’s status increased or re-conferred
45. Having one’s role re-conferred
46. Being accepted into or reinstated by a group
47. Being instructed, supported, or guided
48. Being asked for help or guidance
49. Being kept informed (being in on what’s happening)
50. Being given cooperation or assistance
51. Being forgiven
52. Having loved ones treated with respect or kindness


Ego Defense Mechanisms.
When most of us experience negative feedback, we use various psychological defense mechanisms to protect our identity or self-image.

Suppression: Attempting to hide a personal weakness or failure from others or trying to keep others from finding out that one has made a mistake or has caused a problem.
Denial: Denying—to either oneself or others—that one has made a mistake, has a problem, or has caused a problem.
Projection: Blaming others for a mistake or problem or attributing to others the same weaknesses and shortcomings that one finds in oneself. Another form of this mechanism involves “wearing a mask” and displaying or projecting what we want others to see in us— for example, our strengths rather than our weaknesses and vulnerabilities.

The preceding defense mechanisms constitute our first line of defense against negative feedback. The next nine mechanisms constitute our second line of defense. They come into play when we must acknowledge our weaknesses, mistakes, wrongs, or problems and then come to terms with the psycho-emotional consequences within ourselves.

Rationalization: Justifying one’s shortcomings, mistakes, or problems with reasons (excuses) that help keep one’s self-image intact
Compensation: Engaging in alternative activities in which one is more capable of being successful and generating self-image-reinforcing positive feedback
Sublimation: Unconsciously blocking psychologically painful experiences from rising to the level of conscious awareness
Repression: Consciously pushing negative emotions and thoughts out of one’s mind
Fantasy: Substituting daydreams for reality (that is, dreamily thinking about things being the way one wishes they could be)
Regression: Reverting to behavior patterns involved in more ego-satisfying situations or circumstances of the past (for example, regressing to childlike behavior)
Identification: Identifying or associating with those who appear more successful, liked, respected, or admired than oneself
Aggression: Taking out one’s frustration, anxiety, resentment, or anger on other people
Undoing: Trying to right the wrong or doing penance by causing personal suffering to oneself


Dysfunctional Ego Enhancement Measures.
The following are some negative or dysfunctional measures that many people use. They are aimed at what we call “self-superiorization” (self-elevation or self-exaltation). In general, they enhance one’s own ego at the expense of other people’s feelings and egos. Thus, their use is considered dysfunctional for social relationships and should be avoided.

Identifying: Identifying or associating with those who appear to be more successful, respected, admired, or liked than oneself. (Although this usually does no harm to others, it does not necessarily result in personal development and an improved ability to cope.)
Criticizing, ridiculing, blaming: Putting other people down in order to put oneself up (feel superior to others in some respect).
Dominating, intimidating: Using power, authority, or influence in order to control others and feel superior to them (as an authoritarian boss, spouse, or parent might do).
Creating dependency: Causing others to become financially, emotionally, or otherwise dependent on you, so that you can control and feel superior to them.
Manipulating, using: Manipulating, using, or otherwise taking advantage of others in order to feel more powerful, competent, shrewd, or successful than they are.
Unfairly outcompeting others: Becoming more successful than others by deceiving them, obstructing their activities, undermining their efforts, subverting their relationships, or otherwise unfairly putting them at a disadvantage.
Engaging in one-upmanship: Talking about having something more or better than another person has (whether or not one actually does)—for example, a better-paying job, a larger house, a fancier or faster car, a higher score, travel to more places, more knowledge or experience, more skill, more power or influence, a greater number of friends, or more important acquaintances.
Applying double standards: Applying different standards to oneself than one applies to others in order to make oneself come out ahead in some respect.
Hurting others: Consciously or unconsciously hurting people in other ways, in order to feel superior to them (less vulnerable than them) or to get even for being wronged by them.




For more Information:
People Management Skills
Essential People Skills, How to Deal With Difficult People, How to Deal With People Problems and Problem People, Managing People, Managing Power, How to Getting Along with Just About Anyone

Interpersonal Relations - Ego Defense Mechanisms, What Hurts People and What Makes Them Feel Good. Personal Learning and Development.

Conflict Management and Resolution - Developing successful Conflict-Resolution Strategies at home or at work. Business Management Resources.

Conflict-Resolution Strategies


Overview

Conflict is a daily reality for everyone. Whether at home or at work, an individual’s needs and values constantly and invariably come into opposition with those of other people. Some conflicts are relatively minor, easy to handle, or capable of being overlooked. Others of greater magnitude, however, require a strategy for successful resolution if they are not to create constant tension or lasting enmity in home or business.

The ability to resolve conflict successfully is probably one of the most important social skills that an individual can possess. Yet there are few formal opportunities in our society to learn it. Like any other human skill, conflict resolution can be taught; like other skills, it consists of a number of important subskills, each separate and yet interdependent. These skills need to be assimilated at both the cognitive and the behavioral levels (i.e., Do I understand how conflict can be resolved? Can I resolve specific conflicts?).


Responses To Conflict Situations
Children develop their own personal strategies for dealing with conflict. Even if these preferred approaches do not resolve conflicts successfully, they continue to be used because of a lack of awareness of alternatives.
Conflict-resolution strategies may be classified into three categories— avoidance, diffusion, and confrontation. The accompanying figure illustrates that avoidance is at one extreme and confrontation is at the other.

Avoidance
Some people attempt to avoid conflict situations altogether or to avoid certain types of conflict. These people tend to repress emotional reactions, look the other way, or leave the situation entirely (for example, quit a job, leave school, get divorced). Either they cannot face up to such situations effectively, or they do not have the skills to negotiate them effectively.
Although avoidance strategies do have survival value in those instances where escape is possible, they usually do not provide the individual with a high level of satisfaction. They tend to leave doubts and fears about meeting the same type of situation in the future, and about such valued traits as courage or persistence.

Defusion
This tactic is essentially a delaying action. Defusion strategies try to cool off the situation, at least temporarily, or to keep the issues so unclear that attempts at confrontation are improbable. Resolving minor points while avoiding or delaying discussion of the major problem, postponing a confrontation until a more auspicious time, and avoiding clarification of the salient issues underlying the conflict are examples of defusion. Again, as with avoidance strategies, such tactics work when delay is possible, but they typically result in feelings of dissatisfaction, anxiety about the future, and concerns about oneself.

Confrontation
The third major strategy involves an actual confrontation of conflicting issues or persons. Confrontation can further be subdivided into power strategies and negotiation strategies. Power strategies include the use of physical force (a punch in the nose, war); bribery (money, favors); and punishment (withholding love, money). Such tactics are often very effective from the point of view of the “successful” party in the conflict: that person wins, the other person loses. Unfortunately, however, for the loser the real conflict may have only just begun. Hostility, anxiety, and actual physical damage are usual byproducts of these win/lose power tactics.
With negotiation strategies, unlike power confrontations, both sides can win. The aim of negotiation is to resolve the conflict with a compromise or a solution that is mutually satisfying to all parties involved in the conflict. Negotiation, then, seems to provide the most positive and the least negative byproducts of all conflict-resolution strategies.


Conflict-Confrontation Strategies

A) Problem Solving
Problem solving is an attempt to find a solution that reconciles or integrates the needs of both parties, who work together to define the problem and to identify mutually satisfactory solutions. In problem solving there is open expression of feelings as well as exchange of task-related information. Alderfer (1977) and Wexley and Yukl (1977) summarize the most critical ingredients in successful problem solving:
1. Definition of the problem should be a joint effort based on shared fact finding rather than on the biased perceptions of the individual groups.
2. Problems should be stated in terms of specifics rather than as abstract principles.
3. Points of initial agreement in the goals and beliefs of both groups should be identified along with the differences.
4. Discussions between the groups should consist of specific, non evaluative comments. Questions should be asked to elicit information, not to belittle the opposition.
5. The groups should work together in developing alternative solutions. If this is not feasible, each group should present a range of acceptable solutions rather than promoting the solution that is best for it while concealing other possibilities.
6. Solutions should be evaluated objectively in terms of quality and acceptability to the two groups. When a solution maximizes joint benefits but favors one party, some way should be found to provide special benefits to the other party to make the solution equitable.
7. All agreements about separate issues should be considered tentative until every issue is dealt with, because issues that are interrelated cannot be settled independently in an optimal manner (Blake & Mouton, 1962, 1964; Walton & McKersie, 1965).

There are two preconditions for successful, integrative problem solving. The first precondition is a minimal level of trust between the two groups. Without trust, each group will fear manipulation and will be unlikely to reveal its true preferences. Second, integrative problem solving takes a lot of time and can succeed only in the absence of pressure for a quick settlement. However, when the organization can benefit from merging the differing perspectives and insights of the two groups in making key decisions, integrative problem solving is especially needed.

B) Organizational Redesign
Redesigning or restructuring the organization can be an effective, intergroup conflict-resolution strategy. This is especially true when the sources of conflict result from the coordination of work among different departments or divisions. Unlike the other strategies discussed so far, however, organizational redesign can be used either to decrease the conflict or to increase it.
One way of redesigning organizations is to reduce task interdependence between groups and to assign each group clear work responsibilities (that is, create self-contained work groups) to reduce conflict. This is most appropriate when the work can be divided easily into distinct projects. Each group is provided with clear project responsibilities and the resources needed to reach its goals. A potential cost of this strategy is duplication and waste of resources, particularly when one group cannot fully utilize equipment or personnel. Innovation and growth also may be restricted to existing project areas (Duncan, 1979), with no group having the incentive or responsibility to create new ideas.

The other way to deal with conflict through organizational redesign is to develop overlapping or joint work responsibilities (for example, integrator roles). This makes the most use of the different perspectives and abilities of the different departments, but it also tends to create conflict. On the other hand, there may be tasks (for example, developing new products) that do not fall clearly into any one department’s responsibilities but require the contributions, expertise, and coordination of several. Assigning new-product development to one department could decrease potential conflict, but at a high cost to the quality of the product. In this case the organization might try to sustain task-based conflict but develop better mechanisms for managing the conflict. For example, providing “integrating teams” can facilitate communication and coordination between the members of interdependent departments (Galbraith, 1974).



For more Information:
Conflict Management Centre
Managing Conflict with Your Boss, peers, and family. The Conflict Resolution Toolbox. The Handbook of Conflict Resolution.

Conflict Management and Resolution - Developing successful Conflict-Resolution Strategies at home or at work. Business Management Resources.

Fundamentals of Annuities Planning. Wealth Management, Pensions, Annuities & Retirement Planning Guide. Your Learning Resource Centre.

Annuities


WHAT IS IT?
Annuities are the only investment vehicles that can guarantee investors that they will not outlive their income, and they do this in a tax-favored manner. In addition, annuities are available with a host of features to meet a wide variety of investor needs. The income taxation of annuities is governed by IRC Section 72.

Technically, annuities are contracts providing for the systematic liquidation of principal and interest in the form of a series of payments over time.[1.] However, this really refers to the “payout” phase of an annuity; in point of fact, annuities can (and often do) have an accumulation phase that also lasts for a substantial period of time.

An annuity is established when the investor makes a cash payment to an insurance company, which invests the money – this may be a single large cash payment or a series of periodic payments over time. The money remains invested with the insurance company and is periodically credited with some growth factor – this is the accumulation phase of the annuity. In return for making a deposit into an annuity, the insurance company ultimately agrees to pay the owner (or owners) a specified amount (the annuity payments) periodically, beginning on a specified date – this is the payout phase of the annuity.

If the specified date for payouts to begin is within one year of the date the contract is established (i.e., a single cash payment is made and the insurance company begins a systematic liquidation of the payment back to the owner within one year), the annuity is called an “immediate annuity”. If, alternatively, the specified date for payouts to begin is at least one year later, the annuity is called a “deferred annuity” (because deposits are made now, but the payout is deferred). An immediate annuity only has a payout phase; a deferred annuity has both an accumulation and a payout phase.

If the payout phase of the annuity is a life annuity, the company promises that payouts will continue for as long as the annuitant (or annuitants) live; the income stream can never be outlived (NOTE: although often the same, technically the owner of the annuity does not necessarily need to also be the annuitant; occasionally these are different individuals). If the payout phase is a fixed period annuity (also called a term-certain annuity), the company promises to pay stipulated amounts for a fixed or guaranteed period of time independent of the survival of the annuitant. An annuity payout can also utilize a combination of the life and fixed period options, such as “for the greater of 10 years or the life of the annuitant(s).

In addition to differentiating between immediate and deferred annuities, and fixed and term-certain payouts, annuities are also categorized as to whether they are fixed or variable (be careful not to confuse a “fixed annuity” with a “fixed period payout”). Classification as a fixed or variable annuity refers to the underlying investments during the accumulation phase of the annuity; a fixed annuity is invested in the general fixed account of the insurance company, while a variable annuity is invested in separately managed sub-accounts (that function similarly to mutual funds) selected by the annuity owner. Variable annuities often have additional features to help manage the risk of their underlying investments, such as guaranteed death benefits or newer “living benefits” that provide company-guaranteed payments for owners or beneficiaries even if (or especially if) they would be higher than actual investment performance would provide for.

Newer annuities may also offer a variable option during the payout phase (whether for a fixed or term-certain period). A “variable annuitization” has payments that may fluctuate up or down depending upon the performance of the underlying sub-account investments; a “fixed annuitization” has payments that remain the same through the payout phase (or occasionally increase by some set rate to keep pace with inflation; however, this rate is pre-determined and contractual, is still invested in the insurance company’s general account, and is thus still considered a “fixed payout”).

Annuities purchased from an insurance company are called “commercial annuities” while those purchased from a person or entity that is not in the business of selling annuities are called “private annuities.

Annuities grow tax-deferred during the accumulation phase, although withdrawals during this phase are taxed on a LIFO (last in, first out) basis – meaning that withdrawals during the accumulation phase are considered to be withdrawals of growth first (fully taxable) and principal second.[3.] Payouts during the annuitization phase are split; a portion of each payment is considered principal and a portion is deemed interest/growth. The proportion of each is determined at the annuity’s beginning payment date and is based upon the already-accumulated growth, an assumed internal growth factor for the payout period, and the expected length of the payout period. All amounts distributed that are considered interest/growth are taxed as ordinary income, regardless of the phase or timing of the withdrawal. In addition, certain withdrawals before the age of 59 1/2 may be subject to an additional 10% tax penalty.

Although annuities have tax-deferral features that can be quite advantageous, the primary reason annuities should be purchased are for their risk management features. Annuities can provide a variety of guarantees, whether protecting against interest rate risk, reinvestment risk, market volatility risk, or the risk of living too long and outliving one’s assets. Annuities are first and foremost a risk management tool.


ADVANTAGES
1. The guarantees of safety, interest rates, and particularly lifelong income (if selected) give the purchaser peace of mind and psychological security.
2. An annuity protects and builds a person’s cash reserve. The insurer guarantees principal and interest (in the case of a fixed annuity; a variable annuity is subject to the performance of the underlying selected sub-accounts), and the promise (if purchased) that the annuity can never be outlived. This makes the annuity particularly attractive to those who have retired and desire, or require, fixed monthly income and lifetime guarantees.
3. An annuity allows a client to invest in the market while moderating risk. The insurer may provide guarantees of death proceeds or a certain annuitization amount (if purchased) within a variable annuity, thus providing guarantees that would otherwise be unavailable to a client that purchased the underlying investments directly. This makes a variable annuity particularly attractive to those who have retired or are nearing retirement and need (or want) to hold risky investments while trying to moderate risk.
4. A client can “time” the receipt of income and shift it into lower bracket years. This ability to decide when to be taxed allows the annuitant to compound the advantage of deferral.
5. Because the interest on an annuity is tax-deferred, an annuity paying the same rate of interest (after expenses) as a taxable investment will result in a higher effective yield.
6. Because of the risk-management factors available, especially in variable annuities, a client may be able to take on greater risk in the underlying investment options (e.g., equities, smaller-capitalization equities, high-yield bonds, etc.) while still maintaining a reasonable overall risk exposure due to the underlying guarantees.
7. Adjusted Gross Income (AGI) may be reduced in years where the annuity is held with no withdrawals (thanks to the tax-deferral features of the accumulation phase). In addition, lower taxable income may be recognized during the payout phase, due to the partial recovery of basis associated with each payment. A reduced AGI can bring tax savings, as many other income tax rules are calculated based upon AGI and generally a lower AGI results in lower taxation (and vice versa). A reduced AGI can create tax savings by lowering the amount of Social Security includable in income, reducing the floor threshold for deduction of medical expenses (7.5% of AGI) or miscellaneous itemized deductions (2% of AGI), and avoiding the threshold for phase-out of exemptions and itemized deductions.


DISADVANTAGES
1. Receipt of a lump sum (either at retirement, or to a beneficiary at death) could result in a significant tax burden because income averaging is not available (however, this can be moderated if the proceeds are annuitized).
2. The cash flow stream of a fixed payout may not keep pace with inflation, particularly for longer-term payout phases such as a life annuitization.
3. A 10% penalty tax is generally imposed on withdrawals of accumulated interest during the accumulation phase prior to age 59 1/2 or disability (this may also apply to the annuitization phase if the annuity was not an immediate annuity and certain short payout terms are selected).[6.]
4. With a few limited exceptions, if an annuity contract is held by a corporation or other entity that is not a natural person, the contract is not treated as an annuity contract for federal income tax purposes. This means that income on the contract for any taxable year is treated as current taxable ordinary income to the owner of the contract regardless of whether or not withdrawals are made.
5. If the client is forced to liquidate the investment in the early years of an annuity, management and maintenance fees and sales costs could prove expensive. Total management fees and mortality charges can run from 1% to 2 1/2% of the value of the contract (occasionally as high as 3% in the case of variable annuities with a number of underlying guarantees). There may be a “back end” surrender charge if the contract is terminated within the first few years to compensate the insurer for the sales charges that are not typically levied “up front.”
6. Investment earnings are taxed at the owner’s ordinary income tax rate when the owner receives payments, regardless of the source or nature of the return. Consequently, investment earnings attributable to long-term capital appreciation (typically in variable annuities) do not enjoy the more favorable long-term capital-gain tax rate that would otherwise generally apply. This has become even more disadvantageous with the reduction of the maximum long-term capital-gain rate to 15% (or even 5% for lower-income taxpayers). Furthermore, investment earnings attributable to dividends on stocks that would qualify for the 15% maximum tax rate if the stocks were held outside an annuity will also be taxed at the owner’s ordinary income tax rate (although these dividends will not be taxed until withdrawal). Consequently, variable annuities where the annuity owner is inclined to invest in equities are much less attractive than previously.


WHAT FEES OR OTHER ACQUISITION COSTS ARE INVOLVED?
There are five typical fees or charges that are usually incurred when purchasing annuities, particularly variable annuities. These include:
1. Investment Management Fees – These fees run from a low of about 0.25% to a high of about 1%.
2. Administration Expense and Mortality Risk Charge – This charge ranges from a low of about 0.5% to a high of about 1.3%. However, additional riders and features can increase this cost to as high as 2.0%.
3. Annual Maintenance Charge – This charge typically ranges from $25 to $100. However, it is often waived once total investments exceed a specified amount, such as $25,000.
4. Charge per Fund Exchange – This charge generally ranges from $0 to $10, but most funds will permit a limited number of charge-free exchanges per year. In addition, automatic rebalancing programs usually do not count towards this limit.
5. Maximum Surrender Charge – Surrender charges vary by company and policy and generally phase-out over a number of years. If the charge is lower, the phase-out range tends to be longer. For example, typical charges and phase-out periods are 5% of premium decreasing to 0% over 10 years or 8% of premium decreasing to 0% over 7 years.

Items 1 through 4 in the above list must be explicitly stated in the prospectus for a variable annuity. In a fixed annuity, these costs are generally incorporated into the management of the insurance company’s general account and are simply netted out of the return credited to annuity-holders. Thus, when comparing fixed annuities, cost comparisons (although other non-cost aspects are also analyzed) are generally restricted to an evaluation of the comparable crediting rates of the general account and the surrender charges.


HOW DO I SELECT THE BEST OF ITS TYPE?
1. Compare, on a spreadsheet, the costs and features of selected annuities. Consider all of the five costs discussed above as well as how much can be withdrawn from the contract each year without fee. Be certain to fully read through the full details of costs/ charges, guarantees, riders, and special features in the prospectus of a variable annuity.
2. Compare the total outlay with the total annual annuity payment in the case of fixed annuities. Be certain to incorporate the time value of money if the payment schedules are different.
3. In an analysis of variable annuities, evaluate the total return for the variable annuity sub-accounts over multiple time periods (Lipper Analytical Services, Inc., and Morningstar, Inc., both have information to help assess this).
4. Compare the relative financial strength of the companies through services such as A.M. Best. Insist on a credit rating of A+ (or at the very least, thoroughly discuss with the prospective buyer the risks involved in purchasing from a company with a lesser rating).



For more Information:
Pensions, Annuities & Retirement
Pension and Retirement Plans. How to Retire Happy. Variable Income Annuities, Pension System, Endowments

Fundamentals of Annuities Planning. Wealth Management, Pensions, Annuities & Retirement Planning Guide. Your Learning Resource Centre.

How to Determine the Right Life Insurance Policy. Personal Development Resources. Professional Development, Education and Training Resources.

How to Determine the Right Policy

HOW TO SELECT THE TYPE OF INSURANCE PRODUCT OR PRODUCT MIX APPROPRIATE FOR THE CLIENT

Above all, the planner must always “MATCH THE PRODUCT TO THE PROBLEM.” The particular type of life insurance coverage appropriate for a given client is a function of four factors:
1. the client’s personal preferences, prejudices, and priorities;
2. the amount of insurance needed;
3. the client’s ability and willingness to pay a given level of premiums (cash flow considerations); and
4. holding period probabilities (duration of need considerations).

Preferences, Prejudices, and Priorities
The selection of a particular type of life insurance policy or policy mix is to a great extent a very personal decision. Just as some individuals prefer, by psychological nature, to lease an automobile or rent an apartment, others prefer to make their purchases with a minimum down payment and stretch out the length of payments as long as possible, while others prefer to make a relatively large down payment and to pay off the loan or mortgage as quickly as possible. To many clients there is emotional comfort in “owning,” while others feel that owning ties them down and restricts their freedom of choice and flexibility. Similar comparisons can be made to life insurance policies. Some clients do not want to “pay, pay, pay…and have nothing to show for it at the end of the term,” while others have been told all their lives to “buy term and invest the difference.” In the real world, both positions are correct, and not correct. Even the advice of knowledgeable planners has been tainted by their own prejudices. For most clients, the right course of action usually lies where they are most comfortable—since peace of mind is really the impetus for the purchase of life insurance in the first place.

Another useful analogy is the purchase of technology tools by professionals. Some tend to purchase the highest quality, most expensive tools that they can afford to so that the tools will serve them well over a lifetime (or at least the reasonably expected lifetime of the tools). They do not tend to purchase lower priced, lower quality tools that will have to be replaced by other tools because they wear out, were inadequate to begin with, or break. But others cannot afford to (or will choose not to) purchase top quality tools. They may have other priorities. They may prefer to have the money to invest or to spend on current consumption. They may end up spending more over the length of their careers on tools and may be inconvenienced in the process of continually replacing the original tools.

Although this “preference/priority”-based decision making is not necessarily the most logical, it is a strong and important process that requires the planner to take into consideration the client’s psychological makeup. The rules of thumb here are as follows:
1. Buy term if the client has a high risk-taking propensity.
2. Buy term if the client has a “lease rather than own” preference.
3. Buy some type of whole life insurance if the client has an “own rather than loan” type personality.
4. Buy some type of whole life insurance if the client wants something to show for his money at any given point. The more important it is for the client to have cash values and dividends at any given point, the more whole life type coverage is indicated.
5. Buy a mix of term and whole life if the client is—like most clients—not solidly on one end of the spectrum or the other.

Amount of Insurance Needed
When the amount of insurance needed is so great (as it often is for families with young children or for couples with high living standards relative to their incomes) that only term insurance or a term/whole life combination is feasible, the need for death protection should be given first priority. This results in simple rules of thumb:
1. Buy term insurance when there is no way to satisfy the death need without it. The term insurance can be converted to another form of protection at a later date, if and when appropriate.
2. Buy a combination of term and permanent insurance when the client can cover the entire death need and is able and willing to allocate additional dollars to appropriate permanent coverage.
Keep in mind, however, that buying term insurance means paying ever-increasing premiums for a constant amount of coverage. People with little prospect of increasing their income sufficiently to pay ever-increasing term premiums face a difficult trade-off. They can buy term insurance for the amount of coverage they think they currently need, and face the prospect of being unable to afford that coverage in the future. Or they can purchase as much permanent insurance (e.g., level-premium whole life) as they can afford and be relatively assured that they can maintain the coverage for the long term, but have less coverage than they think they need.

Cash Flow Considerations
There are a large number of premium payment configurations that provide considerable flexibility for policyowners. Some clients will prefer to fully prepay for their coverage and take advantage of the tax-deferred internal buildup of investment return. This limits the total amount of premium that will be paid, even if the insured lives well beyond life expectancy. Other clients will be more comfortable with the payment of premiums at regular intervals for a fixed period or for the life of the insured (or for the working life of the insured). This “installment” purchase of life insurance benefits the policyowner who dies shortly after the policy is purchased, since a much lower total premium would be paid before death.

Conceptually, the insurance company itself is indifferent to the premium payment method selected; all of these patterns of payment, if applied to the same level of death benefit and continued for the same duration of time, will have the same actuarial value. So client abilities to pay and preferences are the major factors in the decision. The rules of thumb are as follows:
1. Prepay coverage (buy vanishing premium or limited payment whole life permanent insurance) if the client expects to live longer than average.
2. Pay on the installment basis (purchase term or low outlay whole life coverage) if the client thinks he or she faces a greater than average mortality risk.
3. Purchase yearly renewable term (YRT) if the client wants or needs to pay absolutely minimal initial premiums, but is willing to pay increasingly larger premiums each consecutive year to keep the same level of coverage in force.

Duration of Need Considerations
In many cases, the planner’s decision must be dictated at least in part by how long the need is expected to last. Some rules of thumb here are:
1. Buy term insurance if the need will probably last for 10 years or less.
2. Buy term and/or whole life if the need will probably last for 10 to 15 years.
3. Buy some type of whole life coverage if the need will probably last for 15 years or longer.
4. Buy some type of whole life coverage if the policy will probably be continued up to or beyond the insured’s age 55.
5. Buy some type of whole life coverage if the policy is purchased to solve a buy-sell need.
6. Buy some type of whole life coverage if the policy is designed to pay death taxes, or to transfer capital efficiently from one generation to another, or to replace capital given to charity or otherwise diverted from the client’s intended beneficiaries.


HOW TO DECIPHER POLICY ILLUSTRATIONS OR LEDGER STATEMENTS


The policy illustration or ledger statement is the principal source of financial information regarding a new-issue policy. The separate chapters on the various types of policies provide ledger statement illustrations and describe in considerable detail what to look for in these statements. Here, we present a general overview. Understanding these ledger statements is important, because the information they provide serves as the basis for the various policy comparison measures that are discussed below.

The first step in understanding a policy illustration is to identify the columns that state the following:
§ yearly premium payments;
§ year-end policy cash values;
§ projected policy dividends;
§ cumulative cash value at given policy durations;
§ the death benefit from the basic policy; and
§ the death benefit provided by any dividends.

The critical questions are:
1. What does the client pay, year by year—compared to what he gets if he lives and what his family receives if he dies?
2. What portion of those amounts is guaranteed—and what portion of those amounts is projected?
3. What interest or other assumptions are built into these figures?

Financial services professionals should examine a policy illustration with particular emphasis on the following:
§ surrender charges;
§ cash value projections;
§ policy loans; and
§ dividends.

Surrender Charges
Determine what the company charges if the client surrenders the policy in a given year by looking at the cash value columns. Where there are two columns for cash values—one that reflects the net surrender value of the contract and the other the year-end cash value for the policy—the difference between these two amounts is the surrender charge for the given year.

Cash Value Projections
Ascertain the “premium level safety” by looking at the cash value projections on universal life and interest-sensitive life products. It is common under these two types of policies to show future cash values based on: (1) the guaranteed interest rate; and, also, (2) one or more higher interest rates related to either: (a) current portfolio earnings, or (b) whatever earnings level the agent has selected for the illustration.

Question the long term reasonableness of the assumptions. Are they unrealistic? Does the cash value associated with the guaranteed interest rate drop to zero after some years of duration? This indicates that the premium being charged for the contract will at that point become inadequate to support the coverage in force if the insurer is only able to credit cash values with the guaranteed interest rate. The client will be forced to pay higher premiums unless the contract earns interest higher than the guaranteed rate. If the illustration shows positive cash values at all policy durations, the premium will be adequate to carry the policy indefinitely.

Policy Loans
The notes to the ledger statement should explain what interest rate is being charged on the policy loans and if the rate is fixed or variable. If the rate is variable, is the rate being used for illustration reasonable over the period shown?
Check the illustration to see if loans are part of a systematic plan of borrowing to pay premiums. This is called a “minimum deposit” plan. Although no longer a popular approach to financing insurance premium payments, this is evidenced by a regular pattern of increasing outstanding loan balances where the increases are tied closely to the interest rate applicable to the previous outstanding balance and the premium payment due under the contract.

Dividends
Remember that dividends are not guaranteed. Many insurance companies have recently, and significantly, reduced dividends below their original projections. If the ledger statement shows policy loans, the notes to the ledger statement should explain whether dividends are reduced when loans are outstanding. Check to see whether the projected dividends reflect reductions attributable to any projected policy loans. Also, determine what interest rate the company assumes it must earn to pay the projected dividends. If the assumed interest rate seems too high or too optimistic over the long run, run another ledger with projected dividends based on a more supportable long-run interest assumption. Also, check the interest rate that the insurer will pay on any dividend left with it to earn interest. (The interest is currently taxable, even though the dividend itself will not be taxable to the policyowner.)



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Life Insurance Planning


WHAT IS IT?
A life insurance policy is a contractual promise by an insurance company or beneficial association to pay a specified amount of money to a designated beneficiary when the insured person dies. The contract is between the insurance company and the policyowner who pays premiums in exchange for the promised death benefits. Frequently the policyowner is the person insured, but the policy can (and often should) be owned by someone, or some entity, other than the insured.

There are many variations on the theme but classically, the insurance company charges a premium for the contract that is combined with premium payments on other contracts into a general account of the insurance company. This general account, in addition to growth/ earnings on the investments, is designed to provide adequate funds to pay the promised death benefits as they come due and also cover insurance company expenses (and profits). Because a relatively small percentage of insureds actually die in any particular year, most of the policyowner premiums are collected in the general account and are saved (with accumulated growth) for payment as a death benefit in the (possibly distant) future. In addition, since most individuals will live many years before a claim must be paid, the insurance company will not only accumulate a large number of premiums over time, but will have a great deal of time to accumulate additional growth on the invested premiums. Consequently, the death benefit is almost always larger than the cumulative premium(s) paid for the individual policy (sometimes quite significantly so). Although on an individual basis, this could be a substantial loss for a company (in theory, a policyowner might make a single $1,000 payment, have the insured die, and $1,000,000 death benefit will be paid to the beneficiary), when the insurance company applies this pricing structure to a large number of policyowners, the individual fluctuations tend to offset each other and the inflows and outflows become extremely predictable when averaged over the aggregate.

There are different types of life insurance policies and they can be classified in different ways. The primary method of differentiating life insurance policies is as either term or permanent insurance. Term insurance is generally purchased for a certain (and limited) term of time, such as 5, 10, 20, or 30 years, or until age 70. Permanent insurance, on the other hand, is generally meant to be “permanent” – i.e., it can be kept in force as long as the insured lives, however long that may be. One defining characteristic of permanent insurance is that there is a “cash value” associated with the policy, and it may be available to some extent to the policyowner, either via a loan from the insurance company, or outright when the policy is surrendered.

Permanent insurance policies are typically separated into four distinct categories:
1. Whole life;
2. Interest-sensitive or current-assumption whole life;
3. Universal life; and
4. Variable life.

Each of these types of permanent life insurance (as well as term insurance) is discussed in detail in the Question and Answer portion of this chapter.

Another method of classification is by the number of lives insured. Most policies cover only one life, but policies are available that cover two or more lives. A joint life policy covers two individuals and pays a death benefit at the first death only; a joint survivorship (also called a 2nd-to-die or last-to-die) covers two individuals and is not payable until the death of the second (or last) of the insureds.


ADVANTAGES
1. Life insurance provides a guarantee of large amounts of cash payable immediately at the death of the insured. The amount of the death benefit payable is almost always significantly greater than the premiums paid for the policy. This is particularly true when the insured individual dies at a younger age – which is often the very situation in which insurance is needed the most in the greatest amount.
2. Life insurance proceeds are not part of the probate estate when policy proceeds are payable directly to a specific beneficiary other than the insured’s estate. Only when the estate is named as the beneficiary of the policy (or the proceeds are paid for the estate’s benefit) are the proceeds subject to probate. Therefore, the proceeds can be paid to the beneficiary without expense, delay, and aggravation caused by administration of the estate.
3. There will be no public record of the death benefit amount or to whom it is payable.
4. Life insurance policies offer protection against creditors of both the policyowner and of the beneficiary. The amount of protection varies from state to state but in many states it is significant.
5. Life insurance cash values provide virtually instant availability of cash through policy loans. The interest rate for policy loans is almost always lower than the rate on loans from other sources.
6. The death benefit proceeds from a life insurance policy are generally not subject to federal income taxes. (See the discussion of the transfer-for-value rules below for the exception of this general case.)
7. The increases in the cash value of a life insurance policy enjoy favorable federal income tax treatment. Interest earned on policy cash values is not taxable unless or until the policy is surrendered for cash. (See the discussion of the modified endowment contract rules below for the exception to this general rule.)
8. Life insurance proceeds are often exempt from state inheritance taxes. In Pennsylvania, for example, proceeds are exempt, even if payable to the insured’s estate. (But aside from a relatively small amount, life insurance proceeds paid to the insured’s estate is not recommended).
9. The guarantees and risk management provided by life insurance often brings peace of mind to the policyowner.
10. Permanent life insurance, with its cash value accumulations, can provide a method of “forced” savings (because premiums must be paid anyway or the policy may lapse) that aid individuals in long-term savings. However, it is important that life insurance “savings” not be made to the detriment of other, more appropriate, savings plans.


DISADVANTAGES
1. Life insurance is often not available to persons in extremely poor health. Individuals in moderately poor health can almost always obtain insurance if they are willing to pay higher premiums. These extra charges, to take into consideration the extra risk assumed by the insurance company, are called “ratings.”
2. Life insurance is a complex product that is hard to evaluate and compare. The time required to gather policy information, decipher it, and compare it with other policies discourages purchasers from engaging in comparison shopping for many types of insurance.
3. The cost of coverage reduces the amount of funds available for current consumption or investment for the future.


TAX IMPLICATIONS
1. In general no tax deduction is permitted for premium payments on life insurance policies. The notable exception is that the premium payment on group term life insurance provided by an employer to employees is income tax deductible.
2. Dividends received by the policyowner on a mutual policy are considered a return of premium – repayments of this nature are generally not subject to federal income taxation. Dividends will not be taxable income unless the aggregate of dividends paid (and other amounts withdrawn) exceeds the aggregate of premiums paid by the policyowner. However, income tax free dividend distributions do reduce the cost basis of the life insurance policy for future gain/loss determinations.
3. The cash value increases on an in-force life insurance policy resulting from investment income are not taxable income. The cash value build-up in a life insurance policy enjoys deferral from taxation while the policy remains in force and is exempt from income tax if the policy terminates in a death claim. However, if the policy is surrendered for cash, the gain on the policy is subject to federal income taxation. The gain on a surrendered policy is the amount by which the sum of the net cash value payable and policy loan forgiveness exceeds the owner’s basis in the policy. The character of any gains are ordinary income rather than capital gains. Because life insurance policies are personal property that are not held for investment, losses are not deductible.
Basis in the policy equals the premiums paid less policyowner dividends and less any other amounts previously withdrawn. For example, a policy on which $35,000 has been paid in premiums and $7,000 has been received in dividends would have a basis of $28,000 ($35,000 – $7,000 = $28,000). If that policy were surrendered for $10,000 in cash and a policy loan of $50,000 canceled (as if a total of $60,000 was received at the time of surrender), there would be an ordinary income taxable gain of $32,000 ($60,000 – 28,000 = $32,000).
4. The death benefits payable under a life insurance policy are generally free from federal income taxation. Proceeds from corporate-owned life insurance policies can increase “adjusted current earnings” (ACE), a portion of which may be taxed under the corporate “alternative minimum tax” (AMT). In a worst case scenario, this tax amounts to roughly 15% of the total policy proceeds paid to a corporate beneficiary. The AMT system is basically an alternative tax system that calculates taxes due under a separate tax structure – in any particular year, the corporation pays the higher of the regular tax bill or the AMT system tax bill. The AMT system does not allow tax deductions or exclusions for certain items that receive preferential treatment under the regular income tax rules. The AMT is generally applicable only if there are large amounts of preferentially treated items relative to the regular corporate income tax. Consequently, it is possible that the AMT will not apply if the death benefit proceeds are paid in a year when there are few other preference items. Additionally, after 1997, corporations meeting the definition of a “small corporation” are exempt from the AMT. A small corporation is generally one which has average annual gross receipts for the previous three years that do not exceed $7,500,000 ($5,000,000 for a new small corporation’s first three years, and never applicable in the first year of a corporation’s existence).
5. Unless certain requirements are met, the death benefits payable under an employer-owned life insurance contract will be included in the employer’s income to the extent the death proceeds exceed the amounts that were paid for the policy (including premiums). One set of requirements is that before an employer-owned life insurance contract is issued the employer must meet certain notice and consent requirements. The insured employee must be notified in writing that the employer intends to insure the employee’s life, and the maximum face amount the employee’s life could be insured for at the time the contract is issued. The notice must also state that the policy owner will be the beneficiary of the death proceeds of the policy. The insured must also give written consent to be the insured under the contract and consent to coverage continuing after the insured terminates employment.
Another set of requirements regards the insured’s status with the employer. The insured must have been an employee at any time during the 12-month period before his death, or at the time the contract was issued was a director or highly compensated employee. A highly compensated employee is an employee classified as highly compensated under the qualified plan rules of Code section 414(q) (except for the election regarding the top paid group), or under the rules regarding self-insured medical expense reimbursement plans of Code section 105(h), except that the highest paid 35 percent instead of 25 percent will be considered highly compensated. Alternatively, the death proceeds of employer-owned life insurance will not be included in the employer’s income (assuming the notice and consent requirements are met) if the amount is paid to a member of the insured’s family (defined as a sibling, spouse, ancestor, or lineal descendent), any individual who is the designated beneficiary of the insured under the contract (other than the policy owner), a trust that benefits a member of the family or designated beneficiary, or the estate of the insured. If the death proceeds are used to purchase an equity interest from a family member, beneficiary, trust, or estate, the proceeds will not be included in the employer’s income.
In addition, the Act imposes new reporting requirements on all employers owning one or more employer-owned life insurance contracts. These provisions regarding employer-owned life insurance are effective for life insurance contracts issued after August 17, 2006, except for contracts issued in a 1035 exchange where there was not a material increase in the death benefit or other material change.
6. Life insurance policies that have been transferred by one policyowner to another may be subject to the transfer-for-value rule. Under this rule, the death proceeds of a policy transferred to certain non-exempt parties for a valuable consideration are taxed as ordinary income to the extent the death proceeds are greater than the purchase price plus premiums and certain interest amounts relating to policy indebtedness paid by the transferee.
In other words, if an existing life insurance policy or an interest in an existing policy is transferred for any type of valuable consideration in money or money’s worth, all or a significant portion of the death benefit proceeds may lose income-tax-free status. However, policies can be transferred safely to certain parties that are exempt from the transfer-for-value rules, including:
a. The insured;
b. A partner of the insured;
c. A partnership in which the insured is a partner;
d. A corporation in which the insured is a shareholder or officer; or
e. Any party whose basis is determined by reference to the original transferor’s basis (e.g., a gift transfer).
7. The proceeds of a life insurance policy will be included in the estate of the insured for federal estate tax purposes if the insured held any “incident of ownership” at death or at any time during the three years prior to death, or if the proceeds from the policy were payable to or for the benefit of the estate of the insured. Incidents of ownership include such things as the right to: (a) change the beneficiary; (b) take out a policy loan; (c) surrender the policy for cash; or (d) pledge the policy for a loan.
8. Distributions such as cash withdrawals or policy loans from a life insurance policy classified as a modified endowment contract (MEC) may be taxed differently than if the policy is not so classified. If a policy entered into after June 21, 1988, falls into this category by failing the seven-pay test, distributions from the policy will be taxed less favorably than if the seven-pay test is met.
A policy fails the seven-pay test if the cumulative amount paid at any time during the first seven years of the contract exceeds the net level premiums that would have been paid during the first seven years if the contract provided for paid-up future benefits. If a material change in the policy’s benefits occurs, a new seven-year period for testing must begin, which can potentially cause a policy to fail the MEC test, despite initially being exempt as a policy issued before June 21, 1988. Once a life insurance policy becomes a modified endowment contract, it remains so for the duration of the policy.
Distributions, including policy loans, from modified endowment contracts are taxed as income at the time received to the extent that the cash value of the contract immediately before the payment exceeds the investment in the contract. In effect, this means that policy distributions are taxed as income first and recovery of basis second, much as distributions from annuity contracts are taxed. Additionally, a penalty tax of 10% applies to distribution amounts included in income unless the taxpayer has become disabled, or reached age 59-1/2 or the distribution is part of a series of substantially equal payments made over the taxpayer’s life. However, proceeds from a MEC paid as a death claim still enjoy the tax-exempt status of life insurance.
For the purpose of determining the amount includable in gross income, all modified endowment contracts issued by the same company to the same policyholder during any calendar year are treated as one modified endowment contract.


WHAT FEES OR OTHER ACQUISITION COSTS ARE INVOLVED?
Life insurance is generally sold on a specified price basis. Life insurance companies are free to set their premiums according to their own marketing strategies. All but a few states have statutes prohibiting any form of “rebating” by the agent (sharing the commission with the purchaser, or reducing the cost of the insurance for the buyer via the agent giving up a portion of the commission). The premium set by the insurance company includes a “loading” (a specified part of each premium payment) to cover such things as commission payments to agents, premium taxes payable to the state government, operating expenses of the insurance company such as rent or mortgage payments and salaries, any other applicable expenses, and a profit margin for the insurance company.

There are some life insurance companies that sell “no load” life insurance policies. These policies do not provide a commission to the selling agent. However, these companies tend to price in a cost premium that approximates the charge by those companies who do pay commissions to agents – the additional cost premium is generally used to cover other marketing costs which are necessary to secure sales to consumers when commissioned insurance agents are not used. These costs often bring the total loading up by an equal amount to the reduction in costs from commission savings – thus, the total loading (and thus the total cost) tends to be similar, whether using a “no load” insurance policy or not. However, for individuals who seek not to work with a commissioned individual, this still provides an alternative (although not necessarily cheaper) life insurance purchase experience. There are also opportunities for direct negotiation of premiums with the insurance company in the case of a private placement ultra large ($10,000,000 or greater) policy.

The bulk of an insurance company’s expenses for a policy are incurred during the year the policy is issued. It may take an insurance company five to nine years or even longer to recover all of its front-end costs. These front-end costs include not only the commission paid to the insurance agent, but also the internal costs for the entire underwriting process (such as ordering the medical evaluation and physician statement and examining records and the insurance application) and the administrative work necessary to add the new policyowner to the system.

The state premium tax applicable to all life insurance premium payments is an ongoing expense. The average level of this tax (which varies from state to state) is about 2 1/2% of each premium payment.

With most cash value policies, the aggregate of commissions payable to the selling agent is approximately equal to the first year premium on the policy. About half of it is payable in the year of sale and the other half will be paid on a renewal basis over a period of three to nine years. On single premium policies (where the entire cost for the policy is paid at once rather than over time) the commission payable usually ranges between 2 to 8% of the premium. Commissions are usually paid in a similar manner on term insurance policies as they are on cash-value policies, but the premium/commission amounts tend to be significantly smaller (resulting in a smaller total commission per sale), and the commission is often even more front-loaded (possibly 75% to 100% of the first-year premium paid as a commission with no renewals in subsequent years).


APPROPRIATE TYPES OF POLICIES
There is often no such thing as a single “best” policy or type of policy for a particular client since there may be many policies that will be appropriate and competitively priced. But the policies that the planner should consider should meet certain criteria. Factors to consider include:
1. Total death benefit required;
2. Duration of the need;
3. The preferences of the client as to living benefits;
4. The amount of premiums the client can afford and the client’s cash-flow abilities and timing preferences;
5. The type and amount of investment and other risk the client is willing to assume (or guarantees the client demands or is willing to give up) in return for potential enhanced cash value, dividend, and death benefits.

Some generally accepted rule-of-thumb guidelines in policy selection are:
1. For durations of 10 years or less, term insurance is usually appropriate;
2. For durations between 10 and 15 years, both term insurance and cash value coverage should be evaluated;
3. For durations in excess of 15 years or when it is impossible to ascertain how long coverage will be needed, cash value forms of coverage are usually more cost effective than term;
4. Clients who prefer maximum premium flexibility and death benefit flexibility will want to consider some form or combination of universal life and variable universal life;
5. Clients preferring to direct the investments behind the policy and who are willing to assume the investment risk will want to consider variable life insurance (such as variable universal life or variable whole life); and
6. Clients desiring a maximum of guarantees and a minimum of risk assumption will prefer the more traditional contracts such as whole life and level term.

Individual preferences relative to “pre-funding” (paying higher payments at the beginning in order to avoid payment increases in later years) or “pay-as-you-go” (paying the lowest possible price initially subject to substantial increases with age) will influence the premium paying pattern appropriate for the client. Clients willing and able to pre-fund totally may consider single premium policies, while those who are willing to pre-fund only partially generally prefer level premium payments for a specified period. Clients not willing to pre-fund life insurance will purchase annual renewable term insurance and pay increasing premiums at each renewal of the term coverage. Pre-funding of life insurance may result in increased policy cash values. The tax-deferred earnings on those cash values help defray or eliminate the future premium needs of the policy.


Specific Policies
Selecting a specific policy involves a combination of factors that include:
1. An evaluation of the insurance company’s financial soundness; and
2. A comparison of policy guarantees and projections (benefit promises).

The company should generally have one of the highest ratings from one or more of the following companies: A.M. Best Company, Standard & Poor’s, Moody’s Investor’s Service, Fitch, Inc., or Weiss Research, Inc. The company should also have a reputation for prompt and courteous service in handling policy changes and claims. It is important to give close attention to the full name and city of domicile for insurance companies as many of them have very similar names. Companies that do business in New York State are generally subject to more comprehensive consumer protection laws than companies that are not licensed there.

The agent should have experience with life insurance, as it is used for the particular needs situation of the client, a minimum of 3 years experience, and be well versed in both insurance knowledge and tax knowledge at the federal and state levels. He or she should have, or be working on obtaining, a CFP®, CLU, or ChFC designation.





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Insurance Planning Resources
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