This month, our CEO, Jay Judas, talks to Eric Eklund, Esq., Chief Operating Officer & Founding Partner, The Ridgeback Group. In what can only be described as a discussion between two life insurance geeks, the pair discuss Eric's path to his current role, dive deep on the ins and outs of life insurance illustrations, and chat about potential legislative challenges to grantor trusts. Read on to learn more!
JAY: It is rare to include a fellow life insurance technical geek in our Tier One Interview Series, so this sit-down is a special treat. Eric, if someone eavesdropped on one of our typical conversations about any technical development in our industry, I think the response would be, “Well, I am glad they found each other!”
Readers will certainly witness some of this, so let’s get started. Tell me about The Ridgeback Group and your role with the organization.
ERIC: Jay, you uniquely know how geeky I can be about our business. The pictures accompanying this interview will give the unfortunate readers a good sense.
First of all – wow, thank you for the honor of this interview. I really enjoy reading this each month and feel like the pressure is on. I also want to acknowledge you and Pete. It’s been great developing a friendship with you both. Thank you.The Ridgeback Group – well, we are the next greatest thing in life insurance distribution (chuckling). At our core, we are producer firm-loving distribution network with serious technical chops, technological advantages, and a mission to bring only the 100 biggest and baddest firms together to grow their business in the company of like-minded business owners.
I run Advanced Concepts and function as Ridgeback’s Chief Operating Officer. Advanced Concepts is more than just traditional advanced markets. As a tax, trust and estates practitioner with a strong background in technology, personal production and major life insurance distribution, my goal was to have a much fuller offering than models and split-dollar how-to articles and we have accomplished this. Our team provides actuarial support, product manufacturing expertise, AI support, and renowned underwriting. When I met with Ridgeback co-founders Dan Murphy and Matt Murphy to discuss their vision for the organization, I could see right away that they were as industry-loving as I am as well as extremely smart and dedicated. We immediately bonded over our shared common vision. I tell everyone I got the last best position in this industry.
JAY: You attended college at the University of Illinois with a past, two-time Tier One Interviewee, Jerry Hester. Unlike Jerry, you were not on the men’s basketball team but were equally as talented in another pursuit. I want to hear about your upbringing, your education and your path to the life insurance industry. Do not forget to talk about your college days!
ERIC: Jerry Hester and I were in the same Freshman class. And, of course, he didn’t know me at all, but we all knew him. I did sit in Orange Crush a few times…which, if you know, you know!
If I tell you my whole story, it won’t sound credible so here are some highlights. I grew up in a small timber town called Medford in Southern Oregon. Medford is almost famous for being the home of Guitar Center and Harry & David. At 17, I was plucked to go to the University of Illinois on a music scholarship. I was a concert cellist from a young age until I was about 26 when I decided to return to being an amateur. I was at U of I at the dawn of the internet web browser and got involved in software development, particularly around web-based applications. So, after hanging up my bow, I worked in software and internet start-ups. I was fortunate to have made a little money and then took a “sabbatical” for about a year.
After that year, I found I was tired of software and decided to go to law school. Because when you don’t have any marketable skills, that is what you do, right?
However, first, I found myself sitting for my insurance licenses to sell multi-line coverage for a small midwestern mutual. “Sell two apps a week”, they said, “and you’ll have a great life!” I found out about MDRT, top of the table, human life value, and I never looked back. Later, after the commission disclosure rules came about in the UK, I decided I had better diversify, so I took my love of tax and estate planning and focused on a law degree. I did this to combine my knowledge of legal principles and financial products with the hopes of finding a niche. It turns out that such a combination is a marketable skill. Who would have ever imagined? Not my high school guidance counselor!
Early in my life insurance career, I learned about another U of I graduate – Dave Downey. I made it a goal to meet Dave and then had the pleasure of doing so while running Advanced Markets and Government Affairs at M Financial Group. Incidentally, this was just after Jerry Hester had worked for The Downey Group. Dave is one of the cleverest people I have ever met. Without him knowing, he did a lot for my career. In fact, we should all know how much Dave Downey has done for our industry. One of the photos for this piece is from an interview I did with him for a podcast I used to host. That moment is one of my greatest life insurance career treasures.
JAY: I was lucky enough to have two, lengthy private conversations with Dave Downey in my career, too, so I know how you feel, Eric. Let me switch gears and I hope you will pardon my lack of finesse, but there are a bunch of life insurance producer groups which seem to be fighting for a finite number of producer firms in the high-net-worth segment. What makes The Ridgeback Group different? Pretend I am a big-time producer who meets your requirements and who might be disappointed with my current product-sourcing relationship. What would you say to me to get me to consider joining you?
ERIC: Ha – pretty smooth, my friend. Really? What groups and firms? Tell me (chuckling)! If a group is “fighting” for firms, it is probably not a very good or differentiated model. A good network fit is like a marriage or relationship. You know when it’s right. When it’s not good, either inertia keeps you with the “devil you know,” or you break free, and the sky looks blue again.
This reminds me of a line from Bojack Horseman: “When you wear rose-colored glasses, all the red flags just look like flags.” Here is another adage that applies and, Jay, you know this: “People don’t care what you know until they know that you care.” That is what makes us different. Coincidentally, this morning, Ridgeback’s head of technology slacked me this: "All tech aside, our secret weapon is that we care."
We aren’t a commission club, but we have great payouts. We are youthful and have execution risk, but we don’t have the legacy problems that plague legacy distribution. And we aren’t a producer group. We are a firm group. We exist only to help firms grow into enterprises with recurring revenue streams and the opportunity to grow their multiple.If you are a big-time producer, we may not be interested simply because we are not aligned. We want to help firms grow. But if you are a big-time producer wishing to build and grow your firm, there may be alignment.
What would I say?
Is your current IMO, BGA, Group or Network solely dedicated to helping you have a thriving, growing enterprise? Wouldn’t it be nice if that’s all they were dedicated to? If this message resonates – then maybe there is something to talk about.
JAY: You mentioned technology so, of course, I am going to focus on that for a second. I understand you are now patent pending on a pretty cool modeling simulator called Illumine. We discussed it a few weeks ago and I will admit to being impressed. What does Illumine do and why is it a game-changer for the distribution and sale of life insurance products?
ERIC: Indulge me to use one more saying to get across my point: “What is the best type of life insurance policy to own? The kind that is in force when you die.” A simple answer is to have a fully guaranteed product, which is expensive. Many people buy universal life, indexed, and variable universal life policies with shorter-term guarantees but strong current assumption returns because they are less expensive…but then these are potentially less effective.
Life insurance illustrations are a horrible proxy for reality. And while we can’t predict the future, we can use Bayesian statistics and stochastic modeling to assess the probability of success. We have developed a precision life insurance emulation engine that can model interest rate performance, carrier behaviors, and premium payor/ policy owner behaviors with extremely high accuracy. We also have user-friendly reports that explain what is happening and how to fix it, as well as predict when you may or will need to fix it.
My partners Adam Sendzischew and Brendan Costello and I originally developed Illumine to assess the health of premium finance arrangements we were called to review. This allowed us to assess the probability and health of indexed universal life and variable universal life contracts used in estate planning and accumulation and income style designs. We think we have even cracked into the black box of whole life insurance pricing, covered in the patent application, but it is still a work in progress.
Life insurance can be as simple as Barry Kaye said: “You pay, you die, it pays.” But these contracts are not simple. Policy owners don’t understand their policies and rely on the agent, who may or may not be skilled, to assess the client’s risk. The agent makes this assessment based on what? One only has to get 70% to pass the life insurance exam.
Fiduciaries love what we are doing because it is unbiased advice backed by statistical analysis that provides direction. It’s not an illustration measuring contest, which may incentivize the reviewing agent to stretch the illustration to be compensated for the work.
It also allows us to offer sound pre-sale advice and incredible ongoing policy service. We believe all life insurance products are very good if they are realistically managed.
In a time when trust in everything is at stake, we want clients to have total control of their financial decisions, and we think this is the best way to take control of your life insurance.
Best of all, our partnership with The Ridgeback Group as our initial distribution partner gets the tool and reports into the hands of very high-end producers who see its ability to change the narrative of the life insurance sale and drive a stronger value proposition to their centers of influence and clients.
JAY: What I found most interesting about Illumine is that you have used it to dispel a few behaviors about which the industry gets all riled up. What comes to mind is the illustration of index loans and whether a guarantee in a VUL product is useful. Explain what you mean by this.
ERIC: Ok – nerd time. Let’s look at indexed loans. Many well-known insurance advisors speak from the hip against indexed loans. But we have data to back it up. In LIRP and financed designs where the client is being advised to use indexed loans to take income from their IUL policy or to pay back a policy loan, these loans, based on our current data sets, perform roughly 75% to 80% of the time. This suggests they are likely to work, but certainly not as illustrated.
I’m seeing designs now where people borrow all the cash value in policies to grow into new contracts, sometimes repeatedly. It’s terrifying because 75% of the time, it works, but 25% of the time, it doesn’t and it could be a terrible outcome. However, if the client can accurately assess the risks and has the ability and desire to take on the risks, then does that change the story?
If we can honestly assess the sequence of return risk—which we can in Illumine—then we can find honest designs with a high probability of success. This doesn’t mean that performance must be worse than illustrated. It provides transparency on the potential timing and actions a policy owner may need to take to manage the sequence of return risk or other risks caused by the carrier that might changing non-guaranteed elements or the policy owner who may be skipping premiums or taking loans.
Next, let’s talk about VUL guarantees. You and I talk about this all of the time, Jay. Guarantees are a nice story, but are they the right move? I love the story of VUL with lifetime or age 105 guarantees because it allows a solid floor and the ability to swing for the fences. Well-structured and managed, with a sufficient time horizon, VUL is phenomenal. We wanted to measure how much a VUL guarantee really costs. Recall that the policy must run out of cash value for a secondary guarantee to come into play. Then, and only then, is the guarantee worth anything.
That means if a VUL without a guarantee is designed to have an Illumine score of 98% success, does the cost to get it to 100% provide reasonable or substantial savings over buying the fully guaranteed product?
I’ll give you a hint. Generally, yes. You can have a high-probability product at significant savings over a long-term guaranteed product. Not in every case, of course, but armed with only an illustration – how do you know?
Here is a conundrum of “conventional wisdom” for ILIT trustees: if you are buying a policy with a guarantee and the guarantee has a very low probability of ever being used, are you committing economic waste? Yikes. It is a really tough question that a savvy beneficiary could sue over.
We want to answer those types of questions, so we created this technology.
Illumine has spun off some cool secondary products and data for scholarship. We just want to answer tough questions and put control into the buyer’s hands. We believe that the best agents in the world want to provide this level of expertise to their clients and centers of influence. If we really do it right, maybe it will influence carrier product design and development behavior. Let’s wait and see…
JAY: I am anxious to see Illumine at full power! Let me ask one last subject matter question, Eric. In Washington D.C., we are hearing grumblings about changes to grantor trust laws. What is this all about and how would the application of life insurance be impacted?
ERIC: Inside baseball for Beltway nerds… Jay, you are making me look like a real dork. As an industry, the greatest asset we share is that since the income tax code was introduced in 1913, life insurance has been called out specifically in the tax code, and frankly, rightly so.
But just because it is called out specifically doesn’t mean it has a special tax favor. Life insurance is taxed just like nearly every other asset we can own. We buy it with after-tax dollars; the unrealized gains and appreciation, if any, are not taxed. At death, there is a basis adjustment, and the proceeds are passed with a new income tax basis to the beneficiary. If it causes, or is included in, a taxable estate it is subject to estate taxes just like most other assets.
Over the years, many have considered taxing the unrealized gains inside a life insurance policy to raise revenue. I believe, logically, this position is simply inconsistent with how other assets are taxed.
The grantor trust rules, which were designed to be a penalty, just so happen to work out very well for ultra-high-net-worth individuals due to the ability to burn down their estate when they pay the income tax on behalf of the trust. Coupling an estate tax advantage for taxable estates with an income tax-advantaged product ruffles some policy feathers. But we can’t lose sight of the fact that life insurance provides so much security for widows, orphans, small businesses, employees, and more.
My gut is that if the life insurance industry must take any stand, it will be to continue the income tax treatment of life insurance as is. If forced, the industry policy arms, ACLI and Finseca, will likely have to take positions that limit some tax benefits for the very affluent, like the grantor trust rules.
Changes to, or elimination of, the grantor trust benefits would impact the income/gift/estate tax efficacy of some planning techniques but would ultimately favor the use of life insurance—discounted dollars for pennies a piece.
The whole thing is ridiculous because, again, the qualified income tax treatment of life insurance is completely consistent with the rest of the income tax code and, in my opinion, shouldn’t even be discussed.
Let’s just keep things consistent. Changes would be so administratively complex for clients, wealthy or not. It is bad policy to cause upheaval in people’s lives in this manner.
JAY: Given that you are an owner in The Ridgeback Group and love what you do, I know you work quite a bit. In those few hours away from your job each week, how are you spending your time?
ERIC: Oh boy, I definitely wear many hats, but I don’t work - it’s a good hobby! My wife and I are living a nice life in Charlotte, North Carolina. We have moved around a lot over the last ten years - four states – and, most recently in July, from Miami. When we aren’t packing, moving and unpacking, we like to travel and hang out with friends and family. I still practice the cello, cook, golf, and read. I have a stupidly huge sneaker collection, and I guess I hoard wines too. I also keep a collection of rare life insurance books, when possible, signed by their authors. I can imagine you are the only person envious of this collection! If any of your readers have a book, signed or not, they want to donate or sell me; please pass my contact info to them. I’ll definitely consider it.
JAY: Are any of your cello performances available on Spotify?
ERIC: I just searched, and the answer is no. It looks like Taylor Swift is the only artist on Spotify. It’s cool, though, because many of my friends are now “famous” in the classical music world and I can enjoy most of their works on Spotify.
JAY: You have raved about the restaurant question asked of each Tier One Interviewee, calling it “brilliant” and “needed in our industry.” It is your turn! Without naming a steakhouse or a steak dish, give me some recommendations on where I should eat and what I should order when I am there?
ERIC: I’m going to be so unpopular. Most food is so uninspiring that my wife and I think the best restaurant is the grocery store. My wonderful wife Alejandra said to me recently, “You know, every bite doesn’t have to change your life.” But wouldn’t it be nice if it could?
So, I’ll go regional. First, to Santa Barbara California where your readers should visit La Super Rica Taqueria. It’s an amazing 40-year-old little taco stand loved by Julia Childs. Everything is good, even the lengua (tongue) tacos; the only tacos that can taste you back.
I’m skipping the Mountain West/ Plains because you asked for no steak houses.
Next to Champaign, Illinois. Head to Jarling’s Custard Cup located just blocks from Memorial Stadium and Assembly Hall. Jarling’s is a great classic family stop for the best-frozen custard in the Midwest.
Out east in Washington D.C. you have to go to Rasika. This is a gourmand’s Indian restaurant. I eat there every time I go to DC.
As for this this weekend. I’m headed to Winston-Salem, North Carolina, to eat my first Paw-Paw. I’ll text you and let you know how it goes.
Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at www.lifeinsurancestrategiesgroup.com.