Annuities

The Right Tool for the Job


Annuities

I’m not the handiest person around, so it’s no surprise I don’t enjoy fixing things around the house. When I do tackle a project however, the experience is completely different when I have the right tool instead of using something that just gets the job done. The right size socket as opposed to an adjustable wrench, for example.

When it comes to your clients, helping them select the best options on a fixed indexed annuity (FIA) can make it the right tool for retirement income.

We all know that over a longer time horizon you will achieve better returns in the stock market, which makes variable annuities (VAs) with subaccounts attractive to many clients. During the accumulation phase of building up your portfolio, VAs are an attractive piece of the puzzle. However, coming down the stretch or at the beginning of the withdrawal period, there are several things that work against the variable model and favor a fixed indexed option.   

First, we all know that an ill-timed negative year can have a major impact on the value of the account. An FIA takes the negative year off the table. Are you giving up the potential for a larger gain? Yes, but if your client no longer has the time horizon to weather a double-digit negative year, it’s a small price to pay. If you’re saying, “That’s why we have a roll-up and a guaranteed lifetime withdrawal benefit,” I agree.   

Fees

The fees in the VA are going to be higher than the FIA. The rider fee may be similar, but when you factor in mortality and expense fees, as well as administration and investment fees, your VA could be charging you 3 percent, 3.5 percent or even more. An FIA will limit your fees to somewhere around 1 percent annually. In distribution, fees become even more critical to your portfolio. If you’re taking a 5 percent lifetime distribution and being charged 3 percent per year, are you going to have greater than 8 percent annual returns? If you’re using the income rider, does it allow for a portfolio that can generate that type of return, or does it give you limited investment options associated with the rider? I think you would have to agree that your VA is no longer an accumulation vehicle.  

Sequence of Returns

Just as important as the fees is the sequence of returns. If you’re arguing that you are using the VA to maintain an account value or grow the asset during distribution, a double-digit negative year can make than prospect almost impossible. Obviously, a repeat of 2008 would be devastating to any allocation, but even during the early years of distribution, a 15 percent decrease would be difficult to overcome. Add in the fees, and what would it take to see an increase in income or maintain your account value?

Fixed Indexed Advantages

Now that we are looking for an annuity that works as a distribution tool, why is an FIA a better option?  FIA offer your clients:

  • Higher rollup rates than you will find in VAs, which allow for greater guaranteed income potential
  • Higher distribution rates, which allow for higher guaranteed payments in retirement
  • Increasing payout options that aren’t tied to the account value, eclipsing the income value
  • Fees only associated with the benefit of having a guaranteed income that you cannot outlive
  • No negative performance impacts to the account 

 

The Bottom Line: An FIA can be the right tool for the income portion of your client’s annuity portfolio. The right product and rider can be an efficient income generator to meet their income needs for a lifetime.

 

Fixed Annuities

Help Minimize the Impact of RMDs


Annuities

Who would’ve ever guessed that one day we’d be saying, “I may actually live longer than expected”? It’s true – we’re actually living longer! According to data compiled by the Social Security Administration:

  • A man reaching age 65 today can expect to live, on average, until age 84.3
  • A woman turning age 65 today can expect to live, on average, until age 86.6*

Those are just averages – the SSA also reports about one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.

Since we can expect to live longer, then we need to help our clients’ retirement funds live longer as well. QLACs (Qualified Longevity Annuity Contracts) are one new option to help ensure your clients don’t outlive their income. These long-term investments designed for retirement income planning are a contract between your client and an insurance company. Though annuities are not new, QLACs were only introduced to the market last year. 

On July 1, 2014, the U.S. Department of Treasury and IRS issued the final rules regarding deferred income annuities (DIAs), thereby deeming longevity annuities that meet specific requirements QLACs. Like all annuities, QLACs help retirees plan for their retirement by using a portion of their savings to purchase a guaranteed income stream. This income stream is backed by the financial strength and claims-paying ability of the issuing insurance company. With QLACs, however, this income stream begins much later in life. 

By purchasing a QLAC, retirees can reduce their RMDs (required minimum distributions) by up to 25 percent (a maximum of $125,000) and not have to take distribution on those funds until later (up through age 85). This is not ideal for all clients, but it's a good opportunity for clients who aren't using their RMDs for necessary income. 

Carriers had to create specialty DIAs to meet QLAC guidelines. They started rolling out products at the end of 2014 - more are likely coming soon. 

The Bottom Line: As your clients approach retirement and their life expectancies increase, QLACs can help them hedge the risk of outliving their retirement income. Contact your Ash Brokerage annuity team for information explaining this new offering. 


 *March 1, 2015: "SSA Calculators: Life Expectancy," http://www.ssa.gov/planners/lifeexpectancy.htm

For financial professional use only. Not for use with general public. #E1503-591 Rev. 3/15

Sweeping Gains Off The Table


Annuities

Over the last five and half years, we’ve seen a 192 percent increase in a bull market … it’s been a nice ride! However, the average bull market only last four years. Are your clients ready for the next big market change? 

Even the experts aren’t sure how long this performance will last, and our clients are more uncertain than ever about when they will retire. Worker confidence is down 43 percent. With only 19 percent of them having some type of pension outside of Social Security, many are concerned with their accounts taking any losses ... and having enough time to make up with gains.

Now more than ever, clients want the flexibility to turn on income whenever they need … and not be locked in. 

Of the 76.4 million baby boomers, the oldest are currently in their 60s, and the youngest are entering their 50s. That puts the median age at 57, and we’re finding that 50 percent of retirees are retiring sooner than expected.

So, if a 57-year-old client is still looking to retire age 65, they have about eight years left. But in reality, the average retirement age is closer to 62, so they would only have about five years left. Maybe it’s time to start looking at age-based, in-service withdrawals. Now might be the time to sweep their gains off the table, locking them in and eliminating risk to their principal.

We’ve got to ask ourselves: What are the ramifications for staying at the party too long? Do these baby boomers have time to make up for any market losses? What would it take to get back to even? Based off where we are in the market now, where are we going next.

With a fixed indexed annuity, a client near retirement can protect a portion of their portfolio from downturns and still participate in gains. When the market is up, interest is locked in and account value is intact with any growth that might have been credited – not capturing 100 percent of the gain, but protecting the loss to principal when the market goes backwards. Even if the market would be down every year, with a fixed indexed annuity, there still is a minimum guarantee somewhere close to 1 percent.

The Bottom Line: Now is the time to sweep gains off the table and reduce portfolio volatility. Talk to your clients now – you never know when the bull market will end. 

bull market

Start the long-term care conversation


Annuities

We often use annuities to protect our clients from longevity – the risk of outliving their income. But annuities can also help protect against another risk of living longer – the risk of needing long-term care. Statistics show that almost 70 percent of the population will need long-term care, but less than 8 percent of people have traditional long-term care insurance. 

Many advisors do not discuss the topic with their clients and view the LTC conversation as arduous; clients seem to be laissez faire or in denial that they will need some sort of care. Those with assets often state that they will use up some “safe” money (like a CD or money market) in their time of need. However, it’s not uncommon to deplete those resources at a rate of $5,000 to $10,000 per month for various types of home care or nursing home services.

Consider the leverage of a linked benefit annuity. With today’s evolving world of solutions, there are annuities that combine a powerful leverage and tax advantaged treatment of care coverage – think Pension Protection Act if funds are nonqualified. The client spends down their contract value, and if still on claim, the leverage factor begins after that. The fee is deducted from some contracts; others are more modular but the cost is generally less than traditional LTC plans. 

Do you have any clients with old, non-qualified annuity contracts that are out of surrender with a low cost basis and a minimum guaranteed rate better than currently available? Do you have any clients who have asked about traditional LTC but have backed away because they could not grasp the value? Start having conversations with these clients, asking them what they would liquidate first if they experience a health event and are unable to do two of the six activities of daily living.   

These plans are not for the uninsurable, but the process isn’t as rigorous as traditional, standalone LTC insurance and generally consists of a questionnaire, phone interview and medical information. If your client never has a need, the contract value is the death benefit. There are many options depending on the source of funds and the leverage your client is looking for.

The Bottom Line: Consider linked benefit options to protect your clients not only from the risk of outliving their income, but also from the potential costs of long-term care. Call Ash Brokerage, and we’ll help you start the conversation. 

 

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Increasing Client Cash Flow with Temporary Life


Annuities

Upon entering the insurance business, I learned I should do two things: Uncover the need and find the money to pay for that need. A prospect with a need – but not the means to pay for it – isn’t really a prospect. Obviously, the more money you can find, the more of the need that can be met.

Frequently, you can fulfill a need and find the money by suggesting your prospect purchase a single-premium immediate annuity (SPIA) and using the annual payments for life insurance premiums. This creates a systematic process for the client and provides the funds just when they are needed to pay the premium. Additionally, it provides you with two sales opportunities. 

Many times, in wealth transfer situations for older clients, a limited-pay option may be utilized i.e. 10-pay life paired with a 10-pay certain SPIA. Hypothetically, let’s assume a $100,000 SPIA paid out 10 payments of $10,000. What if that same $100,000 instead generated 10 payments of $11,000? Wouldn’t your client now be able to afford more insurance? Alternately, if the SPIA payout is increased, your client may be able to generate the same $10,000 premium for less than $100,000, say $92,000.

The temporary life payout option gives your client greater purchasing power and cash flow. The key difference between a 10-year temporary life payout and a 10-year certain payout, which may normally be used, is that the temporary life option pays out for the lesser of 10 years or death. Because a chance exists that the payouts might stop prior to the 10-year guaranteed period, the amount of the payments increases. The older the client, the greater the chance of death prior to the 10-year period, so the greater the payout differential. For older clients, payout differentials in the double digits are not uncommon. 

The Bottom Line: Utilizing the Temporary Life payout option may result in increased  cash flow, enabling your clients to fill more of their critical need for insurance protection, and greater revenue to your practice.