Annuity Arbitrage: 3 Reasons it Works, Even with Low Interest Rates

Annuity Arbitrage: 3 Reasons it Works, Even with Low Interest Rates

If you were to name the most discussed but underutilized idea in the life insurance industry, I think it would be the annuity arbitrage. In essence, you purchase an immediate annuity and use the payout to purchase another product, like life insurance or long-term care.

With low interest rates, many people don’t see the benefit of annuity arbitrage. But, today is the absolute best time to take advantage of this strategy. Here are three reasons why:  

  1. In today’s low-interest-rate environment, using nonqualified assets to purchase an immediate annuity provides the highest exclusion ratio we’ve seen in decades. The payout, which is heavy in tax-free income, allows the client to purchase more protection because more income is after tax. Also, the higher tax-free ratio affects government thresholds for Social Security and Medicare Part B less than other income-yielding instruments. Lower Medicare premiums could save clients in the middle-income brackets thousands of dollars.

  2. Many people believe low interest rates create a low payout, so they are waiting for interest rates to rise. This is a myth that will cost many Americans millions of dollars of income over their lifetimes. Interest rates make up only a small fraction of an annuity payout, with the majority of the payout being mortality credits. As your clients live longer, their mortality credits will decrease, making for longer, smaller payouts on immediate annuities.

  3. The cost of insurance will not get less expensive as clients get older. They will get less healthy and have fewer years to live. So, now is the perfect time to capture and lock in the costs of life or long-term care insurance. Not to mention, the cash value inside life insurance can be enhanced with the lowest possible cost of insurance. So, securing insurance now is the best option for future leverage.

At the end of the day, annuity arbitrage makes sense in many situations – not all situations. We have a lot of assets on the books of insurance carriers that aren’t being used for their full purpose. I encourage you to evaluate your book of business to see if there are assets available to pay for protection products in an efficient manner.


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About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon.