When your clients ask for ‘predictable, reliable income’, there are some attractive options
by Brian Mann
Mr. Mann is the President and CEO of Clarity Insurance Marketing and Chief Distribution Officer of C2P Enterprises. As a member of the senior leadership team, Brian helps in delivering enhanced support and expertise to C2P’s network of financial advisors and institutions. Brian is also the founder of Elite Advisory Group, a wealth management firm located in Huntington Beach, Cal. Visit www.clarityinsurancemarketing.com
Fixed indexed annuities (FIAs) have had explosive growth over the past decade and can be a valuable tool within a holistic financial plan. Despite years of having an infamous reputation, financial professionals and even many consumers have come to realize that FIAs help address several significant retirement planning concerns. From providing guaranteed income to protecting principal, FIAs can help your clients balance their risk while also providing a reliable income stream for the future.
But, just like any other investment, FIAs come with their own unique set of challenges. For advisors, one of the biggest hurdles in dealing with FIAs is the ability to objectively evaluate these products on behalf of clients. How can you strip away singular factors — like commissions and incentives — so that you can identify the specific insurance product that is in the best interest of your individual client?
Whether you’re a securities-licensed advisor who has never previously used FIAs, or you’re an insurance producer who has used these products for years, the following is a step-by-step process to help you confidently identify and recommend the best product for your clients’ needs. By utilizing the criteria laid out below, you can better evaluate fixed annuity products and ultimately provide your clients with the vehicle they need to round out their comprehensive financial plan.
Criteria #1: Income Potential
One of the biggest benefits of having a fixed indexed annuity in a financial plan is to produce predictable and reliable income. There are only three sources of guaranteed income for clients today. You can guarantee income at the bank via laddered CDs, you can guarantee income through the federal government by laddering government bonds, or you can guarantee income through an insurance company using an annuity.
Most clients buy FIAs to provide lifetime income in retirement, which means one of the most important criteria to evaluate is the income potential. How much will the product pay out in lifetime benefits to your client? As many of us know, annuities can be marketed in such a way where initial bonuses may be given upfront, and it can be misleading if you fail to look closely at the overall income potential.
The current interest rate environment, along with the fact that people are living longer than ever have caused income payout factors to decrease recently. However, clients still desire the guarantees that only an annuity can provide. An alternative to the traditional lifetime income strategy is the drawdown method of income. Using the “free withdrawal” provision in most annuity contracts, the client takes a guaranteed amount of income each year. This methodology allows your client to hold less of their net worth in the annuity (compared to lifetime income options), while still protecting against sequence of returns risk, providing reliable income for a period of time, and helping ensure your clients can weather any short-term market volatility to stay the course with their long-term growth accounts.
To make sure the products you are offering your clients are competitive, I recommend sorting products by income potential, considering increasing income opportunities, and then rank them from high to low. This will give you a solid idea of which products will help your clients get the most out of their premium dollars.
Criteria #2: Carrier Strength
This step in the process may be the one you’re most comfortable with, but that doesn’t mean it should be overlooked. Carrier strength is another important criterion in determining the best products available to your clients because it evaluates the insurance companies on their financial solvency. You are likely used to seeing this statement in compliance disclosures: “Guarantees are based on the claims-paying ability of the insurance company.”
The promises that insurance companies make to your clients are generally long-term in nature, so it is imperative that you’re vetting each company and working only with highly rated ones that can stand by their promises over the course of time. Luckily, there are several resources available to you that rank insurance companies, making it easy to stay up-to-speed on the best and most reliable carriers in the industry.
Two resources I recommend are the AM Best Rating Services and Comdex score. AM Best has an extensive database of insurance companies worldwide and utilizes Best’s Credit Rating, Best’s Credit Reports and other key information. A Comdex score is the average ranking of an insurance company receives from four major rating agencies in American.
Criteria #3: Fees and Expenses
As an advisor, it’s always in our client’s best interest to limit fees and expenses whenever possible. However, when working with FIAs, it’s important to note that fees are not an inherently bad thing, and products or companies should not be discarded solely based on their fee structure. What’s more important is to evaluate what the client is receiving for the fee that is being charged. Is the fee justifiable when it’s weighted with the value of the product? Or does a product’s expense outweigh the perks of the annuity?
I recommend reviewing the statements of various products and personally evaluate the internal fees and expenses yourself. It’s important to make this an annual practice as we all know a company can change or update their policies year over year.
Criteria #4: Accumulation Potential
By evaluating multiple crediting strategies and historical performance, you can measure the potential accumulation of products for your clients. The goal is to make sure that your client has the opportunity to earn maximum return on their money. Some FIAs offer unique indices that can help provide exposure to uncorrelated assets when compared to other holdings in their portfolio, adding another layer of diversification to consider as part of an overall financial plan.
Criteria #5: Renewal Integrity
The fifth and final criteria is renewal integrity. By evaluating insurance companies based on their history of publishing renewal rates and renewal rate integrity, you can get a better glimpse of how they will perform moving forward. For fixed-index annuities, today’s high performing index strategy can be a complete bust tomorrow if the renewal rate integrity is not there, making this a crucial step in vetting insurance companies on behalf of your clients. Especially in today’s interest rate environment, it’s important that you take the time to check out each company’s history to ensure both current and future clients are treated fairly.
As advisors, we not only have an opportunity to help the 10,000 baby boomers turning 65 every single day ease into retirement, but we have the obligation to inform them of how they can insure to protect their wealth and not outlive their income. We have access to lifetime guaranteed income options that provide our clients with the peace of mind of having a pension. We also have drawdown options that give our clients the ability to eliminate sequence of returns risk and the confidence to stay the course with their long-term growth assets.
With these options at our fingertips, it is imperative we are doing our part to properly evaluate these insurance products and educate our clients on all their options so that they can select the appropriate solutions that will meet their individual needs. Keep in mind, properly vetting the endless amount of insurance companies and their products can be daunting, so it may be in your best interest to work with a reliable insurance marketing organization that has a set screening process in place for reviewing these criteria.