Planning Strategies for retirement & longevity
by Mike Janky, CLU, ChFC, CFS, RHU, CAS, CASL, IARMr. Janky is a principal with Forward Strategies, a Tucson based annuity marketing company. He can be reached at email@example.com
With interest rates hovering at all-time lows, why would anyone in their right mind put money into a fixed annuity? Let’s take a look at products, motivation of the policyholder and the value-add that the agent brings that can make fixed annuities still an attractive choice.
One of the great things about our industry is that it is constantly evolving to match the needs and wants of the public. An estimated 10,000 plus people are currently turning 65 every day. They are interested in being able to turn their assets into income to afford them the ability to enjoy their retirement and not have to worry about outliving their income. Several years ago, the insurance industry recognized this need for income and started to promote income riders on annuities. These riders would not only guarantee a certain percentage increase each year in the income value, but then would guarantee a certain percentage payout for life once a person turned that income on.
At first, I have to admit, I was not a big fan of these products. The client has to typically pay an annual fee (anywhere from .35 bps to 1.5 bps) for the right to have their money paid back to them. Where’s the benefit in that? In the last few years, I have seen where the value really is in these products. First off, the income value grows at a rate of anywhere from 5% to as high as 14%. This “income value” is then used to determine what the income to the client will be in combination with a predetermined percentage payout based on the client’s age when he/she turns on the income.
For most of these products for people in their 60’s, the percentage payout is around the 5% range. It used to be that you could plan on taking 5% out of your assets each year and if you didn’t see additional growth, you could at least feel pretty confident that your assets would remain about the same. Well, we all know those days are gone. With the decrease in interest rates and the volatility of the market, 5% seems like a pretty high number. The real benefit on these products is not so much that the income is coming out at 5% but the fact that there is a guaranteed increase on the income value over the years. You are now pulling 5% of a much higher number than you probably would be in other types of assets. Knowing that the income is guaranteed for life is the kind of guarantee the client is looking for.
I will concede that in cases where the client doesn’t live to his/her life expectancy, the actual benefit is lost. People are so concerned these days about outliving their income that for the peace of mind these products provide, it is definitely worth giving up some of the upside potential that other options may provide. Unlike an immediate annuity, the income can be stopped and then started again should a client desire to do so. With the flexibility and guarantees, these income riders on annuities have helped the insurance companies continue to bring in billions of dollars of new premium each year. Over the last year, we have seen many carriers reduce their roll up percentages or decreased the percentage payout, and even a combination of the two. When comparing these to other options currently available, they still offer what the client is looking for; guaranteed growth followed by guaranteed income.
Single Premium Immediate Annuities (SPIA)
With rates so low right now, the single premium immediate annuities have lost some of their luster especially in the period-certain only market. However, SPIA’s do still have the life contingency option and this, knowing that one cannot outlive his/her income, is the drawing card. Another very good wealth-transfer option is to use an SPIA to fund a life insurance policy. The concept allows a person to use dollars that may be either in qualified monies or have a low cost basis and start the income payout and use those funds for a multi-year pay life policy. This can be a great way to spread out the taxes on these dollars over many years while increasing the amount that a beneficiary would receive. If a person’s goal is to pass as much money on to their kids, grandchildren, favorite charity or even their cat, this concept is pretty tough to beat!
In this low interest rate environment, a client can still get a 3% guaranteed interest rate on a 5 year annuity. Typically 3% isn’t going to excite a lot of people, but when you compare this to what they can currently get at the bank, it’s pretty darn good. Based on bakrate.com’s current rates at the time of this article, the highest 5 year rate I could find was 1.9% for a jumbo CD. So the annuity is offering 33% more interest per year than a jumbo CD. Now 33% does sound like a big number. Combine that with the tax-deferred growth verses the taxable CD and you have an even more appealing offer.
Single Premium Life Products
Over the last several years, we have seen many annuity agents start writing single premium life business. Like the annuity products evolving to meet the needs of the consumer, so have the life products. Many of these products have become some of the best options for people who are looking to pass money on if they don’t need it and also create a pool of money available for LTC needs. These life products now have the capability to allow the death benefit to be used for LTC needs and these funds can be received 100% tax free.
With more and more people concerned about the possible need for LTC, these products can offer the best of both worlds. There is more money available for LTC if needed and if not, a larger amount of money will be passed on. Unlike traditional LTC policies, the client doesn’t feel like they are possibly wasting thousands of dollars each year paying for a policy they hope they never use. Not only can these new life products create the pool of money for future LTC needs, they can be issued without the stringent underwriting that typically goes along with a stand-alone LTC policy. Many of these policies are simplified issue with only a few underwriting questions, a telephone interview and prescription drug check.
Let’s not forget that with all the challenges facing the public today (low interest rates, volatility in the world markets, Ponzi schemes and just about everything else), there is an immeasurable value that the agent can bring to the client: trust. Every great salesperson in just about any industry all have one thing in common. They are all able to earn the trust of their clients. Once the client has placed that trust in you, then it’s your job to continue to earn it.
This can be difficult at times when the hard truth needs to be told. Whether it’s that their financial goals are unrealistic based on their current situation or that you cannot provide them with a “10% return and no risk” type of plan. The agent that is straight forward and can have that open, honest conversation is going to be the one that will thrive in this industry. Working with thousands of agents over the last 20 years, I have observed that the agents that spend the most time cultivating that relationship and building trust with their clients are the ones that continue to have the most consistent production.
We’ve all heard the expression ‘The truth will set you free.’ In our industry, not only will it set you free, it will help you build the kind of practice that has real value. Taking care of your existing clients will also lead you to more referrals. As is the case in most industries, referrals are typically the best way to build a business. Whether it’s someone to work on your car, a Doctor, CPA, attorney, you pick it, if you ask someone who you trust for a referral, most likely when you meet with that person, you are already half way there to working with them. Our industry is probably more so than most since we are working with an intangible. So please don’t underestimate the true value you bring to the table. It is the only thing in this challenging environment that you have absolute control over!
Although it’s true our industry is probably seeing some of the biggest challenges we have ever faced, the fact remains that there are still plenty of opportunities to build a successful business. The key is to continue to educate oneself on the current options available to the consumer and to be a good educator and communicator to your clients and prospects. With 10,000 people a day turning 65, there are plenty of new prospects available to become your client. Do the best you can for them and good things will happen for you!