Selling annuities today may require some re-education for your clients
by Peter Hill, ChFC Mr. Hill is an Investment Advisor Representative with Voya Financial Advisors. He is a 19 year MDRT member with 14 COT qualifications. Connect with him by e-mail: firstname.lastname@example.org.
What will the weather be like next month? Our mind knows how the weather has been in years past so we presume it will be similar, although there is no assurance that this will be the case.
When we think about the stock market, we also analyze its performance from the past year. We typically look back at what the average has been to help us with our analysis. However, these concepts don’t exist in individual financial lives.
Whether it’s the weather or the stock market, there is no assurance of a repeat performance. Collectively, we can’t count on the average happening, especially with our finances. If a client wants guarantees in life, an annuity may be something to consider while taking into account their personal financial situation and tolerance for risk.
An annuity contract could be annuitized and may provide a guaranteed income over a certain period or for a life expectancy (guaranteed lifetime income). I was initially taught that by annuitizing one gives up control, which may not be the best idea.
As I have advised more clients in this situation, I have noticed that even though some control may be given up, they have gained greater confidence in knowing they can count on this income. If they are concerned about getting their original investment back, they can be sure to include a refund feature or minimum certain period, which provides for a minimum number of payments.
There are even immediate annuities today that are liquid after a surrender charge period is met.
When to Consider an Annuity
It’s important to ask your client what the biggest financial risk they believe they’ll face over their lifetime. Some will respond by saying stock market performance, interest rates, inflation, health, premature death of a partner/spouse, political decision/indecision, etc.
All of these responses are very real concerns but oftentimes I think one of the biggest risks people don’t give enough weight to is their life expectancy. Our clients may have spent their lifetime accumulating their disposable wealth in employer sponsored plans, which are usually lower cost plans but it’s our job to educate our clients on their options.
If they are still in the accumulation phase of life after they leave employment, perhaps annuities aren’t the best option. However, if they want guarantees to help protect some of their money for current or future income, then an annuity should be considered.
The Fees that Accompany Guarantees
It’s important to note all guarantees are based on the financial strength and claims paying ability of the issuing insurance company, who is solely responsible for all obligations under its policies.
Oftentimes, the client wonders how the insurance company can do this and wonders what fees will follow. The company may directly charge a fee that is deducted on a quarterly or annual basis. In addition, there are indirect ways an insurance company may charge you, which can slow the accumulation or access to your money.
A couple of examples would be the company reducing the underlying interest rate you are receiving or there may be higher and/or a longer surrender charge period that could limit liquidity to your money. If your client doesn’t want to pay for guarantees, schedule a meeting to discuss other financial tools that you feel are going to be the best fit for them.
I believe at some point in their life they are going to want some of their money guaranteed, and at least you have shown them you have products at your disposal to help them when they are ready.
Incorporating Variable Annuities
One tool you can educate your clients about are variable annuities with a Guaranteed Minimum Withdrawal Benefit or a Guaranteed Minimum Income Benefit. These optional riders are available for an additional fee.
Each rider has specific terms, conditions and restrictions. Another consideration to discuss is an Equity Index Annuity or Multi Year Guarantee Annuities (MYGA)2. A MYGA is an annuity that pays a specified interest rate for a specific period of time; usually three to 10 years.
If we can provide clients with an income that outlives them, we help them create a greater sense of financial confidence. It is important though to note that variable annuities may be appropriate for people who are interested in participating in the market while for others it is not.
They must take into account that investments are not guaranteed and are subject to investment risk, including the possible loss of principle. Generally, the greater an investment’s possible reward over time, the greater its level of price volatility or risk.
How to Attribute a Legacy to an Heir
If your client is insurable, they can use a portion of this income to pay for a life insurance policy. We know that the life insurance policy has an income tax free death benefit.
If this needs to be kept out of the estate, you can set up the appropriate trust or ownership so the money passes outside of the insured’s estate. As for charitable giving, the charity could be the owner and the premiums may be tax deductible for the client.
If you are doing this with qualified dollars that are in the annuity, then you presumably don’t need to replace 100 percent of the invested amount. This is because life insurance would be income tax free versus a qualified account that would be taxable.
Income tax free distributions of life insurance policies are achieved by withdrawing the amount of premiums paid, then using policy loans. Loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse.
Advising an Uninsurable or Highly Rated Client
Another option is to use an annuity that provides a guaranteed lifetime income option. However, if the client needs to receive long-term care then the income will increase from the original income benefit.
For an additional fee, the client can also purchase a death benefit guarantee that will rise a certain percentage each year or maintain its value at the original investment if you are drawing income under their income guarantee.
As a member of the Million Dollar Round Table, I’ve had the opportunity to network and brainstorm with fellow members, which has helped me learn how to navigate clients to greater financial confidence. Using annuities is one method of building an account that can provide a lifetime income and a legacy. ♦
1. Variable annuities are long-term investments designed for retirement planning. Variable annuities offer the opportunity to allocate premiums among fixed and variable investment options that have the potential to grow income tax-deferred, until an income stream begins. This income is guaranteed by the issuing insurance company for a specified period of time or for the life of the annuitant.
2. Index annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and earnings potential that is linked to participation in the growth, if any, of a stock market index. Any guarantees are backed by the financial strength of the insurance company.
Securities and investment advisory services offered through Voya Financial Advisors, Inc., Member SIPC. 206 Sixth Avenue, Suite 920, Des Moines, IA 50309 Vision Financial Group is not a subsidiary of or controlled by Voya Financial Advisors, Inc.