How To More Effectively Assist Your Clients In Choosing An Annuity
February 6, 2010 by James Rankin and William Harris
James Rankin, national marketing director, Moody Insurance Group, Houston, TX, and William (Bill) Harris, well-known author and educator for the annuity business, believe that insurance professionals are measured by how many clients they help make informed decisions rather than how much money they make.
Yet, as we all know, the most difficult part of an insurance career is prospecting. To do that successfully, Rankin and Harris say that all annuity producers need is passion to pick up the phone more frequently, great material for product presentations, and diligent follow up. Along those lines, they are going to share some great ideas in this interview about income planning, tax changes, product simplicity, and innovative sales approaches that could collectively make 2010 a very good year for insurance professionals.
Income Planning
Bill Harris: Income planning is the single most effective way producers can assist their clients to live with dignity during retirement.
James Rankin: However, income planning does not begin by merely communicating with the consumer. It begins with the insurance professional knowing how to effectively communicate the importance of income planning to the consumer. Income planning—or the lack thereof—controls every aspect of retirement.
Also, it is important for the brokers to effectively communicate to their clients the risks to income, which include longevity risk, inflation risk, investment risk and even withdrawal risk. Annuities are an excellent source for income based on the nature of the investment which addresses many of these risks.
Harris: What retirees do during the first five years after retirement can control whether they go broke or leave a legacy. James, would you like to discuss our very effective point-of-sale exhibitthat illustrates four different investment scenarios that will make client discussions unforgettable?
Rankin: My pleasure. First, see Exhibit 1(please see print version), which shows four different scenarios for a retiree with $100,000.
As you can see, a common mistake that many seniors make is taking too much income, too soon. The chart shows the dramatic impact early withdrawals can have on a client’s income plan. In this example, by waiting four years there is $85,000 more income. On the other hand, if a client experiences a loss before taking distributions, that can greatly impact income for retirement. In fact, the example shows that the money is gone in year 16 with a 35 percent loss in the first year. Unfortunately, the reality is that many retirees have experienced those kinds of losses in recent years.
Harris: This particular graphic could also be used as a direct mail piece, followed by a telephone conversation, of course.
Tax Changes
Rankin: On the legislative front, the Pension Protection Act moved into its second phase this year with the Roth IRA conversions. Affluent clients now have the opportunity to convert their IRAs into Roth IRAs.
Harris: This scenario reminds me of the story of the farmer who walked into a feed store and was offered two payment options for his seed. The owner said, “I will give you the seed for free, but I want 28 percent of your harvest. Or, you can pay me for the seed now and keep all of the harvest yourself.” Of course, this is a simplified view of the Roth IRA, but it does shine some light on the concept.
Rankin: Clients would probably find some humor in this explanation; yet, now is the time to also make it quite clear that converting to a Roth IRA can be one of the smartest or dumbest things that one can do in 2010. And, insurance professionals can distinguish themselves by illustrating the advantages and disadvantages of a Roth IRA conversion.
Harris: Following are five important variables that can be used when illustrating the advantages and disadvantages of a Roth conversion: (1) age of client, (2) other assets beside the IRA available to pay income taxes, (3) heirs, (4) new higher tax brackets for 2011, and (5) possible tax changes in the future.
Rankin: The age and health of the client is a critical piece to the decision-making process. If they have a terminal illness or a short life expectancy due to advanced age, then the Roth may not be the answer. An ideal maximum age for the Roth conversion is 54, but everyone’s situation is different and may alter this notion.
Even though the taxes can be evenly distributed over a two-year period, it is wise to pay the tax with outside money. This approach will allow the account to accelerate tax-free after the five year requirement is met by the client.
Other factors to consider would be to look at the future tax bracket of the client and the tax code itself. In 2011, the higher rates will rise from 28 to 31 percent, and 35 will become 39.6 percent. Another attractive feature is that the legacy of a Roth may be able to flow to your clients’ heir(s) tax-free and be spread over their life expectancy. This is due in part to the fact that there are no minimum distributions on Roth IRAs.
Finally, while it is very unlikely that the government will circle back to tax income from a Roth IRA, an insurance professional who is building a practice cannot remain silent about the possibility.
Product Simplicity
Harris: Since being introduced 15 years ago, indexed annuities have had the fastest growing increase of any annuity type. And sales should continue to mushroom.
Rankin: Yet, after 15 years, more and more of us continue to ponder such topics as surrender charge duration, caps, how earnings are credited, the working of lifetime income benefit riders, and myriad more “quirks” of the product.
Let’s use a cap as an example. Should an indexed product have a cap? From 1926 to 2007 the average return for the S&P 500 was 12.23 percent. However, the question is how many times within that period did the S&P deliver 8 to 12 percent return? The answer is that with a cap of 8 percent return an indexed annuity owner would have missed receiving more on 45 occasions.
Harris: That’s an important point. Perhaps some prospects who said that they “wanted to think about it” were actually silently objecting to the cap.
Rankin: Bill, you are right. The prospect does not always verbalize his concern. That is why insurance professionals need to be persistent in asking good questions. It’s been said that you make more money asking the right questions than knowing the right answers. Prospects need to be reminded about the down size protection of indexed annuities, which can serve as a bond substitute with equity growth potential. In addition, income riders are a perfect play for senior retirement planning.
Innovative Sales Ideas
Harris: Consumers are getting smarter. In 2008, many felt they had a tolerance for risk, but then in 2009, many discovered they had no tolerance for risk. More owners of certificates of deposit learned that taxes and inflation could devour 100 percent of the interest they earn at a bank.
Rankin: Please take a look at Exhibit 2, below.
Exhibit 2: Remember 1950?
Interest Rate* 1.22%
What You Get 82.60%
After-Tax Return 1.01%
Inflation 1.30%
Actual Return -0.29%
*Source: Federal Reserve, International Revenue Service, Bureau of Labor Statistics
The exhibit demonstrates that in 1950 interest rates were low, inflation was low, but when you add taxes to the equation you have an actual return that is in the negative column. If a family had money in a bank earning interest and were in the lowest tax bracket (17.4 percent), they were keeping only 82.60 percent of their interest. The net return was 1.01 percent, yet inflation was 1.30 percent, which left them with a negative 0.29 percent return.
This exhibit also illustrates the key point for senior clients to understand—that the real rate of return is what will pay the bills. Many times we fail to factor in the eroding elements in our economic cycle into our income planning strategy, such as taxes and inflation. Annuities give clients a sense of empowerment by putting them in charge of when they pay taxes on their income. Inflation destroys the purchasing power of one’s money, and an inflation rate of just 3 percent can reduce the purchasing power of their dollars by 30 percent over a 10 year period.
Amazingly, in the wrong environment a client can actually lose value by saving money. Conversely, a client can maximize his growth by repositioning assets into vehicles such as annuities that can outperform inflation and remain tax-deferred or even tax-free.
Harris: It’s time we rethink how important the single premium immediate annuity can be for our clients.
Rankin: Yes, single premium immediate annuities, when used with other products, can accomplish many different goals for your clients.
SPIAs can help pay for life insurance or long term care products. SPIAs can be combined with fixed annuities with a 10-year guaranteed interest rate so that after the income period of a 10-year period certain option, the deferred annuity will be equal to the initial amount of investment.
It is truly an exciting time to be in the insurance industry. I could go on and on about the possibilities.
Broker World: We wish you could, but we’ve run out of space. Thanks, guys!
Author’s Bio
James Rankin
Rankin can be reached at Moody Insurance Group, Inc., Life & Annuity DepartÂment, 2302 Post Office Street, Suite 601, Galveston, TX 77550. Telephone: 800-252-4002, extension 18. Email: jamesr@moodygroup.com.
William Harris
Harris can be reached by telephone at 800-800-SALE. Website: www.wvhinc.com.
