Selling Annuities As An Accumulation Strategy
October 2, 2013 by John Williams CLU,® Regional Sales Director
John Williams CLU,® Regional Sales Director
Published in the September 2013 issue of Broker World, reprinted with permission
Fixed index annuities combine insurance protection with growth potential, but guaranteed lifetime withdrawal benefits may miss the mark
More than 79 million baby boomers1 are just starting to reach retirement age. Not only are they contemplating the right time to transition out of the workforce, but also they are considering how to stay afloat during their retirement years. Many professionals have already begun addressing a surge of questions from this group about their personal experiences and particular fears. As a trusted advisor, you are poised to profoundly affect the financial decisions they’ll soon make on behalf of themselves and their families.
Although the stock market may be rebounding, a conservative mindset remains among baby boomers in how to grow their retirement portfolio. Investment portfolios and safe-money accounts alike weren’t spared from the global recession of 2009. Its wake left fearfulness about where and how one safely grows retirement savings. Because of this sensitivity, many baby boomers are considering fixed index annuities to gain an advantage and maintain peace of mind.
Even within today’s low interest rate environment, a deferred index annuity can be positioned as a viable solution to help a client’s account beat inflation and maintain purchasing power over the next five to 10 years. Prudent brokers are comfortable offering fixed index annuities because they offer a good chance to safely grow a client’s account in today’s interest rate environment.
Taking the annuity purchaser’s financial goals and position into account, producers may want to focus on fixed index annuities with their opportunity of growth in accordance with index gains rather than index annuities that focus on potential future perks with a guaranteed lifetime ithdrawal benefit (GLWB) feature. If your client is looking for growth opportunities tied to upside performance of an index that reflects gains in the economy and wishes to maximize that growth, an index annuity without the GLWB feature is likely to be a good solution in this scenario.
Why Recommend A Fixed Index Annuity?
Although the average annuity purchaser is getting younger, often investing in a tax-deferred annuity before he or she retires,2 the conservative thinking regarding creating and protecting a retirement nest egg is first and foremost in a purchaser’s mind.
Recommending an index annuity can help a purchaser whose goal for retirement savings includes accumulating retirement funds without sacrificing principal. Index annuities are a type of “fixed” annuity, which – either deferred or immediate – provides inherent guarantees to a purchaser.
Fixed annuities are provided by insurance companies, in which the company, or product promisor, offers minimum guarantees plus the safety of a client’s principal and earnings. Generally, people may buy fixed index annuities not only for their income potential but also for the chance to earn a little more than other safe-money accounts, while simultaneously protecting their downside.
More Return For Their Buck
A recent trend has been to sell index annuities that include a GLWB feature. There is a cost to that feature, and the fee is generally taken from the annuity fund value. When the annuity fund’s growth is reduced by the fee for the GLWB, the potential growth may be unnecessarily dampened, particularly in this economic environment of low interest rates. Accordingly, ongoing growth is even further dragged down based on the reduced annuity fund value.
The additional risk, combined with low rate caps, may result in the purchaser of an index annuity with a GLWB not earning returns on the initial investment much beyond a bank CD. Although annuities and CDs are very different types of products and regulated under different laws, many purchasers do compare the features of each. In any event, the returns are most likely lower than an index annuity without the GLWB. Given today’s economic environment combined with GLWB costs and the corresponding reduction in account value, the question for the annuity customer is if they should purchase a GLWB product or go with a standard index annuity.
Growth Over Flexible Income
If you choose to sell a fixed index annuity with a GLWB rider, it is important to emphasize the flexible lifetime income aspect rather than the guaranteed income account growth percentage. The income account growth only can be accessed if the client requires lifetime income and otherwise is unavailable for the policyholder.
For a client to understand the implied return of GLWBs, or the value of the guaranteed roll-up rate and withdrawal combination a GLWB rider offers, it should first be converted to a number comparable to bank account interest or returns on a mutual fund. These are numbers that clients tend to be familiar with and can make it easier for them to compare with other options. For example, a direct comparison of the GLWB annual growth percentage of 5 percent and the 1.25 percent annual yield of a five-year bank CD is misleading.
A GLWB rider can be appropriate as long as the client desires and understands both its benefits and costs. Clients should know that choosing a GLWB feature today means running the risk of losing purchasing power later. There is a price to pay for access to lifetime income they may never use, or worse, regret buying later. As a financial consultant, you should be comfortable discussing all possible outcomes regarding their investment.
As an alternative, consider positioning a fixed index annuity as an accumulation account that offers the opportunity to earn a little more, beat inflation and, most important, stay safe. An index annuity can potentially earn inflation-beating returns over the next five to 10 years and offer free income for life, in the form of annuitization, should clients request it. Fixed deferred annuities can be converted to a series of payouts that can be structured to last a lifetime. Some carriers allow clients to exchange future income payments for a lump sum payment today. Paying an ongoing yearly charge for a GLWB feature which promises many similar features may leave clients questioning the decision to add the feature in the first place.
Working With Reputable And Principled Carriers
To beat inflation in today’s current cap rate environment, renewal rate cap integrity is key; in other words, evaluating how the company might treat the client in future years as it relates to the maximum crediting level to which the account may grow. In any index annuity sale, the customer is at the mercy of the product promisor. A company that decides to pad its own future bottom line does so at the expense of its loyal customers by curtailing the maximum renewal cap rate offered.
When offering annually renewable fixed index annuities, look for an insurance company with a published renewal cap rate history for anyone to view. Fully disclosed index annuity renewal rate caps are one way a prospective purchaser can check actual return performance of previously sold policies. It is important to align yourself with an insurer who acts in the same manner as you – with integrity, full disclosure, highly personalized service and customer satisfaction in mind.
Frank client discussions reveal genuine intent regarding your clients’ financial goals, and collaboration is essential to see them succeed. Financial advisors and producers should be aware of both the reasonable benefits a GLWB rider provides and the considerable drawbacks when adding a cost item to an annuity purchase in today’s low interest rate environment. It is your job to frame the potential outcomes in terms clients easily understand to ensure you are setting them up for the long term.
1 Cohn D’Vera, Taylor P. “Baby Boomers Approach Age 65 – Glumly.” Pew Research Center website. Available at http://www.pewsocialtrends.org/2010/12/20/baby-boomers-approach-65-glumly/. Accessed May 16, 2013.
2 Standard Insurance Company internal data
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