Along with life insurance, annuities are one of the most flexible products available for helping clients successfully meet their financial objectives. Here are 10 useful strategies to consider:
1. Avoid the mutual fund tax trap. There’s no reason to pay taxes on money that a client doesn’t plan on spending. A majority of mutual funds turnover is 80%+ of the portfolio annually, therefore creating a lot of taxable short-term capital gains. Additionally, your client is responsible for the long-term capital gains, interest, and dividends regardless of performance. The mutual fund portfolio manager doesn’t care about your client’s tax bill. Annuity tax deferred growth will boost performance.
2. Receive a guaranteed lifetime income. If your client has a goal to purchase an income stream, then the industry provides choices. Shop for companies that offer riders to match when your client estimates they may need to trigger the income benefit. For example, one large insurance company offers a 10% rollup for a limited seven years while another company provides a 6% increase for longer duration 10 to 20 years. Clients may pick a joint spousal income or single for a higher percentage. The income rider expense is near 1% per year.
3. Upfront bonus. Numerous carriers create an incentive for the initial investment with the agreement to stay with the annuity for the stated duration. Therefore, be aware of potential recapture, surrender schedules, or market value adjustment. Try not to use the bonus to reimburse any surrender charges on the existing annuity because a better plan is to wait out the remaining surrender to secure the entire bonus for your client later.
4. SPIA bridge Idea. A client under age 70 has a goal to leave a qualified plan alone until RMD time. The SPIA provides a known, guaranteed income stream and keeps the money in a tax-efficient place. For example, age 63, widow and teacher has a lump sum from a life settlement and selects a 7-year SPIA to keep her 403b Plan preserved until age 70½. She achieves seven more years of tax-deferred growth and a monthly income stream in the interim before tapping into her qualified funds.
5. SPIA as irrevocable. The goal for many older age SPIA policy owners is to have an irrevocable, Medicaid-friendly contract. For example, one insurance company allows the owner of a nonqualified contract to add a restricted endorsement rider at no additional expense, therefore binding the SPIA irrevocable, non assignable, and non transferrable. This endorsement is used in certain financial planning situations where it is desirable to restrict the contract owner’s ability to make changes after issue and prohibits any access to funds by way of surrender, transfer, collateral assignment, or commuting the value of the contract. The internal rate of return is competitive with other carriers.
6. SPIA for future income. Another use for SPIA is guaranteed future income that offers clients an opportunity to create their own pension-like retirement. The owner makes an initial premium payment and sets an income start date in the future, and then receives guaranteed income payments for life. Also, the owner may change premium payments, defer, or accelerate the income start date if personal needs change. Good for qualified, non qualified, and ROTH; all managed with an A++ company.
7. Your annuity picks up where your 401k left off. If your client is a saver and has fulfilled the max 401k, then the annuity is the most tax-efficient vehicle for additional deposits. Compliment their qualified asset allocation model with a nonqualified fixed annuity interest rate for downside protection. Your client may consider a higher weighting toward equities knowing there is a fixed position in their comprehensive plan.
8. Liquidity. Are clients afraid of renewing a CD and locking in a new long-term duration to achieve a reasonable rate? Consider the annuity that provides choices such as 10% liquidity after 30 days, interest only withdrawals starting in year 1, or most annuities allow 10% free amount after year one. Clients can have access to their funds and withdraw on a predictable, gradual basis to spread out the taxable gains.
9. Innovation in riders. Insurance companies have a creative side, however there is always a healthy tension between actuarial manufacturing and the sales force. One newer idea is a fixed index company that has expanded its guaranteed living withdrawal benefit rider to provide a choice if the income is not needed. The client can build a flexible plan to use the roll up account for choices: income, home health aid, nursing home, terminal illness, or death benefit. There is a rider expense 1.4%, still significantly less when compared with a variable annuity total expense. The jury is still out to see if more companies trend to the multi choice rider.
10. Rates, rates, rates. Bank savings accounts, money markets, and credit unions — all represent critical parking places for emergency funds and cash. The annuity will provide numerous ideas for better rates, such as the multiyear guarantee, fixed index with potential to achieve higher performance, or a variety of traditional fixed accounts to keep pace with inflation.
Taken together, these 10 annuity strategies help clients accumulate assets for supplemental retirement income and provide an income solution stream of payments.
Jeffrey Singer is National Annuity Wholesaler at First American Insurance Underwriters, Inc., a Needham, Mass.-based national life brokerage firm. He began his life insurance and annuity career in 1992. A Holden, Mass., resident, he is a graduate of Bryant University, and has an MBA from Clark University. He can be contacted at 800-444-8715 or firstname.lastname@example.org.