Using a 10yr Annuity As a Spend Down

[MAnnuity]

Been hearing of folks using a particular very popular 10yr annuity as a spend down vehicle, since the 10% free withdrawal is based on initial premium, not contract value. The idea is to put the money into this annuity rather than keeping it in the bank (which obviously pays the agent rather handsomely), and basically liquidate it out over 10 years.

I see this as a huge suitability issue...I imagine though that they are not telling the insurance company on the suitability form that they plan to liquidate it over 10 years.

Maybe the carrier has factored this into their pricing... or maybe "suitability" wasn't really the right word...maybe it's more of an "ethical" issue here.

Would it matter if the annuity was designed just for accumulation? Or say it had a living benefit rider attached (meaning the agent knew the client didn't need lifetime income, but sold this *particular* product to him anyway?)

Any thoughts? Are a lot of people doing this? I am guessing that in a post-DOL world, something like this wouldn't fly. Right?

 

[DHK]

1. That 10% withdrawal based on initial value is only offered by one company - Allianz. BTW, they came out with some new annuities lately - the Retirement ADV contract - I think it's supposed to be a "fee-based" contract?

2. What suitability issue? You're using it AS designed. Just don't add a living benefit rider. Now, if you're misrepresenting the annuity, then there can be a problem.

The biggest concern that CAN come up is this: If there's an emergency that comes up and you need to access more than 10% in a given year... that amount over 10% may be subject to a surrender charge.

However, compared to what? Assuming that we compare to a money management model that has up to 2% charges, you pay that 2% per year - regardless of performance. 2% x 10 years = 20% charges for leaving the money in there over 10 years. At least you have the chance for a little more upside.

3. What are the other options?

- You can put it at risk in an asset management product. Well, even with tactical asset management designed for protection on the downside, it is NOT guaranteed against loss. Again, 2% per year up to 10 years = 20% charges out of your balance - whether it gains or loses.

- You could use a 10-year period certain SPIA. Well, then it may not be liquid AT ALL in the event of an emergency - depending on the contract.

- You could put it in the bank and earn essentially NOTHING on it.

- You could put it in a VARIABLE annuity... and have NO guarantees on the underlying cash values and hope it works out. (But that's a VERY expensive mutual fund without a living benefit rider.)

- Or, you could put it in an account with 100% principal protection and earn fixed indexed-based interest and lock in those interest credits and never lose them due to market forces.

The company DESIGNED the product this way. That's not your fault, right? And there's nothing wrong with designing a product to work a certain way. It's on the company for the design and YOUR JOB to represent it properly, and design your client's lifetime income strategy properly.

There is no 'perfect' strategy. Which requires plenty of DISCLOSURE to the client to be sure that you've outlined all the alternatives and the downside to the strategy.

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BTW, if you haven't figured it out, the strategy is to SPLIT one's retirement funds between an Allianz contract and another one with a 10-year income step-up for lifetime income.

Suppose you have $1 million in retirement savings.

Contract 1: Put $500,000 into the Allianz contract for 10% withdrawals to liquidate over 10 years (not including the 1st year).

Contract 2: Put $500,000 into another annuity that perhaps grows their lifetime income base at 7% per year for 10 years. (That's not 'real growth' but a step-up in the income calculation for lifetime income payouts.)

As you liquidate Contract 1 over time, contract 2 is building up its own value for an enhanced lifetime income. Using American National's 10-year product as an example, the $500,000 income-base would grow by 7% per year for 10 years to a value of $983,575. If you started this whole program at age 65, then at age 75, the distribution rate would be 6%. 6% of $983,575 = $59,014 each year for life ($9,000 MORE per year than what you started with).

Yes, you can play around with COLA payout options of other annuities and compare the total payouts (I find that it takes too long for it to break even with a level contract payout).

Oh, and don't forget the residual contract earnings after year 10 and the initial contract bonus from the Allianz contract.


Now, if you screw it up, and use the SAME TWO contracts, but use the Allianz one for lifetime income and the American National one for 10% distributions (but that are based on de-cumulation value)... you lose your clients up to 25% of income.

And even if you screwed it up, what would be the DOL violation? Incentive compensation? No, you were paid the same. Would it be contest credits? No, the amounts between the contracts were the same. No, the only reason to cost your clients 25% of retirement income... would be pure incompetence. Strangely enough, the DOL ruling doesn't account for that.

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Note that the end calculation was based on single life, not joint lifetime income. Reduce by 1% for joint income.

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While the DOL may be focusing on "product sales", this sale is primarily about strategy. Try not to judge a product without determining the best strategy to utilize the product.

 

[Cobes]

Great reply post! Makes total sense!

 

[pfg1]

Been hearing of folks using a particular very popular 10yr annuity as a spend down vehicle, since the 10% free withdrawal is based on initial premium, not contract value. The idea is to put the money into this annuity rather than keeping it in the bank (which obviously pays the agent rather handsomely), and basically liquidate it out over 10 years.

I see this as a huge suitability issue...I imagine though that they are not telling the insurance company on the suitability form that they plan to liquidate it over 10 years.

Maybe the carrier has factored this into their pricing... or maybe "suitability" wasn't really the right word...maybe it's more of an "ethical" issue here.

Would it matter if the annuity was designed just for accumulation? Or say it had a living benefit rider attached (meaning the agent knew the client didn't need lifetime income, but sold this *particular* product to him anyway?)

Any thoughts? Are a lot of people doing this? I am guessing that in a post-DOL world, something like this wouldn't fly. Right?

Sure it can be done, and in the right situations could be a good solution for certain clients.

Doing it just to do it, well that makes no sense and yes the carrier probably wouldn't like that as a general practice.

Thats the thing with annuities.... there are so many options, you can find the one that fits the clients needs best. Not any one product is the best in all areas. Some are much better for growth. Some for income. Some for free withdrawals, etc.

 

[DHK]

Exactly. While Stan "The Annuity Man" asserts that annuities are commodities, I find exactly the opposite. There are a great deal of nuances in various contracts, and it's up to the annuity professional to study them out and see how a single or combination of annuities can be used to benefit their clients.

 

[walthamny]

There is nothing wrong with disclosing that you intend to take out 10% withdrawals every year if thats what you intend to anyway. No insurance company is going to deny the application over that. I have never seen it. Also if it is in the clients best interest and the product is design allows it, nothing wrong with advisors using anything that is available to them. Post DOL world would be ok with this, they are more concerned about upfront commissions and trips. To be honest, regulators should have focused on the liquidity risk a client faces, not on the trips.

Some companies have an issue with agents selling a FIA and then rolling over 10% into a new FIA with another carrier. I see their point. It is not clear if DOL would do anything about this. Basically if you build a 25 million annuity book, you can roll over 2 million a year easily into a new annuity and earn 120K basically shuffling paperwork.