Although it wasn't a great first quarter for annuity sales, which declined 27% in the first quarter according to the Insured Retirement Institute, there was some good news for annuity vendors: Variable annuity (VA) sales grew 3% for the same year-to-year period.
In the right circumstances, VAs offer solid benefits, and several advisors describe scenarios in which they would consider recommending a variable annuity (VAs) to clients.
Lowering income Taxes
Jamie Milne, CFP, of Milne Financial Planning in St. Johnsbury, Vt. has recommended VAs' tax-deferral benefits to a client who is well into the maximum federal and state tax rates.
Milne notes that anything he can do to reduce taxable income in future years for clients with an effective marginal tax rate of 45 percent or more becomes a priority. For those clients, variable annuities are a good way get the tax deferral and keep the potential for future growth.
Calming Jittery Investors
Some clients are extremely risk-averse, says Mark A. Ziety, CFP with Shakespeare Wealth Management, Inc. in Brookfield, Wis. They consider high yield bank accounts a great savings vehicle because they can't lose money in them.
The problem, as Ziety points out, is that savings accounts are not a solution for clients in their forties with limited incomes who are behind in saving for retirement. Although they need exposure to the markets, their anxiety over potential losses prevents them from building sufficient retirement assets.
For clients like this, Ziety believes that using a variable annuity with a living benefit rider could give them enough peace of mind to put some money in the market. It's not a perfect solution, he notes, because when the contract and sub-account expenses are included, variable annuities can be quite expensive.
But if the alternative is parking everything in cash, variable annuities with living benefits are one of a few strategies to help the nervous investor get in the market and stay the course.
Saving Above Contribution Maximums
If a client is in the maximum income tax bracket, has contributed to all retirement type accounts available to him or her and has cash that he or she will not need until retirement, variable annuities can and do make sense, says Debbie Frazier with Frazier Financial Consultants in Chapel Hill, N.C.
She recognizes that the argument against VAs is that the investor could buy an index fund, leave it until retirement, and then pay only capital gains on the profit, not ordinary income.
The choice as to which approach works best will depend on the client's emotions when money comes into play. If it was likely that the client would indeed hold the index fund for the years needed, then that would be way to go, but the reality is that having that money sitting in an investment account is tempting if the client wants to indulge, she says.
Covering the Necessities
Mark O. Flaherty, CFP with Virginia Asset Management in Norfolk, Va. believes that VAs, including Indexed VAs, should be evaluated for situations where clients want the assurance of "guaranteed" income at some time in the future. For example, he says, with a couple who are looking at retirement and want to be sure necessities are always covered,
VAs might be a worthwhile tool. If the breadwinning spouse dies, annuities can provide an excellent safety net for part of the income of the surviving spouse who may not have the confidence to manage a portfolio.
Smoothing the Swings
Jay A. Finke, CFP with Lincoln Financial Advisors in Cincinnati, Ohio says that most of his clients are corporate executives at Procter and Gamble and many of them hold stock options.
A strategy Finke frequently uses is to allow the executives to live off their stock-option income for a number of years and then include, as a portion of their portfolio, a variable annuity with a guaranteed withdrawal benefit.
That allows the roll-up and step-up features of the annuity to grow the guaranteed income base for the client over a number of years while the client doesn't need the income.
Once income is required, the client can use the guaranteed income from the annuity or use income from the rest of the portfolio and allow the roll-ups and step-ups of the annuity to potentially continue.
Given the markets' recent swings, he says this strategy has provided immeasurable peace of mind for his clients who have been able to shift part of the risk of the volatile markets to the insurance companies. The focus is not on "hitting it out of the park" with client portfolios, says Finke, but on preserving assets for clients' lifetimes.