Picking The Safest Annuity: The Advisors New Task
The headline of this article sums up a growing issue for annuity salespeople: How to respond to client requests for the safest annuity or annuity option?
In recent months, reps have been calling the products desk at National Underwriter hoping to find some answers. This article provides some suggestions, based on interviews with several annuity executives.
Advisors have a full palette of safe-money annuity options at their fingertips. These include not only fixed annuities (FAs) and their indexed annuity siblings but also the fixed accounts in variable annuities (VAs) and various other conservative VA subaccounts such as market value adjusted accounts, money market accounts, bond funds, principal protection funds, and the new TIPS funds (discussed below).
At issue is not just the respective features and potential returns of each option but also the financial structure of the annuity wrapper itself. Several callers put it this way:
The Fixed Annuity choice. FAs (and fixed accounts of VAs) both offer guaranteed returns backed by the general account of the insurance company. However, this money is subject to the claims of creditors should the company default.
Variable Annuity subaccounts. Many VAs now offer several very conservative subaccount options such as bond funds, principal protection funds, TIPS funds and more. They are separate account products and so are not subject to claims of creditors. However, they are subject to market risk.
Given those facts, advisors are asking, “What do I tell my clients about the safety of the money they place in these products?”
The question is pressing because, according to many sources, more and more clients are demanding safe money options. (See sidebar.)
“Weve seen this trend for two years or more, says John Diehl, vice president, marketing at Planco, a distributor owned by Hartford Financial, Simsbury, Conn.
Consumers financial objectives have not changed since before the recession started, he points out. They still want to fund their kids college education, their own retirement and so on. But now their risk tolerance has changed, Diehl says. They want a safe place for their money, “but they dont know where the safe place is any more.
“Most investment professionals still believe the safe place, for the long term, lies in the power of equities and asset diversification,” Diehl says. “But pressure is growing from clients. They are becoming adamant that they want a safe place for their money, with some kind of guarantee.”
This preference certainly shows up in senior buyers seen by Jack Stayer. He is president of Northern States Brokerage Inc. in Menomonee Falls, Wis.
“In response, I am only selling fixed annuities,” Stayer says. “These are FAs from top-rated companies with a history of performing well on renewal interest rates. They also have short surrender periods.”
When clients ask about the safety of money in those products, he says he points to the ratings. Because the FAs he uses have short surrender periods, he also notes that, within a few years, “you can always get your money back with no surrender penalty.”
If the client will be over age 59.5 at that time, Stayer notes, they wont have to pay the governments 10% early withdrawal penalty, either.
If the client will not be age 59.5 at time of surrender, he points out that the surrendered money would be subject to the 10% penalty. But he also says that “with the fixed annuity, you still know you can get your money back. And you know, right now, how much the absolute minimum will be,” by subtracting the 10% penalty.
By contrast, Stayer says, with a bond fund thats inside a VA, clients dont know for sure what the minimum value will be in the same time period. The VA bond subaccounts are insulated from creditors, he concedes, but “their performance is subject to market risk.”
As a result, Stayer encourages clients to put the money they want to be absolutely safe into a top-rated FA. “Then they can put their at-risk money into some kind of security.”
Some clients are considering certificates of deposits for their safest money, he adds. In that case, he says, point out that FA rates still beat CD rates, and FAs offer tax deferral, too. “This makes you a hero,” Stayer says.
The tax deferral feature of annuities, fixed or variable, “absolutely” has value for consumers, maintains David Shapiro, chief executive officer of Info-One, Campbell, Calif. That, plus the fact that annuities have a death benefit and, in VAs, investment flexibility, make annuities “an absolutely valid option” for consumers to consider right now, he says.
Its true that, in a VA, the equity and debt subaccounts do not avoid the risk of volatility, Shapiro continues. For instance, when interest rates go up, bond values typically go down and vice versa. “If you dont liquidate at that time, you wont realize the losses, but if you do liquidate, you will lose money. Thats the risk.”