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Financial advisors have a tremendous and growing need for information on how to guide older clients on how to turn their investments into income, contends Bill Boscow.

“The subject comes up at every advisor conference I attend,” says Boscow, who is chief marketing officer at Lincoln Retirement, the Ft. Wayne, Ind., annuities operation of Lincoln National Life Insurance Company.

His remarks came during an interview on Lincolns newly enhanced income rider for variable annuities–the i4LIFE rider, discussed below.

Increasingly, advisors are requesting education on income planning strategies, says Boscow, and that is one of the key reasons his company enhanced its income product and why company executives are now traveling around the country to talk about it.

Often, when clients enter retirement, they have assets tucked away in several places, says Lorry J. Stensrud, CEO of Lincoln Retirement. These places may include qualified plans (401(k), IRA, etc.), annuities, life insurance, securities accounts, savings accounts, real estate holdings, etc.

The quandary, Stensrud says, is “which source, or sources, should the client first use for retirement income purposes?”

This is a tax efficiency discussion, not just a longevity discussion, he says. “People are asking, what is the most tax-efficient way to spend down” the assets?

Many advisors recommend leaving the qualified assets and annuity assets alone for a while, to get maximum benefit from the products tax deferral, observes Boscow. But that often means the money goes into the estate and gets passed on in asset transfer at death, he says.

That may not be the best outcome for the client, say Lincoln executives. “In general, its inefficient to use these sources for asset transfer,” Boscow explains. Qualified plans and annuities were designed to provide retirement income, not wealth transfer, notes company literature.

So, then, what to do?

Lincolns suggestion is: “why not use the qualified plan assets and annuity assets first?” This way, says Boscow, the client keeps the other assets growing for later use or wealth transfer.

Where annuities are concerned, he contends that taking income payments from them is tax efficient. The client only pays taxes on the portion of each payment that is considered to be earnings, he explains. Depending on the clients circumstances, this can be advantageous, he says.

When he talks about VA income strategies with advisors, Boscow says, the discussions frequently trigger an “aha” response. Its an “ah, now I see” kind of thing, he says.

He speculates that what advisors may be seeing is not only the advantage of income payouts to clients, but also the possibility that income planning can be a way to grow the advisors own business.

“Its a way advisors can strengthen their leverage with customers,” Boscow explains.

Hence, the rising demand he is witnessing for education about income planning–and income products.

Lincolns new entry, on the product side of the equation, is i4LIFE, an enhanced version of a VA income rider that first debuted two years ago.

Already approved in over 40 states, this rider lets clients change the income stream and the frequency of payments they receive from their Lincoln variable annuities. This is done via the policys “access period” feature. This is the period during which the policy is liquid, and owners can make withdrawals. Heres how it works:

At election, the owner selects an access period that can range from five years to “to age 115″ (or to the youngest owners age 115). During this period, the owner can make withdrawals from the account value as well as continue to receive monthly payments. The company recomputes the monthly payout after any withdrawal.

If the annuitant should die during this period, the policy pays the beneficiary a death benefit equal to the “current account value.” (For an extra premium, owners can bump up the death benefit so that heirs will receive a “guaranteed minimum death benefit.”)

Once the access period ends, owners can no longer make withdrawals and the death benefit falls off. Now, says Stensrud, the policy enters its “lifetime income period,” making payments until the annuitant dies.

(Note: This is a variable income product, so the payouts are not guaranteed. However, owners can get equal payments over each 12-month period by selecting the riders built-in level pay option.)

This rider creates a “bunch of flexibility” for the client, maintains Stensrud. For example, once a year, but before the initial access period ends, the owner can shorten or lengthen the access period without charge, he says.

If the owner elects to “redefine” the access period to a shorter period, the recalculated monthly payout will be higher than before, explains Boscow. The reverse is also true.

That flexibility can be important to the client, according to Stensrud. For instance, if the VAs subaccounts have performed well and if the owners do not need the additional income this has produced, the owners can “redefine” their monthly income–in this case by lengthening the access period–to meet their needs, he says.

Even after the access period ends, owners can continue to change subaccount options, Stensrud adds.

Another choice is available at issue: Owners can elect the policys assumed interest rate (AIR), says Dan Herr, assistant vice president, individual annuity produce development. The default AIR is 4%.

Because there is so much flexibility, policyowners need to get intensive advice from their financial advisor about which changes to make and when, Stensrud says. This is a product that requires “active income planning with the advice of a professional.”

VA money “is meant to be spent,” concludes Stensrud. But the advisor is the one who needs to help the client make the best choices.

Policyholders can buy the rider either at policy issue or later on. They dont pay for it until they elect it and start their income program, says Boscow.


Reproduced from National Underwriter Edition, February 17, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.