Talking To Seniors About Annuities Now

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Senior clients who were burned by the three-year economic downturn are not wasting any time in reacting to recent changes in the financial environment.

These changes include the new federal tax bill, the once-again rising stock market and the plunging interest rates.

Advisors say clients in the 55 to 70 age range increasingly have been calling their advisors, asking, “Is it time to move my money?” “How should I invest now?” Or, “what should I do about this annuity, in view of the changes?”

How to respond is the focus here, using annuities as the illustrative product.

As far as James McKeever is concerned, the new tax cut bill is the one development that is having “virtually no effect” on his annuity practice. Based in Newport Beach, Calif., he is director of financial services for Precept.

Its the same for Mark Marroni, general agent with John Hancock Life Insurance Company, Boston. “We havent heard anything from our customers relating to the tax law change and product decisions they might be making as a result,” he says.

“No matter how low the taxation of dividends goes, or how low the capital gains rate, some seniors wont go back into the market,” sums up Brian Lipinski, director-annuity marketing at Executive Brokerage Service, Pittsburgh, Pa. “Even if logic says now is the best time to get in, they wont budge, especially if theyre over age 70.”

Yet, others do see an impact. Take Brent Brodeski, for example. He is managing director of Savant Capital Management Inc., a fee-only practice in Rockford, Ill.

The newly inked tax law is definitely making a difference in his business, Brodeski says.

“Annuities arent any different than before, but the alternatives are now better.”

Brodeski says he sold variable annuities in the past, when, say, a client had an older annuity that no longer made sense compared to a new VA with lower loads. But now, he says, he is hesitant to recommend such rollovers. The tax changes have made it “mathematically impossible” for even low-load VAs to stay competitive with market-based equity investments, he maintains.

Concerning the other two developments–the rising stock market and the falling interest rates–the advisors are in greater agreement: Younger seniors have noticed the changes and they are wondering what, if anything, they should do about it.

In fact, Brodeski says he has picked up a few new clients, who had grown uneasy with the low interest rates (1% or less) in their CDs and low returns in their money market accounts. “After factoring in taxes, inflation and the Federal Reserves latest rate cut, they decided it was costing them too much to stay there,” he says.

Younger seniors (age 55 to 65) who have money in cash and fixed accounts in VAs have been calling McKeever, too. He says his response is to focus on planning fundamentals, the same way he did three years ago. Also, he says he tells clients the following:

“First, you cant do planning based on tax law.

“Second, if youre going to put money into an annuity, dont do it because of an interest rate–because interest rates cycle. Do it because the product fits you goals, objectives and time horizon.”

“Third, goal setting and ongoing monitoring are critical to the decision process.”

If the fundamentals are done right, clients will make good decisions, McKeever contends. But he says most seniors do need advice from a skilled advisor.

Some younger seniors have been calling around to sample views on getting back into the market, he notes. If most of their assets are in cash and if these seniors have not been working with an advisor, the seniors may be feeling anxious and they may be trying to time the market, he says.

Some call and say, “This could be it. The S&P is up over 10%. Is it time to get in the market?” They are feeling excited and want to make a financial move, he surmises.

For such seniors, McKeever has a warning: “I tell them that this (uptick) could be it for the whole year.” In other words, no one knows if more increase will come this year, so dont make moves based on timing.

But some dont want to hear that, he says. “They want to get out a scalpel and give themselves an appendectomy.” Advisors cant help these people, he concludes.

As for making decisions on interest rates, McKeever tells clients that, if the annuity is appropriate for them, then “dont pay attention to todays low rates.”

Unless interest rates make extreme changes–as happened the late 1980s when annuity rates hit the double digits–its best to stick with fundamentals, he stresses. “That is, if you want a floor, the fixed annuity is for you. Or if you want one foot on the boat and one on the dock, the index annuity might be best.

“Or, if you need an annuity but not those guarantees, use a VA with asset allocation and auto rebalancing.”

Its tough to generalize about what to say, McKeever adds. “For instance, some clients might be better off right where they are, say in a money market.”

Some of the calls coming in about interest rates are from seniors age 70 or more who have suffered a drastic financial impact from the interest declines, says Lipinski, the brokerage general agent. “This is affecting product positioning with seniors more than anything else right now.”

New annuity products are coming out with minimum interest rates of 1.5%, he notes. And the multi-year guaranteed fixed annuities are coming out in the 3.75% range give or take a point, depending on the interest period selected.

In view of that, when he is working with a senior for whom an annuity is suitable and guarantees are desirable, Lipinski says he may suggest a three-pronged approach:

“Put one-third of the assets into the best three- to five-year fixed annuity we can find;

“Put one-third into the best 10-year fixed annuity we can find; and

“Put the last one-third into an index annuity that guarantees a minimum interest of 3% on 100% of the premium.”

This way, says Lipinski, the client will be able to invest at higher yields if annuity rates go up after five years. “But if rates go lower, the client knows that at least one-third of the money is locked up for 10 years.” And the combination will produce a better return than just staying in one product paying 1%-2%.

This increases the comfort zone for many seniors, he says. “Then, agents and advisors dont have to guess correctly about future returns.”

Another option Lipinski offers is an annuity written by a fraternal society.

“Thats not for everyone,” he allows, but some clients do buy. The attraction, he says, is that “the annuities do offer higher yields (5%-6%) than annuities from commercial carriers; anyone can join the fraternal and membership doesnt cost anything.”

Some producers are reluctant to offer fraternal-issued annuities, Lipinski allows, because fraternals tend to be smaller and less well known than commercial carriers. But the fact that the fraternals he uses are several decades old and have track records does change minds, he adds.

For younger seniors, age 55 to 60, Lipinski may also recommend a so-called “point to point” index annuity with a nine- or 10-year interest period. On these contracts, “the money goes in now and the interest is credited at the end of the period,” he says.

Younger seniors have the time horizon for that kind of annuity, he says. Those who choose it often move money from mutual funds and VAs into the product.

Todays seniors are receptive to these ideas, he says, “and at bigger ticket sizes than in the past. My average today is $40,000 to $45,000 per annuity compared to $23,000 to $25,000 six years ago.”

Clients today are still clamoring for guarantees and fixed products, observes Marroni, the general agent. “For a lot of seniors, that does make sense. But for the younger seniors, especially those in their late 50s, it may make more sense for them to have some market exposure.”

That is what his office talks about with seniors when they call about the changing financial environment.

“Sometimes, talking with younger seniors about taking on some market exposure–say, by dollar cost averaging into a VA–is a difficult conversation to have,” Marroni says. Some of the resistance is probably due to the widespread preference among many people to buy high and sell low, he suggests. “They feel comfortable doing that because the crowd is doing it.”

Advisors at his office wont advise on market timing, he stresses. When a younger senior might benefit from an annuity, we might suggest taking some market exposure in the context of the clients long-term goals and time horizon. “But if someone should not be in the market, the current uptick in the market should not sway that decision.”

The measure Marroni uses is: “Keep to the plan.”

What are the results of this approach? “Weve had more VA owners move money into the market sensitive account from their fixed income and money market accounts,” he says.

And while his agency has not done many 1035 exchanges from fixed annuities into VAs, it is just now starting to see clients move money from bank certificates of deposit and bank money market accounts into insurance products. “This is not a groundswell, but its starting.”

This market is very difficult for seniors who initially put money in fixed income products or interest-sensitive subaccounts so they could sleep at night, says Marroni.

But there has not been a lot of pushback from these customers, he says. He attributes this to selling the products right in the first place.

“These seniors do understand that all interest rates are low right now, and they do expect the rates to go up in the future.” The result is, many are still putting money into fixed products. But Marroni says they are choosing products with shorter durations, such as one-year guarantees, so that when rates rise again, the money will soon be available for investing at the higher rates.

Some seniors do try to chase yield in fixed annuities, and so they are seeking out annuities with very high first-year “teaser” rates, he says. His response? “We caution them that annuities come with surrender periods and that those teaser rates create false expectations.”

The lesson learned over the past three years of economic slowdown is that, in the 1990s, many seniors had developed a false sense of financial security, says Marroni. They lost track of common sense and the importance of retirement planning with a time horizon in mind.

“Now, the time horizon has become critical again, and many seniors are focusing on what they want to accomplish with their money and what is most important.”

Even though the stock market has been rising, some seniors–especially those age 70 and up–resist any suggestion of putting money into the market, points out Lipinski.

“They resist, even when it is a logical move for them.” The most common reason cited? Every day, says Lipinski, at least one senior says this: “If we have one more terrorist attack, the market will be in the tank.”


Reproduced from National Underwriter Edition, July 7, 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.