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Portfolio > Economy & Markets > Fixed Income

2 Income Annuity Illusions You Can Combat -- and One Big Selling Point to Boost Sales

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Some people — like those sweating away pounds on treadmills at 6 a.m. — love watching big numbers turn small.

Others hate it — especially when they watch the biggest pile of money they’ll ever see (their 401(k)) turn into a seeming molehill of retirement income.

It’s called the “wealth illusion,” and it’s one of a number of illusions burdening insurance advisors working with retirees today. It’s a tough one to pop: Tell someone they can either receive a big lump-sum payment or get $300 a month for life and it’s no contest.

They’ll almost always grab the money and run no matter how much time you spend trying to explain the lack of logic of their decision.

Don’t waste your time trying to explain things if you’re butting your head against a brick wall. Instead, consider focusing on the guarantees offered by a single premium immediate annuity and concentrate on popping the combatable illusions surrounding SPIAs. Finally, turn to the most critical benefit in your arsenal — the exclusion ratio.

Illusions you can deal with

  1. The “Vanishing Purchase Payment” illusion
    The illusion: “Once I die, all my money is gone.”
    The thought process: This is a tough illusion to pop because it used to be true. You’d turn over $100,000 at age 65, and if you died two years later, your heirs would get nothing, while you would have pocketed only about $15,000.
    Today’s reality: Your clients can now purchase a benefit guaranteeing that total payments won’t be less than the purchase payment amount.
  2. The “Untouchable Money” illusion
    The illusion: “I won’t be able to get at my money if I need it.”
    The thought process: This, too, used to be true. Money in an annuity could only be accessed through established payments.
    Today’s reality: Some carriers offer options allowing clients to access part of their future payments. For example, one company’s benefit allows access to as much as 30 percent of the value of future payments. It’s available after three years, and as often as every 36 months thereafter, during the annuitant’s life expectancy.

The incredible exclusion ratio
After you deflate the illusions, you can turn to the critical benefit that’s closed more annuity sales than you’d imagine — the exclusion ratio.

Here’s the simplest way to explain it:

  • The exclusion ratio develops when the accumulated value in an annuity is converted to an income stream.
  • Part of each payment the client receives — calculated using the exclusion ratio (investment in the contract/expected return) — is considered return of original principal. It is, therefore, not subject to income tax when it’s received.

And here’s an example you might use of the incredible exclusion ratio in action:

  • Explain to your client that income from a CD is fully taxable, so $30,000 of income at a 25 percent tax rate provides $22,500 of net income. Plus, the accumulation within the account is taxed every year.
  • Mention that living benefit income from a variable annuity is also taxable. So, just as with the CD example, $30,000 of income at a 25 percent tax rate provides $22,500 of net income.
  • And then explain how that same amount of income — $30,000 — from a SPIA may have an exclusion ratio of 80 percent. This means that only that amount is taxed at the 25 percent rate — providing $28,500 of net income.

Guaranteed income for life, the option of getting your deposit back upon death, the flexibility to change your mind, the power of the exclusion ratio — when simply and properly explained, your clients will start to see how income annuities can be the best solution to the new ROI.

Laura Hahn is managing director of the Annuity Center for The Marketing Alliance (TMA). She can be reached at 314-275-8713 or [email protected].


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