Like a chess player who’s always thinking several moves ahead or a boxer who’s ready with a one-two punch combination, savvy advisors know it pays to be alert to suitable cross-selling opportunities involving annuities.
The process starts with asking clients the right questions. Bryan C. Bradford, principal of HBW Insurance & Financial Services, Brighton, Mich, says, “Be an investigative reporter. Find out if the client has money sitting in something like a low-yielding fixed annuity or CD, where it’s not doing much,” explains William E. Kauffman, Jr., CLU, ChFC, LLIF, director of marketing for life and annuities at Senior Market Sales in Omaha, Neb. “Then you ask one really important question: ‘What is the purpose of the money in that account?’ That gets the wheels turning and opens up a lot of cross-selling opportunities.”
Done properly, the question-and-answer, fact-finding process should yield cues or red flags that signal a cross-selling opportunity, Bradford explains. The presence of a low-interest-rate account whose contents are earmarked for a purpose, such as wealth transfer, is one such cue.
Though the sale should always be secondary to the solution, cross-selling often leads to a win-win for client and advisor alike. So when opportunities like those detailed below arise, be ready to pounce.
1. Annuity with long-term care insurance. Annuities often need a complement in the form of a wealth-preservation vehicle. A person has a better than one-in-two chance of needing some form of LTC during his or lifetime, points out Pat Sheridan, Kaufman’s colleague and director of life sales at SMS. And the cost of care “can ruin just about anybody.”
Thus, it’s wise to position LTCI as “a way to hedge against that particular loss,” Bradford says. A person over the age of 70.5 with significant funds from an IRA that must be distributed might use some of those funds to pay for a stand-alone LTCI policy.
2. Annuity with an LTC feature/rider. Certain clients might be open to investing in an LTC rider or add-on as an alternative to stand-alone LTCI. By definition, this isn’t a pure, two-product cross-sale, Donohoe notes. But this new breed of hybrid annuity contracts with an LTC component (in the form of an LTC-specific income rider, for example) gives advisors another option to offer clients to cover at least a portion of LTC risk.
“You pay extra for the rider, but if I have a client who needs long term care insurance and isn’t interested in buying [a stand-alone policy], here’s a way for me to get them some level of coverage.”
And because it comes with an annuity, that coverage typically involves no underwriting, he adds.
3. Annuity with life insurance. The annuity-life insurance cross-sale often centers around issues of wealth transfer and tax liability. Generally, says Donohoe, annuities “aren’t the best wealth transfer vehicle” because any death benefit above cost basis is typically taxable on a non-qualified contract. So it may be wise to use life insurance to infuse a client’s estate with a measure of tax diversity. “People who have an annuity need to be thinking about moving some money into a [whole or universal] life insurance policy where accumulation is tax-free and so is the death benefit,” asserts Sheridan.
This maneuver not only can lighten the tax burden on heirs, it’s a leverage play to increase the size of, or equalize, an estate. What’s more, payments from a single-premium immediate annuity can be used to cover life insurance premiums, notes Kauffman.
The emergence of hybrid life insurance-LTC products (similar to the hybrid annuity-LTC products mentioned earlier) provides advisors with an opening to add a wealth-protection wrinkle to the discussion. “When you have someone who just doesn’t want to buy a [stand-alone LTCI policy], you can take some annuity money and put it in something like a universal life insurance policy that offers some level of long term care coverage, where you can get up to five times the face value for long term care.”
4. Exchanging one annuity for another. Because this maneuver involves a 1035 exchange of one annuity for another, it’s more a cross-over than a cross-sale, says Donohoe. If a client wants to maximize the death benefit from an older, nonqualified variable annuity contract that’s now outside its surrender period, he explains, it’s worth considering a 1035 exchange that gives the client a new, zero-surrender-period variable contract that comes with a higher guaranteed death benefit amount. “There may be an additional expense to this, but when the client has plenty of other money to live on and wants to maximize the death benefit, this is one way to do it. You’re locking in the extra death benefit amount, plus you get full liquidity and the return-of-premium feature.”
For example, a client purchased a variable annuity in 2000 for $100,000. The cash value today is $150,000. This contract may have a return of premium death benefit of $100,000. If the client passes away today, the heirs would get the higher cash value. If the cash value were to fall to $90,000 and then the client passes away, heirs would receive the return of premium death benefit of $100,000. If the client instead transferred to a new VA today, they might lock in a new return of premium death benefit of $150,000. If the cash value were to fall to $90,000 and the client passed away, the heirs would receive the $150,000 return of premium death benefit. This assumes zero withdrawals from the contract. In this instance, the client may protect imbedded gains via a new return of premium death benefit. Understanding the client’s liquidity needs is key to making this transaction work. This option may also be worthwhile for clients who have health issues that preclude the use of life insurance.
That’s how good chess players and boxers think.