Your professional knowledge of annuities can open the doors to selling other like-minded products, including life insurance and long-term care insurance, but you need to know how to spot the opportunity and service the need. Here are some hints.
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.
There are plenty of scenarios where annuities can open doors to other products, such as life insurance, long-term care insurance (both stand-alone policies and add-ons to annuity contracts) and more. The challenge lies in uncovering those opportunities.
For advisors, the process usually starts with asking clients the right questions, according to Bryan C. Bradford, vice president at the Brighton, Mich., office of HBW Insurance & Financial Services, Inc. “Be an investigative reporter,” Bradford says. “When you’re talking about cross-selling, you have to learn what’s important to them.”
“First, you 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, an independent marketing organization 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.”
Asking the right questions allows the advisor to “get a foot in the door with clients,” adds Peter Donohoe, CFP, CRPS, CDFA, an advisor at PRW Associates in Quincy, Mass. “Then, as you learn more about clients and their assets that’s when opportunities for cross-selling become obvious,” he says.
Typically, Bradford says, those opportunities come in the form of a problem in need of a solution, such as finding the right instrument to pass assets to heirs tax-efficiently. “Cross-selling is always about solving the client’s problem. It’s never about selling a product,” he says.
Executed properly, the question-and-answer and fact-finding processes should yield cues or red flags that signal a cross-selling opportunity, he explains. The presence of a low-interest-rate account with contents that 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.
The one-two: Annuity with long-term care insurance
As a wealth-accumulation tool, annuities often need a complement–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. “It’s a matter of asking the client, ‘Whose money do you want to use to lose [to cover the cost of LTC], yours or the insurance company’s?’”
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 standalone LTCI policy. The one-two: Annuity with an LTC feature/rider. Certain clients might be open to investing in an LTC rider or add-on to an annuity contract as an alternative to standalone LTCI. By definition, this isn’t a pure two-product cross-sale, Donohoe notes.
But the emergence of a new breed of hybrid annuity contract 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 standalone policy], here’s a way for me to get them some level of coverage,” Donohoe says. And because it comes with an annuity, the coverage typically involves no underwriting, he adds.
The one-two: Annuity with life insurance
The annuity-life insurance cross-sale often centers on issues of wealth transfer and tax liability. Generally speaking, Donohoe says, annuities “aren’t the best wealth transfer vehicle” because any death benefit above cost basis is typically taxable on a non-qualified contract. Thus, 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,” Sheridan asserts.
Such a 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, Kauffman notes.
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 [standalone 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.”
The one-two: 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, Donohoe says. 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 has grown to $150,000. This contract may have a return-of-premium death benefit of $100,000. If the client passed 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 embedded 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.