An Index Annuity ‘Alternative’ (with Double-Digit Cap Rates)

Build a better mouse trap and the world will beat a path to your door.

-Ralph Waldo Emerson

Not only do seniors want the protection and guarantees of an annuity but baby boomers, too, are seeking out the benefits of tax deferral and historically higher potential crediting rates associated with index annuities compared to fixed annuities. But for the first time in modern history, the yield on 10-year Treasuries fell below 2 percent, a level no one thought could ever be pierced. Thus, annual cap rates on effectively all index-based crediting strategies are pathetically low.

Think outside the box

Here’s your chance to think outside the box and create viable opportunities for your clients. Instead of pitching the same old index annuity, consider putting that lump sum purchase into an Index Universal Life (IUL) policy. Why? Because putting $100,000 into an IUL will immediately have a tax-free death benefit of five to six times more. But that’s not the only reason to buy. The index crediting options available in the contract have cap rates that are 13 percent to 17 percent. So even after factoring in the price of insurance that may cost as much as 2 percent to 4 percent, the net index credit amounts are still double digits.

Sure, you will create the once avoided Modified Endowment Contract (MEC), but now you have provided a virtual unlimited IRA alternative. Studies show that the benefit of the tax-deferral break-even versus non-tax deferred is about three-and-a-half years. And if you use the new no-lapse guaranteed contracts along with the enhanced liquidity features, your client will have no downside risk to their principal and no surrender penalties. Any withdrawals would be taxable but 100 percent of the growth would be fully tax deferred.