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It’s no secret the investment environment is murky. There are a lot of options for your clients, but with the economy’s uncertainty, building a portfolio can be challenging. Personally, I’ve found success by using annuities both as alternative investments and legacy-builders. Not only do my clients see the results they are looking for, but my business has seen a great increase in productivity due to the popularity of these products.

Not every financial planner has a wealth of knowledge about using annuities in these capacities, but based on my experience, it’s crucial to growing your business. As a longtime member of the Million Dollar Round Table (MDRT), I believe strongly in sharing ideas and solutions with my fellow advisors. To foster the spirit of MDRT, I’ll explain a couple hypothetical situations to give advisors a better idea of which clients are suited for variable annuities* and how they can benefit clients.

The Portfolio-Building Annuity

Let’s say a married couple, age 55, comes to your office with $500,000 to invest and they don’t really need the money for a number of years. They would like to have guaranteed growth on their money without paying taxes, guaranteed income for the rest of their lives and a guaranteed death benefit.

Additionally, they are very afraid of the market, given today’s worldwide volatility. They know by putting money in their bank account, they will earn a very low interest rate. They feel gold is at an all-time high and real estate will take years to recover. Knowing this information, you can begin to consider alternative investments to include in a portfolio.

Investments in gold today are risky at best. Your clients perceive gold as being at its peak and see no benefit to spending money on an investment they know will decrease in value, so contemplating this approach makes little sense. Additionally, having your clients take their money and put it into everyday mutual funds or stocks poses risks because there are no guarantees in the market.

It is likely your clients will want to leave their money where it’s safe, in the bank, rather than let the funds be subjected to fluctuations in the market. Unfortunately, leaving money in a bank will only allow you to go broke safely. We will more than likely encounter enormous inflation going forward because of all the money the U.S. government has printed. If that is indeed the case, people will need to take more money out of their savings accounts in order to keep up with inflation. The rate at which they will need to withdraw money will vastly surpass the rate at which their account will accrue interest.

With all these options being less than ideal, what else may be a potential alternative investment for these clients?

Enter the new variable annuity. The new variable annuity has essentially three guarantees. It has a guaranteed death benefit, a guaranteed growth rate and a guaranteed income, for the most part, for the rest of one’s life. The negative to the variable annuity, as has been indicated by most critics, is it does cost more than not having an annuity. The real question is: what is the cost for the guarantees? As a reminder, in addition to the normal expenses and charges associated with a variable annuity, there will be specific fees and expenses associated with the guarantees, death benefits and riders. It is very important to make sure the client understands the costs for these benefits and any guarantees are based on the financial strength and claims-paying ability of the underlying insurance company.

While it may be true variable annuities cost more than investing elsewhere, they provide a level of protection clients are usually unable to get with other vehicles. As with all products, client suitability assessments are essential. For people who do not have a lot money to invest and would prefer guarantees, they might want to consider the living advantages of the newer variable annuities. In addition, we would want to make sure a client has enough liquidity to meet all of their needs because variable annuities are long-term investments subject to market risk. Though annuities aren’t suitable for all clients, they can fit a wide array of needs.

The Legacy-Creating Annuity

We’ve been working with another idea that might be beneficial to your clients if the first scenario doesn’t quite address their goals. Skilled advisors can help their clients leverage the dollars from a guaranteed payment, which is our annuity, to create a tax-free income stream to a beneficiary. This creative use of annuities provides another level of protection that transcends your client’s lifetime and creates a financial legacy.

Here’s how it works: a single male walks into your office. He is 70.5 years old and has his IRA in an annuity, but not for the income tax advantages — he wants the living advantages associated with the new annuity. As your meeting unfolds, you learn his $1 million investment in the IRA annuity has fallen to $800,000 in value due to recent market downturns. In addition to this loss in assets, he is being forced to take required minimum distributions because of his age.

If you advise him to use a withdrawal benefit, this annuity will provide a guaranteed payout to the tune of $50,000 per year, based on the initial $1 million investment. Due to taxes, the original $50,000 will eventually be whittled down to $35,000 per year. But by using this distribution wisely, he can build a financial legacy for his son. (This scenario assumes a 5% withdrawal rate and 30% tax rate.)

For instance, the client can use the $35,000 to purchase tax-free life insurance. In this specific situation, his son is the beneficiary of the IRA, so the life insurance would be used for his benefit. When the client passes away, his son will inherit the proceeds of the life insurance, which can then be used to convert the normal IRA to a Roth IRA.

The Roth IRA will then pay tax-free distributions to the son based on his life expectancy. Regardless of his current age, this will result in a sizeable amount of money to be paid to him over his lifetime. Using this method creates the largest amount of money a person can leave to a beneficiary in a tax-free manner.

This is a wonderful way to leverage the dollars from a guaranteed payment, which is the annuity, in order to satisfy the required minimum distribution and ultimately leave a tax-free income stream to the beneficiary for the rest of his or her life. The client has effectively and efficiently created a legacy of wealth to share after passing, which is the goal of many clients during financial planning.

Using annuities creatively can be one of the most satisfying ways to not only prepare a client financially, but to give a client the serenity associated with knowing family members and beneficiaries will be sufficiently provided for after his or her death. This is one of the greatest gifts advisors can give to their clients and in turn, will help grow your own business through referrals based on your practice’s stellar reputation for client service.

 

*Selling VAs requires the advisor to be registered with a broker/dealer and hold a Series 6 or 7 securities license.

This article is for advisor use only. It is not intended for use with clients or the public.


Marc A. Silverman, M.B.A., CLU, ChFC, began his financial planning career in 1983 and formed Silverman Financial in 1989. Marc is a 27-year MDRT member with 16 Top of the Table and five Court of the Table qualifications. He is a past chair of the Top of the Table and an Excalibur Knight of the MDRT Foundation. Marc earned his master’s degree in business administration from the University of Miami and was the past president of the University of Miami Alumni Board, School of Business. He is a past president and board member of the Miami Chapter of the Society of Financial Service Professionals.