Annuities have come a long way from their inception, and today there are numerous riders and benefits to consider when you assess the product’s suitability for your client. To give your client the optimum return on their investment, you must become knowledgeable about which benefits are available.
If your client has an older annuity policy, they might consider switching to a newer contract with better benefits. During this transition, it is critical to know which living and death benefits your client has in place. To demonstrate the difference, imagine your client has a $1 million policy with a value currently at $500,000, and he would like to move from his original policy to a newer contract.
When considering death benefit options, your client should be encouraged to choose dollar-for-dollar on their contract, rather than selecting pro rata. Assume the client has made a $1 million contribution to his annuity. Further assume that the account hit a market high of $1.5 million. Now the value has fallen to $1 million from the $1.5 million. Now the client withdraws $900,000 from the contract. This will leave a $600,000 death benefit with only a $100,000 policy value. The $900,000 can be rolled over to a new variable annuity (assuming this makes sense) with no loss of death benefit. You must pay attention to any remaining surrender charges as well.
With a pro rata death benefit, if your client leaves a small sum of money in the original contract, the company will likely only pay out the difference. For instance, if the client keeps $1,500 in the old policy, the company may say, “You’ve stripped 98 percent of the benefit; therefore, we will pay 2 percent of the original $1 million investment.” Your client stands to lose a substantial amount of money in the transition.