Today many advisors are concerned about locking their clients into an interest rate that is perceived to be the lowest in recent memory. Plus, many clients may be aware how this low interest rate environment could affect their retirement’s overall accumulation. This interest rate scenario may be good for home buyers, but for those who depend on a good interest rate for accumulation and distribution of their retirement assets, not so much. So there may not be a better time to learn about and present the equity indexed annuity (EIA) to all your appropriate clients as an alternative.
Why an EIA?
So why would an equity indexed annuity be appropriate for some of your clients?
- Safety–An EIA could be one of the safest places for their retirement dollar
- Liquidity–Penalty-free access to a portion of their investment
- Tax deferral–Your client can pay taxes when they are ready
- Probate avoidance–Structured properly they pass probate free
- Yield–A higher return than many alternative fixed-rate investments
The only thing different about EIAs are that the returns are linked to an index as opposed to an interest rate, which means potential for greater accumulation. The principal is guaranteed. These are the benefits you could be providing to your clients.
EIAs are not designed to compete with other guaranteed-rate annuities, variable annuities or mutual funds. They are designed to fall in between those and still provide a hedge against the necessary inflation factor in retirement planning.
A common crediting method is the annual reset. When the market moves forward, your client’s retirement plan moves forward. When the market moves backward (I always assume there will be a period of time when the market moves backward), their retirement plan can stop at their last gain; in other words, they don’t lose ground. Once a return has been credited to the policy (depending on the policy provisions, the crediting method and participation chosen), it cannot be taken away. There isn’t any such thing as a loss associated with this crediting strategy.
Two versions of annual reset design
- The point to point with annual reset crediting method. Point to point means there is a starting point and an ending point (the contract anniversary) from which the gains are calculated. For example, if a policy were issued on January 1 this would be the beginning point. The ending point would be December 31, 365 days later. From those two points the gain is calculated and credited to the policy. This strategy performs well in an upward market.
- Monthly average version of the annual reset design. A monthly average uses the close of the given index on each monthly anniversary; all anniversaries are added together and divided by 12 to calculate the index gain at the end of the year. A policy issued January 1 would have monthly anniversaries of February 1, March 1, April 1, and so on. The close of each monthly anniversary is added together and divided by 12. This strategy performs exceedingly well in a volatile market with many ups and downs.