Over the past decade, living benefits have been the primary selling point for variable annuities. That’s what has driven most of the VA sales at Nationwide Financial.
We expect that will continue to be the case because living benefits can be a great tool to help clients address the income replacement challenge in retirement. However, advisors shouldn’t forget to help clients understand that a VA can bring other powerful benefits to a portfolio beyond living benefits.
With interest rates at historically low levels and market volatility an ongoing reality, clients are looking for investment solutions that can position them for market gains, while guarding against market down-turns. This growth is critical as clients plan for inflation, rising healthcare costs and potential tax increases. VAs may be able to help address these challenges, and not only because of the value a living benefit rider can provide.
When talking to clients about whether or not a VA is the right fit for their portfolio, an important part of the discussion should involve the added value of features like tax deferral, legacy planning and the option to create income through annuitization. After you help clients understand the value of the guaranteed income provided by a living benefit rider, here are some other important points to touch upon:
With the possibility of increased tax rates in the near future, the industry has an opportunity to highlight a benefit that addresses a need that is likely to become a growing focus for clients. When taxes were at near historic lows and higher living benefit rates were available, tax deferral may not have been top of mind for many buyers. Now you may find this to be a much stronger selling point.
First, make sure clients understand the potential changes that may affect the tax landscape in the near future:1
- Long-term capital gains rates are scheduled to rise to 20% from 15% for most taxpayers.
- Tax on dividend income may go from 15 percent to ordinary income rates, which could be as high as 39.6%.
- A 3.8% Medicare investment earnings surtax is likely to affect those with high incomes and investment earnings.
- Expiration of Bush-era tax cuts will impact the top four marginal brackets and eliminate the 10% bracket—meaning higher taxes for virtually everyone.
- The phase-out of itemized deductions for high income earners is set to return in 2013.
Next, help clients visualize how a VA may be able to enhance their portfolio’s tax position:
- VAs allow money to accumulate tax-deferred until withdrawals begin and may provide liquidity while the money is accumulating.
- Clients can convert funds or investments that are currently taxable like CDs, money market funds or mutual funds into a tax-deferred variable annuity. (Note: Fees may be incurred by transferring money to an annuity.)
- Owners of VAs can exchange underlying investment options from multiple fund families within subaccounts of an annuity and may not have a tax liability or transaction costs.
- There are currently no regulatory limits on contributions to variable annuities.
At a time when life expectancies are soaring, many clients are struggling to balance the need to plan for an unknown period of income with their hopes to pass an inheritance along to their family. Variable annuities can help clients meet both of these goals because money in the annuity can be tapped for income if needed or left to heirs with a VA’s death benefit feature.
Some VAs offer one-year, step-up death benefit protection, which allows owners to lock-in market gains when the market is up, preserving pay-out levels for beneficiaries during down markets. This lets clients grow money intended for heirs because the VA’s insurance protection may provide a backstop against short-term market dips.