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December 03, 2012 at 05:31 AM
What is your plan when the market goes down 35 percent or 40 percent? As advisors, we know how to answer this question, but do your clients? Most can’t; and this is not a question of “if;” it’s a question of “when.” It is our due diligence and duty to provide clients with the financial support to build a portfolio that can sustain an economic downturn. An annuity is one way to hedge against an uncontrollable financial crisis.
Yet with annuities comes skepticism, and one of the biggest sources of hesitancy stems from the fee structure.
An effective analogy to use when discussing the protection an annuity provides versus the cost is to have clients think of the guarantee and extra expenses as the “air bag” of their financial plan. Remind clients when they are in their car they’re going to put a seat belt on when they drive. Today, all cars have seat belts and almost all of them have air bags. However, years ago that wasn’t the case; you had to pay extra if you wanted to get an air bag. Most people prefer to pay a little bit of extra money to have that level of protection in case they got into an accident. Similarly, the price for effective annuity products are worth the risk mitigation they provide.
Benefits decrease, but still beneficial
Today, there have been changes in the annuity industry where a significant number of insurance carriers are decreasing the benefit being provided for the consumer. They’re decreasing the benefit because the cost to have it is just too expensive. This is due to interest rates being as low as they are at this time, and the cost to hedge that benefit is more expensive than it was before. Therefore, the guarantees the companies are making are less or fewer than they previously were. For example, one company’s lifetime income was 5 percent, which started at age 59-and-a-half, now it is starting at the age of 65. Companies have reduced and/or increased the cost of benefits because they can’t afford to provide it with the volatility in the marketplace.
