Annuities: Real stability in a shaky financial world, part 1

Getting started in annuity sales

Charles K. Hirsch, CLU: Can you talk a little bit about how annuities became such an important part of your sales portfolio? Was this a specific strategic approach you and your firm developed, or was it more of a situation where your prospects were asking about them?

Gregory B. Gagne, ChFC: For my firm, it was a strategic approach. Annuity accounts have been a part of many client portfolios for a long time. They seem to be enjoying more favorable media attention these days since the crash in 2008, but they have always been and will probably be a very important cornerstone in a retirement plan.

The reason they have become so important is due to the demise of the defined benefit pension plan. Now people must rely on their ability to invest and obtain favorable investment results in an effort to generate income during retirement. The process of doing this comes with risk, of course—sequence of returns being one of the largest risks a retiree will face, particularly in their beginning years of retirement. A bad year in the market, coupled with distributions, could damage and jeopardize the longevity of a person’s portfolio. This is where an annuity can add significant value—a steady stream of predictable income based on the life of the person without risk to market performance.

In our plans for clients, we build the plan based on how much cash flow the client will need each month to cover basic expenses of life. For many, this is accomplished through Social Security, and some folks also have a defined benefit plan. But most do not have a defined benefit plan, and the Social Security alone does not create enough cash flow to meet the expenses. Adding the annuity will provide the additional cash flow, and as I tell my clients, “All you need to do is wake up and then money will arrive in your mailbox!” This is comforting for most.

John W. Homer, CLU: There are a particular set of strategies we developed that utilize immediate annuities, which only fit in certain specific situations. When the situation is right, it is like putting on Cinderella’s slipper—everything changes.

We use annuities in tandem with life policies to accomplish one or more of the following:

• Create a guaranteed cash flow that might not otherwise be available to our clients through traditional income instruments, while guaranteeing complete return of principal at maturity.
• Remove assets from a taxable estate, thus reducing or eliminating estate taxes, without taking away the cash flow from those assets we remove from the estate.
• Bail out the accumulated income tax within older deferred annuities so heirs don’t inherit a huge tax problem.
• Create an economic income engine for charitable trusts.

Prior to developing the strategies we use, I was neither recommending nor selling any single paying premium annuity (SPIAs). They were not a part of any strategy we discussed with my clients. The problem with a life-only payout was the risk of dying before recovering the investment in the annuity.

I knew there was a place for SPIAs in our practice when I discovered in the target age group of 70 to 90 years old that an annuity could not only pay out enough to fund a life insurance policy—large enough to replace the entire annuity premium upon death—but it’d have extra cash flow left over that was greater than they could receive from traditional interest-bearing accounts.

Bobb A. Meckenstock, CLU, M.B.A.: After working for two-and-a-half years with a major life insurance company, I joined my father’s agency in June of 1980. Since the late 1960s, my father had pioneered the savings concept of “flexible premium deferred annuities” in the 403(b) marketplace with 501(c)3 organizations—nonprofits—in Kansas. Personally, it was just being able to follow in my father’s legacy and learning as much as I could from a master salesman about the benefits of tax-deferred products in a taxable investment world.

Timing is always critical in these situations. During the early 1980s, there were periods of high inflation and high interest rates created by the Carter administration. Taxable certificates of deposits were yielding around 16 percent to 18 percent. We had the same rates but with tax deferral. We could also “lock in” our yields for up to five years and reposition the funds with no penalties. Needless to say, it was a different world back then, but a world that helped me sharpen my skills in money management for my clients.

Part 2: Which annuities are best?

See also:

• Safety-first mentality leads seniors, boomers to annuities
• 3 tips to sell annuities in an uncertain time
• Industry girds for next tax battle