Soft economic forecasts are definitely not required for an annuity to be a prudent financial instrument for your clients. But annuities sometimes intimidate consumers because a number of them involve complex withdrawal provisions or “roll-ups,” riders, investment features and surrender penalties.

Yet the astute financial professional engaged in writing annuities has to consider situational suitability in addition to working out the mathematics, such as in when to put a fixed annuity to work.

Working backward

Working backward is what retirement market specialist and certified financial planner Ann Hauser Laufman, CFP©, LUTCF, CFS, CFBS, refers to often when asked about her methodology.

“It is definitely smart to focus first on the main problem the potential client is interested in an answer to,” says Laufman, a 20-year-industry veteran and top producer at Boston-based Massachusetts Mutual’s Houston office. “Today, it is more living expenses than exclusively wealth management.”

In that regard, a fixed annuity transfers the risk from the investor to an A-rated insurance organization regulated by state insurance departments, notes Laufman.

Here are two case studies from Laufman in which an annuity proved to be the answer:

Case Study I

In the case of a 71-year-old male with $2 million in assets and concerned with bridging Social Security income with cost-of-living expenses, a SPIA (single premium immediate annuity) turned out to be a good option for two reasons:

  • Longevity genes run in the family (and a healthy annuitant).
  • A SPIA provides adequate discretionary funds for a cash flow-conscious client.

Case Study II

Most consumers and portfolio managers think retirement income when they think annuity. Yet, in this instance, capitalizing upon the tax-deferred, compounding-interest nature of the fixed deferred annuity in the form of a VEBA (voluntary executive bonus annuity) is a good choice.

The subject? A 43-year-old business owner making $5 million per year has no appetite for equity market risk exposure. Why? Simple. He is wealthy already and does not need to play the markets.

So what other financial instruments would this individual consider before opting for the annuity as a long-term growth supplement? To gauge this, one would have to consider the obvious alternatives. Here are some:

  • Treasury notes
  • Money markets
  • CDs
  • High-grade corporate bonds

Sometimes, longevity and not losing money trump maximum market returns, says Doug Price, senior vice president of sales and marketing at Zenith Marketing in Charlotte, N.C., who weighed in on the case of the 43-year-old. In this instance, annuitization was not the key; rather, protection of principal and steady ratcheted gains were.

Ask a straightforward question

Want to know what a client wants? Just ask a specific, straightforward question, and then listen, recommends Price. Such as, “Would you like a portfolio structured around corporate bonds and U.S. Treasuries featuring a defined maturity date?”

Even index funds may pose more risk than a client may be willing to take, Price says. But even more advantageous, an annuity portfolio grows tax-deferred. Each time an annuity matures, continues Price, a client can exchange it for another one while maintaining the tax-deferred status the same way bond laddering works.

The result is an income stream at a pre-determined time horizon without any withdrawal or surrender penalties if done right. Thus, it yields a better rate of return than what local banks or government agency bonds offer, Price says.

Other annuity considerations

  • Multi-year guarantees.
  • Liquidity/full accumulation value at death.
  • When interest rates are low, think short-term annuity.
  • When high, lock in longer ones.

Price adds a final thought: A financial planner who takes risk off the table usually wins over one who wants to garner assets under management. Reduce the client’s risk and the other assets will come.

The Life Insurance Marketing Association, an industry research authority, estimates American households consume $200 billion of annuities each year.

Taking advantage of the fixed annuity in the retirement market as well as business continuity and non-qualified supplementary savings mechanisms are prudent considerations. Not just in the insurance planning world, but also as part of a thorough, sustainable financial strategy.

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