According to Jeffrey Singer, a National Annuity Wholesaler at First American Insurance Underwriters, Inc., advisors shouldn’t limit themselves when advising clients on annuity products. Singer sees the product, along with life insurance, as one of the most flexible products available for helping clients successfully meet their financial objectives. Flexibility is the key word here and with that in mind, Singer has provided five unique strategies for advising clients and prospects on annuity products.
1. Avoid the mutual fund tax trap.
According to Jeffrey Singer, don’t let taxes ruin investment plans. While taxes definitely cast a long shadow over nesteggs, they don’t have to blot them out altogether.
As Singer writes: It doesn’t have to. There’s no reason to pay taxes on money that a client doesn’t plan on spending. A majority of mutual funds turnover is 80%+ of the portfolio annually, therefore creating a lot of taxable short-term capital gains. Additionally, your client is responsible for the long-term capital gains, interest, and dividends regardless of performance. The mutual fund portfolio manager doesn’t care about your client’s tax bill. Annuity tax deferred growth will boost performance.
2. Receive a guaranteed lifetime income.
Guaranteed income is the buzz of the retirement industry these days and by listening to everyone from carriers to marketing organizations to advisors, guaranteed income is the present and the future. In other words, guaranteed income is here to stay.
According to Singer, if your client has a goal to purchase an income stream, then the industry provides choices. Shop for companies that offer riders to match when your client estimates they may need to trigger the income benefit. For example, one large insurance company offers a 10 percent rollup for a limited seven years while another company provides a 6 percent increase for a longer duration of ten to twenty years. Clients may pick a joint spousal income or single for a higher percentage. The income rider expense is near one percent per year.
3. Upfront bonus.
Bonus usually has a positive connotation, but don’t get lulled to sleep by the sound of the word. Bonus can have both a good and a bad tag associated with it.
As Singer says, numerous carriers create an incentive for the initial investment with the agreement to stay with the annuity for the stated duration. Therefore, be aware of potential recapture, surrender schedules, or market value adjustment.
Try not to use the bonus to reimburse any surrender charges on the existing annuity. A better plan is to wait out the remaining surrender to secure the entire bonus for your client later.
4. SPIA bridge Idea.
Suppose a client under age 70 has a goal to leave a qualified plan alone until RMD time. The SPIA provides a known, guaranteed income stream and keeps the money in a tax efficient place.
For example, say a 63-year-old widow and teacher has a lump sum from a life settlement and selects a seven year SPIA to keep her 403b Plan preserved until age 70 ½. With this planning in place, she achieves seven more years of tax-deferred growth and a monthly income stream in the interim before tapping into her qualified funds.
5. SPIA as irrevocable.
The goal for many older age SPIA policy owners is to have an irrevocable, Medicaid friendly contract. For example, one insurance company allows the owner of a nonqualified contract to add a restricted endorsement rider at no additional expense, therefore binding the SPIA irrevocable, non assignable, and non transferrable.
This endorsement is used in certain financial planning situations where it is desirable to restrict the contract owner’s ability to make changes after issue and prohibits any access to funds by way of surrender, transfer, collateral assignment, or commuting the value of the contract. The internal rate of return is competitive with other carriers.