Last time, we talked about common questions that advisors and clients ask that have their basis in misleading claims about fixed annuities.
This time we’ll take a look at what questions you should be asking instead — the ones that get to the heart of what an annuity can do for your client.
1. How does my free withdrawal provision work?
The most common objection to a deferred annuity contract is “losing control” or “locking up” a client’s money. What clients don’t know is that virtually every deferred annuity includes some annual access to the account value. Most often, this amount is either 10% of the accumulation value or the current year’s interest earned.
Not all free withdrawals are created equal, though. Some let the client withdraw 10%, but only on the original premium, which makes a big difference if the client needs to make a withdrawal five years down the road.
On the flip side, some withdrawal provisions are cumulative, which means that withdrawals that are unused are “stacked” up to a certain amount. For example, if the withdrawal is 10% and the client makes no withdrawal in the first year, in the second year the client could withdraw up to 20%. These generally reset to zero once a withdrawal is made, but the added access can be a huge boon in case of unforeseen events.
The nuances of the withdrawal provision could make or break a product for your client’s needs, so it’s a good idea to take a closer look at it.
2. What am I giving up for this bonus?
Premium bonuses are a fact of life in the indexed annuity world. While not all indexed products have a premium bonus, they are common enough that most advisors know what they are: an extra percentage to the initial premium on the contract, credited immediately.
Many fail to take into account that when an insurance carrier designs a product, it can’t add whatever features it wants. There are only so many pennies in each dollar and once a baseline contract is drawn up, there is a limited amount of frill that can be added to it.
To get an idea of how this works, look at two similar indexed annuities from the same carrier, one without a bonus and one with a bonus. The former will have a better annual cap. The carrier doesn’t need to guarantee the bonus up front, so it can give you more upside per year. Another common example is the aforementioned 10% free withdrawal feature available on most contracts. If a carrier is attempting to make a product more attractive for growth, it may trim it down to 5% per year or eliminate free withdrawals entirely. No need to guarantee that liquidity means more upside can be given to the client.
Because of this, designing a product isn’t choosing the best features available but allocating the amount of “value” available in the most beneficial way. Bonuses are a great value to some clients, particularly when combined with an income rider activated in the short term. Just be mindful that another number must come down to make that bonus happen.
3. What’s my withdrawal percentage?
Quick, you have the option to retire with an annuity that has an income rider value of $150,000 or $200,000. Which one would you choose?
Obviously, you choose $200,000. However, now you find out that your withdrawal rate at your current age is 5% on the contract you took and 8% on the one you left on the table. Even though your contract has a big, attractive number on it, your annual annuity income would have been 20% higher — $12k per year versus your $10k — on the “smaller” contract.