Let’s say tomorrow is payday. Your boss hands you your paycheck and tells you that paycheck amount will stay the same throughout the duration of your career.
“You probably wouldn’t say OK to that,” said Michael Kazanjian during a recent phone interview with ThinkAdvisor. “If you wouldn’t accept that during your career, why would you accept that during your retirement?”
Kazanjian, head of product marketing for Lincoln Financial’s annuities business, believes there’s an opportunity to maximize a client’s retirement income.
After all, it’s no secret that the top fear among retirees and soon-to-be retirees is outliving their income.
“Guaranteed lifetime income is important,” Kazanjian said, adding, “Guaranteed income is a good thing but we really think your income should have potential to rise.”
He offered up one solution: Lincoln Financial’s patented income distribution method i4LIFE Advantage Guaranteed Income Benefit.
A Lincoln variable annuity with i4LIFE Advantage, an optional annuity rider feature available for an additional cost, provides lifetime income and the potential for increasing payments during retirement, Kazanjian says.
The rider combines traditional guaranteed minimum withdrawal benefits with the tax-efficient income provided through annuitization into one income distribution strategy.
The guaranteed income benefit portion of the i4LIFE strategy guarantees the client a minimum payment, and future i4LIFE Advantage payments will never be less than the first protected payment — as long as the client does not take additional withdrawals.
The potential for increasing income payments is based on the performance of the underlying investment accounts. Each i4LIFE payment returns a portion of the client’s original investment together with a portion of its gains. For example, a client’s i4LIFE Advantage payments will increase if the return exceeds 4% net of the annuity fees and expenses, the “assumed investment return.”
For the past 30 years, distributions from typical variable annuities have been taxed last-in, first-out, which Lincoln Financial says puts an up-front tax burden on a client’s income.
With a typical variable annuity, if there are gains in the contract, systematic withdrawals start with a client’s fully taxable gains being paid out first, resulting in less current income. Meanwhile, with i4LIFE payments, if there are gains in the contract, i4LIFE includes a portion of a client’s nontaxable principal along with the gains in each payment, saving the client money in taxes. If there are no gains — for systematic withdrawals — all withdrawals are considered principal and are not taxed. For i4LIFE, if the contract experiences no gains or is down, a portion of the payment is treated as a taxable gain and a portion is treated as principal. Once the principal has been paid out, each payment is fully taxable.
Kazanjian also stressed the legacy planning strategies that are available with i4LIFE — which in addition creates a benefit for the advisor.
“If use a product like i4life – which can be passed on to generations – it creates a better business model [for the advisor] to keep assets going,” Kazanjian said.
With the typical variable annuity, beneficiaries are on the hook for all the taxes on the growth, according to the firm.
With i4LIFE, the client’s beneficiary can take the remaining principal out as a tax-free lump sum and stretch the payment of their gains to spread out the tax burden. The advisor then has the opportunity to continue to steward the assets, according to Lincoln.
While i4LIFE has been around for nearly 21 years, Kazanjian said it’s only been the last couple years, as more and more boomers enter retirement, that the strategy has really taken hold.
Lincoln right now is the only carrier that offers i4life – so “it’s not as commoditized as some [guaranteed minimum withdrawal benefits],” Kazanjian said.
i4LIFE Advantage with the Guaranteed Income Benefit Protected Funds is available with Lincoln variable annuities for an additional annual charge of 1.05% for single life, or 1.25% for joint life.