Close Close

Life Health > Life Insurance

The 1 percent advantage: How to win with holistic planning

Your article was successfully shared with the contacts you provided.

If you sell annuities, or sell against them, you’ve certainly encountered a sales pitch boasting a higher guaranteed withdrawal rate vs. a “safe” withdrawal rate from a stock/bond portfolio. Numerous studies confirm that a 4 percent withdrawal rate from a standard allocated portfolio will survive over the worst 30 year period in the equities markets. A current FIA with GMWB will pay a 66-year-old male a 5.32 percent guaranteed lifetime withdrawal. So, even my 3-year-old daughter can deduce that 5.32 percent is better than 4 percent. 

This exact tactic is used nationwide by annuity sales folks. What they don’t tell you is that, according to those same proven Monte Carlo simulations, illustrating a safe 4 percent withdrawal rate, more than 90 percent of those portfolios will have preserved all their initial principle. With this new information added to the equation, most people would decipher that equities (stocks/bonds) with a 4 percent withdrawal rate are the better choice for retirement

Now, it is important to explain that a large portion of my income is directly linked to annuity sales. It is a true passion and earnest pursuit of mine. 

So why am I exposing the flaws and ethical chinks in the armor for a common sales tactic of the product I love? 

Because I firmly believe there is a better way to pitch this, and furthermore, it allows us to be planners and not sales folk. I also believe that creating a justly beneficial plan for your client will stand up to others who are competing for those dollars and you will both feel better about the sale. I would even argue that you will feel more confident and more empowered to make more sales.


Annuities have a higher guaranteed payout over the 4 percent safe withdrawal rate? Yes, but assuming the high probability of the portfolio being preserved with equities what does your proposal really look like? What we need to do is craft a more holistic solution and acknowledge the high potential of portfolio preservation when it comes to the stocks and bonds approach, which is often the annuity sales person’s biggest competition. 

Use the extra 1 percent to your advantage. 

The concept is pretty simple. If a 66-year-old male client has $500,000 of retirement (ignoring taxes and inflation in this illustration), and they take 4 percent per year from a standard 60/40 allocation portfolio, they will pay themselves $20,000 a year and they will have a 90 percent chance of all $500,000 being there when they die in 30 years. A FIA with GMWB (I am using the TargetHorizon with TargetPay for this example) will pay the same 66 year old male $26,645 for the rest of his life. I took the $6,645 difference and placed it in a permanent insurance product. 

I ran a few illustrations on GUL/UL/IUL chassis, and I got death benefitsranging from $288,000 to $500,000+ based on the product. It’s important to note that it’s the concept here, not the exact dollars. If a client wants to match the exact amount of their portfolio it’s going to vary on their age, health and type of product they select. If we are considering an IUL or UL, performance will also be unknown. 

Let’s now look at the comparison. 

With the standard allocated stock/bond portfolio, the client can pay themselves $20,000 per year for 30 years safely, and they are probably going to have $500,000 to pass to their beneficiaries. In fact, there is a chance their money even grows past $500,000. If they take the $20,000 from the annuity, they now get income guaranteed for life, not just 30 years and not just based on probability but an actual contractual guarantee. They also have the extra $6,645 working for them. When you put the $6,645 into a permanent life insurance product, then the “annuity + life” portfolio just got a lot more attractive. 

Here are the main advantages to the new strategy:

1. Even though stocks get a favorable step up in basis upon death, that still doesn’t compare to tax free from a life insurance policy. When you calculate an assumed tax rate on money inherited or spent after inheritance you might even find your life insurance policy with a higher net return at death than the inherited stocks and bonds. (As a Certified Estate Planner, I understand that estate taxes and taxes applicable to inheritance vary by amount, state and what preparations the client has made. Please keep in mind this is a concept, but you can’t make many arguments that inheriting $X from sale of stocks or bonds is more favorable than inheriting funds from a life insurance policy.) 

2. You get the death benefit in addition to the annuity. This is where the FIA (especially the TargetHorizon) really shines. If the client were to die earlier than expected, let’s say 71, then the beneficiaries would receive the remaining principle plus the tax free death benefit from the life insurance policy. In the illustrations I ran, assuming a 3.52 percent non-guaranteed annual assumed interest rate (20 percent fixed, 40 percent 1 year SPX 5 RCTR, 40 percent 5 year SPX 10 RCTR), the client at age 71 would have a $478,946 death benefit in addition to the $300,000 +/- tax free life insurance policy. 


3. It is guaranteed, not a probability. If the client lives way too long, or if the market doesn’t cooperate, the annuity will still payout. Longevity risk is paramount with many clients.

So looking at the numbers again, you can see how competitive the new approach is. The “1 percent advantage” you create in the first part of retirement for the client can be a compelling benefit. For the illustration below I show a 66-year-old male, NS, Premier, Accordia LifetimeBuilder IUL (level) and calculated 5.20 percent assumed annual interest rate. If the indexing performed better, then that 1 percent advantage would stretch further into retirement and create an even higher DB (I know what you’re thinking, that if the indexing did well, that means the market did well and the portfolio would also go up. But that is not necessarily true. Indexing does great with volatility, where the market can be stasis as a result of up and down swings). 

Implementing this strategy may provide more sales, more education and better retirement income plans for your clients. You may also sleep better at night knowing you are selling a true plan not just a withdrawal number. 

SOME IMPORTANT NOTES: I firmly believe in equities for retirement. However, I tend to “root for the underdog” (annuities) because I also firmly believe that they are an important mix to a retirement plan. The public’s retirement is still dominated by the stock/bond mix and/or an inefficient & expensive variable annuity, which I believe needs to change. I also know that a SPIA would be an even smarter choice in the above hypothetical scenario because it has additional tax advantages on exclusion ratio and it will pay a higher guaranteed payout than a GMWB rider most of the time. I illustrate an FIA with GMWB because it is realistic. More FIAs are sold than SPIAs in the market (due, in part, to higher commissions and in part to the idea that clients want to preserve liquidity, just in case). Some FIAs I like have very high mortality crediting. They also don’t use “roll up rates,” which I detest. Smoke and mirrors is not the way to sell annuities. I also like that some of these FIAs, which are based on based on indexing credits, can also have some principle left over. Whereas, a SPIA would not have principle potential, only refund potential or term certain to protect against premature death.


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.