Many financial advisors and insurance professionals encounter situations where potential new clients reach out for information.
A common question that arises involves what to do when employees are given a choice between a lump sum of money or a lifetime income option when separating from an employer. It can be difficult for them to quantify if it is a good deal or not, so they seek out the advice of a financial advisor.
A Typical Story
Consider this scenario: a group of 55 to 70-year-old professionals have been informed that their employment will be terminated in 60 days. Their company elects to give each employee an individual severance package. Employees then receive a letter in the mail outlining the choices they have for their personal severance. Often times the offer includes an income payment for a period of time. The second option would be a lump sum of a larger amount. At this point the employee begins to look at the options, and needs guidance from a financial professional. Many times, clients are uncertain which option is right for them. This becomes an important conversation.
In some instances, employees are not working with a financial professional yet. Naturally they book a “get acquainted” visit with a local financial advisor based on a recommendation from a friend or colleague. In the meeting, employees convey that they were given a severance agreement, but they don’t necessarily know if it’s a good one or not.
The offer states that they can receive an income stream of $31,000 a year for a lifetime. Or they can elect to take a lump sum of $480,000. At this point, employees or clients are simply looking to see if the advisor can beat the income offer.
Analyze Overall Needs
Time is every bit as valuable as the service provided by financial professionals. Don’t allow success obtaining these clients to be predicated on simply besting their income offer. The fact is, their income offer will most likely be higher than anything the open market can offer them. This is an opportunity to educate them on what the company is offering, while at the same time inquiring about the clients’ overall needs, or gaps in their plan.
Share with clients that when an employer offers such a structured payment to a departing employee, the income will be higher than what the current market can offer. The employer would much rather have 100 employees take a smaller income payment, than a lump sum of much more.
It is important to educate clients on the generosity of the income offer, but in fairness the clients must also consider what their income needs are. Perhaps the clients plan on working for five to 10 more years, and won’t need income until later. In addition, the higher income could move them into a higher tax bracket. The clients should also be educated on rate of return during that time. Many times, the potential clients may not even need the full $31,000. Make sure the clients know that they can also receive a substantial income by you, and maintain the full control of the lump sum asset that is being offered.
These future clients must be made aware of the freedoms of utilizing the lump sum with a guidance plan behind it versus the irrevocable decision of a pension offer. The pension may offer a higher income, but many times won’t allow for any death benefit to the estate, limited rate of return, or the ability to make changes.
If your clients take lump sums, the larger figure provides them with multiple options that you can discuss as you develop your unique strategy based on your clients’ goals.
Please remember: just because clients have a higher income number offered to them doesn’t necessarily mean it’s the better deal. Help them see the forest through the trees.
Rick Muzik is a wholesaler at the Crump Annuity Solution Center.