Page 21 - Investment Advisor July/August 2022

lose account value due to poor invest- Traditional Fixed Annuity: This to the consumer, but some, including
ment market returns. The holder can product provides an interest rate that California and Florida, charge a tax
then earn additional interest, based is guaranteed one year at a time, as well on annuities.
on the performance of one or more as an ongoing guaranteed rate. It allows Spousal coverage: Often called a
investment indexes, such as the S&P the purchaser to not only guarantee a joint and survivor annuity, this allows a
500. State insurance regulators classify rate yearly but to lock in upswings in client to buy a product that will pay for
these contracts as non-variable, or fixed, interest rates. them or their spouse for the lifetime of
because of the guaranteed minimum whoever lives longer.
rate of return. AVAILABLE FEATURES
Registered Index Linked Annuity Free-look period: Many U.S. states FINE PRINT
(RILA): These have grown popular in require insurance companies to include Buyers and their advisors should under-
recent years. A RILA limits stand these issues:
exposure to downside risk “Keep in mind: There are always 1. Liquidity: Clients who
and provides the opportu- put cash in an annuity typi-
nity for growth. It offers new wrinkles to think about. If cally face a surrender period
more growth potential of two to 10 years. They will
than a fixed indexed annu- you are new to annuities, and pay a surrender charge if
ity but less potential return, you want to explain them to they remove the money or
and less risk, than a vari- cancel the contract before
able annuity. Typically these clients, start by talking to your then. Some other types of
products offer a variety of annuities, such as immediate
term lengths. compliance people to see what annuities, may not have sur-
Qualified Longevity render charges but may not
Annuity Contract (QLAC): kinds of training and advisory allow the client to withdraw
This is an annuity that is support you need.” lump sums.
purchased with retirement 2. Cost: Fees on these
account funds and held products vary. Insurance-
within a traditional retirement plan — a “free-look” period that allows a buyer based annuities can charge fees for add-
whether it’s a 401(k), 403(b) or tra- to cancel the contract without incurring on benefits, and variable annuities can
ditional IRA. Annuity payments are a surrender charge. charge both benefit and annual main-
deferred until the client reaches old age Riders: These are addendums to the tenance. Variable annuity issuers may
to provide retirement income security contract that allows for customization. charge many different amounts, such
late in life (generally no later than age For example, there are inflation riders, as general fees or administrative fees,
85). This also is a way to hedge against or more well utilized are death-benefit mortality and expense risk expenses,
or reduce required minimum distri- riders that ensure a beneficiary receives investment fund expenses and distribu-
bution as it drawn down a retirement a portion of the contract value after the tion charges.
portfolio. Many 401(k)s may not allow client dies. Riders typically incur an 3. Complexity: A common complaint
QLACs to be purchased within the plan extra fee. is that annuities can be complicated.
but the clients are able to roll distribu- Tax deferral: Annuities allow cli- Remember that these products typically
tions over to IRAs. ents to reduce their taxable income are designed based on the assumption
Single-Premium Immediate when buying an annuity with pretax that a licensed agent or advisor will help
Annuity (SPIA): This contract will pay funds, and clients won’t be taxed until the client understand the nuances, not
out immediately or within a year after a they withdraw the amount. If an annu- for clients who will shop on their own.
single, lump-sum purchase. SPIAs can ity is purchased with after-tax money, 4. Stability: Advisors working in this
be paid out on a monthly, quarterly or only the earnings will be taxed when area need to know how insurer ratings
yearly basis. Interest rate returns on the money is withdrawn. Most states work and have some ability to form their
these products often are higher than charge insurance companies a pre- own independent views of insurance
certificates of deposit. mium tax, which typically is passed on company strength.

JULY/AUGUST 2022 INVESTMENT ADVISOR 19