Offer guarantees with annuitiesArticle added by David Goodrich on December 1, 2011
Ranked: #1476 (103 pts)
Once your clients are aware of annuity options and costs, focus on the guarantees. As an advisor it’s a great discussion to initiate at a time when nothing else is guaranteed.
In today’s market is it vital we, as trusted advisors, get to know our clients and their feelings on the state of the economy if we are to experience business success. Equally important, we must be as educated as possible when it comes to all aspects of the products we are recommending to our clients.
Consumers are more skeptical and are asking more questions than ever before. We must have the answers and handle their needs with care.
If a particular product seems complex to you, imagine how much more complex it will seem to your client. When I first started out in the business, that product for me was annuities. However, once I understood the riders and death benefits of this valuable product, I became skilled at explaining it to my clients and closing the annuity sale.
How could I possibly suggest an annuity to a client without understanding how it would benefit them? In this business, your reputation really relies on your know-how.
The longer I’ve been in the business, the more I’ve seen annuities take center stage, particularly with the older generation. I make a point to present the product to this group and examine why they should consider an annuity in the first place. The “old hat” used to be that a client would get an annuity if they were approaching retirement and knew they’d need a specific amount of money. The annuity would be purchased and then annuitized, which would pay them a set amount of money for as long as they live.
Today, however, annuities have evolved with the addition of living death benefit riders available at an additional cost. In a nutshell, they allow clients to protect their assets, provide a guaranteed income stream, have the ability to grow their account value and provide a death benefit for their family all while retaining control of their money.
Of particular interest to my clients is the guaranteed minimum income benefit and guaranteed minimum death benefit annuities can provide. These riders are separate from the account value and added to the premium.
While the account value may be accessed as a lump sum (subject to surrender charges) a guaranteed amount may be available only as annuity payments. The GMIB offers a guaranteed step up of five percent to eight percent (depending on the contract) if the market has a flat or down year. If the account value has increased due to positive market performance above the GMIB amount, then the market value will be locked in as the new base benefit. Many annuity companies offer a stacking feature that allows these to stack on top of one another, which is very attractive to clients.
Once a client needs income, they can annuitize the contract and receive a fixed rate of income (typically 4 percent to 7 percent of the guaranteed value depending on the contract terms and age of the annuitant) for life. Annuity payments will lower the account value, but even if the account value falls to zero, the payments will continue for life.
The key is they do not have to annuitize the contract to generate the guaranteed income. They are also able to pass their remaining account value that has not been spent down to their beneficiaries. The living benefit riders — for an added cost — promise income in retirement that can’t be outlived — quite an appealing idea, particularly to clients who want to continue living the lifestyle they’re accustomed to after they stop working.
A GMDB added to an annuity, on the other hand, can be received only at the death of the owner. It assures if death occurs while the market is down, they would never get back less than their original principal minus any withdrawals. A good planning tool for the beneficiaries is to elect to stretch the payments out over their lifetime, minimize taxes owed and allow for tax deferred growth of the account.
Keep in mind with all of today’s suitability issues and litigation, it is critical you list all options and costs for your clients prior to their purchase of an annuity. This is where getting to know your client really comes into play. Only after you know what they like and dislike about the market and investing in general can you truly guide them in the right direction. And they’ll tell you.
Over the last 10 years, many of my clients have expressed discontent with the equity markets. They’re scared and their risk tolerance is not nearly what it used to be. With the state of the economic environment today, annuities have a more important role than they ever had. Annuities offer options and value my clients just can’t get with regular brokerage accounts.
With the volatility of the stock market ever-present in the minds of our clients, annuities offer protection to your clients’ accounts and are a welcome addition to a portfolio. Once your clients are aware of annuity options and costs, focus on the guarantees. As an advisor it’s a great discussion to initiate at a time when nothing else is guaranteed.
David Goodrich is an Investment Adviser Representative and offers Securities and Investment Advisory Services through Woodbury Financial Services, Inc. Member FINRA, SIPC and Registered Investment Adviser. PO Box 64284 St. Paul, MN 55164 (800)800-2638.
Variable annuities are appropriate for long-term investing and designed for retirement purposes.
Investment return and principle value of an investment will fluctuate so that an investor’s unit values, when redeemed may be worth more of less than their original cost. Before investing in a variable annuity, please tell your clients that they should carefully consider the investment objectives, risks, charges and expenses of the variable product and its underlying investment options. The current contract prospectus contains this and other important information. Please contact the insurance company to obtain the prospectus and tell your clients to read it carefully before investing. Guarantees are based on the claims-paying ability and financial strength of the issuing company
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