Annuities

Position Your Annuity Practice to Stand Out From the Pack
by W. Andrew Unkefer

How are you positioning your annuity practice? Many annuity advisors make the mistake of trying to compare or compete with other financial products like bank CDs, money markets, mutual funds, hedge funds, etc. The top producers avoid this common practice. Don’t focus on the competition’s features and benefits and how an annuity might improve someone’s position. Instead, focus on the unique characteristics of fixed or fixed indexed annuities that no other financial product can duplicate. This allows you to standout from what the rest of the financial industry is touting. It also closes the door on the competition that cannot compete unless they step into your domain where you are the expert.

Tax Deferral

We have just witnessed the single largest expansion of U.S. government spending in history and it looks like the politicians are not done yet. It is completely reasonable for taxpayers to look for ways to legally shelter their earnings from taxation until they choose to use their funds. An annuity is a great option.

Protecting Social Security Benefits

Many people know that they are paying taxes on their Social Security benefits, but they don’t know how to avoid it or how to reduce their exposure to this sneaky tax. The inside buildup within a tax-deferred annuity is not counted toward the -threshold income calculation and may allow the tax payer to keep all or some of their Social Security benefits.

Protection of Principal and Past Interest

Many people understand the value of saving, but not the risk of investing. Markets rise and fall on a daily basis and investors assume the risk of loss. This could not be more clear than it has been over the past few months when millions of Americans lost trillions of dollars they worked hard to accumulate. As I pen this article on May 22, the S&P 500 has lost 41.8% (a drop from 1,524.12 to 887). That means someone who had $100,000 a year ago would have only $58,200 today. To get back to break even, they would need to earn 71.82%. The time horizon to do this may be well beyond their life expectancy.
In contrast, fixed annuities and fixed indexed annuities provide a guaranteed safety net and tax deferred growth. Had they simply protected their $100,000 and earned just 4%, they would have $45,800 more than if they had been at risk. That’s 78.69% more money just by playing it safe.

Avoiding Probate

The disposition of this asset is done in a highly confidential and protected manner because an annuity is a contract between the owner and the insurance company. The insurer agrees, in writing, to pay benefits as designated by the owner. A properly designated beneficiary allows this to happen without the costs and delays associated with probate proceedings.

Income Planning and Guarantees

Annuities have always been in a league of their own when it comes to income. New lifetime income benefit riders allow annuity advisors to position themselves as income planning experts with tools that no other advisors can offer. To be completely successful in this income planning stage, it is important to understand how to leverage income riders so they do more than expected. Our case study below reveals one simple thing you can do with your clients to always create more income than a typical income rider left on its own. Your planning and preparation will demonstrate more value to your client and lead to more successful planning encounters.

Case Study – Lifetime Income Benefit
Assumptions:

Client age (Single) 62
Premium amount $100,000
Premium bonus 12%
Contract value growth 3%
Income account value growth (roll up) 8%
Rider cost .45%

Let’s also assume that the annuity offers 10% penalty-free withdrawal of contract value available after year one. Withdrawals from the contract value are taken proportionately from the income account value before the lifetime income begins. Based on the above assumptions, if the client deposits $100,000 of premium, the contract value is $115,360 after one year and the income account value is $120,960. At age 63, after year one, the client can begin taking a guaranteed lifetime of income based on provisions of the lifetime income benefit rider. The payout is calculated at 5% for a 63-year-old on $120,960. That equals $6,048 per year for life.

The policy allows for a 10% penalty free withdrawal after year one, which could be up to $11,536. Rather than using the $6,048 lifetime income benefit rider, the client begins taking withdrawals of $7,385 per year for the next seven years (ages 63 to 69). If the policy earns a very conservative 3% annual yield, the client can take this withdrawal without exceeding the 10% penalty-free withdrawal amount in each year. The proportionate withdrawals from the income account value start at $7,551.94 in the first year and increase to $10,303.55 in year seven as the $7,385 annual withdrawals become proportionately larger in comparison to the contract value.

At age 70:
• The contract value is $83,840.27 considering the cost of the rider and the withdrawals along with the assumed 3% growth.
• The income account value is $123,190.54 considering the 8% guaranteed roll up rate and the proportionate withdrawals for seven years.
• The multiplier increases from 5% to 6% for guaranteed lifetime income calculations from the lifetime income benefit rider.

The guaranteed lifetime income at age 70 is therefore, $7,391.43.
Using the 12% bonus and the 8% growth in the income account, we created the same basic benefit of lifetime income, but we added $1,343 to the annual income every year for the rest of the client’s life.

Remember to stay focused on the unique attributes of your products within their intended purpose and design. After performing a thorough review of your clients’ situations, apply those traits honestly, with each client, so you can make a suitable and appealing recommendation they can truly count on.

–––––––––––
W. Andrew Unkefer is President of Unkefer & Associates, Inc. Unkefer & Associates is a national annuity and life insurance marketing organization dedicated to serving independent agents, agencies ,and marketing firms since 1994. Unkefer & Associates provides advanced agent training, case design and support through their unique online agent support platform www.superagenttools.com. For more information, call 800-523-5851 or e-mail him at andy@unkefermail.com.