Updated June 10, 2019, at 2:35 PM
If you’re utilizing annuities in your client’s strategy process, it’s hard not to get caught up in the marketing “bells and whistles” that bombard your email inbox and voicemail every day.
Coincidentally, these are the same bells and whistles that some people use to argue that fixed indexed annuities (FIAs) are too good to be true and are full of smoke and mirrors. If it were true that indices were offering uncapped exposure to the market with no downside risk and that income benefits and guarantees can be in the double digits, then what’s not to love?
Addressing Annuity Risks & Concerns
While all of these features look great as bullet points in an email blast, there really are a lot of smoke and mirrors that have the effect of detracting from the potential value that these products can offer to retirees.
The most successful financial professionals look at annuities for what they are: one more tool in the toolbox designed to do a specific job. They should be properly positioned inside of a well-constructed, comprehensive financial strategy. That way, they offer benefits that can best help people address many of their risks in retirement.
Let’s get back to the basics and focus on some of the top client concerns that you can address utilizing annuities in your business.
1. Market Challenges
You have clients in your book of business who are conservative or moderately conservative in nature and are risk-averse as a result. What product solutions do you have at your disposal to address this concern for these clients? Bank CDs, money market accounts, bonds?
With interest rates low, the potential cost of tying money up in low yield bank products isn’t particularly appealing to most clients. Not to mention the interest rates associated with bonds today make riskier than they’ve traditionally been. So where do you turn?
Offering a solution that offers principal protection with the potential to deliver 2.5-5% long-term average return, can be an attractive solution for many of today’s retirees; particularly for the portion of their portfolio that they don’t want to be exposed to the stock market.
2. Legacy Preservation
There’s no disputing that an effective and efficient way for your clients to leave a legacy to their loved ones is through life insurance. If you have clients that are healthy enough to qualify for life insurance, annuities can serve as an efficient and effective financial vehicle.
What about your clients who might not be healthy enough to qualify for traditional coverage? Or for those who don’t want to be burdened with the expense of paying for it?
Many annuity products offer the potential to provide additional leverage for your clients’ retirement assets to provide enhanced benefits to their heirs. While they’ll lack the tax advantages of traditional life insurance, they can serve as a cost-effective way to provide guaranteed dollars in the pockets of your clients’ loved ones or of the charity or organization of their choosing.
3. Guaranteed Income
Annuities can offer guaranteed income that your clients and their spouses can’t outlive. While this may seem obvious, let’s take a minute to dive deeper into the specific risks that annuities can help you address with your clients relative to distribution strategies.
Sequence of Returns Risk
If your clients are utilizing risk-based portfolios to provide for their retirement income, their success or failure is tied to timing and a little bit of luck. How their accounts perform in the first two to five years of their retirement can make all the difference.
Help take this risk off the table by creating guaranteed, predictable, sustainable income streams that ensure that they won’t have to worry about the question of retiring at the wrong time.
Related: Annuities & Peace of Mind
We’ve been in an extended period of a low inflationary environment. But if we experience a brief period of above-average inflation, it can hurt your clients’ portfolios as their accounts try to keep up.
Annuities offer solutions that can help you to hedge against this risk, ensuring that someone’s well-being isn’t jeopardized in the process.
Health Care Risk
While general inflation has been kept in check over the last several years, the one sector that has been challenging is the cost of your client’s health care, with health insurance premiums up over 196% since 19991.
While no annuity can eliminate this risk on its own, annuities offer solutions that can help your clients hedge against the risk of self-funding a health care event in their retirement. They can also help fund health care and potential long-term care expenses.
Income Replacement at the Death of the First Spouse
This may the risk that many clients are least prepared for.
Are they prepared for the loss of a Social Security income, potentially a pension benefit, or maybe even supplemental annuity income if the income stream isn’t set up to cover both spouses?
Most couples haven’t planned for this, so if the first spouse passes away, it results in a loss of 25–50% (or more) of the predictable income streams for the survivor. How have they planned to account for this? Annuities can be structured in a way that can help remove this risk from your clients’ retirement strategy, ensuring that the emotional burden of losing a spouse isn’t compounded by the financial burden that can potentially follow.
If you take nothing else away from this post, know this: the single greatest risk that your clients and prospects face in retirement is the risk of living too long. Otherwise known as longevity risk. And it’s not even close.
Why? Because longevity risk is a “risk multiplier”.
Think about it this way. If your client retires at 65 and dies at 70, how concerned will they be about the fact that their accounts may have lost money in the first two to five years of their retirement? How much will inflation or a health care event stand to potentially disrupt the success of their strategy?
With medicine and technology evolving at the rate they are, individuals are living longer. The longer your clients survive, chances rise that the other risks will come into play. This potentially challenges an otherwise successful retirement.
“It’s okay to outlive your assets, but it’s not okay to outlive your income.”
Only annuities are tailored to contractually guarantee lifetime income that can never be outlived. I would contend that the foundation of any successful retirement strategy is an underlying baseline of contractually-guaranteed income that helps ensure that your clients’ basic needs will be provided for. Protected from all of the potential risks that are outside of our control.
We’ve barely begun to scratch the surface of all of the potential benefits that annuities can offer to your clients in retirement. Remember that all products are just a means to an end; a tool in your financial tool belt.
And if properly positioned, there’s room for all products in a well-constructed strategy. Annuities can offer solutions and benefits that no other financial vehicle can tout.
Understand where annuities may fit and you’ll ensure that you’re always working in your clients’ best interest.
Guarantees are backed by the financial strength and claims paying ability of the issuing insurance company. FIG does not give tax or legal advice. Your client should consult with and rely on their own tax and legal advisors regarding their particular situation. This is not a comprehensive overview of all the relevant features and benefits of any particular product. Be sure to review all of the material details about any products referenced in this article before making specific recommendations to clients.
Source: 1PBS NEWSHOUR – How Quickly Are Health Insurance Premiums Rising? By Julie Appleby and Kaiser Health News, August 21, 2013