JohnDouglass, President, Annuities Exchange
Richard Hellerich, President, Great Plains Annuity & Life Marketing
Ron Lane, President, Fairlane Financial Corporation
Q: In what innovative ways can brokers use annuities to increase sales and better serve their clients?
John Douglass: Serving our clients is key, and annuities have done an excellent job! Since 2008, when financial markets were going into recession, we have experienced many things—bank money markets paying next to nothing, mutual funds, variable annuities, and stocks taking major hits. Even the American standby, your home, was experiencing dropping values, and yet in this same market you see annuities excel! Multi-year guaranteed annuities (MYGAs) guaranteed interest rates of 2 to 5 percent provide peace of mind to policyholders. We have point-to-point cap rates that paid 6 percent and continue with no reductions, even after being issued a few years ago. Every month we receive copies of single premium immediate annuity (SPIA) statements showing payments continuing to be unaffected by the current economic woes. Last, while unsecured investments left the investor taking all the risk, insurance state guarantee funds, in most states, have doubled protection levels. Annuities have done their job of providing guaranteed income streams to thousands of retirees. As annuity brokers, we have delivered while other investments faltered. My point in all this is that the best way to increase sales is to tell the story of the successes to your prospective clients as to how annuities can be used in innovative ways to balance portfolios, limit risk exposure and provide income streams. Tell your own success stories! Annuities deliver guaranteed financial rewards well into the future!
Richard Hellerich: 1: Work every day to become the recognized local expert on fixed annuities. If you strive to reach that goal you will ultimately have more referrals than you can handle. Successful brokers know that while access to carriers, product and commissions is widely available, it is important to partner with a competent annuity marketing organization (AMO). Look for an experienced annuity marketing specialist to partner with who can provide advanced case development, product education and sales concepts.
2: Consumers are looking for education, not a sales pitch. If you have a website, consider providing financial calculators and education on the use of annuities and income planning. Many of the top annuity carriers have quality consumer marketing tools such as videos, point-of-sale materials, white papers, and third-party materials to help you educate your clients and make more sales. Some of the best annuity concepts have been around for a while and withstood the test of time. Examples of these include the split annuity concept, laddered annuity concept and annuity-life arbitrage. If you are not familiar with these concepts, ask your AMO for assistance.
3: Ask your prospects/clients to invite their adult children to the planning/sales presentations. We know an agent enjoying tremendous results with the children becoming her clients and generating additional quality business. When the clients’ children (usually in their late 40s to early 60s) witness first-hand the effort and expertise that went into their parents’ plans, they often ask to schedule an appointment to discuss their own situation. Though she never asked for them, this agent has also received referrals from the children to their friends. The children frequently share their experiences with their friends and co-workers, resulting in additional “painless” referral opportunities created by raving client fans. This has not only generated some terrific annuity and long term income planning cases, but substantial life cases as well.
Ron Lane: Seniors can benefit greatly from being able to leave money to their grandchildren for college or other living expenses through gifting. Where else can a loving grandparent purchase something today and know that at some future date a monthly monetary gift will be delivered to their grandchild’s door. An annuity can serve as a lasting reminder of a grandparent’s love.
Q: What are the best ways to utilize annuities in a rising interest rate environment?
Hellerich: Interest rate risk is a serious concern for many investors looking for a safe return on their money, especially those on fixed income. However, an even greater risk is staying on the sidelines too long.
Approximately seven years ago we believed we were at all-time low interest rates, and many clients were scared to lock up their money in a 5-year MYGA for fear that interest rates would soon increase and they would be stuck with a low rate. Hindsight is always 20/20, and had the clients known interest rates would continue to decline, they might have taken advantage of that “low” rate at the time they were offered it.
For some clients the answer may be “diversify,” but this advice is applicable only for those clients who have actually accumulated enough financial assets to enjoy the luxury of diversification. According to an Insured Retirement Institute (IRI) study1 released earlier this year, only 19 percent of boomers have $250,000 or more saved for retirement, and four in 10 reported having no savings for retirement. Assuming these numbers are accurate, 81 percent of boomers need help with a retirement savings plan, and I would place low interest rates way down their list of potential retirement problems. Seeing that 40 percent have no savings for retirement speaks volumes for both the lack of financial education in America and the severity of our economic issues.
Fixed and fixed indexed annuities can deliver real value to the appropriate clients regardless of the interest rate scenario. These clients are conservative, safety-conscious savers who value downside protection and upside potential. The opportunity is right in front of you—and according to the IRI study I cited, millions of prospects need our help to put the retirement savings they have managed to accumulate on a secure footing now.
Lane: Wow. What a concept: a rising interest rate environment! In the event interest rates increase more than a quarter point, and the U.S. Treasury yield also has a significant increase, it would be time to visit with all of the dormant policyholders who have been sitting patiently on the sidelines. Many life and health advisors sold fixed annuities years ago with 3 percent minimum rate guarantees. Their clients will soon be clamoring for higher rates of return.
One may ask whether it would be prudent for clients to exchange annuities that are out of their existing surrender periods for higher interest rates. Advisors may find that clients in this situation have kept funds deferred for reasons too numerous to mention. We think it would be prudent to review those old annuity policies to update beneficiaries, ownerships (trusts) and, ultimately, the overall plans for the monies. We think a percentage of policyholders would be enamored with higher rates of return. Advisors can’t know until they ask.
Douglass: The flexibility of annuities to adjust to rising interest rates is best reflected in the ability to set durations currently from 3 to 10 years and utilize the income riders to be turned on when needed at the optimum time. The MYGA products have increased liquidity to up to 15 percent, and some plans offer cumulative withdrawals up to 50 percent. The ability to reposition without penalties as rates rise is crucial. We want to be able to catch the wave of rising interest rates, reward our clients and generate new sales.
Q: How do you best position annuities with an aging client base?
Lane: Advisors can be successful reminding their clients that an annuity is simply a warehouse for monies. Dollars allocated to annuities may be thought of as a hedge against other investment losses. It’s like money in the bank, except at a significantly higher interest rate.
Older investors relish the fact that they can place a percentage of their wealth in tax deferred products and be guaranteed safety of principle. At their stage of life they are acutely aware of the importance of prudent investment safety. Agents should recommend that aging clients keep their investment horizons short (about 5-7 years). The successful advisor should position annuities as an interim place for growth and, if needed, future income streams.
Douglass: Annuities are an excellent vehicle for older clients. We have annuities that issue through age 90, even 100! The annuity market caters to seniors at a time when guarantees and flexibility are needed. Bank CDs and mutual funds are vehicles to hold monies, but annuities are king on payouts and lifetime income options. I feel it is important to note how complicated investing has become. As brokers, dealing with older clients especially, it is important to know that your clients understand the product—for their protection as well as yours. How will they explain or provide information to other family members if they do not understand the products? Annuities can provide a solution.
Hellerich: You could easily devote an entire issue of Broker World to this question!
Fixed and fixed indexed annuities can be an appropriate cornerstone for many financial plans. Experienced annuity agents also know when to suggest that clients take advantage of the various fixed annuity types, including immediate, multi-year guarantee, fixed indexed and deferred income, depending on the specific planning situation.
Here is a short list of fixed annuity benefits to discuss with clients:
• Minimum guarantees
• Safety from market losses
• Guaranteed lifetime income options
• Flexible payout options
• Tax-advantaged growth
• Competitive rates compared to CDs or savings accounts
• Estate planning benefits
• Living benefits for chronic care and wealth transfer
In addition, astute brokers are familiar with utilizing annuities for a number of concept sales such as laddering income planning, split-annuity and annuity-life arbitrage. Annuities offer a tremendous amount of planning solutions and flexibility when properly applied.
Always be prospecting for premium such as:
• Existing under-performing annuity contracts out of surrender
• Savings dollars inappropriately exposed to potential market loss
• CDs and savings accounts with little or no interest credit
• Required minimum distributions (RMDs) that could be repositioned into a single premium life (SPL) policy
Your annuity marketing organization and advisor should be helping you master these concepts and how to recognize potential opportunities to help your clients.
Q: How significant is the impact of increased emphasis on living benefits for the industry and the clients your brokers serve?
Douglass: Living benefits is a great tool promoted by brokers as the Swiss army knife of annuities—able to provide multiple benefits. Let me say it has dominated the market because insurance companies hope to control the monies long term, and the higher commissions make them attractive to sell. Remember, MYGA products often designed with options such as bonuses, cumulative withdrawals and Medicare coverage are just as significant. Though they do not get as much attention, our sales of MYGAs continue to be strong.
There are many unique uses for annuities. Two that are gaining increased popularity are pension funding and deferred income SPIAs. Annuities are a fantastic pension funding vehicle for professionals and small employers. Deferred SPIAs allow guaranteed payouts of future benefits. Annuities, as I mentioned, have served clients well, providing guarantees and flexibility in many product designs for accumulation or payouts.
Hellerich: Living benefits, including guaranteed lifetime withdrawals, chronic care and enhanced death benefits have created new annuity sales opportunities that didn’t exist prior to their introduction almost 10 years ago. For the brokers we serve, active in the income planning arena, these benefits have captured the attention of prospects looking for additional protection and flexibility for potential “what-ifs” that could derail their retirement planning.
Carrier competition and continuing improvement of these benefits provide consumers with valuable planning options and the ability for their premium to multi-task, offering financial protection for enhanced guaranteed income, potential chronic health issues and death benefits.
Broker education is critical! Allowing a client to think that a guaranteed 7 percent guaranteed lifetime withdrawal benefit (GLWB) roll-up rate is credited to account value may close the sale, but belies what is really happening. While a chronic care rider can provide significant financial assistance in the right circumstance, it does not automatically eliminate the value of traditional long term care coverage. These benefits have expanded the topics to cover during the planning phase, but clients must be thoroughly and accurately educated on how these benefits work.
There is no “silver bullet” annuity that works for every client, and navigating the growing number of riders available can become a full time job. Brokers need to thoroughly understand these enhanced benefits and recognize when to suggest their use for the appropriate client(s). An experienced and knowledgeable annuity marketing advisor can help you with education, selection and best use of these riders for your clients’ needs.
Are we working with a client who is only concerned with purchasing a safe accumulation product offering a better than average chance for a better than average return, or a client focused on guaranteed income with potential health and wealth transfer benefits? The broker should be absolutely confident regarding which client he is serving, and offer appropriate solutions based on the client’s primary goals.
Living benefits have been a tremendous positive for fixed indexed annuity sales, with valuable additional protection and benefits for the right clients.
Lane: Many of our advisors are showing the guaranteed lifetime withdrawal benefit (GLWB) on their proposals. The future living benefits attribute is attractive to today’s middle-aged clients because they like the idea of having an income stream they can never outlive while still having some control over their investment.
For the industry, however, the living benefits can be a double-edged sword. Policies enjoy better persistency when clients understand that they can convert their deferred annuities into future income streams—and that they are being charged for that feature. This low lapse rate helps carriers profit during the deferral periods and the payout phases of their policies.
The other edge of the sword cuts out any future repositioning of GLWB policies to other carriers. Advisors find it difficult to offer alternative annuity products to clients after their policies’ deferral periods have ended. The jury is still out as to whether the living benefits have been a blessing or a curse for 1035 business. Probably the latter!
Q: How can brokers help clients moving from the accumulation phase to the distribution phase?
Hellerich: Our job is to help our clients enjoy a worry-free retirement. Traditional retirement transitions are rare. Clients working continuously 45-50 years, getting a gold watch and then sitting on the porch are mostly a thing of the past. With the economic volatility of the past 15 years, the new normal is helping clients who are dealing with their own unique transition, by force or by choice. Some are still working today because the 2008 market crash decimated their retirement assets. Some were forced into early retirement by unexpected termination or downsizing, some due to unforeseen health issues, and the lucky ones actually planned their retirement date or left their job to turn a hobby or avocation into a new career. These unique situations create unique solutions based on the client’s financial situation, expectations and reality.
The best way to prepare clients is to start planning and discussing this transition well before it occurs. In a perfect world we would help clients start envisioning their retirement goals at least 10 years out. This gives us time to explore the “what-ifs” of continued employment, potential health issues and economic forecasting. The further out we start the planning process and consistently update our goals, the greater our ability to react and navigate the threats to our financial security.
Obvious concerns today include:
• Longevity—outliving savings
• Affordable health care
• Financial impact of chronic illness
• Social Security viability
• Exposure to market losses just prior to retirement
• Federal deficits
• Planning ignorance
No wonder many clients have an uneasy feeling about tapping their nest egg or lack confidence in the hope of enjoying a secure retirement someday.
The distribution phase strategy that works best is a well balanced retirement plan. This strategy involves working with the client to break this down to three components: need based planning, luxury based planning and legacy based planning.
a) Need based planning: This part of the strategy covers the income that is required, such as mortgage payments, car payments, insurance premiums, food, clothing, etc.
b) Luxury based planning: This part covers the income that is wanted to take vacations, give gifts to kids, charitable donations, etc.
c) Legacy based planning: This part covers the remainder of the assets and what the clients want to have happen after they have passed.
This planning is one of the most important services you can provide. You bring real value to your clients by helping them understand how far their current savings will take them and discussing the best distribution methods for their situations. I suggest that guarantees and benefits offered by fixed and fixed indexed annuities should be included in that discussion. Look for assistance from a quality annuity marketing organization that can help you create and present the best solutions for a secure retirement and reliable lifetime income. [RH]
Lane: Clients should be shown how to take a portion of their deferred annuities and enact a partial annuitization. This keeps some of the funds deferred and lets some of the money turn into an income stream. Most annuity policy provisions permit partial annuitization after some deferral period. Advisors who do annual asset reviews should be able to identify annuities that can be converted to their distribution phase. [RL]
Douglass: The best way to assist clients transitioning from the accumulation phase to the distribution phase, going into retirement or from a death, is to provide options. Annuities, more than any other vehicle, shine in the unique variety of product and payout options. This is a great opportunity for an agent to show his knowledge in the review of product choices and strengths of each, review of cost basis, tax status, length of benefits, etc. Each annuity type brings different talking points—for example, systematic withdrawals from a SPIA or an income rider, or periodic withdrawals from a MYGA. A good example: We recently saved a client a huge tax bill. The husband died, and his widow was ready to take a lump sum disbursement from an $800,000 IRA account. The broker set up an extended payout benefit, spreading taxes and benefiting the family. In summary, whether turning income on for retirement or receiving death proceeds, the payout phase shows the strength of annuities and stresses the need for an agent’s expertise. [JD]
Footnote:
1. http://irionline.org/newsroom/newsroom-detail-view/boomers-confidence-in-secure-retirement-sinks-to-five-year-low
