When I was asked to write an article regarding life and/or annuity strategies, I wanted to write an article that had value and was intriguing to both annuity and life producers. So, without further ado, we have the “Annuity Max with a Twist” strategy. For those of you working solely in the annuity space, you may have never heard of the Annuity Max concept as I had not, and I have also come to learn that many, if not all, life insurance producers are very familiar with the Annuity Max strategy. But are you aware of the
Annuity Max with a Twist strategy? My guess is either no or that very few of you are.
Annuity Max with a Twist, or “have your cake and eat it too,” or “use the insurance company’s money to fund your life insurance policy” are all catch phrases that I like to use, and I will explain exactly how you can take advantage of using the insurance company’s money to fund your life insurance.
When purchasing a living benefit on a variable annuity contract, I think we all know that all we are really doing is purchasing a sense of security in the event that we run out of money. We have this sense of security because we now know that we have a steady stream of income guaranteed to last our lifetime, even if our account value falls to zero; that sense of security is the sizzle that attracts people to the living benefit story. But what is really going on here? Until your client runs out of money, all we are really doing is spending our own money and allowing the insurance company to put certain restrictions on how fast we spend our own money—and we are paying them all along the way to do so. So, if you purchase an annuity with a living benefit and use that living benefit to fund a life insurance policy (Annuity Max), you are not maximizing anything in my mind, except that you have a tool that can ensure that you do not default on premium payments into your life insurance policy. The reason I say this is that until the client’s annuity runs out of money, all they are doing is using their own money to pay their life insurance premiums and reducing their death benefit with every distribution. So how do you really use the insurance company’s money to fund your life insurance?
The secret sauce lies within a contract at Jackson. Jackson has a unique living/death benefit combo rider that allows the client to take distributions for life and not lower the death benefit. With just about all, if not all, other living benefits and death benefits out there, when you take distributions out of your annuity the death benefit is reduced dollar-for-dollar or pro-rata. This is not the case with Jackson’s Flex DB living/death benefit combo rider. For instance, right now, if you were to put $500,000 in the account and took your distributions for life, as long as there was a value ($0.01) in the account at death, your beneficiaries would get your original $500,000 back. Do I have your wheels turning yet? I thought so. So, let’s put some real numbers to this.
In this example I am going to use a 65-year-old male that is categorized as “Standard Non-smoker” for life insurance purposes. This individual does not need income and is looking to maximize his death benefit to pass on to his beneficiaries–the perfect scenario for this strategy.
Going back to our $500,000 example from above, if we put $500,000 into the Jackson contract with the Flex DB rider using the parameters above, we would be able to take out 4.75 percent ($23,750) for life. Now, we can take that money and fund a life insurance policy. When funding the life policy, I decided to fund a variable life policy at one of the top carriers in the death benefit space and was solving for maximum death benefit. For illustration purposes, I used a seven percent gross return on both the Jackson and variable life illustrations and funded the variable life policy to age 100. At age 90, I assumed that the client passed away. The results were as follows: The Jackson policy returned our $500,000 investment, and the variable life policy paid out a death benefit of $756,029 for a grand total death benefit of $1,256,029.
In comparison, I also ran an illustration with a $500,000 single premium into the same variable life policy with all of the same parameters as above, and the result was a death benefit value of $1,082,126. As you can see, there is a $173,903 difference in “having the insurance company pay your life insurance premiums” compared to paying your own premium directly into your variable life policy. To take this a step further, if we would have just used the Annuity Max approach (funding life insurance with an annuity living benefit and not the non-reducing death benefit), we would have had a total death benefit of $988,711 at age 90. So, the “Twist” gets your client an extra $267,318 in this example when comparing the Annuity Max strategy to the Annuity Max with a Twist strategy.
So, to recap, Annuity Max with a Twist versus going right into the variable life policy, we are in the green to the tune of $173,903, and if we look at Annuity Max with a Twist versus Annuity Max, we are in the green to the tune of $267,318. In either event, what is in the best interest of the client is the Annuity Max with a Twist strategy.
In closing, there is a catch. The catch is that just like any other death benefits out there, if the annuity contract runs out of money before the client passes away, there is no death benefit. However, there are a variety of ways to protect against the account going to zero, but I will save that conversation for you and your Jackson wholesaler.