Stretch Your Clients' Tax Refunds and Get Them a Better Rate Than Bank CDs

Feb 28, 2020 6 min read

This time of year — April in particular — presents one of the best opportunities to show your value as a savvy insurance or financial planning professional, by answering a question many clients are pondering: what should I do with my tax refund?

And for those clients who in the past have thrown their tax refund into a certificate of deposit (CD), April often is when they must decide whether to renew into another 12-month CD, presenting you another opportunity to provide guidance and show your value.

Whether helping someone find a smart use of their tax refund windfall or better use of their money in a CD, you may consider a multi-year guaranteed annuity (MYGA).

What Is a MYGA?

A MYGA is a fixed-rate insurance product that guarantees the buyer will get a set interest rate return for the length of the contract — say, three or five years. Typically purchased with a single premium amount, a MYGA has no annual fees but can be subject to surrender charges — however, many carriers offer penalty-free withdrawal provisions. If you have clients needing to take required minimum distributions (RMDs), a MYGA that allows RMDs without penalty could be a smart option. (Check with the carrier if this is allowed before advising clients.)

A MYGA can be an option for a client who wants an attractive fixed interest rate for his or her money but may be dissatisfied with today’s low interest rates on savings accounts and CDs. Today’s MYGAs may offer higher interest rates and also have the advantage of tax deferral. A client with a CD that’s not in an IRA or other retirement account will be taxed annually on the interest earned, but a client with a MYGA can grow their money and only be taxed when withdrawing it.

Why MYGAs Now?

Interest rates have been on the rise since 2021, after the markets plunged in 2020 due to the coronavirus and market uncertainty. Many investors chose guaranteed accounts during this time, resulting in a surge in MYGA sales. So while conservative investors still like the guarantees of MYGAs, the rising interest rate environment also became more attractive versus other fixed-rate investment products.

CDs in particular are popular because they are both short-term savings vehicles and income-generating tools, and also are low-risk and FDIC-insured up to $250,000. But it’s important to point out to clients that the “real rate” of return can be negative when adjusted for taxes and inflation rates. For the client seeking a secure home for their money, a MYGA, like a CD, eliminates the concern about market fluctuations by offering a contractually guaranteed interest rate, regardless of how the market performs.

The conservative client who likes CDs might be the ideal MYGA client. Weary of low interest rates and bond yields at historical lows for the past decade since the financial crisis, these clients might be open to the idea that CDs may not be the best income-generating option for them right now.

The Simplicity of MYGAs With the Support of SMS

MYGAs are among the simplest of annuities. They are easy for you to understand and to explain to your clients. More importantly, they are easy for your clients and prospects to understand. Their straightforward nature can resonate with clients who normally might be skeptical of annuities.

Even so, if you work outside annuities — say, in Medicare — you may be hesitant to cross-sell a product that you’re less familiar with. Understanding MYGAs in the context of all annuities can help you determine if a MYGA really is the best product for a client.

SMS has an experienced annuity team, including a MYGA team, to help. If you have a specific MYGA candidate in mind or want to ask about MYGAs in general, you can call the MYGA desk and ask for Associate Director of MYGA Sales Mark Cavalieri at 1.800.786.5566, extension 3605.

How to Bring Up Tax Refunds or CDs With Clients

The SMS marketing consultants can coach you on ways to bring up what can be sensitive topics — a client’s personal savings and their tax situation — especially if you don’t currently work in annuities or haven’t had regular conversations about their finances.

The bottom line is you want to help your client, and tax season could present a timely opportunity. For the 2020 tax year, the average tax refund from the Internal Revenue Service for individuals was $2,707. Paying down debt or keeping a tax refund liquid by putting it in savings may be the best use of tax refund dollars for some clients. But for clients nearing retirement, a MYGA might be a better opportunity. As their trusted insurance or financial planning professional, such helpful advice won’t be coming out of left field, especially when everyone talks taxes during tax season.

The CD renewal opportunity, however, may be more year-round. When a CD is up for renewal depends, of course, on when the CD is set to mature. Common term lengths are three months, six months, 12 months, 18 months and five years. (People using tax refunds often choose six-month renewals, making October another opportune time to discuss MYGAs.) When a CD reaches its maturity date, clients have a brief window — often 10 days or so — to inform their bank of what to do next. Doing nothing usually means the CD rolls over into a new one. All too often consumers forget to withdraw or transfer their funds, leaving them with illiquid assets or unfavorable, if not costly, terms. Simply asking a client if they have any CDs can remind them of their renewal date — which they may appreciate. Even if it’s not approaching for months, you’ve planted the seed for them to consider consulting with you when the renewal date nears. Double win!

Whether you’re concerned about how to bring up CDs in a natural way or you want to know more about all types of annuities before offering any one type, SMS can help. SMS’ exclusive annuity program is one place to start. The “Introduction to Annuities: A Starting Point for Success” provides an overview of annuities, followed by the “Annuity Planning Kit,” which shows how annuities can solve your clients’ retirement challenges, and finally, the “Annuity Sales Kit,” which gives you the conversation starters and power phrases that make annuity sales simple. Download the first piece here to get started.