Fixed Indexed Annuities are surging in popularity, but when should advisors really be using them? A recent Retirement Weekly article asked Jack Marrion and our very own Joe Elsasser that very question. Here are their answers:
If the goal is to try to get a higher return than the client is getting from the bank — and they won’t accept market risk to principal and credited interest — index annuities have consistently been a way to do this, provided they have sufficient liquidity in other assets.
If the goal is to get a “safe stock-market return” — an oxymoron — index annuities aren’t the place. I’m not talking about the lack of reinvested dividends. My research shows that when you turn years with market losses into zero losses (an annual reset approach) you more than offset the effect of reinvested dividends. The reality is due to the current low interest rate environment the caps on FIAs will remain too low for them to be competitive with stock market returns for awhile.
You want guaranteed income
Just an example: if your client is age 55, if they put $100,000 today into one of several FIAs with a GLWB they’ll be guaranteed they can take out $8,000 to $10,000 starting at age 65 for as long as they live. If they decide they don’t want to do this they’ll at least have their $100,000 sitting there at age 65. FIAs with GLWBs give them something non-variable annuity Wall Street can’t — an income guaranteed to last their lifetime and control of both the income and whatever cash is sitting in the annuity.
The main one is protection of principal and credited interest from market risk.
Another is if they want a GLWB (i.e. they want a guaranteed level of withdrawal income for life as opposed to annuitizing the contract) an FIA usually provides a much higher guaranteed payout than a GLWB on a variable annuity because the cost of hedging the longevity risk is much, much less.
Almost every deferred annuity is liquid — if they cash them in they will pay a penalty but they still get their money net of penalty. However, every FIA exacts a penalty and that penalty can be steep.
When your client should purchase an indexed annuity depends entirely on their reason for purchase. If they are buying to satisfy a specific liability in the future, they shouldn’t use an annuity if they are under 59½ when they will need the money because the interest will face not only ordinary income taxes, but also a 10% tax penalty.
If they are buying for retirement income, a SPIA is usually a better choice if income will start right away and they are comfortable losing control of their premium. If they are planning on deferring income for a period of time and starting income later, an indexed product with an income rider can be a good choice. If they are looking for an alternative to bonds in their overall allocation, a shorter surrender (i.e. five to seven years) product can make sense — just be sure they won’t be taking withdrawals prior to 59½, or hold it in an IRA so that withdrawals from the product (or cash–out at term) can maintain tax deferral.
Many experts say annuities should never be purchased in tax-deferred accounts, such as IRAs or other qualified plans. As you can see from the circumstances outlined, the bulk of the reasons I see people buying indexed annuities are not for tax deferral, but instead for the specific guarantees that they can buy in an annuity (lifetime income, principal, minimum guaranteed interest) that they simply can’t find in other investments or savings products.
Of worst-case accumulation; of worst-case income; and of worst-case on surrender.
Can provide potentially better upside than is offered by other “predictable” alternatives, such as CDs or savings accounts.
Annuities generally have surrender charges that may last anywhere from a few years to 10 or more years. People who are considering an annuity should be sure that they will be taking less than the free partial withdrawal amount, (which is usually 10% of the policy’s value annually) and have planned other assets that will be available for emergencies.
Lower growth potential
People buy indexed products for safety and predictability first, growth potential a distant second. If you are looking for a racehorse, indexed annuities are the wrong animal.
Before you sell an indexed annuity to your client, make sure that you have fully explored all their options with them for the best annuity money can buy.
For more information on BAA or fixed index annuities, call your marketer at 1-877-645-4939.