Annuities 
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Providing Real Solutions for Your Senior Clients
by Michael Pinkans, CFA

Younger clients have time to ride out the economic downturn, but the downturn can feel catastrophic for older clients. Upside potential is gone forever when a client needs to access funds from accounts that have been depressed by investment losses. Other market segments may be able to wait for an economic upturn to recoup some or all of their losses, but the senior market is struggling.

With investment yields low, asset growth potential is anemic for many investments. (As of August 20, average money markets were yielding 1.20% and five-year CDs were yielding under 3%). Asset growth assumptions of 5% to 6% were realistic and achievable just a few years ago. Nowadays, people are relieved just to break even and not lose any money.

During times like these, many reevaluate what has been sold in this marketplace and sometimes discover that it doesn’t really work for the client. When talking with seniors, there are really three goals their insurance contracts must satisfy: accumulating assets, distributing assets, and transferring those assets to heirs efficiently. But most products (and even many insurance carriers) are singularly focused. Plus, clients don’t think in terms of accumulation, distribution, and wealth transfer.

Products are often sold based on the sizzle; perhaps it’s a high interest-crediting rate without real regard for long-term performance or the client’s goals. For example, a particular annuity may be a tremendous accumulation vehicle and may be easier to sell, but it may be weak for efficient wealth transfer. A different annuity may be the answer from a distribution perspective.

Accumulation
What’s the best way to accumulate assets on a tax-favored basis? Annuities have some tremendous advantages over other kinds of investments. Fixed, multi-year guarantee, or consumer-friendly fixed indexed annuities offer upside potential while eliminating or limiting downside loss for the senior marketplace. Reducing risk is of utmost concern in today’s marketplace.

The fixed annuity marketplace continues to sell well because there are no adequate alternatives to building capital on a guaranteed basis given the low yields of other products. Sure, gone are the days of the 5% multi-year guarantee rates, but annuities just can’t be ignored.

Some annuities are very consumer-friendly, unique, and quite easy for a client to understand. Consider the following example: You’re in Las Vegas playing blackjack with the usual rules. You win if you beat the dealer, if you tie (push) you receive your bet back, and you lose your bet when you lose to the dealer. Is this game really client-friendly? How long will you play?

What if the blackjack rules were changed a bit, allowing you to win if you beat the dealer or tied (pushed)? And if the dealer won, what if the dealer gave your bet back and asked if you wanted to play again? How long would your client play the game now?

There’s actually an annuity like that in the marketplace, which is selling tremendously well as you can imagine. Granted, it has forced some producers into a new direction of annuity sales because it comes with terminology like “performance triggered accounts.” But, it’s extremely client-friendly and certainly protects downside risk while providing upside potential.

Distribution

On the variable annuity side, the feature that has been most important, over the past few years, is the ability to provide an income stream on a level or increasing basis. While VA sales have sputtered recently, income-for-life riders have become an important feature on fixed annuity contracts. Fixed annuities have tremendous potential for clients looking for maximum distribution advantages.

In today’s distribution marketplace, clients get customizable solutions with readily available guaranteed income, income-for-life, and guaranteed increases based on common price changes like the consumer price index.
However, your client needs to understand that not all contracts do everything. Products that may be so strong on accumulation may not be best choice for distribution.

Wealth Transfer

If insurable, life insurance is the perfect vehicle to transfer wealth on a tax-advantaged basis. Products that offer full or simplified underwriting, tax-free death benefits, coverage for long-term care expenses, or a guaranteed return-of-premium are certainly consumer-friendly.
A single premium life contract, with no bells or whistles, is perfect for maximum wealth transfer. One carrier offers a healthy 65-year old female a $100,000 single premium a guaranteed death benefit. It comes with cash surrender values of about $80,000 for the first 15 years and a guaranteed death benefit of just over $353,000. That’s a terrific tax-advantaged leverage.

Another approach is to include LTC coverage. Some carriers offer a life/LTC combo for seniors who shy away from a stand-alone LTC contract because of the cost or the feeling that they may never receive a benefit for premiums paid. For the same $100,000, one company offers a guaranteed death benefit that isn’t as high as a pure wealth transfer contract ($167,000). A 100% guaranteed return-of-premium is always available. More importantly, almost $500,000 is available for qualified long-term care expenses.

Successful producers give seniors choices since one product can’t be the answer for all -clients. When you offer a short presentation on accumulation, distribution, and transfer goals, seniors can choose the product that works best for them and your sale will work for them.
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Michael S. Pinkans, CFA is senior vice president of Marketing for Zenith Marketing Group which has its corporate headquarters in Freehold, N.J. He is a registered representative and investment adviser representative for ING Financial Partners Inc. He can be reached at 800-733-0054 ext. 6134 or MPinkans@ZenithMarketing.com