Because of the low interest environment we are living in today and the rush to safety, the emphasis in retirement planning has changed from being all about growing the cash value of your investments, to being all about providing the most guaranteed income...
By Louis LaBash
The Bad News: CD, Money Markets, Annuity, and Bond interest rates are at an all-time low.
The Good News: There’s the Lifetime Income Rider.
The recent downturns in the markets, the financial problems in Europe, the ongoing major deficits the U.S. Government is incurring, and the apparent inability for anyone in the Congress to even try to fix anything do not make for an optimistic mind set among the masses.
The traditional flight to safety for retirees in the past has been CDs, money market funds, annuities, bonds, and of course the mattress.
Presently most CDs and money market funds are paying a whopping 1 percent at best and most fixed Annuities are paying under 3 percent. Indexed annuities have caps that are in the 4 percent range, but in both fixed and indexed annuities you have to agree to tie your money up for 10 years or more to get the highest rates or caps. Even tax -free municipal 10-year bonds are paying under 2 percent.
With Inflation always rearing its ugly head, these meager returns can actually end up turning into losses. If you earn 1 percent on your money and inflation is 2 percent during that time period, then you actually lost 1 percent and every year at this inflation rate you will lose another 1 percent of your money’s purchasing power.
Because of the low interest environment we are living in today and the rush to safety, the emphasis in retirement planning has changed from being all about growing the cash value of your investments, to being all about providing the most guaranteed income that the client’s money can provide.
All things considered, I believe that retirees and soon-to-be retirees are looking for four things in a retirement plan:
2. Easy access to their capital
3. Rates of return that beat inflation
4. Lifetime Income
There are two easily obtainable financial vehicles available today along with a lifetime income rider that can provide all four of these.
1. A Fixed Annuity
2. A Fixed Indexed Annuity
The lifetime income rider has a number of different names depending on the carrier, but essentially does the same thing.
This is a relatively new feature that has been promoted pretty heavily in the last five years.
In the past, annuities had to be annuitized and the lifetime income was purchased with the payment of annuity account value. Income today would be generally provided by a lifetime income rider that allows the client to receive a guaranteed lifetime income and not have to worry about outliving their income. They are able to use a set percentage of their own money as needed and if they should run out of money at some point in the future, the life income rider guarantees the income can continue for life. Annuitization is still available in annuities and that function still has its place in retirement planning.
The guaranteed income from the lifetime income rider is based on the premium paid and the growth of an income account based on the initial premium, plus any bonus money applied. It grows at a guaranteed compound or simple interest rate either for a specific length of time or until income starts, whichever occurs first. The growth rates on the income account are currently in the 6 percent to 8 percent range and the income paid out is based on the value of the income rider account and a factor based on the age of the client when income starts. Currently the payout rate of the lifetime income rider account balance for client’s in their 60s is around 4.0 percent and in their 70s it is in the 5.0 percent range.
The bonus will add to the value of the income account and will also grow based on the guaranteed growth rate. Some guaranteed growth rates are guaranteed for life, some for 10 years, and some for 20. Some are free and some can cost as much as 90 basis points or more. The guaranteed payout rate is based on the client’s age when the income is started. The older the client is when they start to take income usually will increase the guaranteed lifetime income. Since the payout rates are set based on the age of the client, one should consider that just waiting to take income at certain breakpoint ages, such as age 70 versus age 69, can increase the payout by as much as 1 percent a year for life.
Currently in this low interest and low cap environment, the actual cash values of the annuity, aside from the initial premium or premiums, will have little effect on the income guaranteed unless the client makes withdrawals that are larger than the guaranteed income amounts, which can reduce future amounts of guaranteed income.
These are some of the things you may want to evaluate about the annuities with lifetime income account riders that are available today.
If you don’t take all of the options into consideration, you won’t know which offering is better for your client. Figuring out which company is offering the best product for your client requires taking more than one variable into consideration.
For the most part, the income account rider value is not a cash account and can’t be cashed in while the client is alive or at death. Some products will also pay out the remaining value in the income account over a five year period or to the beneficiary until the account value is used up.
To make it easy to figure the payouts, I have created this easy to use interactive calculator to quickly compare products to other annuities, or to a CD, and explain it to your prospects. You can very quickly see which annuity is offering the most in the way of income based on when the income is needed. It only handles compound interest growth on the income rider presently. This really is “How to Rob a Bank” legally!
The above calculator shows a $100,000 annuity with a 6 percent bonus, 5 percent compound growth on the income account rider and a guaranteed 4.25 percent payout ($11,953) for life verses what would accumulate in a CD over the same time period (20 years) with a 1 percent taxable rate of return in a 28 percent tax bracket. (All percentage rates are examples only)
How does the annuity income for life compare to the CD’s income for life?
Clicking on the Quick Fact button will show that for the CD to provide $11,953 for life starting at age 65, the CD would have to provide a 10 percent return for life to provide the same guaranteed income starting at age 65.
In this imperfect economy, lifetime income riders can provide the added income and security that people need.
Along with all of the compliance and suitability issues, after determining if the client a good fit for an annuity, for your own protection you will need to document that you did your due diligence and provided your client with the right product for their needs.
Tools like this can help you be sure you are providing the right product for your clients.
Louis G. LaBash is the CEO of Financial Scenarios LLC and has been in life and health insurance sales and software technlogy for the industry for more than 30 years. Contact Louis at Louis.LaBash@innfeedback.com
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