Not all annuities are equal: Answers to client questions

How can you help a client choose an annuity? Who’s the right fit for an annuity with an enhanced death benefit rider? Here I provide InsuranceNewsNet with answers to some frequently asked questions about annuities. 

Q: Why are annuities particularly attractive to discuss with clients now?

A: The recent rise in interest rates has helped on two fronts. With fixed indexed annuities, rates are as high as they’ve been in 10-plus years. So it’s a great opportunity to lock in those rates. 

People can protect some of the recent gains they’ve made in their portfolios and reduce their exposure to potential downsides. They have a measured opportunity for growth by way of a fixed indexed annuity. 

At the same time, higher interest rates have led to improvements in what insurance companies are offering. When interest rates were squeezed, a lot of insurance companies cut back on the features and benefits they included in their annuities. Now, with interest rates coming back, companies can price products more competitively. And you’re seeing better features, such as enhanced death benefit riders and stronger guaranteed minimum accumulation benefits. 

Q: Consumers have many choices when it comes to saving for the future. How can advisors help their clients manage their retirement risks?

A: I recommend a simple strategy to help clients manage risk — encourage them to focus on diversification. Help them create a portfolio of products that provides principal protection, some measure of upside potential, and a way to protect their wealth and transfer it to their loved ones. 

For principal protection, one of the safest moves is to choose an insurance product such as a fixed annuity or a fixed indexed annuity. Fixed annuities guarantee principal protection, and they’re a good alternative to bonds.   

Fixed indexed annuities may provide more upside growth potential than fixed annuities. They offer some market participation, while at the same time providing protection from market losses. A fixed indexed annuity with an enhanced death benefit rider can help clients maximize their growth potential while also giving them the option to leave a lasting legacy.  

Q: What’s happening in the macro environment that makes annuities a more integral part of a client’s portfolio?  

A: People tend to become more conservative as they get older. That’s why fixed annuities can play a larger part in a client’s portfolio. A massive number of baby boomers is looking for that protection. Pure population demographics are driving the demand for annuities. They’re shifting their money from equities to products with more protection.

The demand has been there for the past few years, but we expect 2023 to be the biggest year ever for sales of fixed indexed annuities. 

Q: What are the most important factors to consider when helping a client select an annuity? 

A: There are many factors, but here are the ones I think are important to explore: risk tolerance, liquidity, longevity and the financial strength of the insurance company that issues the annuity. 

Another important factor is to consider riders that can adapt to a person’s changing needs over time. Explore income and death benefit riders for clients looking to meet income or wealth transfer goals.

Q: What can a death benefit-focused annuity do for your clients’ retirement savings? Who is the right client for this benefit?

A: A death benefit rider in an annuity can help clients maximize what they pass along to their heirs. It’s precisely for that person who wants to accumulate and transfer wealth to beneficiaries. 

We think of an annuity as a “live-on” benefit. We think of life insurance as a “leave-on” benefit. An annuity with a death benefit rider is for those who want to start viewing their live-on assets as leave-on assets. The purpose behind the product matters, particularly if the product qualifies as a legacy asset.

The reality is that not everyone can qualify for life insurance. Or they may qualify but hesitate to go through the process of obtaining it. An annuity with a death benefit rider allows people to set aside funds that will grow and serve that legacy purpose. 

Q: What is the process for determining the death benefit amount in a fixed indexed annuity with a death benefit rider? 

A: A typical fixed indexed annuity uses the account value as the death benefit. Enhanced death benefit riders offer beneficiaries a death benefit greater than what’s included in the base annuity policy. 

Most death benefit riders provide growth by applying a set percentage, referred to as a rollup rate, or by applying some type of growth factor to the performance of the underlying indices. Recently, providers have been combining these two strategies. This offers opportunities for guaranteed growth in declining markets and performance-based growth in positive markets, further maximizing the growth potential of the death benefit.

Q: How does the death benefit rider impact the overall growth potential and surrender value of the fixed annuity?

A: Annuity issuers may charge a fee for a death benefit rider, which results in a reduction of the account value. But it’s important to remember that in exchange for this fee, annuity owners receive valuable benefits that may accumulate over time. 

Q: Are death benefits flexible when it comes to payout options or beneficiary designations?

A: A death benefit should be payable in a way that serves the beneficiary’s needs or satisfies the annuity owner’s intention. Again, it comes down to the annuity owner’s legacy goal, whether the designated beneficiary is a loved one, a church or a favorite charity. 

And the best-case scenario is a death benefit that offers flexible payout options, such as a lump-sum payout option with no reduction in value. This is important because some death benefits require a payout over a specified period, like five years, or a reduced payout if the beneficiary chooses a lump-sum option.

Q: Are there any age or health restrictions that affect a person’s eligibility to add or benefit from a death benefit rider? How does the rider handle issues such as preexisting conditions or changes in health status?

A: There is usually no medical underwriting involved when you select a death benefit rider. Compared with a life insurance policy, buying an annuity with a death benefit rider is a less invasive way to secure a legacy for your beneficiaries. Annuity issuers usually have issue age requirements. The maximum issue age for death benefit riders is generally 75 to 80. 

Q: How can advisors discuss annuity rider fees with their clients?

A: The first step is to identify the primary purpose of a client’s intent to buy an annuity. Is it for protection, growth, income or legacy? After you determine the intent, you can better assess the trade-off between the fee and the benefit. 

Fees are only an issue in the absence of value. And an annuity with an enhanced death benefit rider offers great value. 

Rich Lane is the vice president of individual annuities sales and marketing at The Standard. Contact him at [email protected].