Recommending FIAs: Start with the client’s objective

Fixed indexed annuities have become popular financial solutions for advisors to address client goals of safe investment returns and lifetime income. FIAs offer owners the ability to earn higher yields than fixed annuities if the markets perform well, while typically providing some protection against market declines. With the increased popularity of FIAs, insurers have become more creative in some design of FIA features and benefits.

FIA Design Factors

At the core, all FIAs have three basic components. First, clients are guaranteed to receive their premium back at the end of the contingent’s deferred sales charge (also known as the surrender charge) period less fees for riders selected. Second, the insurance company needs to make a profit and recoup the costs to issue and maintain the contracts. Third, the remaining balance is applied to the option budget, from which the carrier then determines what caps, spreads and participation rates can be credited for the contract.

Potential Enhanced Returns

With the current low interest rate environment, many carriers have added a feature allowing clients the option to pay a fee in exchange for higher potential crediting of the index based on increased participation rates, higher caps and lower spreads. The trade-off for clients is that the guarantee of premium is now reduced by the fee amount so that clients could get a decrease in the account value should the fee exceed the enhanced index credit amount.

Lifetime Withdrawal Benefits For Longevity Protection

Industry-wide, about one-half of FIAs are issued with a lifetime withdrawal feature either built in or added as a rider. When the lifetime withdrawal benefit is added as a rider, the client generally pays a rider fee of around 1%. If the withdrawal feature is built into the contract, it is bundled into the overall contract design, which means that the cost will be reflected in lower participation rates, caps and higher spreads than a similar contract with an explicit fee. One design is not necessarily better than the other, but advisors and clients should understand that there is no free benefit.

FIAs that use a lifetime withdrawal benefit have two basic components: the benefit base and the payout factor ratio.  The lifetime payment is calculated by multiplying the benefit base times the payout factor ratio. Some contracts focus on the benefit base in which the roll-up can either be a guaranteed credit or performance based.  Additionally, the benefit base may include an initial bonus. It’s important to remember that the benefit base is not the client’s walk-away money but is used to calculate the lifetime payments amount and may be an enhanced death benefit with some contracts. Contracts that focus on the lifetime payout factors may have a lower benefit base but generate a similar or even higher guaranteed payment to the client.

Guaranteed lifetime withdrawals can be leveled or increased based on the performance of the indices and some multiple. Generally, a level payment will have a higher initial amount, while the increasing payment design may provide higher total payments to the client over time. Of course, this must be compared to whatever the guaranteed payment is according to the contract guarantees.

When recommending an FIA for lifetime income, a balance should be considered between the projected lifetime payments and contract value. Some clients may be looking for the maximum potential lifetime income, while others may seek a particular payment to cover specific expenses with the potential for continued contract value to provide either flexibility or a legacy benefit. The total return to the client from an FIA is the number of lifetime payments plus any remaining contract value that can be passed on to the beneficiary.

The range of FIA contract designs and features provides advisors with many options to address client financial goals. It’s important to start with the client’s objective and choose the FIA structured to address that goal.

Rick Wilson is an annuity wholesaler at Crump Life Insurance Services. He may be contacted at [email protected].

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