10 Reasons An Annuity Might Make Sense For Your “Problem” Clients

(Forbes) The world of investing has gotten more complex as the years have gone on. The flood of new products and investing strategies continues to evolve with time. Whether age-based target funds, long/short mutual funds, market-weighted ETFs, structured products, or equity indexed annuities, there’s been no shortage of creativity around the financial industry. 

One of the investments that continues to garner a lot of attention is the tax-deferred annuity. In looking at recent sales statistics as they coincide with market volatility and recession fears, it’s no wonder annuity sales are hitting all-time highs.

Total annuity sales in 2018 increased 14 percent to $232.1 billion, with Q4 2018 having the highest total annuity sales in a quarter since Q1 2009. In addition, total fixed annuities were up 47 percent from Q4 2018 at $37.4 billion. Fixed annuity sales rose 25 percent from 2018 to $132 billion, which is an all-time high. Also, indexed annuity sales set an all-time quarterly record at $19.5 billion – a 40 percent increase from Q4 2018.1

So why is there negative press around annuities, even as sales are hitting record highs? Let’s look at 10 reasons why annuities are popular and could be a PARTIAL solution to retirement planning. 

Other advisors may put these in different order, but the numbers above don’t lie – millions of investors are motivated by some, if not all, of the reasons mentioned below.

1.    Political uncertainty in the U.S. and the world. It feels like there’s never been such division in Washington, D.C., and across our nation. The political rhetoric is downright scary. Impeachment hearings, record-level national debt, and the specter of socialism is frightening many investors. It isn’t much better in Europe with anxiety over Brexit and negative interest rates. Many European banks continue to be in the danger zone. 

2.    Guarantees found in no other investment vehicle. Just for fun, ask your current financial advisor if they can provide a written guaranteed rate of return on the investments they manage for you. If they’re willing to do so and you’re not buying an annuity, your next phone call should be to the SEC or FINRA. Annuities are the only investments associated with the word “guarantee.” In an uncertain world, you can see why this is appealing to so many investors. 

3.    Tax-deferral. A basic function of annuities is they can turn taxable money into tax-deferred savings with virtually no contribution limits. That means no pesky 1099s at the end of the year. With a variable annuity, any dividends, interest, or annual capital gains are not taxed and continue to grow within the account. Why pay taxes on your investment income when you don’t have to, especially if you’re in a high tax bracket?

4.    Index-linked growth with optional fees.The annuity industry has worked to solve the gripe that annuities are too expensive by creating a wide variety of equity-indexed annuities that offer optional riders at an additional cost. In addition, equity indexed annuities often include surrender charges, and in exchange for some form of downside protection, returns may be limited by caps, participation rates, and spreads. 

5.    Income you can’t outlive. As a financial planner, one of the most serious questions I receive from a new client is, “Based on my savings and spending habits, when do you think I’ll run out of money?” Without an annuity, it could be sooner than you think, especially if the market is unproductive for an extended period. With many annuities, you’ll always have a stream of income, even if you live to be 120. In fact, the longer you live, the more valuable the annuity can become. You could end up receiving years of annuity payments the insurance company didn’t anticipate you collecting – all in your favor. On a large contract, that could amount to significant additional income. 

6.    College planning for families with college-bound students. This is for families who are hoping for financial aid and are looking for ways to reduce the Expected Family Contribution on FAFSA forms. Moving funds from a taxable, non-qualified account into an annuity can have a positive impact on the amount available for financial aid. 

7.    Stacking and ratcheting. These are two significant features that are available in many variable annuity contracts. Ratcheting allows the account holder to lock in contract values at different times. Some contracts allow for annual ratcheting, and the most desirable contracts offer quarterly ratcheting. Stacking allows the investor in some variable annuities to lock in appreciated gains and continue to grow the income benefit base at annual rates of about 5%-7%, depending on the contract. 

8.    Cost of hedging. When considering a traditional stock and bond portfolio, how do you hedge your long positions? The average investor typically reduces their equity exposure and increases the fixed income allocation. The more sophisticated investor may consider using put options or inverse ETFs. But there’s a time and energy cost associated with purchasing put option contracts or dragging down the performance with inverse ETFs. My experience suggests the annual cost is somewhere between 1% and 4%, depending on the level of insulation, which could be more than the cost of a typical variable annuity. 

9.    Stay long and strong. One of the challenges facing older investors is the need to become more conservative as they get older. Many retirees are not as confident in the market once their time horizon shortens and they’re no longer receiving a paycheck. Many annuities, especially variable annuities, allow the investor to stay in equities much longer than normal and let the guaranteed downside protection reduce their risk. 

10. Added peace of mind. Wouldn’t it be nice to know the outcome of your investments 10 or 12 years from now? Uncertainty often leads to anxiety. Anxiety can lead to health problems. For retirees, being confident they won’t have to go back to work is essential. 

Annuities aren’t for everyone. Some feel they’re too complex. For others, the features and benefits mentioned above are more compelling than traditional investing. The annuity concept is intended to represent the “safe” portion of your retirement nest egg. It has specific guarantees associated with it that no other traditional investment can offer. In an uncertain world, annuities can offer the added peace of mind many investors are looking for.


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