In the context of an asset allocation strategy, bonds serve two primary purposes: 1) to provide steady income and 2) to counter the volatility of the equity portion of the portfolio and provide stability. How has that been working for you?
If you work with older, high net worth clients, you have most likely uncovered the need for life insurance, either to provide estate liquidity or for the purpose of increasing a family legacy. Whatever the reason, a life insurance policy is a major purchase for older clients, often requiring the payment of large premiums for the remainder of their lives. While you wouldn’t recommend such a purchase for any clients who don’t have the income or the assets to comfortably cover the premium payments, you could greatly enhance the financial position of those who do with the use of a Single Premium Immediate Annuity (SPIA) as a funding source.
Retirees’ demand for more predictability and security in their retirement income has led an increasing number of financial advisors to look to annuities as way to provide more stability in their clients’ investment portfolios. They are also looking to annuities as a way to replace the third leg of the retirement income stool as a guaranteed lifetime income. Retirement planning occurs in different phases and at different stages of peoples’ lives. Depending on what stage of life a person is in, there is different kind of annuity that is best suited for their situation.
You’ve probably never heard anyone complain about their pension. That’s because it provides the certainty of knowing how much income they will receive and that it will last as long as they do. That kind of certainty is very difficult to replicate, which is what makes annuities so attractive.
As a financial producer, you’re aware that one of the main concerns of your clients is how to efficiently and responsibly pass on their wealth, whether it’s to younger siblings, children or even grandchildren.
While there are numerous ways your clients can leave inheritances, certain methods create more burdens than your clients would prefer. For instance, a lump sum often creates harsh tax implications that your clients’ heirs then have to deal with. Additionally, a lump sum without any spending restrictions can be used quickly and not help family members throughout their lives, as your clients likely intended for it to.
Instead of leaving a large sum as an inheritance, you can advise your clients of a more beneficial and structured method: a deferred annuity.
Looking at annuities in a new light
In most cases, your clients will have heard of annuities as a means to manage finances and retirement income, not as a wealth transfer tool. But, as long as the primary and contingent beneficiaries of an annuity are who the client wishes, it can act as a well-structured inheritance, paying out only after your client’s death.
Benefits of a fixed annuity
Two major benefits of using annuities as a wealth transfer method are that your clients can design exactly who receives funds and how the proceeds will be disbursed. An annuity can be set up with one beneficiary or more, as well as with contingent beneficiaries in case an heir is no longer living when the annuity becomes active.
If your client has three children, all of whom have children of their own, he or she can design the annuity to provide income to all three children. In the situation where a child has passed before the annuity begins to pay proceeds, that child’s children could be named the contingent beneficiaries and receive that person’s share of the inheritance.
This is just one example you can provide to your clients to illustrate the flexibility in assigning inheritances.
Annuities not only allow your clients to determine who receives an inheritance, but how. Proceeds can be paid throughout beneficiaries’ lifetimes or in larger sums for a shorter period of time. The ability to customize how the annuity will pay out is important as your clients can manage the tax burden on their heirs and reduce the likelihood of the inheritance being used irresponsibly.
You can even advise your clients regarding the possibility of using a restrictive endorsement with an annuity, ensuring their control over the sum isn’t lost. Under a restrictive endorsement, the beneficiary is unable to sell or assign his or her rights to the annuity, ensuring he or she can’t receive a lump sum in place of timely disbursements.
Using an annuity as a wealth transfer tool offers your clients control and flexibility. In addition to these qualities, which are lacking in lump sum inheritances, an annuity helps your clients protect their families years into the future, ensuring they have the income they need with fewer tax consequences.
There’s a good chance many of your clients are experiencing worry over retirement. Such a significant life transition is bound to come with feelings of apprehension, and it’s typically the financial side of things that gives clients the most pause.
Fortunately, fixed annuities could be the ideal solution to provide clients with a valuable product while also reducing retirement trepidation.
The benefits of a fixed annuity
Like with life insurance and other types of investment, annuities lead to greater feelings of financial security thanks to the guarantee involved. In most cases, a fixed annuity can act as a guarantee that individuals will not outlive their income – a growing fear as people continue to live longer lives.
Financial advisors who do not include annuities among the products they offer are missing out, as worry over retirement only appears to be expanding. More individuals are turning to professionals for financial advice, and retirement planning is often the driving force.
Fixed annuities, along with products like life and long term care insurance, provide clients with the tools they need to face retirement confidently.
Future costs leave Americans concerned
It’s not just maintaining a comfortable lifestyle that has Americans worried about their retirement prospects. Many individuals are even more concerned with the future costs of aging as they’re related to health care.
In fact, research from Fidelity shows that health care costs for couples in retirement are on the rise. They estimate that a couple, aged 65 and retiring in 2016 will need $260,000 to cover health related expenses.
“In recent years, the health care industry has experienced a period of historically low spending levels, due to a range of factors including a period of slow economic growth,” said Adam Stavisky, senior vice president, Fidelity Benefits Consulting. “Looking forward, we expect health care spending to pick up from where it’s been in recent years, though less than what we’ve seen over the last few decades.”
In addition to standard health care, which can at least be partially financed by Medicare, retirees must also come to terms with the need for long term care.
Since Medicare can only be used to fund long term care in very limited and temporary instances, it’s vital for Americans to invest in ways to fund their future care needs.
In addition to LTC insurance, a fixed annuity can be counted on to provide steady income as long as an annuity holder lives. Together with Social Security, life insurance and other investment opportunities, fixed annuities can offer your clients the reassurance they crave and help them obtain the services they need as they age.