Indexed Annuities or Indexed Life: Top Producers Use Both
June 15, 2011 by Brian D. Mann
Take a look at this chart from [AnnuitySpecs.com’s Indexed Sales & Market Report] that shows industry sales volumes of indexed products, and it is clear why agents would want to be selling indexed annuities and indexed life insurance. During a decade where sales of traditional fixed or variable products have bounced up and down from year to year, both types of indexed products have seen a remarkably steady rise in popularity.
These rising sales trends are due to the attractive combination of guarantees and enhanced interest crediting potential that indexed products offer to our clients. But while indexed annuities and indexed life insurance share a common way of crediting interest, they also have some significant differences that make one or the other a better fit for each particular client.
Many agents sell indexed annuities, but not indexed life insurance, or vice versa. But since there are situations where one is clearly superior to the other, to serve your clients best, you should know how – and when – to sell each.
When Indexed Life Insurance Fits Best
Indexed life insurance products offer some compelling advantages:
- They have very high index participation relative to annuities.
- They offer not only tax-deferred cash value accumulation, but also the potential for tax-free distribution via contract loans.
- They provide an income tax-free death benefit that is far in excess of the premiums paid.
Here are some situations where indexed life insurance fits the client’s needs better than an indexed annuity.
- Younger clients: Younger clients benefit from the combination of relatively low cost-of-insurance rates and very high index participation. Plus, they are usually healthy enough to qualify for the insurance without much trouble.
- No lump sum: Many clients see the need to put money aside for future needs, but they haven’t saved up enough to meet the minimum premium requirements of an annuity. Indexed life insurance can accept a low monthly premium without requiring an up-front lump sum.
- Inadequate retirement savings: Even if your client has a high enough lump sum to purchase an annuity, that lump sum may not be nearly enough to assure a comfortable retirement. Indexed life insurance can’t solve that dilemma for the contract owner right away, but it can immediately provide for the owner’s beneficiaries should the insured owner happen to die before having the chance to accumulate a comfortable amount of retirement savings.
- Concerned about tax rate increases: Under current tax law, values in an indexed life insurance contract can be accessed via contract loans on an income tax-free basis, as long as the premium pattern has not violated the modified endowment contract limits. If your client believes that tax rates are going to go up, the prospect of tax-free distribution is particularly appealing.
When Indexed Annuities Fit Best
Indexed annuities also offer some compelling advantages:
- They are relatively simple to purchase and easy to understand.
- They have no cost of insurance or other charges, other than surrender charges, which can be avoided by simply not taking any excessive premature withdrawals.
- They have the ability to accept qualified money in a tax-free transaction.
Thus, there are certain situations where an indexed annuity fits client needs better than indexed life insurance.
- Qualified money: Clients can put their traditional and Roth IRA money into an annuity. They can also move money from an employer’s qualified retirement plan into an annuity without triggering taxation. Every year, about half of annuity sales involve qualified money – money that cannot go into a life insurance contract.
- Desire for simplicity: Some people prefer a nice, simple product that they can easily understand without the need for an illustration to figure out its benefits and that does not have charges that vary from year to year. Plus, clients don’t go through a lengthy underwriting process when they purchase an annuity.
- Chronic health conditions: Clients can qualify to purchase an annuity regardless of their health conditions.
- Older clients: Older clients who can qualify for life insurance often find the cost of insurance charges expensive, so they like the fact that annuities have no explicit charges other than surrender charges.
Therefore, Use Both
To serve your clients best, you need to know how to sell both types of indexed products, annuities and life insurance. If you don’t, there are carriers and marketing organizations that make free training available to you. I strongly encourage you to take advantage of that opportunity. It’s worth your time, and your clients will be glad you did.
Brian D. Mann is the executive vice president and chief marketing officer at Partners Advantage Insurance Services. He is a multi-million dollar personal producer, coach and mentor for insurance professionals. Partners Advantage is a national insurance marketing organization that serves as a one-stop shop to more than 20,000 independent insurance agents, financial planners, and broker-dealers.
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