FOR FASTER ACCELERATION, DITCH THE GLWB RIDER
August 5, 2013 by John Williams
When selling fixed annuities in today’s low-interest-rate environment, it can be difficult to manage client expectations about comparably low returns. Managing expectations is a sales skill many advisors might not have needed much in the past. But, in today’s market, managing client expectations is a must.
Having a conversation with a client in order to set expectations shouldn’t deter advisors from promoting the key points of fixed indexed annuities. If sold through a reputable carrier without an income rider, they offer a strong opportunity to grow the account’s value.
Selling a deferred indexed annuity can help a client’s account beat inflation over the next five to 10 years. Some advisors think indexed annuities offer the best chance to grow a client’s account because of their greater return potential. Think of it as an alternative to the latest trend, which is selling the anticipated future perks of a guaranteed lifetime withdrawal benefit (GLWB) feature added to the base account in the form of a rider. Indexed annuities sold with an eye toward accumulation can be a winning solution.
The True Benefits of an Indexed Annuity
The Employee Benefit Research Institute recently published its 23rd annual Retirement Confidence Survey, which reported that 49 percent of workers are not confident they will be able to afford a comfortable retirement. Twenty-eight percent said they are not at all confident –
one of the highest levels recorded in the history of the survey. Everyone’s financial goal and situation is unique, but the survey shows that people who continue working are worrying about earning more on their money. New retirees, another group that may purchase annuities, are likely to feel the same way.
To that end, recommending an indexed annuity can help align your prospects and clients with their goal of accumulating retirement funds without sacrificing principal. All fixed annuities are under the jurisdiction of state insurance regulators and are considered safe-money investments. The insurance company, or product promisor, offers minimum guarantees plus the safety of a client’s principal and earnings. Generally, people may buy indexed annuities not for their flexible income potential but for the chance to earn a little more than other safe-money accounts, while simultaneously protecting their downside.
Indexed annuity customers want more return than what they could get from purchasing a bank certificate of deposit. Yet, advisors who follow the latest trend of selling today’s indexed annuity with a GLWB add-on run the risk of weighing down future returns that could be matched by a competitive five-year bank CD. Over the life of a policy, rider costs drag on indexed annuity account returns. That drag is heaviest in a low-interest-rate environment.
The main anchor on annual returns is the cost of the GLWB rider. This cost, which averages 0.8 percent of the current account value regardless of what the client earns on the account, pays for the right to a future lifetime income he may never use.
For example, a client earning interest on today’s average one-year bank CD would need to save for more than one year to earn enough interest to pay for the cost of a GLWB rider for one year. This added expense, coupled with low cap rates, puts the client at risk of losing his or her future purchasing power, while earned returns sink toward bank CD returns. Would clients buy the rider if they were aware of this?
Growth Over Flexible Income
If you choose to sell an indexed annuity with a GLWB rider, it is important to emphasize the flexible lifetime income aspect rather than the guaranteed income account growth percentage. The income account growth only can be accessed if the client requires lifetime income and otherwise is unavailable for the policyholder to access.
For a client to truly understand the implied return of GLWBs, or the value of the guaranteed roll-up rate and withdrawal combination a GLWB rider offers, it first should be converted to a number comparable to bank account interest or returns on a mutual fund. These tend to be numbers that clients already are familiar with, making it easier for them to compare with other options. For example, a direct comparison of the GLWB annual growth percentage of say 5 percent and the 1.3 percent annual yield of a five-year bank CD is misleading.
The GLWB rider and many of its benefits can be great, as long as brokers have ensured they are selling an income rider to someone who wants and understands it. Clients should know that choosing a rider today means running the risk of losing purchasing power later. There is a price to pay for access to lifetime income they may never use, or worse, regret buying. As a financial advisor, you should be comfortable discussing all possible outcomes regarding their investment.
As an alternative, consider positioning an indexed annuity as an accumulation account that offers the opportunity to earn a little more, beat inflation and, most importantly, stay safe. An indexed annuity potentially can earn inflation-beating returns over the next five to 10 years and offer a free income for life, in the form of annuitization, should clients request it. Fixed deferred annuities can be converted to a series of payouts that can be structured to last a lifetime. There’s no need to pay extra for this feature.
Working with Reputable and Principled Carriers
To beat inflation in today’s current cap rate environment, renewal rate cap integrity is key; in other words, evaluating how the company might treat the client in future years as it relates to the maximum crediting level to which the account may grow. In any indexed annuity sale, the customer is at the mercy of the product promisor. A company that decides to pad its own future bottom line does so at the expense of its loyal customers by curtailing the maximum renewal cap rate offered.
When offering annually renewable indexed annuities, look for an insurance company/insurer with a published renewal cap rate history for anyone to view. Fully disclosed indexed annuity renewal rate caps are the only way a prospective purchaser can check actual return performance of previously sold policies. It’s important to align yourself with an insurer who acts in the same manner as you: with integrity, full disclosure, highly-personalized service and customer satisfaction.
Successful Sales and Satisfied Clients
Frank client discussions reveal genuine intent regarding your clients’ financial goals, and collaboration is essential to see them succeed. Financial advisors and producers should be aware of both the reasonable benefits a GLWB rider provides and the considerable drawbacks when adding a cost item to an annuity purchase in today’s low-interest-rate environment. It’s your job to frame the potential outcomes in terms that clients easily understand to ensure you’re setting them up for the long term.
John Williams, CLU, is a regional sales director of individual annuities for Standard Insurance Co. John can be reached at John.Williams@innfeedback.com.
