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  • Add Plain Jane Annuities for Real Sales Sizzle

    January 26, 2012 by Christopher Martin Scott

    January 24, 2012

    By Christopher Martin Scott
    AnnuityNews

     

    Are you a broker reluctant to address consumers’ misconceptions about annuities? Have you resisted employing the selling advantages that annuities can provide? This is understandable in light of the industry’s sensitivity to the sharp disappointments and losses that investors have suffered in other financial markets over the past two years. We know through our every day experiences that many consumers have become wary of any new investment option, especially those with which they may be unfamiliar. But be brave. You can help your client overcome resistance to a new opportunity by turning to the “plain Jane” in the broker’s arsenal, the no-gamble fixed annuity. 

     

    Primary among the advantages of the annuity is that over the term there is a minimum guaranteed rate and no loss of principal to investors. Contrast that with the fact that there are no such guarantees with individual stocks, mutual funds or bond accounts. The interest rate spread can offer a greater reward than current savings accounts, CDs, money markets, and savings accounts. Plus, the latter are annually taxable often reducing the principal, whereas the fixed annuity offers the advantage of tax deferral until maturity. 

     

    It is also a misconception that investors have to give up total liquidity. Some carriers may offer free withdrawal of interest on a monthly basis others may offer 5 to 10 percent of the total account annually, or some combination of the two; many others offer waivers and riders free of surrender charges or penalties. (Federal and state taxes may apply to withdrawn amounts. Clients should consult with their tax advisors.)

     

    Fixed annuities can take several forms, yielding flexibility and assurance to investment-shy consumers. Among them are the single premium deferred annuity in which a lump sum is invested at the time of purchase; the flexible premium deferred annuity wherein the client can add to the principal over time; the single premium income annuity familiar to purchasers as a means of receiving a monthly, quarterly or annual pay out of funds, and indexed annuities. Our focus here is on the single premium deferred annuity and the fixed indexed annuity that can participate on the upside of equity markets with guarantees.

     

    A primary strategy I recommend for the single premium product is laddering. In this process, the total investment is broken down into several different maturities assuring the investor a variety of rates and payouts. The client can choose a multi-year guaranteed annuity (MYGA) with a maturity of 5, 6, 7, 8, 9, or 10 years. Whatever the choice, the client is guaranteed a minimum rate that remains constant for the life of the annuity. This is an impressive advantage in a moving-interest-rate environment. By laddering, you are offering an option that can satisfy your clients’ desires for a higher long-term rate but overcome concern that their money is locked away and inaccessible. The client who wants to hedge his or her investment is a prime prospect for this strategy.

    As an example, say a person has $75,000 for an annuity. Instead of putting it all into one annuity, the pie can be split into three annuities. He or she can choose a 3 percent rate for five years, a 3.25 percent rate for seven and a 3.75 percent rate for 10. If rates inch up, he or she can cash out at five years and use the funds to capture a higher rate. If rates edge down, he or she still has the benefit of the higher seven- and 10-year rate. This provides an advantage in an environment in which standard savings instruments are offering one percent or less. And there is no risk of loss of the principal.

     

    Now to add some sizzle. The newest product in the market is the indexed annuity. These annuities may offer guaranteed rates of 1.52 percent rates with the potential to reach 6 or 7 percent. This is possible because the indexed annuity participates in equity market indexes such as S&P, NASDAQ and EURO50. If the indexes increase, the annuity participates in that growth through a predetermined formula. If the index falls, the annuity still offers a minimum guarantee of no less than 1½ to 2 percent, depending on the carrier. And there is no risk of loss of the principal. The formula is spelled out in the contract at the time of purchase. Brokers can consult the insurance carriers or their GA about the details of the various contracts.

     

    Here is how laddering and indexing can be combined for the best returns.

    Taking that same aforementioned $75,000 investment, the broker can advise the client to purchase three single premium annuities with differing maturities, but now splitting the funds up into three $20,000 segments having different maturities. The remaining $15,000 is invested in an indexed annuity that takes advantage of any up tick in financial markets. Therein is the potential for a little “pop” with no downside. 

     

    In any economy, even in booming markets, annuities should always be a portion of the investment pie. In turbulent markets especially, this Plain Jane product has the capacity to beat the standard investment because of its interest guarantee and lack of risk to principal. The purchaser is further protected in this respect by guaranty corporations in every state whose purpose is to safeguard consumers against a loss that may occur as the result of a possible failure of an investment entity. Fixed annuities are the answer to your client’s search for safety and security. They are an essential part of the building blocks of any portfolio. With a variety of strategies to draw upon, brokers can offer additional incentives to purchasers at any level of investment.

     

    Christopher Martin Scott is executive vice president of sales and marketing at Algren Associates, Inc., which partners with advisors and helps them create, coordinate and close sales. Information on Algren, which has offices in New York and New Jersey, can be found at www.algren.com.

    © Entire contents copyright 2012 by InsuranceNewsNet.com, Inc.  All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.

    Originally Posted at AnnuityNews on January 24, 2012 by Christopher Martin Scott.

    Categories: Industry Articles
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