10 annuity strategies with high client appeal
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Along with life insurance, annuities are one of the most flexible products available for helping clients successfully meet their financial objectives. Here are 10 useful strategies to consider:
1. Avoid the mutual fund tax trap. There’s no reason to pay taxes on money that a client doesn’t plan on spending. A majority of mutual funds turnover is 80%+ of the portfolio annually, therefore creating a lot of taxable short-term capital gains. Additionally, your client is responsible for the long-term capital gains, interest, and dividends regardless of performance. The mutual fund portfolio manager doesn’t care about your client’s tax bill. Annuity tax deferred growth will boost performance.
2. Receive a guaranteed lifetime income. If your client has a goal to purchase an income stream, then the industry provides choices. Shop for companies that offer riders to match when your client estimates they may need to trigger the income benefit. For example, one large insurance company offers a 10% rollup for a limited seven years while another company provides a 6% increase for longer duration 10 to 20 years. Clients may pick a joint spousal income or single for a higher percentage. The income rider expense is near 1% per year.
3. Upfront bonus. Numerous carriers create an incentive for the initial investment with the agreement to stay with the annuity for the stated duration. Therefore, be aware of potential recapture, surrender schedules, or market value adjustment. Try not to use the bonus to reimburse any surrender charges on the existing annuity because a better plan is to wait out the remaining surrender to secure the entire bonus for your client later.
4. SPIA bridge Idea. A client under age 70 has a goal to leave a qualified plan alone until RMD time. The SPIA provides a known, guaranteed income stream and keeps the money in a tax-efficient place. For example, age 63, widow and teacher has a lump sum from a life settlement and selects a 7-year SPIA to keep her 403b Plan preserved until age 70½. She achieves seven more years of tax-deferred growth and a monthly income stream in the interim before tapping into her qualified funds.
5. SPIA as irrevocable. The goal for many older age SPIA policy owners is to have an irrevocable, Medicaid-friendly contract. For example, one insurance company allows the owner of a nonqualified contract to add a restricted endorsement rider at no additional expense, therefore binding the SPIA irrevocable, non assignable, and non transferrable. This endorsement is used in certain financial planning situations where it is desirable to restrict the contract owner’s ability to make changes after issue and prohibits any access to funds by way of surrender, transfer, collateral assignment, or commuting the value of the contract. The internal rate of return is competitive with other carriers.
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