Strategic Use of Annuities
Advisor Insights
Help improve your clients’ financial plans by understanding where an annuity can provide specific benefits.
The Annuity Landscape
At more than $2.5 trillion in size1 , it’s no surprise that nearly half of investors own an annuity, and even more are interested in the idea of guaranteed lifetime income2.
Insurance solutions, including annuities, are typically purchased to generate guaranteed lifetime income, tax-deferred growth potential and downside protection against market losses. Historically, high-cost commission-driven products have negated the potential benefits they can provide and were not necessarily sold to clients out of best interest.
In the last two decades, the advent of investment-only variable annuities (IOVAs) has allowed RIAs to leverage the power of tax-deferral for their accumulation-focused clients. Today, as more clients seek the income- and protection-focused benefits annuities can provide, carriers have developed Commission-Free solutions to align with the fiduciary model.
A New Approach
DPL Financial Partners understands the impact annuities can have on both a client’s financial plan and how fiduciaries differentiate themselves from their competition. By working with carriers to remove product commissions, DPL is helping RIAs strategically implement annuities to solve for more than just lower cost.
Using Annuities for Guaranteed Income
As pensions and other reliable income sources disappear, clients are faced with either reducing discretionary spending in retirement or assuming additional risk in a total return portfolio to meet income needs. An annuity with a guaranteed income benefit can provide clients a stream of income they cannot outlive, and does so with an exclusion ratio, which reduces the tax liability for income distributions. The guaranteed income rate provided by an annuity is often much higher than the conventional 4% and helps eliminate sequence of returns risk. By using an annuity to address essential expenses, clients gain both a license to spend in retirement and can designate more asset for accumulation or legacy purposes.
Using Annuities to Lock in a Death Benefit
Using an annuity with a death benefit can provide a level of financial protection for your client’s beneficiaries. Many annuities come standard with a death benefit, while most IOVAs offer them as their only optional benefit. A standard Return of Premium death benefit ensures that regardless of market performance, a client’s beneficiaries are guaranteed to receive a payment equal to the initial premium. Additional death benefits can be considered to provide ongoing quarterly step-ups reflecting increasing contract values, which helps clients protect a potentially larger legacy. If the accumulated contract values decrease, the death benefit remains level so the gain in death benefit is “locked-in”.
Using Annuities as a Fixed Income Alternative
With interest rates at historic lows, maintaining reliable and efficient fixed income levels is becoming increasingly difficult. Using a fixed index annuity (FIA) as a bond replacement can deliver a higher interest rate while protecting principal. FIAs performance is based on a selected index, while Multi-Year Guaranteed Annuities provide a fixed rate for a defined period, allowing clients to choose the right annuity products to meet their income needs.
Using Annuities for Accumulation
The tax-deferred status of annuities makes them an ideal accumulation vehicle for high net worth clients. Designed with low costs in mind, IOVAs provide an additional avenue for growing retirement earnings, without the contribution limitations of traditional retirement accounts, and often with a wider range of investment choices.
For clients nearing retirement but still interested in maximizing growth potential, an annuity with principal protection features can be useful. Registered Index-Linked Annuities (RILAs) provide two protection options—floors and buffers—each with a defined level of protection and upside. A “floor” helps minimize tail risk by absorbing any losses beyond a defined percentage, while a buffer absorbs the first losses of a market dip. With a focus on minimizing the effects of market volatility, RILAs can help clients remain invested and capture upside.
Conclusion
Commission-Free annuities enable advisors to deliver greater value to their clients and grow their business by providing new solutions to address client needs more efficiently. By taking current client needs into account, you can determine where an annuity fits best within your client’s financial plan, delivering greater client benefits while increasing advisory AUM.
Consider utilizing annuities when your client needs:
Guaranteed Retirement
Income Fixed Income Alternatives
Tax-Deferred and Protected Accumulation