MDRT INSIGHTS | BY TOM HENSKE
Variable Annuities: Power ‘Clubs’ Score Hole-In-One Financial Plans Lifetime Guarantee
T
he score of a golf game isn’t necessarily affected by the type of club that’s used—but rather by how the player swings it. The same can be said about developing a client’s portfolio. Let’s consider a variable annuity as the “club.” There are many parts needed to ensure a hole-in-one financial plan, and an annuity is just one small part.
Three Suitability Factors
a factor, as each investor has a varying level of apprehension. If you determine a prospect to be an ideal candidate for an annuity product, start the conversation by describing the worst case scenario—give the guarantee as an example. You can illustrate this by saying, “Mr. Client, when you’re 65, if your company could provide you with X amount of income—guaranteed for life— would this be something you would be interested in discussing?” They’ll likely chuckle and say, “Umm… yes!”
Today, the human body has the capacity to live well past 100, which is concerning to many of our clients. The longer a person lives, the more resources they will need, which increases the likelihood they’ll run out of money. No one aspires to run out of income, but annuities with guaranteed lifetime payouts, guard against this longevity risk. When the stock market took a drastic decline in 2008 and 2009, it was because people were selling. It is very difficult to talk a person “off the ledge” when they see the value of their portfolio cut in half. Few who held variable annuities with guarantees sold out of the market, and people with guaranteed riders got the benefit of the market rebound—which is important to tell your skeptical clients. There are no other products that give you the upside of market participation, downside protection and a favorable tax treatment for a relatively small investment.
The three most important factors when Protection evaluating a client’s suitability for an Variable annuities allow investors who annuity product are their age, health tend to be risk-averse to be more aggresand risk tolerance. Older clients may Worth the Risk sive in their asset allocation. For example, find variable annuities to be an appropri- As advisors, we know a variable annu- if an investor without an annuity typically ate tool to achieve their retirement goals ity is not an inexpensive proposition, but felt comfortable with an investment portbecause of the assurance many of them the cost is only relevant in the absence folio with 60 percent in equities and 40 offer. For example, a 65-year-old can be of value. Your client has to be concerned percent in fixed income, they might be invested in a balanced portfolio which about outliving their resources and invest- willing to increase equity exposure if it guarantees a 5 percent ing in equities. The price resided inside of a variable annuity with “An annuity is not for effective annuity prod- a guarantee rider. The long-term benewithdrawal rate for life. an inexpensive This is justified by paying ucts are worth the risk mit- fits of this strategy could be significant proposition, but 3 percent in annual cost. igation they provide. For over an extended period of time, allowing The same 3 percent, example, for a 3 percent their retirement nest egg to last longer. the cost is only however, does not make annual fee, one insurance relevant in the sense for a 35-year-old to absence of value.” company offers a variable Tom Henske, ChFC, CLU, CLTC, CFS, is the founder of incur because they’ll have annuity product guaran- Henske Advisors. He is now one many more years in the market. Annui- teeing the initial value invested will at of seven partners nationwide for ties generally work best the longer you least double in 20 years (3.6 percent rate of Lenox Advisors, a wholly owned subsidiary of NFP. He is a 10live, based on either annuitization or return). Should the market perform well, year member of the Million Dola specific, guaranteed payout percent- the annual rate of return will still depend lar Round Table (MDRT) and has age for life. This is why annuities do not on the portfolio performance, but the net two Court of the Table qualifications. He can be reached at Tom.Henske@innfeedback.com. make sense if you believe the client’s has to be higher than 3.6 percent. life expectancy will be shortened for any health reason. Risk tolerance is also The Million Dollar Round Table is the premier association of the world’s most successful life insurance and financial services professionals. 50
InsuranceNewsNet Magazine
April 2012