As a co-founder of a fixed annuity marketing organization, I must confess we are living though some trying times. With interest rates as depressed as they are, I see advisers struggling with what to sell.
Although we’ve recently seen a bump upward in rates, I think advisers need to be prepared for the very real possibility that annuity rates are going to remain suppressed for 2011; at least that’s what I am hearing all of our carriers tell us. So where can you find selling traction?
Well, I have some suggestions.
Don’t sit around waiting for rates to rise. If you are, you are as guilty as your clients and you should know better. Sure, the best five-year guaranteed rate annuities are hovering around 3 percent to 3.30 percent, but everything is relative. I monitor weekly CD and money market rates on the FDIC’s website. A jumbo 1-year CD is paying about .50 pbs and money markets are half that, at best.
Here’s an exercise I would encourage you to undertake. Take a $100,000 deposit and make the assumption that your CD client renews their CD over five years. Now make the assumption that rates double for the next three years before leveling off at 5 percent in year five. Then factor in tax rates.
Now compare that to a tax deferred annuity paying 3 percent for 5 years. Guess what … waiting does not pay off!
My advice is to re-adjust your thinking to the new normals we are now living in. We could be here for a while.
Consider selling indexed annuities without premium bonuses. True, most of what reps are selling are bonus products, but with rates as depressed as they are the value is on the non-bonus product if your client is really after accumulation. Case in point, an annual point to point cap on a 10 percent premium bonus might be around 3 percent right now. Drop the bonus, and consider a shorter chassis and now you are talking about 7 percent caps.
What’s that? You like the monthly sum strategy? The story is no different. Rather than sell a monthly sum cap of say 1.5 percent, you could be selling a monthly cap of 2.5 percent or more and that gives your clients way more upside.
Get on board with PPA compliant annuities. PPA (Pension Protection Act of 2006) compliant annuities are a new breed of product that offer linked long term care benefits with tax advantages. This is an exciting new market that many of you still know nothing about. But you should because PPA compliant annuities allow you to sell solutions instead of rates.
To me, the most exciting opportunity here is the 1035 market. Let’s suppose you have clients with a mature non-qualified annuity. Maybe they started with $100,000 and they now have $150,000. Well, thanks to the Pension Protection Act of 2006, you can now 1035 that annuity over to a PPA Compliant annuity with LTC benefits, and your clients can withdraw 100 percent of it to pay for long term care — tax free.
Guys and gals, please do me a favor and re-read that last sentence. It’s an amazing opportunity to solve problems. Be warned: Not all annuities are PPA compliant. So you must be certain you are using one that is in order to pull this off successfully.
I have many more ideas that will help you gain traction in the new marketplace, but I suspect I am pushing my work limit, so I will save those for the next post. Until that time, peace out!