By Linda Koco
When do most advisors start talking with clients about income annuities? Quick, grab a pencil and jot your answer. Then read on.
Executives from CANNEX USA say the prime time for today’s advisors to have “the talk” is when clients reach their late 60s or early 70s.
This is not accidental, according to CANNEX President Gary Baker. When people turn age 70.5, they must, under U.S. law, start taking required minimum distributions (RMDs) from 401(k)s and other deferred compensation retirement plans they may hold. That drives consumers to their financial advisors for help with the RMD calculation, and that in turn drives advisors to ask their clients about other income sources.
Pretty soon, advisors start hitting up the payout annuity database at CANNEX to find out about income annuity products and features available to meet the customer’s need.
A new report on advisor activity on the CANNEX database shows that the average age of potential income annuity buyers, as inputted by advisors in 2012, was the pre-RMD age of 69.1. (For women, the average was 70.5, and for men, 68.1.)
Trends and trolling
Baker believes that the 69.1 average age is significant. The late 60s and early 70s represent the time of life when many people start intentional income planning, he points out. What happens is that the RMD gets people to sit down with their financial advisor, to find out how much they must withdraw under government rules.
“Clients put their papers on the table, the advisor answers the RMD questions, and then the advisor starts checking to be sure the clients have a sufficient floor on income to supplement other retirement income they may have.”
That’s when the income annuity discussion comes up, he says.
This is a time in life when people move from savings to cash flow, Baker adds. But in many cases, “that’s like going from math to calculus”—because many variables are involved, including time segmentation of the income flows, age of the client, contracts that are available, and options for the consumer.
Even so, “in most cases, at age 70, clients are willing to lock in some income,” Baker says.
The CANNEX report supports that contention. In 2012, 90 percent of the advisor requests were for products making monthly payouts that start immediately. Just a fraction—0.21percent—involved products that would start income up to 300 days later.
It’s about non-qualified funds
The report also shows that nearly 77 percent of the advisor’s payout annuity requests named non-qualified funds as the source for the income annuity funding. By comparison, only 21 percent of the requests named qualified individual retirement accounts as the source.
So, even if RMD rules did drive a lot of clients to visit advisors in the first place, advisors did not limit their discussions with clients to qualified plan issues, says Barker. “They looked at the client’s other savings and explored using non-qualified funds to lock in basic retirement income.”
Only the more sophisticated financial advisors tend to use qualified funds in income annuities, notes Jim Dobler, national sales manager for CANNEX USA.
Such advisors might set up a policy to, say, take care of the RMD withdrawals. But the tax penalty for inadequate RMDs is very steep, he cautions, so it’s important to be very sure that an income annuity payout would cover the RMD now and in the future. If tax provisions involving RMDs should increase, older products would likely be grandfathered, Dobler allows. However, in dire circumstances, “all bets would be off.” For that reason, he says, “it would take a sophisticated financial representative to do it right.”
An easier conversation
The 2012 data suggest that advisors may be stepping up their conversations with clients about taking the cash refund option. This increasingly available income annuity feature typically provides that, if the annuitant dies before receiving payouts equal to the annuity purchase payment, the beneficiary will receive the remaining amount.
The 2012 survey shows that 15 percent of advisor inquiries involved cash refund contracts. That’s up from 13 percent in 2011.
Dobler, who used to be a financial advisor, thinks advisor interest in offering the cash refund option is growing in part because “it’s a nice across-the-kitchen-table story to tell the client.”
The rep can point out to the client that “‘although you will start out receiving a few dollars less each month with this feature, you know that your estate won’t lose any money that’s coming to you,’” he says. This is easier to talk about than to lay out some sort of financial plan that accomplishes something similar, he adds.
The cash refund feature also creates an opportunity for advisors to discuss with clients how today’s income annuities are different from those of the past. Many people don’t know about the cash refund feature or that the products have liquidity features, Dobler explains.
No-load and low-load income annuities?
A trend that the survey did not pick up on, but that Baker says is on the way, is the arrival of income annuities that have no loads (for commissions), or very low loads.
A few large distributors are offering such products on a one-off basis, only for use by their own advisors and clients, Baker says. But other distributors are talking about asking insurance companies to make the products available to the broader market so that fee-based advisors—especially registered investment advisors (RIAs)—can use them when working with retirement-minded clients.
RIAs see the products as taking the place of bonds in a client’s portfolio, he says, but they want the product design to fit into their fee-based practice.
Worth noting is that the 2012 survey shows that advisors entered 18 percent more income annuity requests into the system in 2012 than in 2011. (In terms of raw numbers, advisors plugged in 485,482 requests on cases in 2012 versus 412,460 in 2011.)
This occurred in a year when LIMRA reported that actual sales of income annuities increased while sales of most other types of annuities decreased. Baker views this as an indication that “income annuities are making a slow but steady climb in the marketplace,” despite what other annuities are doing.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].
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