By Michael J. Prestwich
The name says it all: the purpose of a Guaranteed Lifetime Income Rider (GLIR) is to provide a guaranteed lifetime income. Period. Improperly sold, a GLIR can do your customers great financial harm. On the other hand, a properly implemented GLIR can be an astute financial move. This article will cover the following subjects:
· When a GLIR is right for your client, and when it is not.
· Avoid promising 7.2 percent when the return is likely to be closer to 0 percent.
· Calculate the cost of withdrawals.
· How to cut the cost of lifetime income riders in half.
· Let income taxes work for you instead of against you.
When is a GLIR is right for your client? The GLIR costs money. Think of the .50 percent, .75 percent or 1.00 percent reduction from the account value as insurance against running out of money if your client lives to a ripe, old age. This insurance premium is a waste of money for a person who will very likely live less than the average life expectancy. People who have high blood pressure, heart disease, cancer, diabetes, obesity, and emphysema generally die sooner than those who do not have these health risks. In my view, most people in these situations should avoid adding a GLIR to their annuity policy.
Avoid promising 7.2 percent when the return is likely to be closer to 0 percent. Here’s an example of when a GLIR is inappropriate. Fred Hefty, age 60, who has a life expectancy of age 81, puts $100,000 into a fixed indexed annuity with a GLIR that charges .75 percent of the value of the income account each year. The income account is guaranteed to grow at the rate of 7.2 percent each year. The first year cost is .75 percent of $100,000, or $750. In year 10, the income account has doubled so the cost is .75 percent of $200,000 or $1,500; in year 20 the income account has doubled again so the cost is $3,000. Assuming a hypothetical 3 percent average interest rate, by including the GLIR the indexed value of the annuity would grow to just over $141,000 in 20 years; without it, the value would be nearly $181,000. If Fred begins the $26,110 guaranteed lifetime income at age 80 and lives until age 85 (four years longer than his current life expectancy), he would receive $130,550 from the policy. This represents a 1.25 percent rate of return. Assuming a 25 percent income tax bracket, the amount Fred would receive is about $98,000, less than a 0 percent return. Using the same assumptions, without the GLIR Fred could withdraw $26,110 from his policy for 8 years, pay minimal taxes, and receive about $180,000 after-tax. On the other hand, if Fred lives until age 95 he would receive nearly $400,000, $300,000 after-tax. The lesson learned here is that your client’s life expectancy is a critical component when determining whether a GLIR is a suitable option for your client. I highly recommend that you walk your client through a Life Expectancy Questionnaire, such as the one on the livingto100.com website, prior to selling a GLIR. Keep a copy of the results in your files in case you ever have to prove the suitability of this recommendation.
Calculate the cost of withdrawals. If you add a GLIR to an annuity policy, tell your client to avoid taking withdrawals except in an extreme emergency. If your customer wants to take a withdrawal, ask the insurance company to calculate the future consequences of this withdrawal on the guaranteed lifetime income. The numbers may surprise you. One client who started a $100,000 policy at age 60 wanted to take a $10,000 one-time withdrawal until he discovered it would reduce his lifetime income by $1,600 per year. Since he planned on living until age 95, this single $10,000 withdrawal would cost him $1,600 times 25 years, or $40,000. He found the $10,000 somewhere else.
How to cut the cost of lifetime income riders in half. So far, you must think I have a negative opinion of Guaranteed Lifetime Income Riders. The opposite is true. My paternal grandfather lived until age 94 and my father still works part-time at age 80. I am fortunate enough to have the “risk” of living to age 100 or beyond. I use the above examples because too many producers add a GLIR on annuity policies without asking their customers about their life expectancy, income tax situation, liquidity needs, or future income needs.
Let income taxes work for you instead of against you. Here is a simple idea that will increase your customers’ indexed account value, give them more flexibility, higher after-tax income, and won’t decrease your commissions: Instead of selling a $100,000 policy with a GLIR, sell two $50,000 policies, one with, and one without a GLIR.
Compare the results for a man age 60, in a 25% tax bracket, earning a constant hypothetical 3 percent interest rate: In ten years the $100,000 policy grows to a $122,000 hypothetical value and will provide just over $11,000 of guaranteed lifetime income. Since all of the income from a GLIR is taxable, the after-tax income from this policy is about $8,250.
In 10 years, the two $50,000 policies have a hypothetical value of $133,000 because the cost of the GLIR is half that of the single $100,000 policy (the first year $50,000 times .75 percent = $375; $100,000 times .75 percent = $750). In year ten, the first annuity will pay out roughly the same after-tax income for ten years as the $100,000 plan. In the 20th year the second annuity will provide a guaranteed lifetime income of just over $14,000 — $3,000 per year more than the $100,000 policy.
In summary, generally you can optimize the benefits of guaranteed lifetime income riders by using the following strategies:
Sell GLIRs when your customer has a life expectancy of age 90 or longer.
Don’t put the GLIR on one single policy, but divide the money into two or more policies.
Base your calculations on the after-tax income.
As required by the 2010 NAIC Suitability in Annuity Transactions Model Regulations, disclose the cost of the GLIR to make sure your customer sees the value of what she is buying.
Use withdrawals from annuities that do not have a GLIR for your client’s unexpected cash needs and to provide income until the policy with the GLIR reaches an age that provides the most income.
Michael J. Prestwich sold his first annuity in 1975. After seven years he started ImagiSOFT, Inc. which develops life insurance and annuity illustration, marketing, and compliance software.
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