Annuities: Money for Life

Money for Life

A conversation with Guardian’s Douglas Dubitsky

By Maria Wood

It’s all about lifetime income these days. That’s how Douglas Dubitsky, below right, vice president of product management and development for retirement solutions at Guardian Life Insurance Co. of America, sums up the current annuity landscape. Weary of seeing their savings battered by a fickle market, the public and their advisors are coming to understand the value annuities can bring to a retirement portfolio, namely, income one cannot outlive.

“Even when the markets go back up, people are going to look for that consistent, reliable, guaranteed lifetime income, and at that end of the day, only an insurance company can provide that,” said Dubitsky in an interview.

Consequently, Guardian intends to grow what Dubitsky called its “income business.” Among Guardian’s main annuity products are a variable annuity with a living benefit rider; a single premium immediate annuity; and single premium deferred annuities. Last year, the company did more than $1 billion in variable annuity sales. It has a smaller footprint in the fixed annuity arena, where it did just under $100 million in sales last year. Dubitsky, who is based in New York City, said low interest rates have made fixed annuities less of a priority for Guardian. “But it will be an important product again once we get some interest rate pick up,” he said. The company does not do equity indexed annuities.

“Designer income”

As someone who has worked in the annuity business for 15 years, Dubitsky has seen a shift in product concepts as well as how the public perceives annuities.

“The annuity business used to create products and the financial advisor had to fit their client into our products,” Dubitsky said. “Over the past few years, it’s much more about creating a product that has flexibility in it so that the financial advisor and ultimately their client can design the income plan to fit their need.”

Or, as he termed it, “designer income.” For example, in Guardian’s variable annuities, a policyholder can choose the percentage of funds he or she wants in equities or fixed income, going from 80/20 down to 40/60. They can also select from a menu of different holding periods, so policyholders can decide to take the payout when they need it most. There are also cost of living adjustment riders. “When I talk about flexibility, it’s really focused on allowing the product to meet the needs of the person who is buying it,” Dubitsky said.

Because of those flexible options, coupled with the sting of market upheavals still fresh in the minds of consumers, annuities are now being seen in a new light by the general public, Dubitsky said.

“The past few years have been exhausting for people in the marketplace‑exhausting for companies and for consumers opening up their statements every month,” he said. “And the need for guaranteed lifetime income that you cannot outlive is starting to resonate in this country at a level it hasn’t in the past.”

What liquidity really means

Dubitsky conceded the industry has failed to clearly explain to the public what is admittedly a complex product. To help people better understand the benefits of an annuity, the industry now needs to educate consumers on what liquidity really means.

To most, liquidity means going to the bank on any given day and having access to their money. But Dubitsky said that is the wrong way to view liquidity.

“People always believed I need to go to the bank on July 17 and have access to my money. That’s liquidity,” he said. “No, liquidity is having cash flow on July 17, August 17, September 17 in 2012, 2013 and 2014, and every year for the rest of your life. That’s liquidity. That piece has been so misunderstood by advisors, the public and the industry. And that’s a story we really need to tell. Because that’s what provides people the flexibility and freedom to do things in their life.”

An annuity frees up the advisor to do his job as well. Once a client’s basic expenses are covered by an annuity, the advisor can concentrate on maximizing the client’s discretionary assets.

“Nobody is talking about taking all the client’s assets and annuitizing them,” Dubitsky explained. “Look at your client holistically. You cover their basic needs with guaranteed lifetime income…And that allows the advisor to now be an advisor on the rest of the assets.”

Focused distribution

Dubitsky acknowledged the annuity industry faces myriad challenges today, mostly stemming from the low interest rate environment.

Guardian manages those risks by having a focused distribution channel through its agency sales force; its broker-dealer, Park Avenue Securities, LLC; and selected independent financial planners. It does not distribute widely through banks and the wirehouses, thus it can avoid making “knee-jerk” reactions based on short-term market volatility, Dubitsky said.

“The fact that we have targeted distribution allows us to be more thoughtful and more strategic in our thinking, because I don’t have the fear of uncontrollable flows coming in,” he said.

Guardian also carefully selects the funds in its annuity products. “In addition to looking at the stability of the fund, its track record, and the consistency of the management team, we have to be able to hedge it,” Dubitsky said. “That’s a huge aspect of risk management and that causes tremendous selection in the fund family. We are also very focused on what our benefits provide and matching the right benefits to the marketplace and keeping a competitive product, but at the same time making sure it’s a risk that’s going to enable Guardian to remain a strong company.”

Another hurdle is simply trying to break apart the misunderstanding of annuities, said Dubitsky. “We used to run from the word annuities. We don’t do that anymore. Annuities are a good thing.”
Source: LifeHealthPro. July 16, 2012.

Annuities: California Appellate Court nixes Glenn Neasham conviction

California Appellate Court nixes Neasham conviction
By Maria Wood

An Appellate Court in California has overturned Glenn Neasham’s 2011 conviction for theft from an elder stemming from the insurance agent’s sale of an annuity to a then 83-year-old woman.

In the judgment handed down Tuesday by the Court of Appeal of the State of California, First Appellate District, Division Three, jurists wrote that “although there was conflicting evidence as to the elder’s ability to understand the nature of the transaction, there was no evidence that defendant [Neasham] appropriated the elder’s funds to his own use or to the benefit of anyone other than the elder herself, nor was there evidence that the defendant made any misrepresentations or used any artifice in connection with the sale.”

Further, the court ruled that the instructions given to the jury were incorrect in that the panel was told it had only to find “the purchase of the annuity deprived the elder of a major portion of the value or enjoyment of her property, eliminating the necessity of proving that defendant had any such intention.”

“I was overwhelmed with joy yesterday,” said Neasham in an interview with LifeHealthPro.com. “My family and I are ecstatic about the outcome because it was reversed in full. We’re hoping we can get on with our lives, get our insurance license back and move forward.” Neasham did 100 hours of community service and paid a $5,000 fine in connection with the case.

The case could be returned to the local district attorney’s office, according to Neasham. His attorney at the trial, Mitchell Hauptman, told him that it was “highly unlikely” the case would be re-tried because Schuber’s money was returned to her in full with interest in 2012; therefore, there was no theft. Further, Neasham said that Schuber is now deceased.

Calls to Rachel Abelson, the Deputy District Attorney who tried the case, were not returned by press time. In a local newspaper report, she was quoted as saying there was “a possibility of appealing the decision.”

The saga began in 2008, when Louis Jochim, a client of Neasham’s brought his live-in girlfriend, Fran Schuber, to his office to discuss the purchase of an annuity by Schuber. Ultimately, Schuber purchased a MasterDex 10 Annuity issued by Allianz Life that had a premium of $175,000. The California Department of Insurance has approved the sale of that policy to persons through the age of 85.

When Jochim and Schuber went to the bank to withdrawal the funds for that premium, a bank employee later contacted the Department of Social Services because she believed that Jochim was “exerting undue influence” on Schuber. That triggered an investigation by authorities into possible elder abuse. According to the recent Appellate Court ruling, government investigators uncovered evidence that Schuber was confused and suffering from dementia. Also included in the court document was a notation that Neasham called the bank to advise them of Schuber’s arrival and that if there were any delay in the withdrawal process, he would contact the district attorney’s office.

So in October 2011, the case went to trial in Lake County, California. A detailed investigation of the trial by National Underwriter Life & Health revealed possible bias against Neasham by some jurors and other procedural issues. Neasham was subsequently convicted of theft from an elder, a felony.

During the trial and in subsequent press reports about the case, Neasham maintained that he had seen no evidence of Schuber’s dementia at the time of the sale. Her condition was definitively diagnosed long after the transaction. Neasham also stated that he took steps to ensure that Schuber understood the annuity she had purchased. A former assistant to Neasham testified at trial that Schuber appeared competent at the time the sale was being discussed.

Within the insurance industry, the case set off a heated debate over the question of selling complex financial products, like annuities, to seniors. Many agents contended the Neasham conviction would cause them to curtail the sale of such products to any elder, even if that person appeared to be in full control of their faculties and would benefit from the annuity. Industry observers also decried the increased scrutiny the case might bring upon annuity sales. Since the Neasham case hinged on whether Schuber was mentally competent at the time of the sale, many in the industry argued that it was unfair to hold insurance agents fully accountable for assessing the mental state of an elderly client. In the wake of the trial and conviction, many advisors spoke about increasing their due diligence and suitability review when dealing with senior clients.

Source: LifeHealthPRO, October 9, 2013.

Fixed Annuities & Rising Interest Rates: Can They Get Along?

Fixed Annuities & Rising Interest Rates: Can They Get Along?

By Cary J. Carney

 

When 2012 arrived, some in the financial services community opined that the era of historically low interest rates was beginning to wind down. But this promising rise didn’t last. In early 2012, interest rates suffered a disappointing retreat, which is particularly challenging for retirement savings options such as money market accounts and certificates of deposit (CDs), which are highly sensitive to interest rates.

Traditional fixed annuities also have struggled due to the continued low interest rates. In fact, total sales of fixed annuities dropped 10 percent in the first quarter, according to a report by LIMRA in April.

Yet LIMRA’s report also pointed out a bright spot on the annuity front: fixed indexed annuity sales jumped 14 percent in the first quarter, outperforming traditional fixed annuities for the third consecutive quarter and capturing 45 percent of the fixed annuity market. It is widely understood that this growth is largely driven by consumer interest in the income riders that offer reliable guaranteed income. Such sales outperformance came as little surprise to financial professionals who are familiar with fixed indexed annuities and their specific characteristics. These products provide clients seeking retirement income with a sound combination of flexibility in interest-crediting options and limited upside potential.

Here’s how they do it.

Fixed indexed annuities depart from their traditional fixed annuity counterparts in that they give owners some interest-crediting potential, which is typically linked to the performance of one or more market indices. The owner can put all or some of the annuity’s value in the index-crediting strategy and/or elect to allocate some portion to the fixed interest rate strategy that is typically offered. If the index performs consistent with the index-crediting strategy, the owner benefits, yet if the index goes down, a credit may not be received. However, either way, the owner’s principal is protected. And every contract anniversary date, the annuity owner can re-allocate between the index and the fixed and index components of the product to seek a more appealing balance.

If rates rise, then what?

It’s clear from LIMRA’s findings that buyers are out there for fixed indexed annuities, yet many financial professionals may not fully understand what is driving this demand. After all, the interest rates on the fixed portions of these products have been nothing to write home about. Why are people buying these products? We can speculate that interest rates have been low for so long that, for many clients, these rates have become the “new norm.” As such, financial professionals must adjust their view of the interest rate hurdle and potential sales opportunity this product category represents.

The major hurdle to sales of fixed annuities is the prospect of future rising interest rates. Now, more than ever, financial professionals and clients alike are finding it hard to envision rates going any lower. They share the sentiment that rates will rise in the coming year or so, which can make a range of long-term interest-rate-linked instruments, including fixed annuities, seem less attractive at today’s rates.

In response to these concerns, some insurers have introduced new features on their fixed indexed annuities to credit interest if rates rise. Some carriers have introduced interest-rate-based crediting strategies that use a point on a published “swap curve” as the benchmark rate, while another approach provides the fixed indexed annuity owner with credit based upon an increase, if any, in the three-month London Interbank Offered Rate (LIBOR). This index strategy credits interest if the three-month LIBOR rises from one annuity anniversary to the next.

In practice, this feature typically allows the annuity owner to work with their financial professional to create a degree of diversification of index-crediting strategies within the product. They may be able to adjust how much is allocated to the product’s options for a guaranteed rate, equity index and interest rate benchmark, leveraging the annuity’s potential to act as a durable and flexible vehicle for retirement savings.

Tough conversations.

Regardless of whether a fixed annuity–of any variety–might be a good fit for a particular client, many financial professionals first must deal with various myths about the product that might make the client leery. Perhaps the most common myth, one that can undermine trust from the very beginning, is that fixed annuities are laden with fees and charges that are kept out of sight of the buyer. Typically, the base fixed annuity has no direct fees. Generally, optional features and benefits–such as guaranteed income or specific death benefits–are the only direct fees charged to a contract holder.

Surrender charges can be another point of confusion. Some clients may imagine that they face punitive fees that will prevent them from accessing any of their funds if they need them. Here, too, is another opportunity for a financial professional to explain what surrender charges are, when they are incurred and when funds can be accessed without the imposition of a surrender charge. For example, typically, an annuity owner can withdraw up to 10 percent of the annuity’s value in a given year without penalty. Additionally, many annuities follow the “10/10 rule,” which limits surrender charges to 10 years and 10 percent in the first year of the annuity. Such charges diminish over time and completely disappear by the end of 10 years. Of course, regardless of the “10/10 rule” all surrender charges must be considered carefully in any situation when a client is considering an annuity purchase.

Limits on interest crediting in fixed indexed annuities, such as caps, spreads and participation rates, also may be misunderstood, with clients thinking that such limits somehow boost profits for insurers. Generally, the insurance company purchases hedges to cover the cost of index credits that the annuity owner gets paid. In other words, an insurers’ hedging strategy typically means that they are not impacted by the actual performance of the respective index and don’t get a windfall depending on the actual market performance or interest rate movement.

Taking action

Plenty of financial professionals have clients who are treading water: Clients worry about stock market volatility on the one hand, but also are reticent to lock into current interest rates that may turn unacceptable if rates rise in the coming months. Fixed indexed annuities, including those with features that take advantage of rising interest rates, may present a viable solution for these clients.

By providing the real story about new strategies and options–and addressing some of the negative myths–financial professionals can help their clients overcome their fear of the future and get back to saving for a more secure retirement.

Source: LifeHealthPro, August 23, 2012.

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About the Author

Cary J. Carney is the vice president of independent distribution for ING U.S. Insurance’s annuity and asset sales business, overseeing business development from the national marketing organizations, external wholesaling efforts and providing support for product development and marketing initiatives for the company’s annuity business. He has held a number of positions within ING U.S. since 1997. Prior to joining ING, Cary was a property & casualty and life insurance representative. He also holds his series 6, 63 and 26 securities licenses.

How Annuities Can Benefit Your Clients

How Annuities Can Benefit Your Clients

By Lloyd Lofton

 

With the future of Social Security uncertain and traditional pensions becoming a luxury of the past, the burden of financing retirement is increasingly falling on the shoulders of your clients. To address these growing concerns we reviewed how we can help our senior clients with risk management strategies that include annuities. We have looked at the “features” of an annuity. We pointed out that features are what the product “has” or “does”; benefits are “why” your client would want those features. In other words, features are about the product, while benefits are about the client.

In this article we will look at the benefits of the annuity product for our clients. In other words we will learn “why” our clients would want to have an annuity. The reason we want to review both the features and the benefits of the product is because “features” are the language of logic. Even people who insist they buy logically or based on features do so because that’s what makes them “feel” better. Benefits are the language of emotion. Focus on emotions, not intellect. People buy on emotion but are moved to action by logic. We have to provide an emotional justification to make a logical purchase.

 

Annuity Benefits

1. Tax Deferral

Perhaps the most attractive advantage of an annuity, other than income for life, is tax deferment. Earnings credited to an annuity are not taxable as income until withdrawn.

Tax deferment and the miracle of compounding allow annuities to out-perform most other taxable investments. Because of tax-deferment, annuities (through “triple compounding”) produce more growth more quickly.

Triple compounding allows annuities to accumulate interest on principal, earn interest on interest, and earn interest on money not taken out for taxes, thus a higher effective yield.

The following chart compares how money may grow taxable versus tax-deferred.

 

2. Taxes on Social Security

It may be generally unknown that annuities can reduce or eliminate taxes on Social Security. Income over a certain amount may cause a portion (up to 85 percent) of Social Security income to be taxed. Enough money may be placed into an annuity to reduce income below the threshold amount so that Social Security benefits will not be taxed. This, of course, only works for those who do not need the investment income to augment their current income.

 

3. Avoid Probate

Probate is the process used by individual states to determine the tax liability and the proper transfer of an estate. If the deceased has no will, he or she dies intestate, and the probate courts will determine how the estate is to be apportioned. There are many problems with probate. Among them:

• Lack of Privacy. The process of probate is a matter of public record. Notice is required to be given to all interested parties so that claims may be brought against the estate.

• Delay. It is not unusual for the probate process to require several years depending on the size, complexity and number of claims against the estate.

• Cost. Probate can be expensive. There are associated fees for court, attorney, filing, appraisal and executors and/or conservators. It is usual for fees to amount to as much as 10 percent of the estate and in many cases much more. Sometimes it is necessary to sell estate assets to cover probate cost.

 

4. Safety

Insurance companies are required by regulation to maintain reserves to the extent of expected withdrawals. The insurance rating companies investigate insurance companies regularly to assure they have maintained the financial stability necessary to protect their ratings.

 

5. Liquidity

Deferred annuities usually have a withdrawal provision after the first year that allows the owner to make penalty-free withdrawals of up to 10 percent of the principal or, in many cases, the account value.

 

6. Guaranteed Income for Life

Annuities can provide a guaranteed income stream for a lifetime, depending on the settlement option chosen. The owner has the ability to choose from one of several settlement options, including payments for a specified period, or income for life‑no matter how long. With non-qualified fixed annuities, a portion of each income payment is considered return of premium and is not taxed, thus reducing the tax liability. An annuity maximizes the use of retirement funds and guarantees them to last a lifetime.

 

7. No Management Fees

Investments, such as variable annuities, stocks, bond and mutual funds, assess management fees, sales fees and miscellaneous expenses. The cost of administering a fixed annuity is built into the product. The only additional cost to the consumer is if the policyholder chooses a rider, such as an income, death or family endowment rider.

Of the money invested, 100 percent earns interest immediately. The investment and management of the account is the responsibility of the insurance company.

In variable contracts and mutual funds, the investment risk is borne by the investor. With annuities, the investment risk is borne by the insurance company.

With annuities, the amount of premium payment, the type of premium, the persons involved, and the payout methods are all the decision of the owner. A great amount of flexibility is available to an annuity owner.

 

9. Tax Timing

In addition to deferring taxes and earning interest on money that would otherwise be paid in taxes, the investor may also exercise control over the timing of the payment of taxes.

In early retirement years, there may be sufficient income from other sources without withdrawing annuity funds. If additional income is not needed from the annuity, or if the goal is to delay taxation until later retirement years when taxable income may be less, distributions can be postponed.

NOTE: Annuities funding qualified accounts may have minimum distribution requirements.

 

10. Tax Favored Income

In the payout phase of an annuity, the payments are split between the return of premium and gain. This is accomplished by using the exclusion ratio.

For example:

• A. Assume that $100,000 paid in grew to $150,000.

• B. Assume monthly payments of $1,500 based on the settlement option chosen.

In this example, $1,000 would be return of premium (not taxable) and $500 would be gain (taxable). Therefore, only 33 percent ($500) of the income realized from the annuity income would be subject to income taxes.

 

11. Guarantees

An annuity guarantees the return of principal plus the guaranteed interest as long as there are no early withdrawals and surrender charges are not incurred. Typically, fixed annuities have minimum guaranteed rates. These are guaranteed in the contract and reflect the minimum rate that can be credited to the annuity account.

 

12. Medicaid Qualification

Certain annuities can be made irrevocable and cannot be converted to cash. This type of immediate annuity may provide an income stream to the non-institutionalized spouse, a portion of which may not be counted for Medicaid qualification. Properly structured, this annuity can provide income that is outside the spend-down requirements. It may be considered an unavailable asset if it is placed under an irrevocable settlement option paying principal and interest in equal installments. To qualify, an annuity must be in the payout period prior to applying for Medicaid.

CAUTION: States have different requirements and agents should use caution when advising on Medicaid qualification. It is always good practice to consult an elder care attorney when dealing with Medicaid.

 

13. Develop Income With 100 percent Tax Dollars

Tax-deferred annuities allow interest on tax dollars to accumulate, providing future income on the money that would have been paid in taxes. The annuitant can have a lifetime interest income, and may never have to pay taxes on the funds that provided the income.

 

14. Diversification

Annuities may provide the necessary diversification for portfolios that include riskier investments. They provide the safe and stable income account to balance the portfolio.

Keep in mind there is no typical senior; however, there are commonalities. It is helpful to understand the similarities and to respect the differences when working with seniors. Seniors tend to focus on how a situation makes them feel. Their responses are based on their total life experiences. So keep in mind that their number one fear may be loss of independence.

“Independent living is not doing things by yourself–it’s being in control of how things are done.”

Judith Heuman

 

About the Author

Lloyd Lofton, CSA, LUTCF, is the chief operating officer of American Eagle Financial Services Inc., Smyrna, Ga., a national marketing organization. He is a Georgia Department of Insurance-approved continuing education instructor in annuities. He has hired thousands of agents and hundreds of managers over the years and can be reached at [email protected] or through www.linkedin.com/in/lloydlofton.

 

Source: LifeHealthPro, August 15, 2012

 

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