Annuity Illustrations
Annuity Marketing, Sales Ideas, Suitability, and Issues by Michael J. Prestwich

I will let you decide which is the best income plan for a hypothetical sixty year-old man in a 25% tax bracket who wants the highest lifetime income from $100,000 starting in five years:

Plan A: Certificates of Deposit

$100,000 at 4% interest, less 25% taxes, grows to $115,927 in 5 years. He lives off the interest, $4,637, pays $1,159 taxes, and enjoys a non-guaranteed lifetime after-tax income of $3,478.

Plan B: Indexed Annuity With Income Rider

The $100,000 grows free of taxes for five years then provides $7,040 guaranteed lifetime income at age 65. He pays $1,760 each year in income taxes and enjoys a $5,280 guaranteed lifetime income. (See slide 23 in the PowerPoint training seminar designed by the insurance company for licensed agents.)

Plan C: “Laddered” or “Split” Annuity

$100,000 is divided into three annuities that grow free of taxes for five years:

1.    $24,862 - Five Year Guaranteed Rate Annuity at 4.90%

2.    $23,587 - Ten Year Guaranteed Rate Annuity at 5.00%

3.    $51,550 - The same Indexed Annuity as Plan B above

This plan qualifies for the exclusion ratio so most of the income is tax-free. At age 65, this plan guarantees $7,020 annually, $6,508 after-tax, for five years; at age 70, it guarantees $8,541 annually, $7,584 after-tax, for five years, and finally, at age 75, it generates a $10,793 guaranteed lifetime income ($2,698 taxes, $8,095 after-tax).

So which plan is better after 15 years?

Plan A: $34,780 “maybe” after-tax income; $100,000 likely remaining in account

Plan B: $52,800 guaranteed after-tax income; $61,869 guaranteed amount in indexed account (guaranteed values calculation detail)

Plan C:  $70,460 guaranteed after-tax income; $70,676 guaranteed amount in indexed account (see last page of split annuity illustration for details)

Plan C has double the income of the CD and also outshines Plan B. Plan C, the three product plan, gives the client more flexibility, more access to his money, higher guaranteed income, and better tax advantages.

The agent also benefits; a higher, guaranteed, after-tax income is easier to sell. Shorter surrender charges make this concept easier to defend as a suitable sale. The commission is less in the first year, but since there is a built-in new commission every five years, the 15 year total commission is actually higher.

After 30 years, when the client is age 90:

Plan A: $86,950 “maybe” after-tax income; $100,000 likely remaining in account

Plan B: $132,000 guaranteed after-tax income; $0 guaranteed amount in indexed account (guaranteed values calculation detail)

Plan C:  $191,885 guaranteed after-tax income; $0 guaranteed amount in indexed account (see how income riders work)

It is important to mention that the indexed annuity may perform above its guaranteed interest rate and that the client may have a positive balance in his indexed account at age 90.

Most agents tell me that they derive 95% of their income from Fixed Indexed Annuities. Most agents believe indexed annuity products are generally the best for the client, but I doubt that this is true 95% of the time. There may be some agents who sell indexed annuities because they pay a higher commission than traditional annuities; or do they?

Who makes more money:

Agent A who sells an indexed annuity, makes a one-time $100,000 sale, and earns $8,000, or

Agent B who sells a five year guarantee product and earns a 3% commission every five years? Here is his commission assuming a 4.50% continuous interest rate:

·         Year 1, commission on $100,000 = 3,000

·         Year 5, commission on $119,252 = 3,739

·         Year 10, commission on $148,610 =  4,659

·         Year 15, commission on $185,194 = 5,806

Agent B’s total commissions over 15 years is  – $17,203 — more than double that of Agent A’s!

Other considerations:

·         Which product is easier to explain and sell?

·         Which product is easier for the client to understand?

·         Which product has a shorter surrender charge?

·         Which product is easier to defend when client suitability is challenged?

I have nothing against Fixed Indexed Annuities. In fact, they are wonderful products when the client understands the product and does not need to touch their money for ten or more years. In many situations a blend of different traditional and indexed products works best.

Successful agents find the best annuity products for their clients and let commissions take care of themselves.

An agent in Tucson just emailed the following ad that appears the local paper by an Arizona Super-lawyer. One of her clients answered the ad, the law firm filed a lawsuit, the insurance company is investigating, and the agent faces a $78,000 commission charge-back for an indexed annuity sale made in January 2008.

The irony of this situation is that the indexed annuity was funded with stocks that would have lost about 40% of their value in the 11 months from January 2008 to December 2008 had the client kept them. The agent gathered a lot of information about the client’s financial situation. At the time of the sale the agent, the client, and the insurance company deemed this sale suitable.

I have several questions for the readers of this blog:

·         If you are an insurance agent, has something similar happened to you? Please share your experience on this blog.

·         Do insurance companies fight to keep annuity business on the books, or do they nearly always settle when confronted by these law firms?

·         In these situations, what documentation do insurance companies ask agents to provide about the nature of the sale and why it was deemed suitable?

·         Do clients often lose heart when indexed annuity products declare a zero percent interest rate in the first year?

·         This product had a 10% interest rate bonus – does this help or hurt a sale, since bonus products have much higher and surrender charges than non-bonus products?

·         This product had about an 8% commission – does this help or hurt when an insurance company has to defend a sale?

·         This was a one-product, one-company sale for nearly $1,000,000 – does it help or hurt to put all your money in one product if you have to defend a sale?

Please share your experiences and comments.