Advisors can address a variety of needs by selecting the right annuity product for the job
Advisors who have yet to enter the annuities space may want to consider it, as people’s need for fixed income continues to grow. According to the latest industry report from the Canadian Life and Health Insurance Association (CLHIA), annuity and pension premiums reached $46.2 billion last year, with annuity premiums growing by 3.5%.
And with a variety of annuity products to choose from, there’s plenty of opportunity to satisfy the needs of different clients. “Many retirees may need to draw enough income to live comfortably, but they must exercise caution not to deplete their nest egg,” noted InsuranceNewsNet Magazine contributor Lloyd Lofton. “In many cases, the split annuity may hold the answer to their concern.
By using both an immediate and deferred annuity, Lofton explained, a split annuity can provide immediate income while replenishing the principal.
“Enough premium is placed in the deferred annuity to grow back to the original total investment (or close to it),” he said. The remaining premium, he added, goes into an immediate annuity to provide necessary income over a specified period, after which the deferred annuity grows close to the original investment amount, and is completely out of the surrender charge period.
Bonus annuities, meanwhile, will provide an interest bonus during their first year, and a set base rate in succeeding years. Many will also pay a bonus for additional money added to the annuity throughout its entire term. Because of the high first-year credit, bonus annuities have a higher average yield, and may be used to cover surrender charges from other plans.
Multi-year guarantee annuities, meanwhile, are similar to certificates of deposit and bonds in guaranteeing a rate of interest either for the whole annuity period, or for a set number of years. The surrender charge period and the interest guarantee period are usually the same; Lofton said these annuities sometimes allow a withdrawal of up to 15% after the first year without penalty, and most will permit interest-only withdrawals after the first year.
Tax-sheltered annuities can be set up for certain people by their employer, who deducts payments directly from the employee’s income. There may be maximum contribution limits; in some cases, employees may be allowed to catch up on contribution shortfalls from previous years. Funds are accumulated on a tax-deferred basis, with taxes to be paid on the full income once it’s withdrawn.
Single-payment immediate annuities, meanwhile, can provide a solution for different situations. Those who face fixed monthly expenses can use it as a low-risk source of guaranteed income, freeing them to invest their other assets more aggressively. It can also be used to fund benefit payments laid out in a client’s divorce decree, such as child support or alimony, and to fund the purchase of a business.
“The annuity is owned by the client, with payments made to the business’s seller,” Lofton explained. With the use of an SPIA, the seller can get full price for the business, the buyer can shell out less money for the purchase, and the seller can defer capital gains tax. Once the business is paid for, the owner of the annuity can use the benefit payments for other purposes.
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