Wealth Management
(New York)
Even advisors who use fixed index annuities frequently may not be aware that under the new SECURE Act, the products have gotten some preferential new tax treatment. In particular, clients can now rollover 401ks, 401bs, IRA, or pension payment into a fixed index annuity tax-free. This obviously comes in addition to the fact that FIAs are tax deferred to begin with.
FINSUM: This seems like a very useful addition to the FIA universe provided by the Secure Act. Advisors should be aware.
(New York)
Any advisor even remotely familiar with annuities will know that while the two share the nomenclature of being “annuities”, fixed and variable annuities are very different. Fixed annuities protect principal and give limited upside, all with the design of trying to outperform CDs. Variable annuities do not protect principal, but offer much more flexibility and choice in allocation and give good upside. They do have fairly stringent rules during the accumulation phase, but that can lead to good income in the payout phase. In terms of the current market, there are two ways to look at it, and the proper investment depends on the age and position of the client. If the client is younger and wants capital appreciation, then the current market may offer a good entry point for a variable annuity. If someone is nearing retirement, locking in principal protection is likely crucial, so fixed annuities would be preferable.
FINSUM: The reality is that a lot of clients are going to be liking the security of principal protection in the current environment (which makes some sense), so those are probably going to be the most apposite for the current market.
(New York)
Imagine retiring this month. The Dow’s recent bottom means it was 18%+ off its peak. That is a really rough time to be entering the late stages of a career or early stages of retirement. One option for those worried about protecting income is a fixed index annuity. The insurance product guarantees full principal and is designed to offer upside as well. The idea is to have their yields outperform the market, but at the same time offer full downside protection.
FINSUM: Fixed index annuities are probably going to see a big rise in popularity this year given how poorly the stock market is doing. Worth consideration.
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(New York)
One of the best ways to use annuities is in so-called “annuities ladders”. MYGAs are commonly used in this way with the goal of maximizing returns rates, but one good strategy involves mixing MYGAs with a fixed index annuity. A typical example would be to invest a total of $400,000 this way: $100k into a 3-year MYGA, $100k in a 5-year MYGA, $100k into a 7-year MYGA, and $100k into a 10-year fixed index annuity. MYGAs have contractually protected yields, and the hope is that the FIA will yield a bit better than comparative CDs. Both products fully protect principal.
FINSUM: This is a sound strategy for trying to maximize yield while minimizing risk since yields and principal are mostly locked in.
(New York)
Variable annuities can be a fantastic product for long-term income security. However, they are complex products and buyers need to make sure they understand what they are buying. In particular, here are a few key points to remember when purchasing. Firstly, providers often have unique policies for how benefits are paid out once one spouse dies, so make sure these are understood to avoid accidentally disinheriting someone. Secondly, make sure clients understand the differences between the different value measurements of a variable annuity, such as cash-out value, death benefit, or “annuitized” value, as these can potentially cause some shocks. Finally, be careful when exchanging an older annuity for a new one, as older versions can be significantly more generous and are worth holding onto.
FINSUM: Variable annuities can be great long-term income streams, but it is integral to understand exactly what one is buying.
(New York)
The market is currently in a rough patch. Even with yesterday’s big rally, the near-term prognosis for stocks could be quite bearish. That said, one product that would clearly benefit from a bear market is fixed index annuities. Because they are designed for principal protection (with limited upside), they tend to do very well during down markets, with clients showing ample demand. They are also not overly vulnerable to the Fed cutting rates, so taken altogether, they may be a perfect product for this market.
FINSUM: It seems like a good time for fixed index annuities, and we suspect clients will be showing good demand for the product given widespread anxiety.