FIAs for Guaranteed* Retirement Income

In today’s world, the markets can change from day to day. There can be a pattern of growth or a quick downhill slide, which can make some clients nervous about planning for the future. This is why configuring the “Gold Standard” safe withdrawal rate with fixed indexed annuities was so profound to the financial industry and retirement planning.

The year was 1994, and there was a CFP from California that would create one of the most profound “rules of thumb” for retirement income that has ever been created. William Bengen wrote an article which appeared in the Journal of Financial Planning, and it released the results of this very profound study that he had just undertaken.

This study is what started the “Gold Standard” safe withdrawal rate of 4%. William basically said that even though over time the market had averaged around 10%, in the distribution years, it doesn’t mean that a client can “safely” withdraw 10% from their portfolios. So, what William did is he back tested hypothetical retirement “start dates,” assuming a 50% stock and 50% bond portfolio all the way back to the 1920s, using the actual stock and bond market performance. After the analysis was said and done, he said that consumers were “safe” by withdrawing 4% of their initial portfolio value per year adjusted for inflation or deflation. By “safe,” what he meant was that the 4% distributions were very unlikely to spend down the client’s portfolio/retirement money before the end of the 30-year retirement.

As a matter of fact, in his study, he had a 100% success rate using the 4% rule for retirement income. As a result of this study, securities reps for almost two decades have been living and dying by this rule. If a client has a million dollars at retirement, then the client should not take more than $40,000 during the first retirement year, for example.

A later study was done in 2013 that was coauthored by Morningstar Inc. It established, in this new world of volatile markets and low interest rates, that the new “safe withdrawal rate” is actually 2.8%. The study indicated that with today’s low interest rates, market volatility, and SEQUENCE OF RETURNS RISK that there is almost a 52% chance of failure using the 4% rule. Would you get on an airplane if there was a 48% chance of having the number of landings equal the number of takeoffs?

So, how do you handle this risk? Before looking at what a GLWB can do for this client on a “guaranteed* basis,” I want to point something out. When you look at this risk that we just discussed, which is the client losing 20% of their portfolio value or taking a major pay cut in retirement, or having to delay retirement, this risk is just as catastrophic as say a car crash, a medical emergency, a house fire, etc. Or, maybe even death itself. What is my point? My point is, when risks in our lives are catastrophic, should they occur, we take actions to hedge those risks. What do we use? We use something called insurance.

• Car crash = Auto insurance
• House fire = Homeowners’ insurance
• Death = Life insurance

 Why would you treat this shortfall risk as anything different? Is it not “worth” insuring?

Learn more about fixed indexed annuities for guaranteed* income. Download our complete whitepaper: “The Stars are Aligned for Fixed Indexed Annuities and Guaranteed Lifetime Withdrawal Benefits.”

Fill out my online form.

FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH CONSUMERS.

*Guarantees provided by annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank of the FDIC.  Guaranteed lifetime income available through annuitization of the purchase of an optional lifetime income rider, a benefit for which an annual premium is charged.

Annuities are designed to meet long-term needs for retirement income. They provide guarantees against the loss of principal and credited interest, and the reassurance of a death benefit for beneficiaries. Please note that in order to provide a recommendation to a client about the transfer of funds from an investment product to a fixed insurance or annuity, you must hold the proper securities registration and be currently affiliated with a broker/dealer.  If you are unsure whether or not the information you are providing to a client represents general guidance or a specific recommendation to liquidate a security, please contact the individual state securities department in the states in which you conduct business.

This information is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Encourage your clients to consult their tax advisor or attorney.

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How Do You Measure Expenses?

By: Charlie Gipple, CLU,® ChFC® is the Senior VP of Sales & Marketing at Partners Advantage. Excerpt from “A New View on Modern Portfolio Theory: Making the Case for Life Insurance as an Asset Class”

“I understand I get a death benefit with IUL but isn’t life insurance an extremely expensive product for building retirement dollars?”

You can show your client the internal rate of return (IRR) report that many carriers have to demonstrate expenses. Many carriers have IRR reports on the death benefit and there are also carriers that have the IRR based on the cash value.

Cash value IRR

The cash value internal rate of return report basically calculates what the “net” amount of return was on the client’s premium in order to arrive at the cash value that the product generates in year 20 for example. This can be a great tool in demonstrating how the average expenses over the life of the product. This can be done by analyzing the disparity between the actual “internal rate of return” of the policy and the rate in the illustration.

Hypothetical Example

To elaborate further, before we discuss life insurance cash value IRRs, let’s use a simplified analogy. Let’s say that you had a magical “product” that had zero expenses. Assume this “product” was going to grow a client’s deposit by 6% per year from now until say 20 years from now. Without any expenses coming out of this product, what would be the true “internal rate of return” the client would recognize? It is 6%! We know this because, as mentioned, whatever the deposit/ premium is put into this hypothetical “product,” it is going to grow by 6% and not be eroded by any expenses. Therefore, 6% is the answer.

Well, what if we calculated the internal rate of return on the same product with one exception. This time we assume the product had .50% in annual expenses. Well, in this case, the internal rate of return to the client in this product would be 5.5% (6%-.50%)? In other words, if you punched in to your financial calculator what the deposit/premium was in this product versus what the year 20 value was in this product after being eroded by this .50 annual expense, magically the financial calculator would arrive at an IRR of 5.5% per year.

Now, let’s go back to talking about the life insurance illustration to make the point. We know that in our illustration, the policy is going to credit a “gross” 6%. Why? Because we told the system it will by using 6% as the illustrated rate. That does not mean that once you plug the premium payments into the illustration and the 6% illustration rate/gross rate that the cash value will actually grow by 6%, right? No, because there are “expenses” imbedded in the policy and thus the illustration.

The main expenses in IUL are what I call “The Big 3.” They are: 1. Premium Loads 2. Per Thousand Charges. 3. COI Charges. These expenses reduce cash value year after year.

How Large are These “Expenses”?

This is where the Internal Rate of Return calculators can help you put a number on the “expense drag” in the project. Rather than having the actual IRR report on my example, if you otherwise did the math on your financial calculator when I said that the client would pay $16,740 for 20 years then have around $550,000 in cash value in year 20, you would know that the “internal rate of return” would come back at around 4.65%. This is based off a 6% illustrated rate. This means that the “expense drag” averaged 1.35% (6% - 4.65%) per year. In a world where the average A Share Equity Mutual Fund is charging 1.4% (ICI.org), is 1.35% “prohibitively expensive”? It is also important to note that as the policy ages, the “disparity” between the IRR and the illustrated rate narrows. Many times the disparity can be lower than 1%.

Another thing to keep in mind is the tax deferred nature of the growth on the cash value and the tax free nature of loans from the policy. In other words, a tax free rate of return of 4.65% is actually equivalent to an otherwise taxable return of 6.94% (assuming the 33% tax bracket).

Again, these are not investments, but as you can see if optimized correctly the disparity between the IRR and the illustrated rate (expense drag) can be quite reasonable. Especially considering with IUL, you can never lose money because of a stock market decline.

Objection Rebuttal

Something you can discuss to rebut an objection is that “cost is only an issue in the absence of value.” Is the 1.35% expense worth the “value” that the client would be able to get out of this policy? The “value” they are getting out of the policy is, almost $1.3 million in distributions (harvest) on a total premium (seed) of $334,795 while in the early years having significant death benefit “leverage.” And again, the client is merely paying taxes on the seed, not the harvest. Note, if the client were to die in the early years, the IRR percentage on the death benefit would be in the hundreds.

In designing the policy with the goal to eventually take tax-free loans against the policy, it is important for the financial professional to be well-versed on how to set up and adjust the policy’s premiums and death benefit in order to minimize the COI charges. If done correctly, the client may find that the cash value in IUL is not only an “asset” that will not drop in lockstep with the stock market like other assets in a portfolio, but also the client may find that IUL can be a very cost-effective and tax-effective “asset class” relative to others.

Access the full article “Life as an Asset Class” by Partners Advantage’s Charlie Gipple Senior VP of Sales & Marketing by filling out the form below.

Fill out my online form.

For Financial Professional Use Only. Not for use with consumers.

Guarantees are backed by the Financial Strength and claims-paying ability of issuing company.

Annuities are designed to meet long-term needs for retirement income. They provide guarantees against the loss of premium and credited interest, and the reassurance of a death benefit for beneficiaries.

An income rider or benefit (sometimes called Guaranteed Lifetime Withdrawal benefit rider or GLWB rider) is an additional feature available with some annuities and generally optional and come with additional costs. Income benefits are designed to provide income options above and beyond the standard annuitization or free withdrawal features in annuities.

Pursuant to IRS Circular 230, Partners Advantage Insurance Services and their representatives do not give tax or legal advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Encourage your clients to consult their tax advisor or attorney.

The information contained in this article is not intended to serve as tax or legal advice and is not intended to provide financial or legal advice and does not address individual circumstances.

The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. Actual investment results may be more or less that those shown. This illustration does not represent any specific product and/or service.

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Insurance Marketing Organizations Thrive with Business Growth Services

FOR IMMEDIATE RELEASE 

Riverside, CA (March 22, 2016) – As a result of the continued success of services offered to agencies and marketing organizations, Partners Advantage Insurance Services announced the addition of its enhanced "Business Growth Services" which will be made available throughout its Platinum and Premier divisions.

Partners Advantage has assembled a vast array of shared services to help agencies gain access to resources which help achieve agency growth and efficiencies, including: 

• In-house underwriting team
• Advanced markets consultants
• Compliance and suitability
• Ongoing sales training
• Consumer-ready sales materials
• Recruiting lists
• Marketer training
• Case management and problem resolution
• Commissions processing
• Technology solutions
• Business development, reporting and operations insights
• Access to a Registered Investment Advisory (RIA) firm and broker-dealers 

The company's Premier model offers opportunities to gain an infusion of capital in agencies and/or build succession plans.

Partners Advantage Insurance Services, LLC, is one of the nation’s largest independent, national insurance marketing organizations, working with agents, agencies, and financial institutions. In 2015, sales at Partners Advantage spanned $1.3 billion in annuity business and $57 million in life insurance business. It is a privately held company led by CEO Scott Tietz, CLU^®, and President James Wong. Additionally, Senior Vice President, Charlie Gipple, CLU^®, ChFC^® oversees the Partners Advantage Sales and Marketing team which includes the broker-dealer distribution.

"The focus is on creating “Causation of Sales” for marketing organizations that choose to work with us," stated Gipple. "From understanding subtle nuances between carriers to complex advanced markets cases, we can help agencies leverage our resources to achieve greater success."

The company's Great 8 Index Sales Boot Camp will visit more than 20 major cities by the end of this year. For more information, contact Partners Advantage at 888-251-5525, Ext. 700, or visit this page online. http://ow.ly/Y01Ks

About Partners Advantage Insurance Services

Partners Advantage Insurance Services, LLC, is among the top national insurance marketing organizations in the country with 70 associates located in offices across the United States. The company's Advantage Division is a one-stop brokerage for licensed agents and agencies throughout the United States who sell annuities and life insurance. The company's Platinum and Premier Divisions work to enhance insurance marketing organizations and agencies throughout the country. The corporate headquarters for Partners Advantage is located in Riverside, CA. Regional offices are located in Huntington Beach, CA, Palm Beach, FL, Sioux City, IA, Ada, MN, Florham Park, NJ and Henderson, NV. For more information about Partners Advantage, visit www.PartnersAdvantage.com.

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Four Reasons FIA Sales Skyrocketed and Will Continue To Skyrocket

By: Charlie Gipple, CLU,® ChFC® is the Senior VP of Sales & Marketing at Partners Advantage. 
Excerpt from “The Stars are Aligned for Fixed Index Annuities and Guaranteed Lifetime Withdrawal Benefits!”

I believe that the proliferation of Fixed Indexed Annuities (FIAs) are a result of many factors. However, I believe that there have been four MAJOR reasons for their success. The environment that was the very reason FIAs were created in 1995 is the environment that we have been in for the last 15 years. In other words, in 1995, there were three primary concerns that led to the creation and successful launch of FIAs: 

1. Fear of a bad stock market. 
2. Low interest rates rendering CDs, Money Markets, etc. not as great of a proposition as they once were.
3. A bond market that had traditionally been considered “Safe” that had taken many by an unpleasant surprise.

In this paper, I will discuss these three components but also add a fourth factor that has caused the proliferation of index products, Guaranteed* Lifetime Withdrawal Benefit Riders.

1. Fear of the stock market: Again, the market has been chopped in half twice over the last 15 years, while at the same time experiencing inflation. This has added to the erosion of the purchasing power of the consumers’ retirement savings. Furthermore, from its trough of 676 on March 9, 2009, the S&P 500 has climbed to 2,083 or up 208% at the time of this writing (November 2015). Considering the average bull market lasts 48 months and we are approximately 80 months into this bull market, consumers are edgy. 
2. Low interest rates: The downward slope in interest rates has continued. We are now 34 years (since 1981) into this downward slope. Ironically, however, consumers have flocked in droves to these low paying interest products because they are so fearful of losing their money in the stock market. There is almost $8 trillion in checking accounts and CDs, which is double the amount prior to the financial crisis. What are these products paying? In November 2015, the 10-year treasury sits at 2.3%. Today the average one-year CD is .27% and the average five-year CD is .85%. Using the rule of 72, this means that at .27%, it would take 267 years for a client’s money to double. At .85%, it would take 85 years. Needless to say, consumers are looking for more yield than what these products are offering, and thus, there is great potential for fixed index annuities.
3. Fear of the Bond Market: With the 34-year decrease in interest rates that we have experienced, there have been new conversations open up among money managers, analysts, etc. about the Bond Market. Many pundits believe we are in a “bond bubble,” which, again, was one of the catalysts of the invention of FIAs. A very profound article was written in Investment News on March 10, 2013 that was titled “Fear Rising with Rates.” The Chief Investment Officer of Fixed Income at Blackrock stated: “Normally, people don’t think of treasuries as riskier than equities, but 30-year Treasuries are now more volatile than equities are.” Interest rates have been driven so low over the last 34 years that many people believe that there is only one way for rates to go, and that is up. And with bonds or bond mutual funds, what happens when interest rates increase? There is a lost value in that bond or bond fund. Again, as experienced in 1994.
4. Lifetime Income Riders: Go back to the year 1900, when the life expectancy of a person was 47-years-old. Who would have ever thought that a baby born in 1900 would live to see the year 2000? This would be 100 years of age and more than double their life expectancy. However, as we know, in the year 2000, there were many of those 100-year-old “babies.” I am not suggesting that we are going to live to age 150. But, what I am suggesting is that people are living longer than anybody could have projected and medical technology continues to get stronger and stronger. Today, a 65-year-old male has the life expectancy of 85. An 85-year-old female has a life expectancy of living to age 88. When you put the two of them together, there is a 50% chance one of them will live to age 92. Therefore, there is great risk that a person will be in retirement for 30+ years.

To view the full article the "Stars are Aligned for Fixed Indexed Annuities and Guaranteed Lifetime Withdrawal Benefits" 

Fill out my online form.

For Financial Professional Use Only. Not for use with consumers.

Guarantees are backed by the Financial Strength and claims-paying ability of issuing company.

Annuities are designed to meet long-term needs for retirement income. They provide guarantees against the loss of premium and credited interest, and the reassurance of a death benefit for beneficiaries.

An income rider or benefit (sometimes called Guaranteed Lifetime Withdrawal benefit rider or GLWB rider) is an additional feature available with some annuities and generally optional and come with additional costs. Income benefits are designed to provide income options above and beyond the standard annuitization or free withdrawal features in annuities.

Pursuant to IRS Circular 230, Partners Advantage Insurance Services and their representatives do not give tax or legal advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Encourage your clients to consult their tax advisor or attorney.
The information contained in this article is not intended to serve as tax or legal advice and is not intended to provide financial or legal advice and does not address individual circumstances.

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