Category: Insurance - PFwise.com

The Elusive Benefits Of "Lite" Annuities

6/4/2022

From the introduction of the index mutual fund several decades ago (which greatly reduced the cost of buying a diversified portfolio) to the more recent dramatic reduction in the costs of trading (now free on most platforms), investors have benefited from the trend of lower investment fees. Nevertheless, simply because one product has a lower fee than another does not necessarily mean it is the better choice, because in some cases higher costs bring with them certain benefits that can outweigh paying a higher fee.

One area where fees and benefits can vary significantly is in the annuity space. For example, annuities with a Guaranteed Lifetime Withdrawal Benefit (GLWB) feature – which allows access to the annuity contract value (i.e., are revocable) and guarantees a minimum level of lifetime income (which in some cases could even increase) even if the underlying account value goes to zero – can come with a range of features that add additional costs. And while GLWBs have traditionally offered an annual ‘step-up’ provision (that can increase the income/benefit base used to determine the income level), more recent products only offer a step-up only once, at retirement. These ‘GLWB-Lite’ products with fewer step-ups come with reduced fees compared to ‘regular’ GLWBs, but advisors might wonder whether the reduced costs are outweighed by the more limited benefits.

According to an analysis conducted by Blanchett, while the expected aggregate value of the products (lifetime payments plus any residual balance available for heirs) is similar, the ‘regular’ GLWB dominates based on lifetime income (while there is a larger residual balance leftover with the ‘GLWB-Lite’). And so, because individuals typically buy annuities for the income benefits as a form of longevity insurance (rather than as a tool to maximize the size of legacy gifts), it likely makes more sense for these individuals to purchase the ‘regular’ higher-cost GLWB if they’re going to pursue such income guarantees at all (and perhaps earmark some of the non-annuitized portions of their portfolio for a legacy benefit).

Ultimately, the key point is that it is important for advisors to look beyond fees and understand client goals when analyzing potential investment products. And this is especially true in the case of annuities with GLWB features, where ironically seeking the lowest-cost option could negate much of the benefit of buying an annuity in the first place!

What is the New "Contingent Deferred Annuity"

5/15/2022

ThinkAdvisor has a great article discussing the new contingent deferred annuity, here is the link and key parts of the article.

Longevity risk is one of the hot topics on the minds of advisors and clients considering expanding life expectancies. The poor performance of equities and bonds so far in 2022 compounds these concerns given the prospect of sequence of return risk for retirees. And while sources of guaranteed income, such as annuities, might be attractive to many clients, some balk at the loss of optionality that comes from taking funds out of their portfolio and putting them into the annuity.

With this in mind, Aria Retirement Solution’s RetireOne introduced a fee-based Contingent Deferred Annuity (CDA) product (also known as a Stand-Alone Living Benefit or SALB) that allows clients to keep their funds invested in their current investment account (with eligible RIA custodians) while gaining the protection of guaranteed income if their account is depleted. With the CDA, the issuing insurance company guarantees a certain annual income for the purchaser, such as $40,000/year on a $1,000,000 investment account. This income initially comes from portfolio withdrawals from the account itself. If returns are favorable, the distributions simply sustain. However, if market returns are less favorable, and the portfolio is depleted to a specified level, at that point, the insurance company takes over the income payments. In return for this protection, the insurance takes an annual fee from the portfolio (varying from 1.1% to 2.3% per year in the case of the new Aria/Midland product, with fees driven in part by the amount of risk taken in the portfolio). Notably, the total cost of a CDA arrangement will also include the advisor’s own AUM fees for managing the portfolio, and any underlying fund fees.

In a new whitepaper, retirement researcher Michael Finke compares the CDA to sharing a birthday cake at a party. If the slices are made too big (i.e., too much annual income is withdrawn from an investment portfolio), the cake (portfolio) could run out. On the other hand, if the slices are too small, there could be some left over (or in the case of a retiree, they spent less during their lifetimes than what their portfolio would have supported). The CDA ensures that the retiree will be able to have a certain annual income each year without having to make the annual ‘slices’ small enough to make sure the portfolio lasts throughout retirement (because the CDA guarantee backstops the arrangement if the ‘cake’ is running out).

In the end, it is important for advisors to recognize their clients’ retirement income styles and choose a retirement income strategy accordingly. For those with full confidence in long-term market returns, underlying guarantees may not be necessary, and those who don’t want to take any market risk may not want to invest at all. However, for a segment in particular, the CDA structure is aiming to find a balance of serving clients who are willing to stay invested in markets, but are willing to give up some long-term upside (as a result of the annuity costs) in exchange for having some income floor in place in the event of an unfavorable sequence of market returns that is otherwise beyond their control.

Searching for a Fixed Income Alternative?

5/5/2022

Below is an article from AIG that shows how a fixed index annuity (FIA) can provide a unique combination of growth potential, asset protection and lifetime income that a traditional 60/40 stock and bond portfolio may not offer.

Retirement Income Options

5/3/2022

Follow the Route that Helps Achieve Your Income Game Plan -

What is Chronic Illness Rider and How it Works - Part B

4/3/2022

In last blogpost, we explained the key features of chronical illness rider.

A Case Study
Jeffrey purchased a $1 million life insurance policy at age 50. His policy includes the Chronic Illness Rider. Some years later, he is diagnosed with a chronic illness and is unable to perform two of six ADLs. His doctor estimates he has two years to live. Jeffrey has a maximum total acceleration limit of $800,000, and has requested a $100,000 acceleration benefit.

In Jeffrey’s case, with a two-year life expectancy, his actuarial discount is 9 percent. This means, since he requested a $100,000 acceleration, he will receive $90,900. He can use this benefit to: pay medical bills, stop working and spend time with family, take a dream vacation with his loved ones, or even to pre-plan and pre-pay his funeral.

Calculating Jeffrey's Benefits

Requested acceleration: $100,000
Minus the 9% actuarial discount (4.5% discount rate X 2-year current life expectancy): $9,000
Minus the flat charge: $100
Acceleration amount: $90,900

After taking his accelerated benefit, Jeffrey still has $900,000 in remaining death benefit and $700,000 in remaining accelerated death benefit option.

What is Chronic Illness Rider and How it Works - Part A

4/2/2022

With the Chronic Illness Rider, if you are chronically ill (can’t perform two of six activities of daily living) or have severe cognitive impairment, you can accelerate a portion of the death benefit early. This can provide funds for you to pay for long-term care expenses – or for whatever else you choose. By having these funds, you can avoid spending down personal assets to pay for your long-term care services.

Key features of Chronical Illness Rider

Benefits are available as a lump-sum payout, up to the IRS per diem limit
Accelerated benefits can be taken once every 12 months
No upfront cost – an actuarial discount and flat $100 fee are charged only if your client uses the benefit
Maximum cumulative chronic illness benefit is up to 80 percent of the policy face amount at the time of the first acceleration request (with a maximum of $1 million)

What is the Actuarial Discount?
When insurance companies price the cost of life insurance, they plan on the beneficiary receiving the full death benefit upon the insured’s death. Since the insured is taking a portion of his or her death benefit early, you are getting an advance payment. The actuarial discount is based on the insured’s life expectancy and the Moody’s Corporate Bond Yield average, and it’s the insurance company's way of taking into account the time value of money between the advance payment date and the insured’s actual life expectancy (when the insured is expected to die). The shorter the insured's remaining life expectancy, the less his or her actuarial discount will be.

In next blogpost, we will show a case study of how it works.

Differences Between Indemnity and Reimbursement - Part D

3/29/2022

In last blogpost, we showed 2 case studies to compare indemnity and reimbursement. Now we will compare different insurance companies' LTC riders.

Differences Between Indemnity and Reimbursement - Part C

3/28/2022

In last blogpost, we discussed the differences between indemnity and reimbursement.

Case study: maximum benefits limits

Jackie purchases a life insurance policy with a Long Term Care Rider that has a $50,000 monthly benefit. Twenty-five years from now, she incurs covered expenses of $28,000 per month.

• Under an indemnity policy with a 1x HIPAA limit, the most she could receive in LTC Rider benefits is $25,110 (even if she was paying for a max benefit of $50,000 per month). This means she would need to dip into her personal savings for the additional $2,890 per month

• Under a reimbursement policy without a HIPAA limit, she could get reimbursed for her actual expenses of $28,000 (all income-tax free)

By having more benefit available, Jackie gains flexibility and freedom. She can choose which facility she wants to go to (since she does not need to feel she is restricted to a facility that charges less than the HIPAA limit). She also doesn’t need to deplete her personal assets.

One might argue that an indemnity rider is preferable to a reimbursement rider because if the client’s expenses are less than their maximum monthly limit, they can take more than their actual expenses.

While this is true, keep in mind the reason your client is purchasing this LTC Rider. The goal isn’t to get “extra money.” It’s to cover LTC expenses so they don’t have to deplete their personal assets to pay for long-term care services. The more benefit the client takes in excess of their actual LTC expenses, the less time their LTC Rider benefits will last.

Case study: duration of benefits

Adam purchases a $1 million life insurance policy with a $1 million LTC Rider benefit pool, and a 2 percent monthly acceleration option. He can take up to $20,000 per month ($240,000 per year). If his actual expenses are $16,000 per month ($192,000 per year):
• A reimbursement policy would last 62.5 months (5 yrs. 2 ½ months)
• An indemnity policy where he is taking the full $20,000 would only last 50 months (4 yrs. 2 months)

At first glance, an indemnity rider may seem like the obvious choice, that your client has access to greater benefits and that they won’t need to prove expenses. But once you’ve taken the time to delve into the product details and considered reallife situations, a reimbursement rider may prove to be more beneficial.

In next blogpost, we will compare different insurance companies' LTD riders.

Differences Between Indemnity and Reimbursement - Part B

3/27/2022

In last blogpost, we discussed LTC rider's tax treatment.

Indemnity – Policyowner can take rider benefits up to the maximum monthly benefit limit regardless of the actual expenses incurred.

Reimbursement – Policyowner is reimbursed based on actual expenses incurred by the insured, up to the maximum monthly benefit limit.

Although this makes it seem like an indemnity rider might be the best choice, most indemnity riders have a “real maximum limit” of 1x the HIPAA limit. If we look ahead 25 years, the monthly HIPAA limit (at 3 percent inflation) would be $25,110. This would be the max benefit even if they purchased a $50,000 monthly benefit. The result: you may never get to take an amount up to the indemnity limit you purchased unless the IRS significantly changed the HIPAA limits or there is substantial inflation.

Some indemnity carriers have a limit that is a multiple of the HIPAA limit, for example, 2x the HIPAA limit. However, keep in mind that the IRS only automatically allows benefits up to 1x the HIPAA limit to be received untaxed. If you wanted to take more than the HIPAA limit, you would have to ‘prove expenses’ to receive favorable tax treatment. So, even though you don’t have to submit receipts to the life insurance company, you will still have to keep track of your receipts to prove expenses to the IRS.

With the reimbursement rider, you can take up to the full monthly benefit as long as they have qualifying expenses. There is no restriction based on HIPAA limits. You still will have to prove expenses to get reimbursed, but because there is no HIPAA limit, you may be able to take more benefit from the rider than from a company with a 1x HIPAA limit. And, because you have to submit receipts, your records will already be ‘in order’ to prove expenses to the IRS, if needed.

In next blogpost, we will show a case study.

Differences Between Indemnity and Reimbursement - Part A

3/26/2022

While some insurance companies' LTC Rider follows what is known as a reimbursement rider model, other life insurance companies have LTC riders that use an indemnity model. Knowing the difference is important. The following information will help you get a better understanding of the two designs.

How LTC Rider Benefits are Taxed

First, it’s beneficial to have an understanding of how LTC riders are taxed. LTC riders are designed to qualify for favorable federal income tax treatment under Section 7702B of the Internal Revenue Code, as amended. This favorable tax treatment extends up to the greater of the HIPAA limit, or actual long-term care expenses.

The IRS HIPAA limit is currently $400 per day for 2021. That results in $12,000 per month (for a 30-day month).

Chances are, the life insurance with LTC riders that you purchased won't be needed for 20-30 years from now. If we assume the 2021 limit increases for inflation at 3 percent, the daily HIPAA limit in 25 years would be $837, or $25,110 per month.

In next blogpost, we will get to the differences between indemnity and reimbursement.

How Life Insurance with LTC Riders Help - 2 Case Studies

3/25/2022

Scenario 1. Nick purchases a life insurance policy with a long-term care rider
At age 50, Nick purchases a $1 million Life Protection AdvantageSM policy. He chooses to add the LTC Rider with the option to accelerate the entire $1 million for long-term care services at a monthly maximum rate of 2 percent of the maximum benefit per month. This allows him to be reimbursed for up to $20,000 in long-term care expenses per month.

• When he needs long-term care services at age 75, he incurs qualifying expenses of $15,138.75 per month ($181,665 per year) for a semiprivate room in a nursing home. He resides there for four years before he passes. Over this four-year period, he is reimbursed for his four years of long-term care, which totals $726,660

• When he passes, his beneficiaries receive the remaining amount of $273,340 as a death benefit. He also still has his remaining $1 million in assets. When this $1,273,340 is divided among his three children, each will receive $424,446

Nick’s planned premium on his Life Protection Advantage policy was approximately $11,000 per year. Even considering premiums paid, this planning strategy still makes sense. Plus, if Nick had died prior to needing long-term care, his beneficiaries would have received the entire $1 million as a death benefit.

Scenario 2. Nick doesn’t plan ahead for long-term care expenses
At age 50, Nick chooses not to plan ahead for the possibility of a long-term care need. By not planning ahead, he ultimately makes the choice to self-insure.

• When he goes into a nursing home at age 75, he starts taking $181,665 per year from his savings to pay for a semiprivate room. He resides there for four years before he passes. Over this four-year period, he spends $726,660 for long-term care services

• His long-term care expenses reduce his $1 million in assets down to $273,340. Each of his three children receives an inheritance of $91,000

And, depending on the types of assets he had, he could end up paying unexpected capital gains tax, income tax and potential surrender charges generated from asset liquidation. Or, he could miss out on any returns the liquid assets were expected to generate.

Summary
By choosing the LTC Rider on his life insurance plan, Nick’s premium investment resulted in each of his three children ending up with significantly more inheritance than if Nick hadn’t planned for long-term care expenses. Help clients protect their assets and preserve their independence. Show them the value of an LTC Rider on their life insurance policy. Learn more about the LTC Rider at MutualofOmaha.com/ltc-rider.

Annuity Fighting Inflation Ideas

3/23/2022

Are you looking for more growth potential to help offset inflation? Below is a brochure from AIG about how a fixed indexed annuity (FIA) could be a good solution for people to combat low rates and rising inflation.

Optimal Retirement Planning - Using Annuity for NY Residents

3/22/2022

Below is a brochure from American National for its CENTURY PLUS ANNUITY for NY.

This annuity product offers 4 major benefits:

Guaranteed Fixed Rates declared each year by American National Life Insurance Company of New York
Guaranteed Minimum Interest Rate that protects your money from loss of value
Guaranteed Minimum Surrender Value that you will receive if you decide to surrender your contract
Guaranteed Death Benefit upon the death of the owner of the contract

Use FIA to Overcome Ultra-low Interest Rates

3/21/2022

Are you using fixed income assets like CDs and bonds for yield, safety, or both? With 5-year CD rates at only 0.28% and bond yields at 1.95%1 , retirees relying on these assets to cover their expenses may not have enough income to meet their needs. Adding a fixed index annuity (FIA) can help protect against market downturns, while enhancing the performance potential of your clients’ portfolios, according to recent research by leading asset manager AllianceBernstein (AB).

AB research showed that portfolio outcomes improved up to 92% of the time with a fixed index annuity

Adding a lifetime income benefit improved outcomes 99% of the time
AB also found that when it came to providing retirement income, adding an FIA with a guaranteed living benefit (GLB) rider enhanced results 99% of the time over a 60/40 portfolio. In the best-performing scenarios, the FIA Enhanced Portfolio with a GLB rider provided almost $3,500 more in annual retirement income, an increase of more than 12% over the 60/40 Portfolio.

REASONS TO USE ANNUITIES IN IRREVOCABLE TRUSTS

3/19/2022

CONTROL OVER THE RECOGNITION AND TAXATION OF IRREVOCABLE TRUST EARNINGS
Investing trust assets in an annuity can provide income tax efficiency within the trust and help meet the needs of trust beneficiaries. Taxable income retained by certain non-grantor trusts is subject to comparatively higher effective trust income tax rates and may be subject to an additional 3.8% net investment income tax. Although income may be distributed to trust beneficiaries to help reduce the impact of the trust tax rates, payment of income to the trust beneficiaries may not be desirable. Investment in an annuity by a trust meeting certain requirements may avoid this tax dilemma. Keep in mind that the manner in which the annuity is titled will have an impact on how the annuity contract operates. The titling options and rules are described throughout the remainder of this brochure.

ANNUITIES AND TRUSTS: IRC SECTION 72(u)
Annuities that are owned by trusts that act solely for the benefit of living individuals will receive tax deferral under IRC Section 72(u). With annuities that meet the requirements under IRC Section 72(u), the appreciation of the annuity remains tax-deferred until the trustee requests a distribution.

Annuities owned by trusts that benefit nonnatural entities, businesses, or charities will not receive tax deferral.

FLEXIBLE INVESTMENT OPTIONS WITH GROWTH POTENTIAL
Changing trust objectives and economic conditions may cause the trust to change or modify its investment allocations. In many cases, the reallocation of trust assets may result in transaction costs and/or the realization of capital gains.

DEATH BENEFITS WITH POTENTIAL TO ENHANCE THE VALUE OF ASSETS PASSING TO TRUST BENEFICIARIES
An annuity with a guaranteed death benefit or enhanced death benefit offers the potential for long-term growth with downside protection, allowing the trustee to consider a more aggressive asset allocation for the benefit of the remainder beneficiaries. If the account performs poorly, an enhanced death benefit may provide an amount higher than the original account value at the death of the annuitant.

GUARANTEED LIFETIME INCOME
An annuity can satisfy a need for trust income through a guaranteed lifetime income stream for the income beneficiary of a trust. This can be beneficial for two reasons:

1. It allows the trustee to allocate a specific amount of trust assets to generate a lifetime stream of income.

2. It enables the trustee to invest more aggressively without fear of compromising income needed for the beneficiary’s life, thereby potentially growing the trust assets for the benefit of the remainder beneficiaries.

TAXATION OF BENEFITS BASED ON POLICY OWNERSHIP

3/18/2022

The table below compares some of the differences in taxation based on ownership of the life insurance policy:

Life Insurance Strategies

3/17/2022

If used properly, life insurance could help you accomplish many different purposes. Below is a list of how life insurance could be helpful if used right.

How to Prepare for a Tax Efficient Future

3/14/2022

As you plant the seeds for retirement, now is the time to consider how taxes will affect you when you begin spending your savings.

The following illustration will help you understand how taxes affect your retirement plan and how to diversify assets, so you can keep more income and pay less in taxes when you begin distributions.

As you understand how taxes impact the money you use to invest in the different options and how taxes impact your distributions, you will see that diversification is not only important for growth but distribution.

SPIA From American National Helps Shield From a Major Life Risk

3/10/2022

One of the major fears your clients face is outliving their income. A Palladium® Single Premium Immediate Annuity (SPIA) could help you shield you from this risk .

SPIA allows a lump sum to be converted into a steady stream of guaranteed annuity payments, providing a guaranteed income for as long as it's needed.

5 Life Insurance IRC Tax Benefits

3/8/2022

These 5 Internal Revenue Tax Code sections put the power of life insurance to work helping you reach your financial goals:

Case Study: Income Solutions from AIG

3/4/2022

Attached here is a case study from AIG on the new Lifetime Income Choice’s Max Income Option.

Max Income Option Provides:

Up to 7.25% (ages 72+, single life) as initial income
Guaranteed 5.50% income credits
Flexibility in coverage and taking income

A Simple Approach for Business Owners to Get Protection

3/2/2022

Principal® market research shows business owners rank income protection as their #3 priority for business solutions, yet only 42% have disability income insurance.

Helping business owners get the income protection they need can be easy with Principal's 3-3-3 program.

With this program, business owners can get pre-approved for a 3A occupation class quote when they meet these simple eligibility guidelines:
• 3+ years as owner of their business
• 3+ employees (in addition to themselves) or sub-contract manual labor
• $30,000+ net income in each of the previous two years

Here is how this program works:

Mee the above guidelines;
Request a pre-approved Disability Income quote
Receive a quote at a 3A occupation class rate – guaranteed.

Some offers may have limited benefits, so they’ll also offer an alternate class at standard benefits. For example, an owner of a plumbing company who does much of the labor might receive two options, such as: a) Offer at a 3A occupation with a $2,500 benefit and 5-year benefit duration; or b) Traditional maximum benefit quote at a 2A occupation rate.

Weather Future Financial Storms with Signature Protection IUL

2/28/2022

The American National Signature IUL is a good insurance product with multiple benefits:

Flexible guaranteed death benefit coverage and premiums from ages 80⁠–⁠121.
Innovative cash accumulation potential, with three carefully selected index options.
Secure protection for life’s unexpected events with Accelerated Benefit Riders.

4 Insurance Options to Protect Against Chronic Illness - Part B

2/26/2022

In last blogpost ,we showed 4 insurance options to protect against chronic illnesses.

4 Insurance Options to Protect Against Chronic Illness - Part A

2/25/2022

Being chronically ill means you’re unable to perform at least two of the Activities of Daily Living (eating, bathing, etc.) for at least 90 days; or you suffer from a severe cognitive impairment. Here’s a quick snapshot of four common insurance options that people may consider for financial protection in the event of a chronic illness.

In next blogpost, we will compare the pros and cons of each option.