Annuities are financial products that offer clients a reliable income stream, especially during retirement. According to the Insurance Information Institute, annuities represent the largest life/health product line in terms of premiums written, surpassing life insurance and health insurance. 

Despite their popularity, annuities can be complex to sell due to the volume and variety of products available. From immediate annuities to fixed, deferred, variable, and indexed annuities (just to name a few), each category offers a different set of features and benefits. Additionally, financial underwriting can further complicate the buying process.

Understanding the complexity of annuities

There are a few roadblocks that can make obtaining annuities challenging, particularly if the annuity represents a significant portion of a client’s portfolio. While there is technically no limit on how much you can contribute to an annuity, the client should carefully assess their situation to ensure they are not spreading themselves too thin financially. Advisors must also consider:

• Feasibility issues: Annuities should not constitute an overly large part of a client's assets, which could expose them to undue risk.
• Timing issues: Some annuities have a waiting period before the client can access the income. Clients may worry about losing their investment if they die prematurely. Most carriers offer refund options where beneficiaries receive the remaining amount, though this can sometimes lead to client hesitancy.
• Decision paralysis: Various riders can be added to annuities to address specific concerns, such as death benefits or long-term care needs; while having many options is beneficial, choosing the best one can also be challenging.
• Taxation concerns: Each payment from an annuity is subject to potential taxation on any un-excluded portion, necessitating careful administration. Proper tax documentation and advice from a CPA can help manage these obligations.
• The non-natural person rule: The non-natural person rule prevents entities other than individuals from benefiting from the tax deferral of annuity earnings, which are instead taxed annually as ordinary income. Some exceptions include immediate annuities, charitable organizations, and grantor trusts.

How Modern Life can simplify the annuity purchase process

Modern Life, a tech-enabled life insurance brokerage, combines proprietary technology with hands-on brokerage support to streamline the annuity purchase process. Here’s how we can assist financial advisors:

• Personalized client solutions: Modern Life ensures that each client receives personalized recommendations based on their financial goals and circumstances
• Customized summaries: Modern Life provides detailed summaries to clients with key details such as the account and surrender values, interest rates, benefit payments, fees, and beneficiary information
• Ongoing support: Our brokerage team provides continuous support throughout the annuity purchase process, from initial consultation to post-sale service
• Addressing client concerns: Modern Life helps advisors address common client concerns by offering guidance on choosing appropriate riders to enhance the annuity’s benefits

Providing clear, concise information and personalized recommendations helps clients feel less overwhelmed by the plethora of options. When clients understand their options and feel confident, they are more likely to make purchases and be satisfied with their decisions. Proper documentation and streamlined processes reduce the administrative burden on advisors, enabling them to focus on providing high-quality service to their clients.

Case study: Using annuities for executive retention

Overview

A mid-sized biotechnology firm has consistently been at the forefront of innovation, attracting top talent from the industry. However, the competitive landscape and the high demand for skilled executives have made employee retention a challenge.

Challenge

The company faced the potential loss of one of its key executives. The executive played a pivotal role in the company's developments, and her departure would profoundly impact the company's ongoing projects and stability. The company needed an effective strategy to retain the executive while aligning her long-term interests with the company's goals.

Solution

To address this challenge, the company’s board decided to use an annuity as a retention tool. This approach was chosen because it provides financial security and incentivizes long-term commitment.

Implementation

• Selection of annuity product: The company worked with a financial advisor to select a suitable annuity product tailored to the executive’s needs. They chose a deferred annuity that would begin payments after a specified vesting period.
• Vesting period: The annuity was structured with a ten-year vesting period. The executive would receive annual contributions to the annuity during her tenure, but she would only begin receiving payments if she remained with the company for the full vesting period.
• Incentive alignment: The annuity's value was linked to the company's performance metrics. This alignment ensured that the executive’s personal financial growth was directly tied to the company's success, promoting mutual goals.

Outcome

The company’s use of an annuity as an employee retention tool proved highly effective in retaining the executive. By offering a combination of financial security and performance incentives, the company retained a key employee and fostered a deeper commitment to its long-term success. 

Next steps

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