- Market Volatility
- Interest Rate Risk
Risk #1: Market Volatility
27% of Americans are worried the stock market will experience a major decline in the near future.
In this fictional example, financial advisor Dave teaches you how to sell annuities as a way to mitigate client concerns about market fluctuations.
Over the years, Dave has been managing Karen’s account to maximize her growth potential. As Karen approaches retirement she has expressed her concern over what another market decline would do to her retirement income. She certainly does not want to “give back” or lose the gains she has made, yet she also wants to make sure her money continues to have growth potential.
Dave explains that a fixed index annuity could be the right option for a portion of Karen’s retirement funds. As an insurance product, a fixed index annuity offers growth potential tied to the performance of a market index, such as the S&P 500® Index. When the index is up, Karen will benefit from interest credits (up to a cap) which are locked in each contract year. When the index is down at the end of a year, 100% of her contract value remains protected from the decline in the index. And, when Karen is ready to start taking income — whenever that may be — a fixed index annuity can provide her with a predictable lifetime income stream.
Risk #2: Longevity
One in every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95. The possibility that your clients may outlive their money is a real concern.
In this fictional example, financial advisor Allen teaches you how to sell annuities as a way to mitigate client concerns about longevity.
Bruce is concerned about spending too much in retirement and depleting the money he has saved before he dies. Yet he also worries about spending too little and not enjoying his retirement. He considers himself to be in good health. While it is not guaranteed Bruce will follow suit, his father is now in his 90s and is enjoying his own lengthy retirement.
Bruce wants to know he’ll have enough income for his entire retirement — no matter how long that might be. He decides to meet with Allen, his financial professional, to discuss his options.
Bruce’s biggest questions are:
- How much should he plan on withdrawing
from his savings during retirement?
- How long will his money last at that level?
Allen introduces Bruce to the idea of a fixed index annuity with a lifetime income rider. With such an annuity, Bruce could start receiving income just when he needs it. Knowing he will receive a “retirement paycheck” each and every month gives Bruce confidence that he won’t run out of money during retirement, even if he lives to be 122.
Bruce is much more confident about his retirement future knowing he will have guaranteed lifetime income payments, and he is less worried about being off track. By adding a fixed index annuity to his portfolio, Bruce is:
- Guaranteed income when he is ready to take it
- Protecting his money from market declines
- Achieving the conservative growth potential of his contract
Risk #3: Inflation
The impact of inflation on your client's money can result in a serious loss of purchasing power. How can your clients address this decline?
In this fictional example, financial advisor Jennifer teaches you how to sell annuities as a way to mitigate client concerns about the risk of inflation.
Meet Terry and Susan. Terry and Susan have a portfolio of stocks, bonds, and mutual funds to help them achieve their retirement goals.
After the most recent market decline, Terry and Susan decided to move a portion of their money into a five-year jumbo CD paying 3.32%. Their CD is up for renewal. With the current rate of inflation at 2.1% and five-year jumbo CD rates are averaging less than 1%, Terry and Susan are unsure what to do.
Terry and Susan decide to meet with Jennifer, their financial professional, and discuss alternatives that would give them additional opportunities for growth and keep their money safe. Jennifer understands Terry and Susan are unhappy with current CD rates but are concerned about putting money back into the market to gain a higher return. At the same time, they wish to keep up with inflation and protect their hard-earned retirement dollars.
Jennifer proposes adding a fixed index annuity (FIA) to Terry and Susan’s overall retirement portfolio. She explains that an FIA offers the potential for greater interest-crediting by linking interest credits to the performance of a market index. Because of the design, an FIA protects their contract value and credited interest from market declines.
Terry and Susan decide to add a fixed index annuity to their retirement portfolio. This move helps them:
- Keep pace with inflation
- Protect their purchasing power
- Have the potential for higher interest crediting
- Defer taxes
- Gain access & flexibility
Risk #4: Interest Rates
88% of traditional bond funds lost money in 2013.
How does an interest rate increase impact your client's portfolio? The potential for a rising bond interest rate environment can be detrimental to traditional bond funds. When new bonds are issued with higher rates, the value of existing bonds with lower rates goes down. And that can have a negative impact on the value of bond funds. Conversely, when new bonds are issued with lower rates than existing bonds, the value of those existing bonds rises.
In this fictional example, financial advisor Mark teaches you how to sell annuities as a way to mitigate client concerns about interest rate fluctuations and risk.
James & Rebbecca have a well-diversified portfolio containing 40% bond mutual funds, but James and Rebecca have already experienced loss in their fixed income portfolio when interest rates rose in the third quarter of 2013. They are planning to retire in three to five years, and want to protect the value of their fixed income assets against the potential for future losses by finding an alternative solution that offers protection and lower interest rate risk.
Mark, a licenced insurance agent, with whom they have an existing relationship, explains that it may make sense for those with a longer time frame to hold their existing bond fund portfolio. However, given the fact that James and Rebecca have plans to retire and begin a systematic withdrawal plan in the very near future, he suggests an alternative approach.
Mark recommends moving a portion of their fixed income portfolio with the longest duration (and highest interest rate risk) to a fixed index annuity.This shift achieves the objectives of reducing volatility, and generating the potential for interest income, with the added benefit of 100% principal protection from market losses and lower interest rate risk.
Based on Mark's advice James and Rebecca decide to allocate a portion of their money to a fixed index annuity to further balance their retirement portfolio. This move provides them with:
- Principal protection
- Guaranteed growth
- Higher interest rate crediting opportunity
- Lower interest rate risk