Laddering fixed annuities? Try laddering fixed indexed annuities

In this article, we’re going to discuss laddering fixed indexed annuities and how this strategy can provide:

• More liquidity to the client through the respective CDSC periods

• An opportunity cost of only 5% in ending account value for maximum liquidity

• How to find eligible clients in B2

  
  

In high-interest rate environments, a huge driver of fixed annuity sales comes from the concept of laddering MYGAs. The premise is simple- divvy up the premium that would be used for one MYGA and instead open a variety of different guarantee period buckets so that you have a rotation of liquidity while other portions of the fixed annuity portfolio are still growing.

This is a great sales concept for clients and advisors alike. For clients, they have access to cash on a predictable schedule that they can choose what to do with, and for advisors they are creating a strategy that injects the clients with fresh liquidity as needed, or finding a policy that can match their needs for unused funds. 

However, in periods of increasing interest rates, clients can feel the opportunity cost of not being able to take advantage of purchasing a higher interest rate fixed annuity. Market value adjustments can further this opportunity cost by potentially penalizing a client for withdrawing more than their available amount each year prior to the end of the surrender charge period if interest rates increase.

Fixed Indexed Annuities are less sensitive to interest rate risk for the client because their returns aren’t directly correlated to the interest rate that they MYGA is built on top of. There is still interest rate risk, and your caps and participation rates are only as good as the insurer you’re purchasing them from and how good they are at pricing options annually and pricing those options over the duration of the contract.

This article is going to cover how we can maximize liquidity in a fixed indexed annuity strategy, some data to help prove the point, why this could benefit both the advisor and the client alike and where to look in B2 to find opportunities.

Laddering fixed indexed annuities could be a good solution to this problem. This is hardly a new sales idea for advisors. Given the state of the market and where interest rates are expected to head, it could be a good play for a client who is willing to take on a little risk of not earning anything in a given year for the chance to grow their money more than a typical guaranteed-rate product.

Every time you make the decision to ladder a product, whether it be a CD or fixed annuity, you are consciously making the decision to leave money on the table- this is the risk reward of wanting more flexibility from your annuity. But because you can earn more of a return in up years in a FIA, this can have a more positive impact on your portfolio when using indexed annuities.

Again, your caps and participation rates are only as good as the carrier that you purchase them from, and how good they are at pricing the contract for its duration. Choosing the right carrier is of utmost importance. It's necessary to choose a portfolio of fixed indexed contracts where the longest duration policy accepts subsequent purchase payments with non-rolling CDSC periods (where each deposit's out-of-surrender date is based on the date of the contract issuance) unless you are supremely confident you will not add funds to the longest duration bucket as each FIA comes out of surrender.

Liquidity

By portioning out enough funds to go into 3- and 5-year FIA buckets, with the lion's share being received by a 7-year contract, you are creating more liquidity throughout the full 7 years than by putting all the eggs in one basket.

Let’s use an example. For a $200,000 deposit into a 7-year FIA and a 5% rate of return for the full seven years, a client has access to the following amount each year:

• Year 1: $20,000

• Year 2: $21,000

• Year 3: $22,050

• Year 4: $23,152

• Year 5: $24,310

• Year 6: $25,525

• Year 7: $26,801

  
  

*Assuming midyear withdrawals looking back to the most recent contract anniversary

Instead, by laddering our contracts with $50,000 in a 3-year, $50,000 in a 5-year, and $100,000 in a 7-year, we end up with the following results:

• Year 1: $20,000

• Year 2: $21,000

• Year 3: $22,050

• Year 4: $75,245

• Year 5: $24,020

• Year 6: $82,654

• Year 7: $26,163

  
  

*Assuming owner rolled over the funds into a 7-year and took no withdrawals

What would be the opportunity cost of doing a strategy like this? Maybe $20,000 in total lost? Surprisingly, the laddering strategy only comes up less than $7,000 short in total account value when compared to the non-laddered alternative. Again, this scenario assumes that the client doesn’t use the funds and instead deposits them into a 7-year FIA at the new money cap rates. That is $7,000 given up expanding liquidity and giving maximum flexibility.

Flexibility

In order to make this strategy work in the best possible way, and to maximize our account value sweep strategy, we need to find a 7-year FIA that accepts additional deposits on a non-rolling CDSC basis. Ideally, that contract would also carry a strong minimum guaranteed interest rate on a fixed account but that wouldn't be necessary to use this concept.

By utilizing a contract with non-rolling surrender charges, we are keeping the theme of maximum liquidity when the contract is fully out of surrender. Each subsequent deposit ideally works off a 7-year's initial issue date. A 7-year FIA that has a strong minimum guaranteed interest rate on the fixed account also means that when the contract is outside of its surrender charge period, you can use the fixed account as a high yield savings account, moving money into and out of as the client’s needs change. Fewer contracts nowadays carry a guarantee like that outside of their CDSC period so having the ability to move funds into a new fixed rate product when rates are higher, and back to this contract when rates are lower is a competitive edge- simply keep the account funded with the minimum maintenance requirement.

Drawing back to the main argument of this sales concept, by having a bucket of money liquid in 3-, 5-, and 7-year intervals, clients can “rate chase” as new funds become available- giving them an opportunity to lock in higher rates when interest rates increase or roll the funds into the 7-year FIA policy when rates decrease or use their savings as retirement income as they see fit.

How to find opportunities

We can find strong candidates for these sales opportunities in B2 by looking at a few of the following groups:

• Clients with Index Horizons contracts that are out of surrender

• “Has the Game Plan Changed”

• “Do I still need this?”

  
  

The first one can be a prime sales target because they are already familiar with indexed annuities. If they still have their Index Horizons contract, they are now seven years older and might have a liquidity concern in the future, making them a prime candidate.

The second group has variable annuities with income riders that have not yet turned their income on. Like the first group, this report will find clients nearing or at the end of their CDSC. They might want to de-risk their portfolio and consider their liquidity or death benefit protection needs.

The last group, “Do I still need this?”, groups clients with variable annuities that have a guaranteed minimum accumulation benefit rider. If you’re unfamiliar, these riders guaranteed a portion or all your initial investment back after 7, 10, or 20 years. That means that a client who utilized a rider like this liked the idea of upside growth but was conservative enough to protect the downside- another great candidate for a targeted campaign like this.

Summary

As interest rate declines are expected and likely to come soon, guaranteeing a floor for an investment with accumulation potential is a great strategy for a client that can’t afford to lose any money but can afford to not earn anything in a contract year. By offering a way to break up portions of an accumulator’s portfolio into various fixed indexed annuity terms, we can spread out funds to be used near, during, and well after retirement has begun.