The Wall Street Journal recently ran an article entitled “Retirement Income? Annuities Come Up Short.” (April 30th, 2011). The article, written by Brett Arends, makes the case against lifetime income annuities. The argument is this: Payout rates are down, compared to previous years. By locking yourself into a lifetime payout rate today, when interest rates are relatively low, you give up any hope of benefiting if interest rates rise. The author also argues that lifetime income annuities don’t provide any hedge against inflation. You also give up control of your principal, and run the risk that the insurance company could become insolvent.
As the legendary Marine Corps officer, then Colonel Chesty Puller put it, “they’ve got us surrounded, the poor bastards!”
Lifetime income annuity salespeople, you have nothing to apologize for – provided you recommend and sell the annuity properly. The LIA has one primary purpose – to maximize income while guaranteeing the client will never out live his or her income. Anything else is a sideshow.
Use the Objection
Objections are positives. They help move the conversation forward. If a client asks you about this article – or the assertions within it, take a move out of the martial arts world. Employ some jiu-jitsu, and use the objectives to draw the prospect toward the sale.
Objection: “This article says ‘annuities come up short.”
Answer: “Compared to what?” If you establish that the prospect of outliving income is a legitimate concern, then there is no getting around the LIA. The LIA is the only financial product that will give you a guaranteed income for life. Guaranteed. “And we will put it in writing.” CDs can’t do that, because of reinvestment risk. Neither can muni bonds. And certainly not stocks.
Objection: “Interest rates are too low.”
Answer: “Is the important thing the interest rate? Or your guaranteed income?”
The older the client is, the better the payout ratio, thanks to mortality credits. (I always referred to them as “longevity benefits.” It sounds better). Remember, if interest rates are really that low, the client is not getting paid much to wait out the market, either. And frequently is taking on substantial risk for doing so, because the time when interest rates are lowest is often the time when the downside risks in bonds are the highest.
Objection: “I’m worried about inflation.”
Answer: “Would you like to build in a guaranteed cost of living increase?”
Many annuities are sensitive to this objection, and offer some form of inflation-linked or guaranteed increase – at a cost, of course, of a lower initial payout. But the client would pay this cost one way or the other – in the form of taking on increased risk, or tying up money for a longer period of time.
If the client seems to be leaning towards taking refuge in stocks as a hedge against inflation, another approach might be this: “When was the inflation rate highest in your lifetime?” The client will answer “the 1970s.” Or “Under Carter.” Your response: “Do you remember how stocks were doing during those times?” A quick check of any chart would reveal that the 1970s were an atrocious time for equities. Yes, stocks eventually caught up: after inflation was tamed by a severe recession in 1981, which your LIA clients will remember – even if you don’t. You can gently point out that equities make sense as an inflation hedge for those with very long time horizons. “But you will need to take income. And when you take the income you need out of a stock-heavy portfolio in a bear market, you wind up eating your seedcorn.”
Objection: “I want to leave money for my heirs.”
Answer: “Excellent. Then lets just take care of your most basic living expenses – the things that you need to guarantee. We’ll commit the smallest amount possible – and leaving the most for your children.” This works because of mortality credits – er, longevity benefits. The LIA still generates the greatest guaranteed income for life on the market, especially for older folks.
In some cases, you may be able to buy a permanent life insurance policy for a lower premium than the lifetime annuity payout. People who specialize in pension maximization do this all the time. You may need to shop the insurance application around to several carriers, however.
Another approach for those people might be: “have you given any thought to protecting these assets against creditors? Against Medicaid officials? Have you heard of anyone who’s been victimized by fraud in their declining years? Taken advantage of?” Few products do more than an income annuity to protect assets against creditors.
Objection: “I’m worried about the insurance company going broke.”
Answer: “How many insurance companies have gone broke since you can remember? How many banks? How many publicly owned companies? Where do you think your money is safest?”
Yes, there is a guaranty fund for your state. But most states prohibit you from mentioning them. Fortunately, you shouldn’t even be tempted to: The track record of financial stability and stewardship in the life insurance industry is still far superior to that of any other financial sector – and speaks for itself.”
This is just a start. And sometimes even the best response to an objection cannot overcome the prospects reluctance. The key, in the end, is to keep things simple. “How much income in retirement will you need?” Then, “How much of that retirement income do you want to have guaranteed in writing?” The answer will almost always be either “some of it,” or “all of it.” Then just give them what they want. No one else – not their banker, not their broker, not their CPA and not their sainted lawyer can even approach what you can do for their retirement security.
And you can tell your prospect, “you can take that to the bank.”
If it’s still there.