Retirement
One of the major changes in life is going from an active participant in the workforce to the life of a retired individual. This can be a very traumatic and emotional period for a person who is accustomed to a certain way of living, and it can take some time for a person to come to terms with their retirement if he/she has not planned for it in advance.
Retirement Goals
Seniors may have differing retirement goals depending on their income levels, number of beneficiaries, spending behavior, retirement age, and personal objectives, but the goal of financial security and sustainable living for the
remainder of their lives is the top priority. Aside from that, it is up to the senior to come up with personal goals for themselves before their retirement, whether it is traveling the world, improving their golf handicap or spending more time with their loved ones.
Used prudently, annuities can help a senior in achieving all of the goals that they may have (except, perhaps, their golf handicaps). Financial security and a steady income for living expenses can be advantages that come from investment in an annuity.
Annuities and Retirement
An annuity is a long term investment, and with seniors living 20 or 30 years in retirement, it makes financial sense to invest in investment vehicles that can provide a steady income in the years to come. There are several ways in which annuities can help a person meet their retirement goals as compared with other investments.
• Tax Relief
A person who invests in annuities can gain tax advantages because the earnings on their investment grow tax free until it is withdrawn. This could be important for seniors who expect their tax bracket to change after they retire.
• Investment Goals
As seniors can have varying investment goals, from growth based outlooks to a preference for conservative secure investments, annuities with variable portions are a good choice for those who want to control how their money works for them without being too close in touch with the markets.
• Security
Annuities are backed by professional investors and the resources of some of the largest companies. An annuity with a secure company that has a
Selling Annuities to Seniors 139
high rating provides a lot more security than other investments that offer equal returns.
• Reduced Risk
Since the senior has a measure of control over how diversified or focused their investments can be, they can choose the level of risk and reward they are willing to take with their annuities and retirement incomes.
• Beneficiary Support
Annuities can be setup in such a way where a portion of the income generated from the annuity is carried over to the spouse who survives the annuitant. They then become the owner of the annuity and can make disbursements from those funds toward the annuitant’s children or grandchildren, depending on their requirements.
• Estate Preservation
Finally, if the person has a large enough estate, money placed in annuities or trust funds may be protected from the laborious process of probate and disputes amongst the family members. This can help the senior ensure that after they are gone, their family and legacy has the means to continue a standard of life that they are used to.
Selling Annuities to Seniors 140
Quiz 11
1. In order for an insurance company to sell annuities, it must to have a certain amount of money and assets in hand which are called: (Lesson 10: Annuity Reserves)
A. Emergency funds.
B. Investment basis.
C. Collaterals.
D. Reserves.
2. The main use of reserves maintained by the insurance provider is: (Lesson 10:
Annuity Reserves)
A. Create investment opportunities for fund managers.
B. Balance the liabilities of the insurance company.
C. Make loans available to the insurance fund when needed.
D. Make loans available to the clients.
3. The base of an annuity contract is: (Lesson 10: Annuity Reserves) A. Accumulation of premiums over time.
B. All other insurance policies held by the client.
C. Promise of future payments to the client.
D. Death of the annuity holder.
4. Compared to reserve requirements for life insurance policies, annuity reserve requirements are: (Lesson 10: Life Insurance and Annuities)
A. Less stringent.
B. More stringent.
C. Nonexistent.
D. More or less the same.
5. Which of the following would be the best method for a company to not overstep its annuity reserve limits? (Lesson 10: Annuity Reserves)
A. Limit the annuity payments
B. Reduce life insurance agent workload
C. Limit the number of annuities agents can sell
D. Use the 1035 exchange process to convert current annuities into life insurance policies
Selling Annuities to Seniors 141
6. A company maintaining annuity reserves that are much higher than the minimum required is likely to be seen as ________ company by investors and ratings providers. (Lesson 10: Impact on customers)
A. A small B. A stable C. An unstable D. A risk-taking
7. With stable interest rates and stable markets, annuity funds are usually invested in: (Lesson 10: Annuity Reserves)
A. Foreign Exchange Markets.
B. Commodities Markets.
C. Diversified Stocks.
D. Tech Stocks.
8. The ultimate goal of annuity fund investments made by an insurance company is to ensure that: (Lesson 10: Annuity Reserves)
A. Future payments will be equal to or less than present incomes.
B. Future incomes shall be more than present payments.
C. Present incomes shall be less than future payments.
D. Present payments shall be equal to or less than future incomes.
9. With high interest rates and booming markets, annuity funds are usually invested in: (Lesson 10: Annuity Reserves)
A. Foreign Exchange markets.
B. Growth oriented stocks.
C. Government bonds.
D. CDs.
Selling Annuities to Seniors 142
10. In a low interest rate situation with slow or bullish markets, annuity reserve fund managers are likely to: (Lesson 10: Annuity Reserves)
I. Place limits on annuity sales II. Reduce risk bearing investments
III. Recommend investments in government bonds A. I only
B. II & III only C. I & II only D. I, II & III
Selling Annuities to Seniors 143
Quiz 11 Answers
1. (D) There are several purposes for the insurance provider to maintain reserves for various products. Life insurance contracts can only be issued by an insurance company that has the prerequisite reserves to meet the demands placed by those contracts, and annuities are no different in that respect because they require reserves to be kept by the insurance provider as well.
2. (B) Reserves are used to balance the liabilities of the insurance provider, as well as to identify profits that might be used for taxation by the government.
Reserves are not used for liquidity purposes for the insurance fund or for loans to clients; they are to cover the obligations of all the investment instruments the company has sold.
3. (C) Since life insurance contracts are based on the accumulation of premiums over time, reserving requirements for those are less stringent. Annuities on the other hand, are promises for monies to be paid out in future.
4. (B) Since life insurance contracts are based on the accumulation of premiums over time, reserving requirements for those are less stringent. Annuities on the other hand, are promises for monies to be paid out in future; therefore, they have more stringent reserving requirements. Careful insurance companies will often use mortality tables with longer life expectancies for calculating reserving requirements for annuities.
5. (C) A careful company that is mindful of its reputation and its standing will place limits on the annuities their agents can sell. The company can set a limit on the agents, the areas, or a total company-wide limit on the annuities sold per year. This limit could affect the pricing of the annuity if the market demand for annuities is rising beyond the supply.
6. (A) Stability is a concern when the insurance provider does not have enough funds at the present moment to meet future contracts. Therefore, a company which has higher than required annuity reserves is likely to be seen as a stable company. An insurance provider with the bare minimum of reserves might not attract in investor as a good company to invest with, while an insurance provider who maintains more than adequate reserves can be expected to easily uphold their end of the contract, and the customer may more likely to invest with them.
7. (C) In times of stable interest rates and market conditions, management teams of the annuity funds with the insurance company may typically choose diverse investments to ensure growth and stability.
8. (A) Annuities deal with future payments on present incomes, and the ultimate goal of an insurance provider is to make sure that future payments on the annuity will be equal to or less than present incomes.
Selling Annuities to Seniors 144
9. (B) In a high interest rate environment with booming markets, the investments made by the annuity fund managers can be expected to give high returns;
therefore, portfolios may become less diversified and invested heavily into growth oriented stocks.
10. (D) In a low interest rate situation with slow or bullish markets, the annuity reserve fund handlers reduce their risk bearing investments for safer option, e.g., government bonds, and would likely reduce their limits on annuity sales as well to keep them in line with the reserves maintained by the company.
Selling Annuities to Seniors 145