Top 5 Annuities When Considering Roth Conversions
Qualified money is perhaps the most valuable money your prospects have. Qualified money has the advantage of tax deferral. That means it can grow without being reduced by annual taxes. Qualified money can also be “stretched” over the life expectancy of beneficiaries who inherit it, giving tax deferral even longer than one lifetime to work.
By thinking about the advantages of long-term tax deferral and the ability to “stretch” distributions to beneficiaries throughout their lives, you can see how $1 of qualified money can become $5, $10, or even $20 given enough time. Likewise, every $1 lost can mean $5, $10, or $20 lost. That is precisely why safety of principal is so important to qualified money.
The value proposition of Fixed Indexed Annuities provides not only safety of principal for qualified money that is so important, but also upside earnings potential. Combined with the turbulent marketplace that has brought safety and guarantees to the forefront of consumer awareness, it isn’t any wonder why almost 50% of the FIA sales in 20091 consisted of qualified money.
As of January 1, 2010, high income earners can now convert their Traditional IRAs into Roth IRAs. Like Traditional IRAs, money in Roths can grow tax deferred and can be “stretched” to beneficiaries to optimize their long-term benefits. Unlike Traditional IRAs, however, qualified withdrawals from Roths can be 100% income tax free. In that sense, Roth money is kind of like super-qualified money! Thus, the importance of principal protection for money converted into Roth IRAs is super-important!
Here are five FIAs that could enhance the long-term benefits your customers receive if a Roth conversion makes sense for them.
1. Lifetime Income
An FIA with a Guaranteed Lifetime Withdrawal Rider (GLWR) can provide a guaranteed, lifetime income stream without annuitization. This means your prospect keeps control of principal even while taking income. Inside a Roth, that lifetime income stream will be tax-free! If your prospect is considering converting to a Roth in order to provide tax-free income in the future, you might consider presenting them Aviva’s Income Select Bonus along with the Income Edge Plus rider. In addition, the post-conversion tax-free income stream provided by the Income Edge Plus can double in the event the policyholder is confined to a qualified care facility. Another alternative is RBC’s Enhanced Choice 12 with the Enhanced Guaranteed Lifetime Withdrawal Benefit Rider. The Enhanced Guaranteed Lifetime Withdrawal Benefit Rider can increase income 150% in the event the policyholder is unable to perform 2 of 6 Activities of Daily Living!
2. Wealth Transfer
Because money passed to beneficiaries inside a Roth is income tax free, it can serve as a very efficient vehicle for wealth transfer. If you have a prospect considering a Roth conversion in order to provide a tax-free inheritance for their heirs, you might consider presenting Aviva’s BPA 12 with the Family Endowment Rider (FE Rider). The FE Rider guarantees a death benefit value equal to your prospect’s principal growing at 5% annual compound interest minus any withdrawals taken. The 5% guarantee can last as long as age 90! Inside a Roth the FE Rider provides a tax-free lump sum death benefit. And with no medical underwriting required, adding the FE Rider to the BPA 12 is easy!
3. Steady Growth
If your prospect’s goal in converting to a Roth is to realize a good opportunity for tax-efficient growth, you might consider presenting Lincoln Financial Group’s New Directions 8. The New Directions 8 features a 1-Year Performance Triggered indexed interest strategy that credits the policyholder’s accumulated value with a competitive interest rate in each and every year the S&P remains flat or increases. What a unique story! If the S&P doesn’t change or goes up at all, you get the full interest credit. If the S&P goes down, you don’t lose any money. The opportunity for steady growth the Performance Triggered strategy provides helped the New Directions 8 become one of the top selling FIAs in 20091.
4. Strong Minimum Guarantees
Some of your prospects considering converting to a Roth have lost money and want to move someplace that will provide a strong minimum guarantee. If safety and guarantees are your prospect’s driving factors, you might show them Old Mutual’s OM Index-Safety 7. The Safety 7 provides the highest minimum guarantee you will find in a FIA. 100% of the policyholder’s premium is guaranteed to grow at 3% regardless of how the index performs!
5. Easing the Income Tax Bite
It’s critical for anyone contemplating a Roth conversion to consider the income tax cost associated with the conversion. One way to ease the pain of writing that tax check is to use an annuity with a premium bonus such as National Western Life’s Ultra Future with a 10% premium bonus or even a 15% premium bonus when combined with the Income Outlook +5 GLWR. Keep in mind, however, that with a bonus annuity, you generally trade higher caps and interest rates for the up-front bonus, and the income riders have an annual fee. So, while it’s not free money, it can help take the sting away from the taxes paid due to the conversion.
Keep in mind that numerous factors need to be considered by a customer when weighing the pros and cons of a Roth conversion. Individual needs, objectives, and family circumstances must all be assessed. And, as always, the suitability of each product recommendation you make is an important part of being a professional.
Regardless of whether your prospect is considering converting to a Roth IRA, the upside potential and downside protection an FIA can provide is an unbeatable combination. Safety of principal for qualified money is paramount. Your prospects are looking for it, and you can provide it!
Jason Smitka
Assistant V.P., Advanced Marketing, Director of Agent Education
Jason Smitka provides agents across the country with solutions that enable them to grow their business successfully. His responsibilities include advanced product training, development of strategic marketing concepts, and the delivery of innovative marketing tools to the agent community. Jason began his insurance career in 2000 and came to Creative Marketing after spending five years at Kansas City Life Insurance Company. Prior to that, he worked as a Marketing Representative with the Lewer Agency in Kansas City, Missouri.
FOR AGENT USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC. 10876-2010/1/25 | 15576 0250310
The Income Select Series [FPIA5 (06/06), FPIA7 (06/06), FPIA10 (06/06), FPIA10P (06/06), FPIAR (10/07), FPIAX (01/08) or state variation] are fixed indexed annuities issued by Aviva Life and Annuity Company, Des Moines, IA. Product features, limitations and availability vary by State; see product disclosure for details. Income Edge and Income Edge Plus [AIR (Rev.9/07), AIRW (02/08) or state variation], are optional riders for which an annual premium is charged.
Enhanced Choice 12 is issued by RBC Insurance. Product/features may not be available in all states. This annuity contains limitations. See annuity contract (Policy Form AN3023 in most states) for complete details. RBC Insurance® is the brand name for Liberty Life Insurance Company, a part of the global insurance operations of Royal Bank of Canada.
The Family Endowment Rider™ [form DBR-BPA (03/06) or state variation], optional rider for which a charge is deducted; and the BPASelect Annuity™ [forms BPASEL6 (10/07), BPASEL10 (10/07) and BPASEL12 (10/07) or state variation] are fixed indexed annuities issued by Aviva Life and Annuity Company, Des Moines, IA. Product features, limitations and availability vary by State; see the Product Disclosure for details.
Lincoln New DirectionsSM fixed indexed annuities (contract form 94-523 and state variations) are issued by The Lincoln National Life Insurance Company, Fort Wayne, IN. Product and features are subject to state availability. Limitations and exclusions may apply.
Safety Index contracts issued by OM Financial Life Insurance Company, Baltimore, MD. Form Numbers: FGL FPDA-ST (6-04) 9-4S, FGL FPDA-ST (6-04) 10-7S, FGL FPDA-ST (6-04) 10-10S, et al. Subject to state availability. Certain restrictions may apply.
The Income Outlook Rider (01-3128-07 and state variations) and Income Outlook+5 rider (01-3128-09 and state variations) as well as the underlying annuity products are issued by National Western Life Insurance Company, Austin, Texas. Products not approved in all states. See Policy for complete information and Policy benefits and limitations. Certain limitations and exclusions apply. Bonus annuities may include higher surrender charges; longer surrender charge periods, lower caps, or other restrictions that are not included in similar annuities that don't offer a premium bonus feature.
Annuities are not FDIC insured; are not obligations or deposits of, and are not guaranteed or underwritten by any bank, savings and loan or credit union or its affiliates; are unrelated to and not a condition of the provision or term of any banking service or activity. Annuities contain limitations including potential withdrawal charges and fees which may affect contract values. Bonus annuities may include lower caps, higher spreads or other restrictions that are not included in similar annuities that don't offer a premium bonus feature.