Tax Advantages
Another advantage of these products, besides the hedge against market downturns, is the fact that FIAs carry no annual fees (unless you attach riders). Gains are locked in annually on the contract anniversary date. And taxes on earnings are deferred until money is taken out.

This tax deferral can be an important planning tool. For clients in a high tax bracket—who may be paying the 3.8% Medicare tax on unearned income or the income-related monthly adjustment amount on Medicare Part B premiums (if their modified adjusted gross income exceeds a certain amount)—the strategy of moving funds to a tax-advantaged product such as an FIA can make a lot of sense.

“By putting the investment dollars into an FIA—or other annuity or life insurance product, for that matter—the income from this investment principal is sheltered from current taxation and may possibly be distributed at a later date when the client might face less tax on the earnings,” says G. Joseph Votava Jr., CEO of Seneca Financial Advisors, a multifamily office based in Rochester, N.Y., and Washington, D.C.

It’s important that retirees be able to manage their tax brackets in the future, he adds. Future tax rates and structures can’t be guaranteed. But if retirees can manage their tax brackets, they can have some control over their annual cash flow and some ability to preserve their investment base. They’ll also have some control over their Social Security and Medicare benefits, which may be partly based on income levels.

FIAs may also be a perfect fit for those who have maxed out contributions to IRAs and 401(k) plans and are seeking other tax-sheltered opportunities.

Adding Riders
In addition, riders can be added to expand benefits, for a fee. Some popular options include long-term care or confinement coverage and guaranteed death benefits. “Riders are great tools for the right client,” says Wilson of Lincoln Financial. “Typically, rider costs for FIAs are relatively low in comparison to VA riders. Rules vary greatly for how riders are appended to and removed from contracts at onset, as well as on existing contracts.”

Lincoln Financial, for example, has an optional guaranteed living withdrawal benefit that can be added at issue or on a contract anniversary, and it can be removed after the fifth anniversary.