Moreover, with a smart asset location strategy, which includes using tax-deferred vehicles such as IOVAs for tax-inefficient assets—including fixed income, REITS, liquid alts and actively managed funds—you can help clients to potentially increase returns without increasing risk. Gains from these investments would accumulate and compound tax-deferred for greater growth potential and would not be taxable until they are distributed from the contract.
Maintaining A Lifestyle In Retirement
Year over year, “Advisor Authority” also shows that saving enough for retirement—and fears of outliving those savings—are also among investors’ leading concerns. As 10,000 baby boomers a day are retiring, while pension plans disappear and concerns about Social Security increase, the retirement income challenge is real—and growing.
For clients already in retirement, insurance such as single premium immediate annuities (SPIAs) can provide another guaranteed income stream, to complement their Social Security—or help bridge the income gap if they postpone Social Security until a later age to maximize their potential benefits. Guaranteed income can also minimize the hazards of drawing down an investment portfolio, a strategy that exposes retirees to market downturns and sequence-of-returns risk. With a base of guaranteed income in place, retirees can invest a portion of their portfolio more aggressively for greater growth potential
Insurance that can guarantee lifetime income—such as SPIAs and variable annuities with living benefits—can mitigate longevity risk. In fact, this year’s “Advisor Authority” shows that 53 percent of RIAs and fee-based advisors use variable annuities with living benefit riders as a solution to protect their clients from outliving their savings. Deferred Income Annuities (DIA) can also help manage longevity risk, typically purchased around age 65 with guaranteed income beginning at age 80 or 85. Qualified longevity annuity contracts (QLAC) are funded with assets in qualified retirement plans such as 401(k)s, 403(b)s and IRAs.
Leaving A Legacy
The great transfer of wealth between baby boomers and their Gen X and millennial heirs in the coming decades will equal roughly $30 trillion, according to industry estimates. Fee-based insurance can help your clients at the legacy and estate planning stage. You can incorporate insurance to keep estates, or parts of estates, from getting tangled up in legal proceedings. Proceeds for annuities and other insurance products can be structured to be passed directly to beneficiaries without going through probate or a complex legal process. With proper planning, this also may be a way to avoid estate taxes at the federal or state level.
Fee-based insurance also can help clients set up trusts in a tax-advantaged fashion. For properly structured trusts, using an IOVA with potentially lower fees and broader selection of underlying investment options, the income earned can accumulate tax-deferred, sheltered from certain distribution requirements and capital gains taxes, until it is distributed from the annuity. Within charitable remainder trusts, especially the NIMCRUT [net income make-up charitable remainder unitrust], using IOVAs allows clients to receive a tax deduction up front, accumulate assets tax-deferred inside the annuity, and effectively time the distribution of an income stream for later years.
“Stretch” provisions for certain annuities can be used to create lifetime annual income for some beneficiaries—while also helping them avoid the tax burden that would be triggered by a lump-sum payment. Recent legislation that will limit the stretch functionality has already passed in the House and is moving through the Senate, but the stretch provision will continue to be an option for a spouse, a minor child, a child with a disability, or a beneficiary who is chronically ill. For all other beneficiaries who inherit tax-advantaged retirement accounts such as annuities after Dec. 31, 2019, they must withdraw the money within a decade of the owner’s death and pay any taxes due.
The Missing Asset Class For A Holistic Financial Plan
Using insurance solutions designed to fit the way RIAs and fee-based advisors work—with greater transparency and more choice, accessible through the support of a licensed insurance agent service and integrated seamlessly into your workstation—makes it easy to adopt for your clients.
National Insurance Awareness Day is a perfect opportunity to evaluate how insurance solutions can help you better serve your clients, as part of a comprehensive approach to holistic financial planning, supporting wealth accumulation, retirement income and legacy planning needs. To learn how you and your clients can benefit, download this whitepaper: Fee-Based Insurance: The Missing Asset Class for a Holistic Financial Plan.
Craig Hawley is the head of Nationwide Advisory Solutions.