MetLife, Other Insurers Face Tough Annuity Calls

With the Department of Labor annuity ruling, the industry and retirees will have to wait and see what happens next. The 1,100 page ruling leaves insurance agencies like MetLife and others determining if they will fade away from annuity offerings or adapt to the new exemption-free offerings. If they opt to adapt, which most experts appear to believe will be their course of action, variable annuities could prove much harder if they switch to a fee-based system.

As ThinkAdvisor notes,

“As a result, many anticipate that, rather than attempting to comply with the strict standards imposed by the pending DOL rule, firms will switch from a widely applicable commission-based model to a fee-based model that charges an asset-based fee. While in some cases this could reduce the overall cost of the product, generally charging an annual fee rather than an upfront commission could still result in a product that costs the same amount over time.

However, it is also possible that many of the currently available riders to annuity products will be eliminated in order to produce a product that charges a lower overall fee, as advisors evaluate whether the lower cost, rider-free product can ultimately serve the same client needs over time.”

Many expect some form of the best interests contract exemption will be included in the final rule. So, the market is likely to adapt in the coming months. However, what sort of adaptation remains uncertain–a status that many expect to remain the same until at least the fall. Eric T. Steigerwalt, chairman, president and CEO of MetLife Insurance of Conn. said during a Q1 earnings call that, “Maybe four months or five months from now, we’ll have a better view of that, but right now given the fact that this (DOL rule) is almost 1,100 pages, we’re just going to have to wait and see what a number of distributors are going to do.”

So, the current situation appears to be a wait-and-see scenario. What happens this fall should dictate what level of adaptation the market makes. It would be unlikely to see annuities be phased out, but many options are still in play.

The Rainbow Strategy (Global Lookback)

The Rainbow Strategy

In these times of high volatility, people are looking for ways to diversify their portfolio in order to protect their nest egg and try to capture as much of the upside as possible.

But what exactly is diversification? Is it choice? A Jelly Bean Store can have thousands of different choices of colors and flavors but everything you buy is still a jelly bean.

True diversification is a mixture of uncorrelated, or lesser correlated, items. When looking for diversification for where you put your nest egg, you want to be spread out across the different economies around the globe.

Where do you think we are going to see the economy improving in the next ten years? China? Europe? Japan? America? How would you like to be in a position where you would not have to guess which economy will grow the fastest to be able to take advantage of that growth? That is what the new “rainbow crediting method” does.

Many of the experts familiar with this strategy say it is like being able to bet on the race after the horses have run. Here is how it works. The strategy uses four indices from around the world: the Hang Seng in China, the Dow Jones Eurostoxx 50 in Europe, the Nikkei 225 Index in Japan, and the S & P 500 in America. This strategy is not only diversified using economies from around the world, but it is also weighted so that most of the money is going to the indices that are producing the best results.

Learn about the rainbow strategy in my book, Outlasting the Storm: A Survival Guide to Retirement Income Planning

Are Annuities Right for Your Plan?

Source: GotCredit

Source: GotCredit

When it comes to personal finance and retirement planning, there is no one size fits all method to follow. Every circumstance and situation creates a need for a different approach. What might be right for you could be the worst option for another retiree.

Usually, an annuity becomes an option for a retiree when they have maxed on more traditional tax-advantageous investment options, like 401(k) and IRAs. As CNN Money noted, “If you have additional money to set aside for retirement, an annuity’s tax-free growth may make sense – especially if you are in a high-income tax bracket today.”

Annuities certainly can be a buyer beware-type atmosphere. Without the proper analysis of your potential investment, you could be investing in a lemon when you wanted stability. It’s why I always stress the mandatory need for thorough research conducted before taking the plunge. Not only should you ask every question you have to your finance professional, but you should research these answers yourself as well. At worst, you’ll find the same information your professional presented you, and now you’ll have more material to make the best decisions for your retirement.

If you’re uncertain if an annuity is right for your investment plan, see if you fall into these situations:

Outliving Your Money? Guarantee Your Income

For those worried that they might outlive their money, an annuity could be the option to ease their fears. With life spans extending and markets always susceptible to volatility, many annuities ensure that you are taken care of regardless the scenario. Immediate annuities could be right for you. Another option to consider is investing in multiple annuities to protect yourself from an insurer potentially going under.

Depending on your advisor, you may hear that an immediate annuity is best. Others might suggest an inflation-adjusted investment to protect you and your heirs. Again, it’s all about what fits you best. Consider all the elements that go into your planning. You have to factor in the annuitant’s age, investment amount and other key factors before determining the proper course of action. If you choose correctly, you can breathe easy knowing your income is ensured while protecting your principle.

Conservative Seniors

The investment landscape shifts as interest rates go lower. As they do, traditional conservative options, like CDs and money market accounts, prove less like the tried and true method they once were.

With annuities, you have various options to match your investment as well as your risk tolerance. While I highlight seniors in this category, any conservative investor could be a fit for an annuity–especially a fixed option. Not only will this conservative approach ensure you have a lifetime income, you now have the opportunity to earn more than other options. The aforementioned CDs and money market accounts definitely have earning potential, but an annuity may be the right fit for you if you’re the kind of conservative looking to generate the most return on your investment.

When comparing money market and bank CDs to a fixed annuity, you begin to see that the annuity investment is the only option that guarantees you income for life. Additionally, it’s tax-deferred accumulation benefits are often alluring to those otherwise considering a non-qualified investment.

Certainly, other individuals fit the bill for an annuity investment–and some in the above instances might be better on another route. However, these are some options worth considering as you move forward in your planning.