Income planning is integral to the service we provide to the producers who work with us. We take it quite seriously, and as such we’re very good at helping you determine the appropriate income strategy for each one of your clients. Whenever we get to talk about income planning, we start with one basic question that really helps us filter out the myriad of income planning options.
Does your client:
a) need income now
b) need income later
c) want an income stream that can be turned on whenever they need it
For the purposes of this post we’re looking at this strictly from an income perspective; rest assured every option mentioned has at least some level of death benefit protection.
Let’s further simplify by using the same client details for each scenario: Jane, a 55 year old female with $125,000 in non-tax advantaged accounts.
Need Income Now
Jane is a recent widow. Her husband had done all the budgeting and bill paying. She really needs a set income she can count on to pay her fixed expenses. By putting the $125,000 into a SPIA we can generate $582.19 per month or $6,805 per year. In Jane’s case, since there is no tax-deferred accumulation, there are no pre-59 ½ penalties on SPIA income.
Need Income Later
Talk about options. If Jane is planning for income down the road in the retirement years, there are multiple ways to go. Let’s focus on two options from completely different sides of the spectrum.
Jane can go the simple route and pick a date in the future to start guaranteed lifetime income. If she uses a deferred income annuity (DIA) with a 12-year deferral period (age 67), she would receive $1,312 per month or $15,240 per year. The DIA throws off a nice amount of income, but there are drawbacks with the lack of flexibility and accumulation potential since this is a pure income maximization strategy.
Alternately, Jane could use cash value life insurance to generate income. This kind of plan is often referred to as a LIRP (life insurance retirement plan). Life products (usually indexed universal life policies) can be configured to illustrate planned withdrawals for supplemental retirement income. Unlike an annuity, these withdrawals would be tax-free as opposed to any annuity option that has at least some portion taxed, not to mention the outstanding death benefit leverage. Be aware, most illustrations would need to be run using non-guaranteed interest rates and the money isn’t guaranteed to last a lifetime. In Jane’s case, she could use her $125,000 for a 5-pay premium outlay and start generating $12,624 at age 67 ($17,533 pre-tax equivalent assuming a 28% tax rate) which would last until age 87. Again, with this plan though perhaps not the best vehicle for generating pure income, it’s important to remember the other benefits that come with purchasing a life insurance policy.
Jane is still working, so a fixed income isn’t that important today, but she recognizes the benefit that lifetime income provides. She has no idea when she would want or need an income stream to begin. By putting the $125,000 in a fixed index annuity with an income rider, her money will continue to grow based on the interest crediting strategy she chooses, participating in some of the index’s gains and none of the losses. At any point, she can activate the income stream. If she waits 12 years, she can guarantee herself $1,233 per month or $14,798 per year. The allure of the fixed index annuity with an income rider is the flexibility to take the income whenever you want (or not all if you want to keep accumulating). So if Jane decides to take the income earlier at 10 years, now she can take $1,094 per month or $13,125 per year.
|SPIA||DIA||DIA||LIRP||FIA Income Rider||FIA Income Rider|
|Income Generated Annually||$6,805||$13,138||$15,240||$12,624||$13,125||$14,798|
|Wait time||Today||10 Years||12 Years||12 Years||10 Years||12 Years|
There’s a lot to consider when discussing income with your clients. All the options discussed here have their place. As with all the planning we do, these solutions are not one-size fits all. When you’re looking for the most complete set of options available for your income planning cases, put your trust in Zenith Marketing Group’s team of income experts. Whether it’s Income Now, Income Later, or Income Whenever, we have the solutions.
All numbers are current as of 1/27/16.