Guarantee Your Client a Return Above 7% For A Portion Of Their Money
The Story
When guaranteed income is the goal, an annuity can be a great solution. When there’s also a goal of leaving an inheritance, greater results can be achieved by combining an annuity with a life insurance policy. Not only will your client have more income in retirement, but they will also be taking advantage of tax savings, levering the annuity to fund life insurance, offering the best of both products. Find out about the benefits of an annuity arbitrage strategy.
The Problem
John and Jane are both in good health and do not need this asset. They want to maximize the after-tax legacy to their children when they pass away.
Client Profile
John and Jane are both 60 years old with five years left before retirement. They’ve done well financially, have three children, and are looking to make sure they have enough recurring income for stability in retirement. They also desire to leave an inheritance to their children when they pass away. They have $1M of qualified assets to allocate to these goals.
The Problem
Putting all $1M into an annuity would generate the income John and Jane need, with payouts of $106,000 beginning at age 65. The income would be guaranteed by an insurance company and not dependent on investment performance.
The annual income would not be sensitive to the sequence of returns and represents a 6.44% internal rate of return should John and Jane live to life expectancy. Assuming a 1% annual advisory fee, this is the equivalent of a return of 7.44%.
The downside with the pure guaranteed income solution is that the residual value of the annuity after John and Jane’s joint lifetime is likely to be $0, so it doesn’t meet both of John and Jane’s goal—to generate guaranteed income and also leave an inheritance.
How it Works
Annuity arbitrage allows you to leverage the different between the cost of the annuity and the returns it generates. The clients can reinvest some of the payouts from the annuity to purchase a life insurance policy. The annuities provide the guaranteed income while the life insurance provides a tax-free death benefit to the children. It’s especially effective with qualified funds that the client would have to eventually spend anyway.
The Solution
With the children in mind, John and Jane look at a solution that couples a life insurance policy to provide their children a guaranteed repayment of the investment principal while still providing guaranteed lifetime income.
With the same $1M investment, they could generate over $90,000 per year of guaranteed income at age 65 and add a $1M death benefit to their three children that pays at the second death. The internal rate of return at their joint life expectancy would be 6.6%, which adjusted for a 1% advisory fee would be 7.6%.
The Result
Annuity arbitrage puts at your disposal a financial instrument that can create guaranteed cash flow and a guaranteed return of principal with a guaranteed internal rate of return of over 7% at life expectancy.
