To someone who only has a hammer in their tool box, everything tends to look like a nail. While there is nothing inherently wrong with a hammer, sometimes it just can not do the job required. At those times the builder needs other tools to be able to successfully complete the job at hand.
Likewise, there are times and situations where an annuity just will not work and alternative solutions are required so as to best serve the client.
It is the purpose of this article to review some of the more common situations where an annuity is not a good fit; and to propose alternative solutions for those situations. The ultimate goal of this article is to provide the reader with new tools for those situations where an annuity just will not work.
It is an undisputed fact that people are living longer. Annuity options became fewer and fewer at these advanced ages, even to the point of being entirely unavailable. Factor in Florida's suitability issues at advanced ages, and an annuity may not be a viable option at all. Age is also a factor for a client who is under the age of 59 and and states that they will have a need to access the funds prior to reaching that age. A 10% tax penalty makes an annuity unsuitable for this person under 59 w who already knows today that they need liquidity before then.
While annuities have free withdrawal features, the fact remains that surrender charges are part of the long term nature of annuity contracts. Add to this the potential tax penalty for early withdrawal prior to age 59,, and you are clearly dealing with an illiquid asset that is designed to be held long-term, even until death.
Some investments are illiquid for legitimate reasons. But when the client requires a greater degree of liquidity than annuities provide, alternatives are needed. When a client clearly states that liquidity is a high priority and / or necessity … Then an investment with no surrender charges and the ability to access all of the funds would be a better solution than an annuity.
INSTITUTIONAL, CORPORATE, MUNICIPAL, BOARDS
annuities are products designed for individuals. There must be a measurable life expectancy of an individual before an annuity can be issued. Liquidity is also usually a priority for investors who are not individuals. The result is that there are investable dollars in our economy for which an annuity product is either suitable nor possible.
“Restricted assets” are those investable dollars that by operation of law or contract may only be invested in specific types of accounts. Examples of restricted assets would be reserves held by home owners associations, non-profits like charities and churches, professional associations, and business entities. All of these organizations maintain and manage assets, but are often restricted by their laws as to where they can invest those assets. Other examples of restricted funds would include some court ordered structured settlements, some accounts held for the benefit of minors, and accounts used as collateral. There are plenty of additional examples where an annuity would not be allowed for that restricted asset.
LOVERS OF FDIC
Some Buyers want FDIC for the security and peace of mind. Some Buyers require FDIC by Law or by Charter. For these Clients … The FDIC Guarantee trumps all other features and benefits of other investments. This Buyer's requirement for FDIC obviously makes an Annuity a non-starter.
If Liquidity and the FDIC Guarantee are priorities / necessities for the Client, or The Client is investing “Restricted Assets”, then consider this alternative: FDIC Insured Market-Linked Bank Certificates of Deposit.
Market Linked CDs are issued by the US based subsidiaries of major global banks. They are principal-protected and FDIC insured up to the statutory limits. Most MLCDs offer a minimum guaranteed rate of return, along with the upside potential of being linked to indices of stocks, bonds, and commodities. Market Linked CDs are Principal-Protected if held to maturity. Most MLCDs may be sold back to the issuing bank at any time for the CDs current market value, which could be a Gain or Loss.