In the annuity business, there is an unwritten rule that you should never put more than 30% of a client’s assets into their annuities. This is neither a regulation or a law, but something that is pretty much followed across the board with advisors. While the 30% rule is best for most clients, there are always exceptions to the rule. Advisors can be nervous to go against the grain because they might look bad or like they are pushing annuities that aren’t best for the client, but sometimes you just need to break the unwritten rule because it’s best to do something different for your client. Linda Koco of Annuity News says that “Rules of Thumb Can Smother Options,” in an article posted on Insurance News Net.
If you think that a client is better off using more than 30% of their assets to buy an annuity product or products, the best thing you can do is tell them that and explain why. Just because industry standards dictate a certain percentage, there are definitely clients who would benefit from a different approach. The author gives the example of a healthy widow in her 70′s who has sold her home and has those cash proceeds along with savings, Social Security, and retirement plan benefits. It is likely in her best interest to buy an annuity or laddered annuities using 45 or even 50% of her assets. The advisor has to worry that they might be questioned by the client’s other advisors or even the annuity distributor because they are bending the 30% norm.
Unfortunately, simply adhering to an unwritten rule may steer some clients away from their ideal annuities. The author just wants to make sure there is a discussion about the pros and cons of using 30% or more (or less) of one’s assets to buy an annuity. Although this isn’t the exact same thing, something similar is happening in the federal government with their discussion on longevity annuities. They are proposing a 25% limit on QLAC contributions and the IRI worries about such a limit. The IRI believes that some flexibility should be allowed because a 25% limit isn’t right for everyone. The author points out in this article that flexibility is exactly what should be used with the unwritten 30% annuity rule as well.
Written by Rachel Summit
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