Using Indexed Annuities In Asset Allocation

Today, more securities licensed financial advisors are using asset allocation to help their clients achieve financial objectives. Regardless of the asset allocation model used, almost all models call for varying amounts of exposure to equities and fixed-income investments. An aggressive asset allocation model seeks to achieve the highest growth in asset value by investing mainly in equities. In contrast, a conservative asset allocation model would be heavily weighted with fixed income investments, like bonds, so as to preserve capital.

During economic periods of excessively low interest rates, advisors should carefully evaluate the suitability of bonds when fixed income investments are called upon in asset allocation planning. That’s because bond values have an inverse relationship with interest rates; meaning as interest rates rise, bond values will commonly decrease. Ultimately, this could end up eroding principal.

To hedge against this risk, some advisors have turned to equity-indexed annuities with above-average minimum guarantees to supplement fixed income exposure. And unlike bonds, rising interest rates usually correspond with positive equity movement so annuities linked to a major market index, like the S&P 500®, can be a valuable tool.

While historically low interest rates at the onset of the millennium caused many carriers to lower their contractual minimum guarantees to 1.5% or 2.00%, some carriers continue to offer products with strong guarantees. ING’s Secure Index Annuity offers indexed-linked upside that’s reset annually with a contractual guarantee of never less than 3.00% compounded for the life of the contract. Translated, that means that your clients receive the value of the index strategy, or 3.00% compounded over time…whichever value is greater. Plus, with a short 7-year surrender schedule and surrender charge waivers for hospital and nursing home confinements, it’s suitable for clients between 65 and 85.


Advisor Considerations

• Make sure you and your clients understand the tax consequences and penalties of liquidating an asset before transferring them to annuities. Advising your clients to consult with their tax advisor may be appropriate.

• Be sure you understand the minimum guaranteed language of the equity-indexed annuity you are considering. For example, language that reads “3.00% on 90% of premiums” produces a significantly lower minimum value at the end of the annuity’s term than “3.00% on 100% of premiums.”

•If the client is using the bond to generate interest income, it’s important to understand that most indexed annuities do not allow withdrawals in the first contract year. In this instance, using an indexed annuity is not suitable.

Shore Benefits Brokerage. PO Box 1. Allenhurst. NJ 07711
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