Making excess withdrawals to meet spending needs when the market plunges can permanently impair investment return. A registered index-linked annuity could help your clients protect their retirement savings.
Your clients spend their working years focused on accumulating savings enough to last through retirement.
They are aiming for the target—that big number that should fund their retirement paycheck. But a sharp market downturn right before retirement could jeopardize their plans. For some clients, their entire savings portfolio may be exposed to market risk.
That’s why it’s important to talk with your clients about ways they can protect their long-term investments. One way to do this is with a registered index-linked annuity, which gives investors the ability to balance their desire for growth with their need for protection.
Unexpected financial outcomes
Clients typically focus on building their nest egg. With their optimism bias, they may not worry about market volatility—the rise and fall of stock prices over a time period—but even a well-crafted retirement plan is vulnerable to a prolonged market decline.The effect is exacerbated if the dramatic dip happens just when your clients start making withdrawals. Drawdowns during a bear market can create a sequence of return risk—the possibility of withdrawals depleting a portfolio as the result of declines early in the distribution phase.
As account balances shrink, your clients may no longer be able to meet their retirement objectives. They risk outliving their money, delaying retirement or making serious lifestyle concessions.
You may be able to help limit their potential losses while offering participation in equity market gains with a registered index-linked annuity.
Registered index-linked annuity
A registered index-linked annuity is a unique product that blends features of Variable Annuities and Fixed Indexed Annuities (FIA), allowing for more generous participation in market gains than with traditional FIAs, but also exposing principal to potential loss. This type of product tracks a particular index to calculate gains or losses, but the client is not directly investing in that index. Some index-linked annuities may include segments that can be used to tailor investment strategies.The index of a registered index-linked annuity is chosen by the owner from one or more options the insurance carrier has provided. These often include the S&P 500 Stock Market Index, which captures the performance of a group of 500 publicly traded stocks intended to represent the United States stock market. The cap is the maximum portion of the underlying index’s upside that can be credited to the annuity contract when the segment matures. For example, if the indexed strategy features a cap of 5% and the selected index rises 8% over the segment term, a credit of 5% is applied to the segment value.
The floor is the maximum loss resulting from negative index performance that can be applied to the segment value. The range of floors is typically 5%, 10% and 20%. For example, if the owner chooses a floor of 10% and the index drops 25% over the segment term, the net loss to the contract will be 10% of the amount allocated to the segment—avoiding an additional 15% of negative performance.
The buffer is the point beyond which negative index performance will be applied to the segment value. For example, if the owner chooses a 10% buffer and the chosen index declines 15% over the segment term, the segment value will be reduced by 5% – the amount that the index declined beyond the buffer. With this strategy, the client avoided the first 10% of the index’s 15% decline. However, it’s worth noting the potential loss for any segment utilizing a buffer strategy is substantial.
Staying on track
Registered index-linked annuities may help keep clients’ retirement savings from being derailed by significant market declines. Depending on the product, clients may also be able to select a guaranteed interest rate option. Segments using this strategy earn a fixed rate of interest. The interest rate may be an attractive alternative to the rates offered by other interest-bearing instruments such as CDs or money market funds.Because registered index-linked annuities offer the option of receiving a guaranteed interest rate and/or utilizing a variable component, they are sometimes referred to as hybrid annuities. Other names are market-linked and structured annuities. Although these annuities have been available since the 1990s, their popularity has increased in recent years as savers have sought ways to protect their retirement savings in declining markets while participating more in equity market advances.
Helping clients take the next step
Fees vary by product and can range from an annual fee to no annual fee. If you’ve identified clients for whom an registered index-linked annuity would be a good fit, you’ll likely have options available to define and customize a segment strategy to address their circumstances and concerns.
With your guidance, savers may have the opportunity to realize their retirement objectives in the face of market uncertainty.
Registered index-linked annuities are complex Insurance and investment vehicles. Before investing, investors should speak with a financial professional about the Contract’s features, benefits, risks and fees and whether the Contract is appropriate for them based on their financial situation and objectives.
Investors should carefully consider the investment objectives, risks, charges and expenses of a variable annuity, any optional protected lifetime income benefit, and the underlying investment options before investing. This and other information is contained in the prospectuses for a variable annuity and its underlying investment options. Investors should read the prospectuses carefully before investing. Prospectuses may be obtained by contacting PLICO at 800.265.1545.
Variable annuities issued by Protective Life Insurance Company (PLICO) in all states except New York and in New York by Protective Life & Annuity Insurance Company (PLAICO). Securities offered by Investment Distributors, Inc. (IDI). All companies located in Birmingham, AL. IDI is the principal underwriter for registered insurance products issued by PLICO and PLAICO, its affiliates.
All payments and guarantees are subject to the claims-paying ability of the issuing insurance company.
Annuities are not a deposit, not insured by any federal government agency, carry no bank or credit union guarantee, are not FDIC/NCUA insured and may lose value.
An indexed annuity is not an investment in an index, is not a security or stock market investment and does not participate in any stock or equity investments.
SM.973516.07.18
