Use This to Combat the White House’s Criticism of FIAs

How to Navigate the SPIA vs FIA Media Storm

In light of the new DOL Proposal and media storm that has followed, I wanted to provide a simple comparison between a SPIA and FIA.

During a recent press conference, President Biden acknowledged the benefits of annuities and called moving a portion of someone's retirement assets into an annuity as 'sound advice.' However, he slammed FIAs because of their higher commissions, complexity, fine print, and hidden fees. I think we're all in agreement that FIAs are more complicated when compared to SPIAs. Additionally, there is a higher commission incentive on a FIA relative to a SPIA.

I would argue that calling FIAs a scam is far from the truth. Sure, certain annuities offer more consumer benefits than others. Also, some people in our industry are illustrating out-of-control FIAs that can create unrealistic expectations for the potential customer. Despite the pitfalls, we firmly believe that FIAs can be a good addition to a client's retirement portfolio when done the right way for the right person, specifically when a bond alternative is used for a portion of a retirement plan for clients looking for downside protection with some upside growth potential.

"They're putting their self-interests ahead of their clients, and they are scamming Americans out of hard-earned money," said Biden. "People should be able to … get advice from a so-called expert [knowing] they are getting real help, not getting ripped off."

The White House highlighted fixed index annuities as a problematic product — rich in conflicts of interest — that could cost retirement savers as much as $5 billion per year.

"When advice is sound, many annuities can be steady, reliable sources of retirement income, much like Social Security," said Biden.

Source: Yahoo Finance

To illustrate the difference between a SPIA and an FIA for retirement income, I used a 70-year-old single male with a $400,000 rollover. In the analysis below, we're assuming that the client has ample other assets, and this is just a portion of their overall portfolio.

I compared using a SPIA with Installment Refund, both with and without a 3% annual compounded COLA inflation adjustment vs an FIA that offers increasing income. Rather than using farfetched returns, I illustrated a 100% allocation to the fixed account, which is currently crediting 3.1%. Yes, the fixed rate could increase or decrease after the first contract year, but this provides a realistic baseline expectation.

While the FIA provides a lower initial income amount when compared to the two SPIA options, it does offer a non-guaranteed income cross-over at age 84 (compared to the level SPIA payment) and significantly more cumulative lifetime income in the client's later years of life.

At age 90, the cumulative lifetime income is $689,417 with the SPIA no COLA, $737,617 with the SPIA w/ 3% COLA, and $815,831 non-guaranteed with the FIA.

The FIA projects over $126k (18% increase) in higher cumulative income when compared to the level income SPIA. At an even longer life expectancy, the FIA income IRR is a whopping 8.7%, which is likely a much higher return than we can expect from other fixed-income assets.

In addition to the much better liquidity, the FIA provides considerably more protection to the beneficiary should the annuitant die too soon.

For example, if this consumer died after 5 years of owning the annuity, the level income SPIA would provide a $235,853 installment death benefit paid out over the next 7 years. The FIA installment death benefit is almost $200,000 higher at $435,577 (based on the current 3.1% fixed rate) and would pay out over 5 years (2 years sooner than the SPIA).

After 12 years, when the SPIA installment death benefit hits $0, the FIA projected installment death benefit is $139,490 and would be paid out over 5 years to the beneficiary.

In looking at the actual math behind these two products, we believe it is unfair to call an FIA a scam, considering it pays the consumer more projected income over a longer life expectancy, provides more liquidity/flexibility in case of emergencies, and a higher installment death benefit to the beneficiaries in case of premature death. Yes, the FIA has more moving parts, a higher level of complexity, and requires more consumer education when compared to a SPIA. Also, they can be over-illustrated and certainly missold. Despite these drawbacks, we stand by these products and their ability to help solve the American income crisis.

$400,000: SPIA No Inflation Adjustment:

Life With Installment Refund$2,143.50DEC-08-2023A

$400,000: SPIA With 3% Annual COLA Compound:

Life With Installment Refund$2,735.78DEC-08-2023A

SPIA: Non-Inflation Adjusted

YearAgeAccount
Value
Guaranteed
Income
Cumulative
Income
Installment
Death Benefit
Payment
Years
170$ -$ 32,829$ 32,829$ 367,17111
271$ -$ 32,829$ 65,659$ 334,34110
372$ -$ 32,829$ 98,488$ 301,5129
473$ -$ 32,829$ 131,317$ 268,6838
574$ -$ 32,829$ 164,147$ 235,8537
675$ -$ 32,829$ 196,976$ 203,0246
776$ -$ 32,829$ 229,806$ 170,1945
877$ -$ 32,829$ 262,635$ 137,3654
978$ -$ 32,829$ 295,464$ 104,5363
1079$ -$ 32,829$ 328,294$ 71,7062
1180$ -$ 32,829$ 361,123$ 38,8771
1281$ -$ 32,829$ 393,952$ 6,0480
1382$ -$ 32,829$ 426,782$ --
1483$ -$ 32,829$ 459,611$ --
1584$ -$ 32,829$ 492,440$ --
1685$ -$ 32,829$ 525,270$ --
1786$ -$ 32,829$ 558,099$ --
1887$ -$ 32,829$ 590,928$ --
1988$ -$ 32,829$ 623,758$ --
2089$ -$ 32,829$ 656,587$ --
2190$ -$ 32,829$ 689,417$ --
2291$ -$ 32,829$ 722,246$ --
2392$ -$ 32,829$ 755,075$ --
2493$ -$ 32,829$ 787,905$ --
2594$ -$ 32,829$ 820,734$ --
2695$ -$ 32,829$ 853,563$ --
2796$ -$ 32,829$ 886,393$ --
2897$ -$ 32,829$ 919,222$ --
2998$ -$ 32,829$ 952,051$ --
3099$ -$ 32,829$ 984,881$ --
$ 984,881

Illustration purposes only.

SPIA: 3% Annual COLA Compound

Account
Value
Non-Guaranteed
Income*
Cumulative
Income
Installment
Death Benefit
Payment
Years
$ -$ 25,722$ 25,722$ 374,27811
$ -$ 26,494$ 52,216$ 347,78410
$ -$ 27,288$ 79,504$ 320,4969
$ -$ 28,107$ 107,611$ 292,3898
$ -$ 28,950$ 136,562$ 263,4387
$ -$ 29,819$ 166,380$ 233,6206
$ -$ 30,713$ 197,094$ 202,9065
$ -$ 31,635$ 228,729$ 171,2714
$ -$ 32,584$ 261,313$ 138,6873
$ -$ 33,561$ 294,874$ 105,1262
$ -$ 34,568$ 329,442$ 70,5581
$ -$ 35,605$ 365,047$ 34,9530
$ -$ 36,673$ 401,721$ --
$ -$ 37,774$ 439,494$ --
$ -$ 38,907$ 478,401$ --
$ -$ 40,074$ 518,475$ --
$ -$ 41,276$ 559,752$ --
$ -$ 42,515$ 602,266$ --
$ -$ 43,790$ 646,056$ --
$ -$ 45,104$ 691,160$ --
$ -$ 46,457$ 737,617$ --
$ -$ 47,850$ 785,467$ --
$ -$ 49,286$ 834,753$ --
$ -$ 50,765$ 885,518$ --
$ -$ 52,288$ 937,805$ --
$ -$ 53,856$ 991,661$ --
$ -$ 55,472$ 1,047,133$ --
$ -$ 57,136$ 1,104,269$ --
$ -$ 58,850$ 1,163,119$ --
$ -$ 60,616$ 1,223,735$ --
$ 1,223,735

Illustration purposes only.

FIA Increasing Income

Account
Value
Non-Guaranteed
Income*
Cumulative
Income
Installment
Death Benefit
Payment
Years
$ 387,914$ 23,750$ 23,750$ 492,1825
$ 374,314$ 24,854$ 48,604$ 482,0675
$ 359,102$ 26,010$ 74,614$ 469,4285
$ 342,170$ 27,220$ 101,834$ 454,0205
$ 323,409$ 28,485$ 130,319$ 435,5775
$ 302,701$ 29,810$ 160,129$ 413,8165
$ 279,922$ 31,196$ 191,325$ 388,4285
$ 254,941$ 32,647$ 223,972$ 359,0825
$ 227,620$ 34,165$ 258,137$ 325,4215
$ 197,814$ 35,753$ 293,890$ 287,0615
$ 165,371$ 37,416$ 331,306$ 243,5885
$ 130,128$ 39,156$ 370,462$ 194,5575
$ 91,915$ 40,976$ 411,438$ 139,4905
$ 50,553$ 42,882$ 454,320$ 77,8735
$ 5,853$ 44,876$ 499,196$ 9,1525
$ -$ 46,963$ 546,159$ --
$ -$ 49,146$ 595,305$ --
$ -$ 51,432$ 646,737$ --
$ -$ 53,823$ 700,560$ --
$ -$ 56,326$ 756,886$ --
$ -$ 58,945$ 815,831$ --
$ -$ 61,686$ 877,517$ --
$ -$ 64,555$ 942,072$ --
$ -$ 67,556$ 1,009,628$ --
$ -$ 70,698$ 1,080,326$ --
$ -$ 73,985$ 1,154,311$ --
$ -$ 77,425$ 1,231,736$ --
$ -$ 81,026$ 1,312,762$ --
$ -$ 84,793$ 1,397,555$ --
$ -$ 88,736$ 1,486,291$ --
$ 1,486,291

Illustration purposes only.

Contact LifePro Today!

If you are looking for a partner who cares about your clients as much as you do, please reach out to LifePro Financial Services at 888-543-3776. We are a premier IMO located in San Diego, CA that has been in business since 1986 and was originally founded by William Zimmerman.

This material is intended for educational purposes only and is not intended to serve as the basis for any purchasing decision. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. The hypothetical example is shown for illustrative purposes only and is not guaranteed. The characters in this example are fictional only. Your actual experience will vary. Policy loans and withdrawals will reduce available cash values and death benefits and may cause the policy to lapse or affect any guarantees against lapse. Remember to consider your client's individual circumstances and objectives when discussing their specific situation. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of the unrecovered cost basis will be subject to ordinary income tax. Withdrawals are generally income tax-free unless the withdrawal amount exceeds the amount of premium paid. Tax laws are subject to change. Clients should consult their tax professionals. Investment advisory and financial planning services are offered through LifePro Asset Management, an SEC Registered Investment Advisor. Registration does not imply a certain level of skill or training. Investments involve risk.

About Brian Manderscheid

Brian Manderscheid is the Vice President of Case Design at LifePro. He works with financial professionals designing advanced case illustrations that are built for longevity and are always in the best interest of the client.

Disclaimer

This information is meant for educational purposes only.



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