Adding annuities to a client's profile

Annuities can be a powerful tool to enable clients to meet their retirement goals. RightCapital allows annuities to be added as assets in a client's profile, and also to use annuities as a modeled income strategy.

If clients own existing annuity accounts, enter them on the Profile > Net Worth screen by adding an Investment account (Add Account > Investment).

Propose an annuity to a client to win more business

You can use the Annuity Income Strategy to illustrate the purchase of an annuity with client's existing assets. There are lots of options to impress clients and win new business!

Which investment account type do I pick?

On the Investment account, select either Qualified Annuity, Non-Qualified Annuity, or Roth Annuity under the Account type drop-down box to input information about an annuity.

Annuity types

Select the Annuity Type from the drop-down box to illustrate three different types of annuities - variable, fixed, and indexed.

Variable Annuities

Variable annuities invest in mutual funds or mutual fund sub-accounts. To add value to the annuity account, specify the investment allocation like any other investment account: either by entering specific tickers or (more likely for annuities) values broken out by asset class using the Add asset class button.

The Cash field indicates the value of cash held in the account. Adding asset classes will adjust the growth rate of the annuity to reflect the classes' asset return assumptions. If only the Cash field holds a value, then the annuity will accumulate growth using only cash growth rates.

Fixed Annuities

Fixed annuities earn a specific rate of return each year. If Fixed annuity is selected, enter the Crediting rate and specify the current Account value. That value will then grow by the crediting rate each year.

Indexed Annuities

Indexed annuities, also referred to as Fixed indexed annuities, earn a rate of return each year that is generally tied to an index. While the annuity will specify the index, for modeling purposes RightCapital generates returns for the index using the assumption for the Large Growth asset class. Most indexed annuity products will restrict the return applied to the account using various parameters, which can be inputted as part of the indexed annuity card:

  • Cap refers to the maximum rate applied to the account in any year; if the Cap is set to 6%, the maximum increase in any year will be 6%.
  • Floor refers to the minimum rate applied to the account in any year; if the Floor is set to 0%, in any year where the return is less than 0%, the account value will not decrease but will return 0%.
  • Spread refers to an amount that is used to reduce the index rate each year. For example, if the spread is 2% and the index returns 7%, we will credit 5% (7% - 2%) for that year.
  • Participation refers to a percentage that is used to reduce the index rate each year. For example, if the participation rate is 80% and the index returns 7%, we will credit 5.6% (7% * 80%) for that year.

Annuity distributions

Use the Distributions drop-down box to illustrate how money will be withdrawn from the annuity.

Regular Withdrawals

If distributions are set to Regular withdrawals, the annuity will be treated similarly to other investments. This is appropriate for an investment-only VA or other annuities that don't have a built-in income guarantee and which the client doesn't intend to annuitize.

The annuity's value will be used to fund cash flow deficits if necessary once taxable accounts are depleted. Income distributions can be set up to withdraw a specific amount each year from the annuity, non-guaranteed.

Annuitization

If the client plans to annuitize the contract (surrender the account value in exchange for a guaranteed fixed income stream), select Annuitization as the distribution method.

Under Income starts, enter the year the client plans to annuitize. In that year RightCapital will annuitize the account, liquidate the annuity value and add annuity income based on the additional parameters set:

  • Income type can be either percentage or amount:
    • Percentage reflects that the income amount will be calculated as a percentage of the total accumulated annuity account value.
    • Amount reflects that the income will be the specific amount entered.
  • Annual increase indicates whether, and if so by how much, the income amount increases each year after annuitization. This can be used to reflect a cost of living adjustment (COLA) option or any guaranteed increase
  • Type indicates the period for which the annuity income will last. '
    • Life only reflects payment for the life of the owner(s) of the annuity. '
    • Certain only reflects payment for a specific duration; if selecting 'Certain only', input the year that income should end in the Guaranteed Period field.
    • Life/Certain reflects payments for the longer of either the client's life or the period indicated.

Lifetime Income

If the client's annuity has a guaranteed lifetime income rider or benefit associated with it, use the Lifetime Income option to model the parameters of that lifetime income guarantee.

  • Benefit base: The value that will be used to calculate the client's guaranteed lifetime income amount; that value will be a percentage of the benefit base. The benefit base will generally increase by a fixed rollup rate or a step up to the client's account value. In projections, RightCapital will automatically step up the benefit base each year if applicable in addition to the rollup specified.
  • Rollup rate: The rate by which the benefit base is guaranteed to increase each year.
  • Rollup rate compounding: If checked, the benefit base will increase by a compounding rollup rate; if unchecked, it will increase by a simple interest rate.
  • Rollup stop year: The year that the benefit base stops increasing automatically by the rollup rate. RightCapital will also stop the rollup rate in the Income starts year, if earlier.
  • Income starts: The year that guaranteed lifetime income withdrawals from the annuity begins.
  • Income type: This can be set to either
    • Percentage reflects that the income amount will be calculated as a portion of the total accumulated benefit base.
    • Amount reflects that the income amount will be the specific amount entered. If Amount is applied, the benefit base and associated parameters are essentially ignored.
  • Annual increase: This field indicates whether, and if so by how much, the income amount increases each year after lifetime income begins. This can be used to reflect a COLA option or any guaranteed increase.

    The lifetime income amount can also increase due to step-ups or if the client's RMD exceeds the income amount.

  • AV based fee Illustrate any annuity fee that is calculated based on the client's account value (AV).
  • Benefit base fee: Illustrate any annuity fee that is calculated based on the client's benefit base.

Using an annuity income strategy

When performing a retirement analysis on a client's plan, there is an option to use an annuity income strategy. This will model the impact of moving some of the client's assets into an annuity.