Slott, Pfau: When and How to Use Annuities, Life Insurance in Client Plans – ThinkAdvisor

And best of all, you don’t have any income tax on life insurance, unlike IRAs. [And it] can be set up to be outside, or excluded from the estate. IRAs, even Roth IRAs, are always included in the estate.

PARRISH: Wade, the annuity debate seems lately to have really been over annuities as an accumulation vehicle. What are your thoughts?

WADE PFAU: A competitively priced annuity can play a role in a lot of different strategies. Now that we have this retirement income style awareness, I always think in terms of that and what role an annuity can play with the different retirement styles.

There’s not going to be a lot of play for annuities in the top half of that [RISA] matrix with the total returns or the time segmentation, but that’s where if there is a role, it would be more as an accumulation tool instead of for lifetime income.

So if you’re [looking for] total returns, you might think about a low-cost investment, [such as a] variable annuity. For less tax-efficient asset classes, you might look at a registered index linked annuity, which is a structured annuity that cuts off some of the downside risk. And therefore, it can give you more of the upside potential than something like a fixed indexed annuity.

Now, if you’re in the time segmentation quadrant, you might look at a few different accumulation-based annuities to also think about that front-end piece of funding, those retirement expenses that could be a [multi-year guaranteed annuity] or other type of a deferred fixed annuity … no risk of capital loss and competitive with other bond asset classes.

And then if you get down into the bottom half with the income protection risk wrap; that’s where you’re really looking at the lifetime income as a driving motivator. And in the income protection world, that can be the [qualified longevity annuity contract], the deferred income annuity, or the single premium immediate annuity, or the fixed index annuity with the living benefit.

And then if you’re in the world of risk wrap, that’s where a RILA with a lifetime income benefit or a variable annuity with a lifetime income benefit, both of which give you more of that upside exposure to the market.

The contract value takes risk [so] you can have a risk of loss there. But at the same time, that income provision with the opportunity for step-ups, you benefit when the markets do well, but your income is protected.

And so you have that guardrail. If the markets don’t do as well, again, you end up outliving the contract value of those assets. Then you have that protected lifetime income.

Pictured: Wade Pfau