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  • The Truth Your Clients Need to Hear about FDIC Insurance

    May 19, 2011 by Brian D. Mann

    By Brian D. Mann
    AnnuityNews.com

    May 11, 2011 — When you sell annuities, one of the most common sales objections you hear is that they are not FDIC-insured.

    Some advisors like to answer that objection by telling prospects about their state guaranty fund, but I’m not a proponent of doing that since, in most states, it is illegal. That’s right — most state guaranty funds have what is called an “advertising prohibition,” that is, you cannot use the existence of the guaranty fund as an inducement during the sales process.

    The answer that I give to clients is that they need to rethink the whole concept of safety. Specifically, they need to think about safety in the context of inflation.

    Consider these prices: $7,354 for a new home, $1,510 for a new car, and $600 for annual college tuition. Are these bargain prices? No, these were the actual average prices of these items in 1950. Today, according to T. Rowe Price, these prices are $185,400 for a new home (and considerably higher in many locales), $29,547 for a new car and $35,636 for annual college tuition (hence why your clients’ adult children keep hitting up Mom and Dad for help with the grandkids’ tuition).

    The bottom line is that what cost $1,000 in 1950 costs about $9,000 today.

    What does this have to do with the safety of your money? Everything.

    Right now, the average interest rate on an FDIC-insured six-month certificate of deposit is well under 1 percent. Imagine that your clients place such a high priority on FDIC insurance that they put their money in a financial product like that. Over the short run, they feel fine, as they have the illusion that their money is protected and gaining in value.

    But what’s the reality? They’re losing money, because their money is losing ground to inflation. In fact, the longer they pursue this strategy, the more devastating their losses become.

    Here is the real kick in the teeth: while they’re losing purchasing power, they’re being taxed on the meager interest they are receiving! Which, of course, only makes the situation worse.

    Example:

    It takes nearly 150 years for a $100,000 certificate of deposit to double in value assuming an interest rate of 0.70% (per BankRate.com as of March 23) and a federal marginal income tax rate of 33 percent.

    I tell my clients that they need to rethink the concept of safety. Sure, FDIC insurance — all by itself — is a good thing. The problem is that in today’s environment, it is paired with a nearly inevitable loss of purchasing power. I don’t want my clients to put aside $1,000 today and find down the road that it doesn’t purchase very much. I want them to maintain purchasing power. To do that, they need to benefit from higher interest rates, the higher interest rates that they will find available on annuities.

    The fact is that fixed annuities are very safe. All evidence is that insurance companies are very well regulated by state insurance departments. They hold levels of reserves, capital, and surplus that were quite adequate to sustain them during the 2008-09 financial crisis. The issuing insurer guarantees – in writing, in a binding legal contract – the safety of the money in the annuity. And if your clients ever have a concern about any of this, a powerful regulator is located right in their home state.

    That’s a lot of safety! And, your clients can achieve that level of safety while receiving an interest rate that is far more likely to retain purchasing power.

    So, fixed annuities provide true safety, even though they are not FDIC-insured.

    Brian D. Mann is the executive vice president and chief marketing officer at Partners Advantage Insurance Services. He is a multimillion dollar personal producer, coach and mentor for insurance professionals. Partners Advantage is a national insurance marketing organization that proudly serves as a one-stop shop to over 20,000 independent insurance agents, financial planners, and broker-dealers.

    © Entire contents copyright 2011 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.

    Originally Posted at AnnuityNews on May 11, 2011 by Brian D. Mann.

    Categories: Industry Articles
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