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Immediate Security for Families of Those with Special Needs

Annuities are often sold with one client goal in mind – guaranteed retirement income. No doubt, this is a powerful value proposition for annuities, but it’s not the only one.

A recent Deloitte study revealed that 38 percent of Americans don’t understand annuities at all. Because the majority of online resources offer only a simplistic explanation of an annuity’s function, even knowledgeable clients may be unaware that annuities can be tailored to serve a variety of financial planning needs. As we seek to embrace diversity in our business, it’s important to remember – and demonstrate to our clients – how annuities can offer different value propositions to different populations.

Nearly 20 percent of Americans classify themselves as having a disability, and for more than 38 million, this disability is severe, according to the 2012 U.S. Census. Every parent wants financial well-being for a son or a daughter. But when that son or daughter needs special care and will be unable to manage income on his or her own, ensuring that they have the financial resources available to live a life with opportunity and dignity becomes even more important. For parents in these circumstances, an immediate annuity can help family members focus on enjoying their time together instead of worrying about the future. An immediate annuity can provide income to parents while they are alive. After the parents have passed away, that same immediate annuity can fund a special needs trust that retains the annuity’s income, which in turn can be used to help support the child financially according to their needs, and for as long as the child lives.

Consider the following hypothetical family of three:

Stan and Katherine live with their adult son, Jeff, who has Down syndrome. Ever since Jeff was born, Stan and Katherine have made it their top priority to give Jeff the best care and education available. Now, as Stan and Katherine are approaching retirement, they are considering their goals for the future. They want to provide for Jeff’s expenses throughout his entire life, so that he can continue to receive top-notch care and live in housing that appropriately meets his needs. To help meet this objective, Stan and Katherine purchase an immediate annuity, which will create an income that ensures Jeff has access to special needs funds for the rest of his life.

In this instance, Stan and Katherine choose a joint payout, naming themselves as joint owners, Jeff as the annuitant and a trust as beneficiary. Katherine is named the joint annuitant on the contract, in case she outlives Jeff. As long as Jeff is alive, Stan and Katherine will receive income until they both pass away. Upon their passing, the contract and payments pass to the trust for the remainder of Jeff’s life. The trustee will direct payments to cover any necessary medical costs, as well as any activities and services that contribute to Jeff’s quality of life.

Using a properly designed special needs trust is advantageous because it can fund benefits above and beyond those received through government programs, such as Supplemental Security Income or Social Security Disability Insurance, without affecting the resource-eligibility limits for the government benefits. For example, if Jeff were to receive an inheritance of more than $2,000, he would be deemed ineligible for Supplemental Security Income. With a special needs trust, this limit does not apply because the assets are in control of the trustee, and not in the name of the child.

With this plan, Stan and Katherine know that the income they pass to Jeff through the trust will help cover his expenses for his lifetime, even after they are no longer able to oversee his care. Plus, if Stan and Katherine choose an immediate variable annuity, that income has the potential to grow depending on market fluctuations and how they impact the performance of the investment options selected. In addition, because a portion of each payment represents a return of cost basis until the basis is fully recovered, an annuitized income stream helps reduce the amount of taxes the trust will pay, leaving more funds to be used on Jeff’s behalf.

This is only one of many ways an annuity can be used as a solution to meet the varied needs of diverse clientele. Each family is different, with a unique set of goals and concerns, and as advisors work to meet these goals and ease these concerns, annuities can play an important role. Clients may view an annuity simply as a means of generating guaranteed income for retirement, but in reality, an annuity is flexible enough to do much more. For parents like Stan and Katherine, the value of an immediate annuity is the relief that comes with knowing they have taken measures to help ensure their son’s needs will always be met, and his quality of life will always be upheld. This security in knowing that their child will have sufficient financial resources also helps to offset the fees or expenses associated with the annuity.

A practice focused on diversity gives many opportunities to celebrate and appreciate different experiences and perspectives. In the spirit of celebrating diversity, remember: an annuity’s function can be as diverse as the clients it serves.


Daniel Herr is vice president, product research & development, retirement solutions, Lincoln Financial Group. He can be reached at [email protected] [email protected].

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