Michael Finke Explains the Bolt-On Annuity

Clients can use investment funds provided by Constance program managers. The underlying fees for those funds range from 0.08% of assets to more than 1% of assets.

Midland National sets limits on how much of a portfolio covered by a Constance contract can be exposed to fluctuations in the stock market. Covering a portfolio with a higher stock allocation limit costs more than covering a portfolio with a lower stock allocation limit.

Clients can choose their own asset custodians, but RetireOne and Midland National require clients to pick the custodians from a list of about 30 financial institutions that use standard data feeds and will let RetireOne monitor the assets.

Midland National notes in the prospectus for the CDA that any guarantees are subject to its own creditworthiness and claims-paying ability.

“The certificate has no surrender value, cash value or death benefit,” the company says in one warning given on the first page of the prospectus.

“There have been relatively few contracts introduced to date that offer the kind of benefit available under the certificate,” the company says in another disclaimer. “Although the Internal Revenue Service has issued private letter rulings concerning products similar to the certificate, these rulings are not binding on the Internal Revenue Service with respect to this certificate.”

Why a CDA?

Finke, who is the Frank M. Engel Chair of Economic Security at The American College of Financial Services, says in the white paper that a CDA could be a valuable addition to a portfolio because it gives a retirement saver a way to make the cash in a portfolio last throughout retirement.

He gives the example of a birthday cake, at a party where the number of guests could range from 10 to 40.

“How large of a slice would you cut the first friend?” Finke asks. “If the slice is too thick, there may be none left to feed the 20th kid who shows up, resulting in tears and major disappointment. To avoid this risk, you cut small slices.”

A birthday cake CDA could help the host guarantee that there would be enough cake for everyone, without having to start by giving each guest just a small slice, Finke says.

Similarly, he said, a CDA can help retirement savers keep income flowing throughout their retirement years without the savers having to skimp on withdrawals early on.

Finke has aimed his paper at consumers and advisors who are new to the idea of annuitizing assets.

He compares the performance of a hypothetical portfolio protected by a CDA to the performance of an unprotected portfolio, but he does not compare the performance of the protected portfolio with the possible performance of an indexed annuity or variable annuity with a built-in lifetime income feature.

A contingent deferred annuity is a like a box of portable lifetime income machinery that an insurer and client can attach to any mutually acceptable investment portfolio. Pictured: Nuts, and bolts. (Image: Winston Link/Shutterstock/DAMS)