The Bolt-On Annuity Strategy

The Bolt-On Annuity Strategy

May 16, 2022

Clients who hate existing retail annuity investment portfolios can build their own.

RetireOne has brought in Michael Finke — a retirement security researcher — to help it explain that this is possible, even for retirement savers who are not billionaires and who do not own lairs on private islands.

Finke wrote a “white paper,” or commentary, that talks about why a retirement saver might consider using a contingent deferred annuity.

What It Means

Everyone knows you and your clients are hungry for ideas about how to generate guaranteed streams of lifetime income.


Very rich people have been able to put their own, homegrown portfolios inside annuities by purchasing private placement annuities.

A CDA contract provides a tool that ordinary clients can use to do something similar.

When a life insurer sells a CDA, it’s agreeing to provide the kinds of benefits guarantees it might offer through a conventional annuity separately from the underlying assets.

A CDA issuer might promise to convert the client’s own pool of assets into a lifetime stream of income, and promise to protect the client against any risk of investment-market-related loss of account value.

The client can use a CDA to bolt an annuity spigot onto an IRA, or onto an ordinary stock portfolio.

A CDA is to a regular annuity what a clip-on tie is to a regular tie, or what detachable skate wheels are to regular roller skates.

U.S. insurers have been working with regulators on developing the CDA concept for years.

David Stone, the founder and CEO of RetireOne — a company that offers the clients of fee-based advisors access to life and annuity products — has been a leader in that effort.

The Constance CDA

Last year, RetireOne worked with Midland National, a life insurer that’s part of Sammons Financial, to develop the Constance CDA contract.

When selling the CDA, Midland National charges an annual insurance certificate fee ranging from 1.1% to 2.3% of the assets, and it helps advisors collect annual advisory fees that typically range from 0.75% to 1% of the assets, according to a product fact sheet for advisors.

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.