Are clients asking whether annuities would be right for them? Make sure you’re ready to give them the information they need.
In 2011, Pew Research came out with a study that predicted that, over the next 19 years, Baby Boomers would retire at the rate of 10,000 per day. The research firm further projected that by 2030, 18% of the U.S. population will have reached the age of 65.
Given those numbers, it’s a good bet that agents are working with clients who want to know more about which products can give them peace of mind once they stop working. For those interested in annuities, be prepared to give them a rundown of the basic pros and cons about the popular savings option.
Annuities come in several forms, with insurance agents able to sell two of the more popular types: fixed and indexed annuities. Essentially, both are a contract between an insurance company and a policyholder in which the insurer invests the money the policyholder gives — typically into mutual funds — in exchange for monthly payments. Those payments either start immediately or at a later date when the contract is annuitized (i.e., the payment spigot is switched on).
How much the annuity owner receives monthly depends on the annuity type. Fixed annuities offer a guaranteed minimum rate of return, while payments from indexed annuities are tied to an equity index like the S&P 500. Indexed annuities protect investors from losing too much when the stock market drops; however, their gains are capped.
How to Talk to Your Clients About Annuities
Like any financial product, annuities have advantages and disadvantages. The choice to purchase an annuity depends upon a client’s financial status and tolerance for risk in the market. Before they buy, make sure your clients should know about the ins and outs so that they can make an informed decision.
Guaranteed Income During Retirement
With an annuity, your clients can enjoy their retirement thanks to a steady stream of income. The amount they receive is based on the total investment into the annuity, and there is no limit on contributions. If your clients are worried about inflation eating away at their investment, they can purchase an annuity that bumps up payments based on the cost of living. Just be sure to tell them they’ll pay a higher initial cost — or receive lower payments when the annuity income starts — if they buy that option.
Any money contributed to an annuity grows tax deferred, much like money put into a 401(K). If a client invests in an annuity but doesn’t annuitize it for many years, that investment could add up without taking a hit from taxes. Also, tax penalties aren’t incurred if your client rolls over money from a qualified retirement account such as a 401(K) or IRA. Annuity payments are only taxed once the income stream is turned on by the policyholder.
Funds for Long-Term Care
Clients may balk at buying a standalone long-term-care (LTC) policy because of the “use it or lose it” nature of the product. They’re afraid they’ll never see the benefit of all the money if they never need long-term care. An annuity with an LTC rider may help. If your clients are diagnosed with a serious illness, they can access funds within the annuity. Like a standalone LTC policy, the amount they receive for long-term care has certain limitations.
Due to a combination of commissions and ongoing management fees, annuities are among the most expensive investment products on the market. Explain that the cost is in part due to the high level of risk companies assume in guaranteeing long-term income. Fortunately, with so many annuities in the market today, you can help your client find one with a fee structure that works for them.
Clients who want to withdraw money prematurely may be hit with hefty surrender charges. Although some contracts with hardship clauses permit early withdrawals, most annuity contracts prohibit owners from dipping into the principal for a set period of time. Because annuities are considered an illiquid investment, make sure your clients understand that they’re long-term options that can’t be easily accessed in case of emergency.
By buying a fixed or indexed annuity, your clients essentially swap the higher gains they could reap in the stock market for a steady, predictable return. Clients preparing to retire — or who already have — may prefer this more conservative type, while others may not mind the risk associated with investments that offer higher potential yield.Annuities can be an ideal retirement income vehicle, but they may not be the perfect investment for everyone. To help your clients make an informed decision, know the pluses and the minuses of annuities so they can enjoy their golden years without financial strain.