Every Client Needs to Know About their Annuity Options
COVID-19 has brought the world into an unprecedented economic phase and it is more important than ever to ensure your clients that you can protect their financial security — and any financial plan you propose is incomplete without the mention of their annuity options.
Annuities are generally left out of the conversation because they can be confusing. They use many specific terms and lack mainstream exposure. Still, your clients need to know they are available, and there is a simple way to explain them — they are accumulation vehicles for clients to provide money for their retirement.
Three big areas of uncertainty in 2020 make annuities more essential for your clients now than ever.
1. Economic Uncertainty: More Americans are unemployed today than at any time since the late-1970s. Many will need to do significant financial planning to keep their retirement savings for when they return to the job market.
2. Political Uncertainty: Elections have an effect on American businesses and whether economic returns will go up or down. Our current political climate can wreak havoc on clients’ investments, making lower-risk options a safer choice.
3. Market Uncertainty: This year saw the fastest decline ever in the market in March and April, followed by a rapid rebound. Indexed annuities can protect clients against these types of rapid market changes.
It is important that you understand what solutions you have at your disposal for your clients. Fixed Indexed Annuities and Single Premium Immediate Annuities are going to be particularly helpful for today’s economy — but first, we will need to better define annuities.
Any financial plan in today’s uncertain times is incomplete without the mention of annuities.
The Annuity Explained
One of the main uses for annuities is to calm fears about outliving one’s assets by establishing steady cash flow during retirement. They operate like life insurance in that clients choose to put money into a policy which, at a certain point, is paid back with accumulated interest. With life insurance, it is more or less paid after the owner’s death; with annuities, it is paid at the owner’s retirement to guarantee an income for their retired life. The payments can be guaranteed for a number of years, for life, or a little of both.
When discussing annuities with your client, have them answer three key questions:
1. At what age are they looking to retire?
2. How willing are they to pay fees for features like protection against a market downturn?
3. Are they willing to incur risk for bigger gain potential in future payments?
While you always want to present the benefits of annuity products, remember to educate your clients on annuities being somewhat illiquid vehicles, meaning the funds should not be touched during what is called the “surrender period,” or the time before the payments will be distributed. For best results, a client should plan to “park” the money until the planned distribution phase. Unlike a savings account, a client cannot withdraw all of their money early without a (hefty) surrender charge or fee.
Annuities are accumulation vehicles with two distinct phases: the accumulation phase, when the client funds the annuity, and the distribution phase, when the payments to the client begin. One confusing aspect of annuities is the many different types based on these two phases, each with different features that could help a client’s specific lifestyle. In general, there are two main accumulation types (fixed or variable) and two main distribution types (immediate or deferred) for annuities, which we go into below.
Annuities were developed to calm fears about outliving one’s assets by establishing steady cash flow during retirement.
Accumulation Types: Fixed and Variable
These two categories relate to how the policy grows its funds. Fixed annuities are not tied to any market, and therefore have a fixed interest rate that provides regular periodic payments to the client. A variable annuity is based on stock market performance, giving the owner the chance to receive bigger payments if the investments do well. This means the cash flow is less stable but allows for better rewards. To protect against this downside, there are also some hybrid annuities, such as the Fixed Indexed Annuity.
Also known as the CD-Type annuity, fixed annuities have a guaranteed rate and term (i.e., 5 years at 3% guaranteed), are almost always single premium (meaning customers cannot add to them), and usually have interest-only or 10% free withdrawals (though it depends on the contract).
These annuities are invested in sub-accounts, similar to how mutual funds are built and tend to have higher fees annually (4% or more), thus reducing returns. Agents must have a security license to sell or advise on these.
“Trust Me” Annuities are a blended annuity with a fixed interest rate for the first year or so (which is specified by the contract) and afterward adjusts according to the bond market.
Fixed Indexed Annuities provide interest annually by a certain index that is tied to the stock market. This is not a direct investment in the stock market, so there is no downside risk for clients, similar to an IUL. Interest is invested in one of several indexes, most commonly the S&P 500. This is a great option for clients who have accumulated a significant amount and now want to be protected from market downside.
Distribution Types: Immediate and Deferred
These two categories of annuity relate to when the client will start receiving their payments. Immediate annuities distribute immediately after the deposit of a lump sum of money into the policy. Deferred annuities are the opposite—payments do not start until the client reaches a certain age, which they specify on the contract.
Single Premium Immediate Annuities consist of a lump sum that is paid to an insurance company, which then makes payments to the client, usually a month at a time for the life of the customer. If the client were to die before all the money was paid, the rest would go to their heirs. This is an excellent vehicle to plan for cash flow in retirement.
Deferred Income Annuities are vehicles in which you invest a lump sum with a company which then guarantees income starting in 13 months to 20 years. At the appointed time, the customer can choose whether to receive the income stream or the amount to which it has accumulated. Many Fixed Income Annuities have an income feature built in which will achieve this same effect.
Use Every Solution Available
When speaking with your clients about the importance of annuities in today’s economy, remember that you are not trying to scare them. Though things may sound dire, you are informing them because they need to know every option available to them to make an educated financial plan. Clients may have lived through tough times before, but they might not have known that there were solutions that could get them good crediting rates and yet protect them from a market downturn. By giving them the option of annuities, you are providing yet another means through which they can achieve their financial security.
For more education and expertise, tune in weekly to The Annuity Hour, our webinar series led by expert Gary Oelschlaeger every Saturday to train agents on everything that has to do with annuities, from their variants to sales techniques to common misunderstandings about the product.
Watch The Annuity Hour here.
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