Annuities Or CDs? Help Clients Expand Their Comfort Zone

While your senior clients may be familiar with bank certificates of deposit, they often may be unacquainted with or even confused by annuities.

You, the advisor, know that annuities can play an important role in meeting client retirement goals. However, swaying your clients from the trusted CD to an annuity can be difficult because this entails moving them away from their comfort zone.

Its up to you, the advisor, to communicate the advantages that annuities have over CDs and expand your clients comfort zone.

Not long ago, interest rates were soaring and many retirees had a simple investment strategy. That is, invest in CDs, live comfortably off the interest and preserve the principal for heirs.

That strategy is not viable in todays low interest rate environment, however. Most seniors can no longer live off interest alone. CD owners have been forced to dip into their principal to maintain income. But as the principal decreases so do the interest earnings, resulting in even faster depletion of principal.

Retirees who invest in CDs alone run the risk of outliving their savings and being forced to rely on Social Security benefits as their only income source.

You can point out to your CD-oriented clients that a deferred fixed annuity is an excellent alternative for those seeking a safe haven for their money and who dont need income right away. Remind them of the many advantages of fixed annuities, including:

A fixed interest rate. Just like CDs, fixed annuities earn a stated interest rate, and the principal is protected from stock market volatility.

Tax deferral. Unlike CDs, earnings in a deferred annuity grow tax deferred. Since deferred income is not included in the formula for determining the taxation of Social Security benefits, the income tax your clients pay on their Social Security benefits may be reduced or eliminated.

Access to the money. Deferred annuities often have built-in liquidity features allowing your clients easy access to their money when they need it.

Avoiding probate. When beneficiaries are set up correctly, deferred annuities help avoid the hassle and expense of probate.

A source of lifetime income. Perhaps the most important benefit of deferred annuities is the option to annuitize the contract in the future and, with a life-related option, receive income your clients cant outlive.

For retirees who need income, a convenient, simple and guaranteed source is an income annuity.

Using a portion of retirement savings to purchase an income annuity can provide cash flow with tax advantages. The exclusion ratio for nonqualified annuities provides tax-advantaged income by spreading taxable gains over a series of payments. But most importantly, income annuities provide the protection of lifetime income–something that a CD cant offer.

Even when your clients understand annuities, some still may be hesitant. Try to understand their position.

To them, a CD is tangible. Purchasing an income annuity may cause some seniors to feel they are losing control of their money. Its important to stress the security of lifetime income. It may help to demonstrate an insurers financial strength. Dont hesitate to use marketing materials, approved for client use, that detail the results from independent insurance rating agencies such as Moodys Investors Services, Standard & Poors or Fitch Ratings.

As more consumers become aware of the benefits of annuities, insurance companies are introducing innovative annuity designs to attract new customers. These modern annuities specifically address the needs of todays annuity buyers.

For example, some insurers now offer income annuities with liquidity options through commutation features. Other examples include guaranteed death benefits and higher annuity payments through impaired risk underwriting or nursing home confinement.

For a long time, annuities have been misunderstood and undervalued financial products. However, they are an excellent way to help your clients achieve a more secure, comfortable retirement.

Steven A. Rohrig, MBA, ChFC, CRPS, is an individual retirement plans consultant for Mutual of Omaha in Omaha, Neb. His e-mail is

steve.rohrig@mutualofomaha.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 3, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.