Annuities are fast becoming the retirement vehicles of choice for the 21st Century, and it’s really no surprise why: In this era of economic uncertainty and strain, the last thing your clients want is to get caught off guard, so the guarantees associated with annuities can be an appealing way to help them craft a stable cornerstone of a retirement plan. Of course, annuities offer stability in the way of their guaranteed principal and, if properly crafted, can also provide an income your clients cannot outlive. For these reasons and more, annuities can play strong supporting or even leading roles in your clients’ planning efforts. With just a bit of legwork, you can find the ideal annuity to bolster your clients’ existing savings plans like a company-sponsored 401(k) or pension, an IRA or even Social Security benefits.
The thing is, there are just so very many annuity products capable of meeting — at least in part — your clients’ financial needs. While some are relatively elementary, others sport confusing arrays of bells and whistles. This is why you must dig down to the foundation of the product and teach your clients that all annuities can be characterized by 1) their investment type, either fixed or variable, and 2) their payout timing, either immediate or deferred.
But what does this mean to your clients? Provide them with the following information so they can at least have a basic working knowledge of these different annuity products. Let them know that there are numerous varieties of each annuity, and you’ll be happy to discuss some appropriate options after you’ve had the chance to uncover their planning needs and goals. That’s your role as their advisor — to help design an annuity that is most ideal for each client’s unique situation.
Fixed annuities are one of the safest and oldest investment products around. The contracts typically involve the carrier making fixed dollar payments over the accumulation period. Explain that fixed annuity products are usually invested in government securities or high-grade corporate bonds, so their money earns a determined rate of return during this time, and their premium and subsequent payments can never decrease. In a nutshell, as long as your clients make their premium payments and the insurer remains solvent, you can structure a fixed annuity to ensure your clients receive guaranteed income for life. Depending on the client, you may elect to use a life, term-certain or fixed indexed annuity to bolster your client’s savings, but it all depends on their situation, since each type has different pros and cons along with variable costs.
If you have a client with an appetite for greater risk in exchange for greater possible reward, try discussing variable annuities. Of course, the first thing you’ll want to explain is that these insurance contracts differ from fixed annuities in that they are tied to the stock market’s performance. During the accumulation phase with this type of annuity, the client must understand that the insurer invests their premiums into sub-accounts, which serve much like investment portfolios, allowing them to decide exactly how much risk they’d like to take. For more conservative clients, these sub-accounts can include money markets or government bonds, while more aggressive investors might choose emerging market, small-cap, mid-cap or large-cap investments. And while at the end of the accumulation phase, the insurer guarantees a minimum payment, income payments will vary based on the performance of your sub-account portfolios — if they’ve performed poorly, your client will receive lower payments. There are, however, many types of variable annuities designed to soften the blow of negative stock market performance, the most popular of which are living benefit annuities, often referred to as a guaranteed retirement income benefit (GRIB), as well as guaranteed lifetime withdrawal benefit annuities. After performing a risk analysis with your clients, discuss the benefits of adding some of these riders to their policy.
The next thing you must explain to potential annuity clients are the differences in payout options. For investors seeking a product that offers an immediate payoff — and who have the right resources to afford it — an immediate annuity is certainly worth exploring. Once your client pays the premium — which is usually paid in a single lump sum, hence the need for a sizable amount of capital — they’ll start receiving income no later than one year after taking out the policy. Additionally, it’s important to explain how immediate annuities afford a great deal of flexibility in how your clients elect to withdraw their payments, including period-certain, lifetime, fixed or variable payments.
Designed to build value over an extended period of time — usually until retirement — before the investor starts receiving income that has accrued tax free during the accumulation phase, deferred annuities are by far the most common and most recommended annuity income model. Depending on your book’s demographics, and particularly for more middle-of-the-road Americans, deferred annuities often make powerful additions to retirement plans, and come in many packages. As their advisor, you can help them to choose either a fixed or variable product, which can be funded with periodic payments or a single lump sum.
While annuities seem so simple to you, to many of your clients, annuities represent a mystery. There’s never been a better time to review your clients’ needs, and an annuity may be just the ticket to a smooth retirement.
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