There is no such thing as a perfect financial product. Every product has its strengths and weaknesses. That’s why there is such a great variety of products available, as providers put together offerings to appeal to clients with varying preferences. 

A fixed annuity is a great option for a client who is looking for a safe place for his or her money to grow without risk of loss. A fixed annuity provides a guaranteed interest rate, a flexible payout option, and a guaranteed income stream that he or she cannot outlive. Not only that, earnings from a fixed annuity aren’t taxed until the funds are paid out of the annuity.

However, a client may be deterred from purchasing a fixed annuity because of his or her concerns about surrender charges. You can overcome this objection by ensuring that a fixed annuity is selected to fit a client’s specific situation.

Meet client needs

When evaluating options to add to their financial portfolio, a client will usually have three concerns about where they put their money: how safe is the product, how much will they earn from it and when can they access funds?

Because no financial product meets all of these concerns perfectly, you’ll have to break the news to your client that they may have to do some compromising to find the product that best fits their financial goals. That’s because products like securities and mutual funds may provide earning potential, but lack a guarantee of safety. Alternatively, a bank account may provide safety and allow access to funds whenever needed, but lack earnings potential.

A fixed annuity can come close to meeting all three needs; the key factor is when the funds will need to be accessed. A client often has concerns about surrender charges when they haven’t sufficiently thought about two questions:

1. What is your purpose for the funds?

If the purpose is to grow the funds to ultimately provide an adequate retirement income, then your client should understand that liquidity isn’t free. If your client has a long time horizon, then perhaps the best way to get the combination of safety and earnings potential that they want is to buy an annuity with a long surrender charge period. Annuity issuers can provide higher interest rates when there is a longer surrender charge period.

2. When do you plan to actually use the money?

Surrender charges decline over time and eventually disappear, so if your client has no use for the money for a certain number of years, that preference can define the length of a surrender charge schedule he or she is willing to tolerate. Just make sure that your client has other money in a liquid account if an emergency arises.

Also, let your client know that even during the surrender charge period, a fixed annuity typically offers a free partial withdrawal provision so that he or she can withdraw a portion of their funds without incurring a surrender charge. And, most fixed annuities allow a client to convert his or her annuity into a lifetime guaranteed income stream without incurring a surrender charge.

A properly selected annuity can help your client achieve his or her key goals of safety and earnings potential. Surrender charges give the annuity carrier the time commitment it needs to create that combination. The longer the time commitment, generally the greater earnings potential the annuity can provide.

The key is for you and your client to determine the client’s true financial goals and tailor the best options to meet those needs. 

See also:

How to explain annuity surrender charges to avoid complaints

A glimpse of the future of annuities

The pros and cons of fixed and indexed annuities

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