How many of you have seen the national television ad where a financial advisor looks straight into the camera and says he would never sell an annuity to a client? Not only does he say he’ll never sell an annuity, but he also goes on to provide this rationale: Annuities are “confusing” and could subject a client to “tax problems.”
I’ve seen this ad run numerous times over the past few months, and it’s gotten me thinking. Common annuity misperceptions such as these are rife in the industry among prospective clients. That’s because many clients have seen ads in the media, just like this one, that make an annuity sound like an unsafe financial venture forced upon unsuspecting clients by predatory salespeople.
You and I both know this is untrue, since annuities are designed to reduce risk. Regardless of how clients have made these inaccurate perceptions of annuities, it’s our job, as agents and advisors, to correct them and point out where annuities offer advantages for a client. Here are a few common misconceptions you may hear from clients and thoughts on how to educate them about the value annuities can provide.
1: Annuities are confusing.
While the thought of purchasing an annuity may be new to your clients, annuities have been around for decades with the same straightforward structure. Any annuity — regardless if it’s fixed, indexed or variable — is built to provide some measure of safety to a client.
However, that safety comes with a time commitment. To protect the financial integrity of the insurance carrier providing the safety, annuities have surrender charge penalties for accessing money ahead of the scheduled time. Typically, the longer the time commitment that your client is willing to make, the greater earnings potential that the annuity carrier can provide. Therefore, it’s important to tailor the choice of timing for an annuity based on a client’s goals and needs.
2: Annuities don’t do what a client would like them to do.
Overcoming this misconception requires you to set expectations with a client about the merits of different types of annuities, and how an annuity can protect his or her hard-earned dollars.
Consider highlighting these nuances:
Fixed annuities have a declared interest rate, and some have an interest rate that is fully guaranteed for the entire surrender charge period — similar to a bank CD.
Indexed annuities provide interest credits based on a market index. There is usually a minimum and maximum interest credit, where the minimum provides protection against the index’s decrease.
Variable annuities have subaccounts much like mutual funds. They provide protection against loss via their death benefit feature, plus they often provide further guarantees through a guaranteed lifetime income rider.
3: Annuities come with high fees.
This misconception is often the result of an annuity that isn’t purchased in line with a client’s needs or financial goals, which are important points for brokers to know ahead of an annuity purchase.
(Photo: Allison Bell/TA)
With a fixed or indexed annuity, a client would typically only pay a fee in the form of a surrender charge — which is avoidable as long as the client abides by the time commitment — or in the form of a fee associated with an optional rider that provides an additional guarantee, such as a guaranteed lifetime income rider.
For a variable annuity, a client could run into three different types of fees: one for investment management, another for the insurance company’s expenses and a third for the guaranteed lifetime income rider. Because of these fees, it’s important for you to make sure a client believes the amount of safety provided by a variable annuity is worth the fees.
4: Annuities can cause tax problems.
As I mentioned recently, annuities aren’t taxed until a withdrawal or regular distributions are taken and interest can stay in the annuity tax-free.
If a client has money in a corporate retirement plan — such as a 401(k), 403(b) or 457(b) plan — or in an existing IRA, those funds can be transferred into an annuity tax-free. In a Roth IRA annuity, as long as your client keeps the money in the annuity for at least five years before taking a withdrawal and doesn’t take any withdrawals before age 59½, the withdrawals and interest credits can be completely tax-free. However, as with all non-Roth IRAs and corporate retirement plans, when your client ultimately takes withdrawals, the withdrawals will be taxed as ordinary income.
For regular savings — otherwise known as nonqualified money — annuities offer tax deferral. The advantage of tax deferral is that your clients can control when they are taxed by controlling when they take withdrawals. Unlike direct stock investments, however, annuities do not qualify for capital gains tax treatment.
Educating clients about annuities’ structure, timing and fee structure are important points to make to help overcome the common misconceptions many have about their merit as a financial tool. By doing so, you can help make sure your clients are meeting their financial goals and positioning yourself as a trusted advisor.
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