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As advisor clients age and retire, the need for guaranteed income grows. Social Security can provide at most a few thousand dollars per retiree per month, but beyond that there are no guarantees. If an advisor perceives a gap between the income that a client needs in retirement and what that client will collect from Social Security and from savings, they might recommend an annuity to fill that gap.

“It all comes down to the client’s situation … to longevity risk and sequence of returns risk,” says Derek Tuz, partner at Aegis Financial Partners in Boulder, Colorado. “We have no idea when we’re going to die and what the market is going to do.”

Tuz is an advisor who uses annuities for certain clients to cover a portion of those clients’ income needs. Other advisors like Leon LaBrecque of Sequoia Financial avoid most annuities except single premium immediate annuities (SPIAs), which tend to be the simplest kind though not without complications or weaknesses.

(Related: Advisors’ Advice: Are Annuities Worth It?)

SPIAs immediately annuitize and start making regular income payments for as along and account holder or beneficiary are living — and longevity annuities do the same but at a later date, often when the client is 80 or older. In exchange for those guarantees, however, the account holder no longer controls these assets; the insurance company does. When the annuity holder dies the contract dies with them unless the annuity holder had chosen an option that will allow the remaining assets to be paid to their beneficiaries or the annuity had a certain term of years which had not yet expired.

That’s not the case for variable or indexed annuities (also called equity index annuities and fixed indexed annuities) whose ownership rests with the investor until and unless the contract is annuitized.

Annuities are complicated. In addition to the different types of annuities, which include more complex variable and indexed annuities, there are multiple riders that can be purchased to meet the specific needs of clients, surrender charges, caps and floors on gains and losses (in the case of indexed annuities) and fees that are often not fully transparent.

Annuities are a proper tool when used correctly,” says Byrke Sestok, a certified financial planner at Rightirement Wealth Partners in Harrison, New York. “You have to know what you’re doing and you have to apply it to each client’s scenario.”

Advisors are divided about the use of annuities. Some don’t use them at all, and among those who do, there is a split often between advisors who tend to favor variable annuities and/or fixed indexed annuities and those who prefer immediate or longevity annuities.

They can’t sell them directly unless they have a state insurance license, and only variable annuities are considered securities, which require a Series 6 securities license to sell.

Also, fee-based advisors have little incentive to provide annuities, which reduce the assets under management on which their fees are based, unless they are fee-based annuities.

Given all these factors, ThinkAdvisor wanted to hear from advisors about their views of annuities and how and why they use them or avoid them, so check out Advisors’ Advice: Are Annuities Worth It?

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