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Life Health > Annuities

How to Explain Annuity Basics

By Heather Lindsley

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What You Need to Know

  • Lack of awareness continues to push clients away from annuities.
  • One thing to talk about is tax advantages.
  • Another is to point out that Social Security is an annuity program.

The lack of general information about annuities can make them seem intimidating, pushing clients away from expressing interest.

Even if clients are interested in expanding their portfolio, they may be hesitant to look into their annuity options.

Once you’ve researched and determined that an annuity would be a valuable addition to your client’s portfolio, educate your client on the benefits of adding one to their portfolio.

Introducing new concepts and educating clients on the full picture of their investment options helps them trust your expertise.

Education Is Key

Ignorance is not always bliss, especially when it comes to finances.

Your clients want to know the ins and outs of their portfolio, and it’s your job to make sure they have the information they need.

Start with a general overview:

There are two spectrums of annuities that intersect with one another: fixed/variable annuities and immediate/deferred annuities.

Meaning, annuities are either fixed and immediate, or variable and deferred.

  • A fixed annuity secures payment of a determined amount throughout the length of the agreement; the value of a fixed annuity cannot increase or decrease.
  • An immediate annuity pays the buyer as soon as they make a lump-sum payment to the insurer.
  • A variable annuity changes depending on the return on the mutual fund it’s invested in; the value of a variable annuity can increase or decrease.
  • A deferred annuity pays the buyer starting on a future date selected by the buyer.

Time to Get Personal

After your clients gain a deeper understanding of annuities and their benefits, it’s time to get personal and determine how this piece of their portfolio would play out in the long run.

All annuities are not beneficial for certain people, and some aren’t a good fit for certain situations.

Therefore, it’s essential that you know your client’s goals.

Are they looking to save more? Protect their income?

Once you know what the overall goal is, you can determine what type of annuity is best for them.

Let’s say you have an older client who is looking for an investment that avoids risk. They want to let their savings increase until they’re withdrawing money from the account.

A fixed annuity would be the best option for them, as they’ll have a particular interest rate for a certain period.

Once you find a specific annuity that directly correlates to your client’s long-term goals, you can increase your credibility as an advisor with their best interest in mind.

Another example is if you have a younger client who currently has a CD savings account, yet they aren’t interested in purchasing an annuity. This is a good opportunity to explain how, unlike with a CD, they will never pay taxes on an annuity until they are actively spending the money in the account, rather than just depositing.

Also, sharing examples of well-known annuities, like Social Security payments, can help clients feel more confident when discussing their investment options.

Help clients expand their portfolio with your ability to teach clients about the full range of investment options.

When you’re able to effectively communicate both the benefits and the risks of annuities, your clients will feel more secure about discussing their annuity investment options.

The more they know, the more they’re willing to trust your expertise.

Heather Lindsley. Credit: LindsleyHeather Lindsley, LUTCF, RICP, LACP, is a financial advisor with Guided Path Financial Services and Retirement Planning in Green Bay, Wisconsin. Lindsley is a nine-year member of the Million Dollar Round Table.

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