As an agent in the insurance market, what’s the first thing you think of when you hear the word annuities?
It could be anything from feelings of bewilderment or disdain to the opinion of, “they’re an essential product in my portfolio.” So, what’s the real story on annuities? Should you be selling them, or staying far, far away?
Let’s take a closer look to demystify annuities and understand the “devil in the details.”
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What Are Annuities?
First things first, we have to understand the basics. Annuities are insurance investment products that guarantee a stream of income, either immediately or on a deferred basis over a number of years. No two annuities are the same, but there are some takeaways that you can count on.
Annuities are insurance investment products that guarantee a stream of income, either immediately or on a deferred basis over a number of years.
While annuities are perceived as having large up-front costs and early withdrawal penalties that make them somewhat illiquid, they can be great for those who need extra income during retirement. Retirement annuities promise lifetime guaranteed monthly or annual income for a retiree for a fixed period of time or until their death. These annuities are often funded years in advance, either in a lump sum or through a series of regular payments, and they may return fixed or variable cash flows later on.
Different Types of Annuities
Even though all annuities share the common goal of providing supplemental retirement income, you’ll still need to be mindful of which type of annuity you’re offering to your clients and why.
Here are the five basic types of annuities:
Fixed annuities — These annuities can be sold by anyone with a life insurance license and are a popular option among clients wanting a modest and guaranteed fixed investment.
Variable annuities — This type of annuity requires a financial license to sell. Investors purchasing this product choose from a variety of mutual funds, and the product value is dependent of the performance of those funds.
Fixed-indexed annuities — Clients who choose this type of annuity will partake in conservative participation in the stock market with downside principal protection. These annuities typically offer a guaranteed minimum income benefit.
Immediate annuities — These annuities resemble life insurance policies. Instead of the product owner paying premiums to the carrier for a lump sum to be paid upon death, the policy owner pays a lump sum to the carrier in return for regular income payments until death, or for a specified period of time.
Deferred annuities — If your clients select this type of annuity, their payments will start at a future selected date, allowing the product owner to create a guaranteed stream of income later in life.
What Are the Selling Points of Annuities?
Annuities have many strong points that can appeal to your clients, and of course, you should know about them!
Income for Life
Annuities provide income for life or, in certain situations, for a set period of time. It’s important to remember that annuities are used to supplement other retirement incomes such as Social Security, IRA, and 401(k) distributions.
Basically, annuity owners don’t owe any taxes to the government on the money in their annuity until they start to take a distribution of their funds from it. This gives annuity owners full control on when and how they pay the related taxes.
For immediate or deferred fixed annuities, the annuity owner will know what the rate of return will be for a specific time period. This means they’ll have a predictable income stream, which is especially great for someone who does not like or appreciate the volatility of the stock market.
Avert Estate Taxes
Annuities assist in avoiding estate taxes, depending on how the annuity is structured. The annuity owner can pass the income stream or a lump sum of their investment to a beneficiary. This may allow that particular asset to be excluded in the probate possess and bypass estate taxes.
Safe Investment Vehicle
Annuities are a vehicle for safe investment, especially for people that don’t like risk in their investments. Generally, annuities grant higher interest rates than what you could normally find in a savings account or CD with a bank or credit union.
Large Sales Potential
Annuities give you, the agent, another tool in your toolbox. This allows you to be a more full-service agent, and your expertise across a broad spectrum of products will be appreciated by your clients.
What Are the Challenges of Annuities?
Like everything in life, you take the good with the bad. In order to properly lay out the details of annuities, it’s important that we stay transparent and identify some of the downfalls that annuities can possess.
Large Initial Fees
When you sell an annuity, you’re paid a commission. Those commissions are taken out up front from the total balance of the product purchased. Buying an annuity directly from the insurance carrier can help get around some of these fees, but there could still be fees that exceed two percent or more for these products. Additionally, if any special riders are added, the price could be even higher.
Lack of Liquidity
Typically, someone purchases an annuity for a certain period of time. If the annuity owner decides to liquidate all or a portion of their investment early, there are usually penalties or surrender charges involved. Depending on the number of years that have been committed to the annuity, there could be surrender charges starting as early as the second year and through years nine or 10.
Make sure to read the fine print and ask the insurance carrier any questions if you’re unsure.
It’s always best to understand the surrender charges up front before purchasing any annuity. Typically, the higher the number of years you are away from the contract being fulfilled, the higher the surrender charge. Make sure to read the fine print and ask the insurance carrier any questions if you’re unsure.
Higher Tax Rates
While it’s true there is tax deferment on annuities, when the policy owner takes withdrawals, that income is taxed as ordinary income. Depending on age, retirement status, and state, these taxes can fluctuate, so instruct your clients to not be surprised. Understand the current tax structure and how an annuity will affect or influence taxes for your clients.
Annuities come in all sizes and shapes, which makes selling and purchasing them quite confusing. The simplest annuities are fixed annuities that can last anywhere from one to 10 years. Even in purchasing this type annuity, your clients must identify beneficiaries and distribution periods and be mindful of any penalties that can occur.
The cardinal rule for both agents and clients to remember is do not buy or sell anything you don’t understand.
Over the past few years, there are many exotic products that have been introduced to the market; many are tied directly to the stock market to gain greater returns on investments. The cardinal rule for both agents and clients to remember is do not buy or sell anything you don’t understand. Most states require that you go through annuity suitability training to ensure that you understand annuities and how they fit into your clients’ needs. Additionally, Ritter’s Complementary Ancillary Product Solutions (CAPS) team offers expert advice and support, as well as specialized trainings to make sure our partnered agents understand all the ins and outs of the products their selling.
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To put it plainly, annuities are not for everyone, but you should still take time to consider how an annuity can fit into your portfolio. If you’re new to selling annuities, begin with simple, fixed annuities, as these are the easiest to understand and can fit perfectly with your current senior client base. Then as you get more comfortable, you can integrate more complex annuity products into your selling options.
Above all, don’t let annuities scare you. Just make sure you have a good basic understanding of them and pass that knowledge onto your clients purchasing these products. And remember, your sales specialists can help demystify that devil of a product called annuities!