If you sell variable annuities, you’ve probably been here before: You have an ideal candidate for a variable annuity – for example, someone whose income is high but has already maxed out 401(K) contributions; or someone in their late 50s without a traditional pension – but he or she is extremely reluctant to even consider one. Why?
As with any financial investment, variable annuities do have their detractors. Most likely your client’s hesitation is due to one of three main objections to variable annuities.
All of these arguments can easily be addressed by looking at the facts.
Objection #1: Variable Annuities Have High Fees
First let’s talk about the high fees: Remind your clients that all investments, including banks, mutual funds, and stocks, have fees too. In fact, there are many investment products that have higher fees than annuities that don’t provide the same value. The reason behind variable annuity fees is the guarantees they offer. Riders like the GMAB (Guaranteed Minimum Accumulation Benefit) or the GLWB (Guaranteed Lifetime Withdrawal Benefit) can help clients secure income for life and make it so they never run out of money. Do you know of any mutual funds that make that same offer?
For clients that want an investment that will not lose value, variable annuities can be worth the extra costs. Clients can look at variable annuities as investment insurance: They can enjoy the upside of the market without the risks of the downside. Additionally, annuities will likely have better returns for clients than if their money was locked into a CD for ten years collecting what is typically less than one percent interest.
The key to overcoming clients’ objections to the fees is to find out what risk protection is most important to them. Then, draw up the contract in a way that protects against their main concerns but keeps the charges from becoming too high. The last thing your clients want to do is pay for unused benefits or management fees.
Objection #2: Variable Annuities are Taxed at Ordinary Income Rates Rather Than Capital Gains Tax Rates (as on Stocks, etc.)
Another objection clients may be concerned with is that annuities make the policyholder pay ordinary income tax rates on gains instead of the lower capital gains tax rates. The higher tax rate on annuity income may seem problematic. However, only stocks held for over a year get capital gains tax breaks, so day traders or mutual funds with high turnover rates will not benefit from these tax breaks when distributions are made to shareholders. It is important to note that the average mutual fund has nearly a 100% turnover rate and many have multiples of that! Additionally, although annuities are taxed as ordinary income, not all annuity payments are taxable. The portion representing return of capital is not subject to income tax.
Objection #3: Unlike Stocks Or Mutual Funds, Annuities do Not Get a Stepped-Up Cost Basis at Death
Finally, when selling annuities you may run into the cost basis argument. While annuities do not get a step-up in cost basis like stocks do, they also do not get a stepped-down cost basis at death either. With an annuity, the guaranteed death benefit protects the family from losing any money at death. With all the investments that lost money over the last decade, this guarantee should be an attractive benefit to many clients.
Tom has been a popular industry speaker for many years and is THE retirement income expert. As a former Fortune 100 senior executive, Tom has dedicated his entire career to helping retirees obtain a happily ever after retirement. He has been featured on FoxBusiness, American College Wealth Channel Magazine, Round the Table, Advisor Today and GAMA Magazine.
Tom currently lives in Arizona with his wife and children.
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