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.
Mutual funds also offer a stepped-up cost basis, but due to the high turnover of many of these funds, investors also have to pay taxes annually on fund distributions. Many clients were burned by this reality when their mutual funds declined over the course of the last few years and they still owed a tax. When you look at it like that, investors are actually paying for much of the stepped-up cost basis in annual taxes. The only true stepped up cost basis at death is on unrealized capital gains.
Matching the Right Product with the Right Client
Annuities are not for everyone, but for some they have proven to be the perfect fit. With the volatile markets of the last few years and the ever-dwindling availability of pensions, more and more people are in need of a guaranteed investment or guaranteed income and variable annuities can be just the right tool to provide those benefits. With all the negative media attention and critics, you will need to work with your candidates to show them how an annuity can help provide peace of mind. It’s up to you to display annuities in an objective light and prevent unfounded objections from causing clients to forgo making the right investments.
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.
Latest posts by Tom Hegna (see all)
- Three Elevator Speech Stories - February 7, 2018
- Why Ken Fisher really LOVES Annuities! (And YOU should too!) - July 8, 2016
- The 3 Primary Variable Annuities Objections and How to Handle Them - June 22, 2016