Consumers and advisors often feel annuities are difficult to understand and implement in financial plans. Many clients avoid them before they fully comprehend the benefits annuities can provide. While annuities are complex, conversations and guidance from financial advisors can help consumers clarify the role of these investable assets in financial plans. Financial advisors should arm clients with a holistic overview that includes both the advantages and disadvantages of annuities in order to increase client understanding.
Determine if annuities are an ideal solution
Annuities can be powerful investment tools for clients in the right stage of their lives. Generally, clients between the ages of 50 and 70 who have less than a million dollars of investable assets are good candidates. Clients in younger age groups usually need to keep assets liquid and have money available to accommodate their financial situations and goals.
Before advisors share strategies with clients who meet the criteria to potentially pursue annuities as an investment option, ensure they are financially secure. They should pay off all credit card debt and have three to six times what they spend monthly in a savings account. Once all factors are considered, determine clients’ interest and present annuities as one of their options.
Determine what a client needs per month to pay bills and cover living expenses. Offset that required sum with social security, and the remaining amount needs to come from their investable assets. This is a good guideline to decide the amount that should be protected in an annuity. Overall, annuities can provide clients with needed financial stability and help them avoid the potential loss of income in retirement.
Help clients compare benefits and disadvantages
As advisors, we offer both guarantees and non-guarantees in financial planning. Each option has its own appropriate application that depends on the client and their financial situation. Non-annuity investments often have a lower cost and no holding period. Annuities, on the other hand, require a seven-year hold on average. The reason for this is that there is no cost to get into the annuity and this is a way for the insurance company to make back the acquisition cost.
Clarify with clients that the higher costs associated with some annuities are the result of the guarantees and provided income protection. The added benefits of annuities can help offset the cost from the client’s perspective. An annuity guarantees tax-deferred growth in the U.S., creditor protection in many states, a death benefit, income for retirement and the ability to escape probate. Make sure your clients are aware of the full advantages, so they can make informed financial decisions.
Deepen client conversations with examples
Advisors should approach client conversations about annuities with a holistic overview. I have effectively increased client understanding with examples that explain the role of annuities in their financial plan. Once clients can grasp these concepts, a more in-depth explanation is warranted.
For example, ask clients to imagine they have to cross over a toll bridge on a rainy night. They can either choose Toll A, which costs $1 and does not have an operator, concrete walls or lights along the bridge. Alternatively, they can take Toll B, which costs $3, has concrete barriers, lights and an operator that watches over the cars. Many clients presented with this scenario would choose Toll B because the added cost of the toll ensures protection. Similarly, annuities come with associated costs and added peace of mind to ensure their investment will not suffer from market losses.
The comparison of annuities to homeowners insurance is another example that resonates with clients. Many homeowners purchase an insurance policy in case of any damage caused by fires and some natural disasters. While many clients know that it is a low possibility they will actually need to file a claim, they feel more comfortable with an added level of protection. Annuities offer similar security for the just-in-case scenarios, such as a large drop in the market.
Decipher the nuances of each type of annuity
When clients have a general understanding of the impact annuities could have on a financial plan, provide your recommendations for the type of annuity that would make the most sense for their situation. If a client cannot fully understand the product, they should not move forward with the investment. I prefer variable annuities as clients are not limited by the amount they can invest.
The current marketplace experiences sustained periods of volatility that can have extreme – although temporary – effects on financial portfolios. Annuities can provide necessary protection from market losses, and clients are able to ensure growth. These assets are great resources that can help clients in retirement cover living expenses and generate income. Financial advisors are often needed to guide clients through the intricacies of annuities and can help them obtain peace of mind in an ever-changing financial atmosphere.