Annuities can be customized to meet many needs. But consumers may be overwhelmed by their options. Agents should be prepared to quickly explain the pros and cons to potential investors.
Annuities generally offer:
- Guaranteed income
- Financial security
- Supplemental retirement funds
It’s important to acknowledge that annuities are not necessarily for every customer. Annuities provide higher rates of return than other investment options, such as certificates of deposit. However, they may offer lower rates of return than some stock-market investments.
In general, remind potential customers that annuities are best for long-term investments. Make sure your customers are willing to commit for several years to receive maximum returns and avoid unnecessary fees.
What Is an Annuity?
Annuities can be complex investment tools. When you provide an annuity to a consumer, you are essentially selling them a savings account insured by an insurance company rather than a banking institution. This “savings account” will later provide your clients with a steady stream of income, typically in retirement.
So, at its core, an annuity is an insurance product, governed by a contract between you (the insurance agent) and your client, that pays out income.
This income can occur immediately or in the future. It can be doled out as a lump-sum payment or broken down into a series of payments over time, usually in monthly installments.
Types of Annuities
Annuities can be either immediate or deferred. An immediate annuity may be an option for someone nearing retirement. A deferred annuity will accumulate money tax-deferred until a later date.
A deferred annuity can be converted to an immediate annuity if your client’s needs unexpectedly change. This flexibility would allow payments to begin sooner than expected.
Annuities are further broken down into fixed, variable or indexed annuities within these two categories.
Fixed Annuity – This type of annuity promises a fixed, or guaranteed, amount of periodic payments as well as a minimum rate of interest.
Variable Annuity – Your client’s payout will vary in this type of annuity depending on how much money is contributed to the underlying investment options (usually mutual funds), the rate of return on those investments (performance) and expenses.
Indexed (or Equity Index) Annuity – A combination of features from both fixed (insurance) and variable (securities) annuities make up this type of annuity where a client’s return is based on a stock market index.
Both fixed and indexed annuities are regulated by state insurance commissioners, while a variable annuity is regulated by the U.S. Securities and Exchange Commission.
How Does an Annuity Grow Income?
A consumer purchases an annuity by making a single payment or several payments (premiums) over time. This money is a non-taxed investment.
A fixed annuity will grow income that will be paid out under conditions predetermined at the time the annuity is purchased.
A variable annuity will allow payments to be split among several different investment options. This type of investment does involve some risks in overall accumulation and eventual returns based on the performance of the funds chosen by the consumer.
How Do You (the Insurance Agent) Get Paid?
The insurance agent collects their cut from an annuity sale on any amounts remaining above their clients’ guaranteed payouts. Additionally, you will make money on fees associated with the annuity as well as services for managing the investment.
Annuity Pros and Cons
The downsides of annuities include annual fees, underlying mutual-fund expenses, and early withdrawal penalties. But they have many upsides as well.
It is your job as the insurer to help the consumer weigh the pros against the cons to make a well-informed investment decision. Understand these terms:
No Income Caps – There is no annual contribution limit or restriction on the amount of money that can be stashed away in an annuity. This is one benefit of an annuity over an IRA, especially for those bringing in higher wages and wanting to make a larger investment.
Tax-deferred Investment – And, all that money invested is tax-deferred. That means more dollars working for the consumer year-after-year. So, for the client about to retire in a few more years, but lacking a sufficient nest egg, they can catch up on those golden years’ funds while putting off a hefty tax bill.
A Pool of Benefits – Also, annuity holders are placed into a “pool.” This feature of the tax-deferred investment allows insurers to offer returns to their clients they wouldn’t otherwise be able to obtain on their own.
Death Benefit – When individuals in the pool die before retirement, their departures essentially provide a greater income stream and available benefits for annuity holders who are longer-lived. If they’ve selected a beneficiary, this chosen individual will also receive a specified payout called a death benefit.
Flexible Payments – Lastly, an annuity offers clients flexibility in payouts.
Annuities sometimes come at a high price. Significant expenses associated with annuities can effectively reduce your client’s investment growth.
Make sure to mention these fees, but also counter with why they are a necessary evil. Don’t dwell on the cost, but rather the overall benefit to the consumer.
Also, earnings derived from the invested funds grow tax-deferred, but eventually these taxes will apply when payouts are withdrawn. Annuities are taxed as ordinary income with a maximum income tax of 39.6 percent. This is true no matter how long your client has owned the annuity.
Annuity.org's mission is to help you through tough financial situations. We’re committed to providing this help the best way we know how — through informative, easy-to-understand articles. Annuity and structured settlement owners can use our website as an educational tool and vantage point for connecting with our trusted partner, CBC Settlement Funding, to sell their payments for cash. Founded in 2004, CBC Settlement Funding is an annuity purchasing and pre-settlement funding company based in Conshohocken, Pennsylvania. CBC works with a variety of financial products, such as annuities, structured settlements, casino payouts and lottery winnings.
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