Why Annuities Are Not as Complicated as You Might Have Thought

Annuities are often believed to be more complicated than other financial products. While it’s true that there is some complexity to annuities, it is worth advisors investing the time to better understand them because of the benefits they can offer your clients.

The Simple Benefits of an Annuity

It is true that annuities have complexity “under the hood” and some annuities are more complex than others, but the primary benefit is generally easy to grasp.

An annuity can provide your client with guaranteed income payments for life. There is no other product that can provide this kind of protection, so annuities really could be a consideration in the context of any retirement planning conversation.

The Perception of Complexity

Much of the perception of complexity comes from the fact that annuities are already something of a hybrid product by necessity, combining the guarantees that make them unique with features found in other products.

In recent years, providers have designed multiple variations in annuity products as client needs have evolved and competition in the category has increased, leading to a proliferation of new features that can be hard for financial advisors and their clients to keep pace with.

Another contributor to the perception of complexity, for both advisors and clients, is the amount of information in the annuity contract itself. This naturally puts the emphasis on you, as a financial advisor, to understand and explain the product’s terms, features, charges and benefits as detailed in the contract, and the value these contracts can provide unique to each client’s needs.

For insights into understanding the charges that apply to annuities, read our feature: Why annuities are worth the cost.

Different Benefits, Different Complexity

The range of annuities may be easier to understand if it is broken down into the most common types. Here, we have highlighted the benefits of each type and the areas of underlying complexity that you may need to interpret for your clients.

Immediate and deferred annuities:

• An immediate annuity enables clients to begin receiving their guaranteed income payment very quickly, usually within the first 12 months of purchase.
• An immediate annuity generally requires one lump sum payment that can’t be withdrawn. In the event of your client passing away prematurely, annuity payments would end unless the product provided for a refund or a guaranteed payment term.
• A deferred annuity enables clients’ assets to accumulate assets for a period and then for the client to receive payments or make withdrawals at a time of their choosing.
  
  

The two distinct phases of a deferred annuity are:

• The saving or accumulation phase, during which the client invests money in an account that has the potential for growth.
• The payout phase, which begins when the client chooses to receive annuity payments or make withdrawals.
  
  

Generally, withdrawals and payments can be taken before retirement, but there may be tax penalties for withdrawals before the age of 59½. Withdrawals may also be made during the accumulation phase, but withdrawal charges may apply.

Fixed, Variable and Indexed Annuities

Within immediate and deferred annuities, there are three sub-types. These are fixed, variable and indexed.

• A fixed annuity enables clients to receive a fixed rate of interest on their principal for a set period of time. In addition, their principal and any interest it accrues are guaranteed.
• A variable annuity enables clients to potentially generate higher rates of return than with a fixed annuity by investing a portion of the principal in sub-accounts that have the potential for growth. With this type of annuity, the invested portion could be affected by volatility and the annuity may have mortality and expense charges. Also, your client’s principal may be subject to loss in the event of a downturn.
• An indexed annuity combines features of both fixed and variable annuities, enabling clients to benefit from yields based on market performance. Losses are limited in the event of a downturn and yields are limited by an agreed cap.
  
  

Why Annuities?

An annuity can be used to address a range of your clients’ needs. Different annuities have different degrees of complexity and the ability to solve for a client’s specific needs. At its simplest, an annuity can generate a guaranteed income for your client in retirement that can provide an element of security in knowing their essential expenses are covered.

Annuities can play an important role in a clients’ retirement planning discussion. As an advisor, you can play a key role in helping clients understanding the value for the costs they are paying, and the level of certainty the can provide in terms of guaranteed income. Providing the full picture can help clients determine if an annuities is right for them.