The New Finance of Longevity

Talking About Annuities…

Five discussion points to present to your clients

by Mike Vietri

Mr. Vierti is Chief Distribution Officer for AmeriLife. Visit

Of all investment vehicles, annuities are probably the most misunderstood. And it’s no wonder. The different structures, varying rules and endless available riders make them a difficult product for the average consumer to evaluate. That’s why it’s so important for a knowledgeable advisor to talk with clients about their individual needs before recommending an annuity product.

Here are the most important discussion points in that conversation:

1. The right time to start thinking about annuities 

Most people who purchase annuities are over 50. Roughly 50% of annuity owners purchased their annuities between the ages of 50 and 64, and approximately 14% of annuity purchasers are 65 or older, according to the 2013 Gallup Survey of Owners of Individual Annuity Contracts.

This makes sense. The closer clients are to retirement, the more likely they are to have accumulated assets to put into annuities and the more likely they are to be attracted to the security annuities can provide.

However, the years immediately before retirement aren’t the only good time to start talking about annuities.

A new study by The Alliance for Lifetime Income and CANNEX shows that members of Generation X (currently between 41 and 56 years old) already show a higher degree of interest than baby boomers in making annuities part of their retirement plan. That makes sense when you consider that far fewer Gen Xers have pensions compared to boomers.

In addition to discussing annuity options as part of your clients’ retirement planning, other good times to bring up annuities are when your clients change jobs or when they’re planning their estates. When there’s a job change, an annuity is always an option for rolling over the company 401(k) plan instead of leaving it with the old employer. In estate planning, an annuity with a death benefit can provide a spouse or other heir a lump sum or stream of payments.

2. Which products are appropriate for your client’s individual risk tolerance

Clients’ ability to tolerate risk varies at each stage of life. As clients get closer to retirement, for example, they are more interested in investments that are stable.

That’s why the first element you need to educate clients about is the difference between the two types of annuities. The first is a fixed rate annuity, which guarantees a specific, guaranteed interest rate on the contributions. There is no downside with a fixed rate annuity; however, fixed indexed annuities may participate in the upside. The second type is a variable annuity; here, the insurance company offers the client a choice of investments — usually mutual funds — in which to put the annuity’s capital. If those investments grow, the annuity is worth more; if they fall, the annuity is worth less.

While the fixed annuity is free of downside risk, the variable annuity is not. Just as the stock market goes up and down, the owner of a variable annuity shares in that potential volatility. Of course, this is also the benefit of the variable annuity compared to the fixed. By accessing any market upside, the owner has the chance to build up more money, resulting in a lifetime of larger payouts. And the owner of an indexed annuity has some opportunity to increase their future payouts, without as much risk as with the variable annuity.

Gaining a deep understanding of your clients’ risk profile will help you guide them toward annuity options that match their risk tolerance levels.

In addition to discussing annuity options as part of your clients’ retirement planning, other good times to bring up annuities are when your clients change jobs or when they’re planning their estates...

3. Why your client should be aware of the product’s time horizon

One of the major ways annuities differ from many other investments is that they usually have a set timeline for when you can receive payouts. In exchange for less liquidity, investors may gain more security. But this tradeoff only makes sense if it matches the client’s timeline.

There is a wide variation in annuity timeframes. Immediate annuities start making payments as soon as you buy them, while deferred annuities start making payments at a future date, which could be decades away.

One of the first things you need to ask clients before determining a potential annuity choice is this: when will they need to use the money? It’s important for clients to be confident about this, because surrender charges will apply if they cash out an annuity earlier than the date they agreed to. So, if they sign up for a variable annuity with a five-year surrender period, and then decide to retire and withdraw the money in just three years, they’re going to pay a surrender charge, which decreases each year of the contract. For instance, according to, a 7% fee might apply in the first year after purchasing a variable annuity, then a 6% surrender fee in the second year, until eventually the owner reaches the point where the fee no longer applies.

4. Why it’s important to buy from a highly rated provider

Independent agents have the opportunity to represent many annuity companies, allowing you to offer clients a range of options to fill their needs.

Clients want to know that you have carefully selected the annuities you sell and that they come from financially strong companies. You can do that by representing companies that get high marks from ratings agencies, such as Standard & Poor’s and AM Best. Explain that the company rating is especially important with annuities, because unlike bank account balances, annuity investments are backed by the insurance company that sells them, not by the federal government.

5. How annuities compare to other investments when looking at the whole financial picture, including taxes

Clients may see a fixed annuity paying 3.5% and think: I could beat that investing in mutual funds. While clients should always consult a tax adviser to fully understand the tax implications of their decisions, you can help them consider the deferred taxation offer by annuities.

One way to demonstrate that is to create two scenarios, comparing how much money they could end up with after five years with a fixed rate annuity versus another investment with a higher growth rate but no tax advantage. Say you invest $100,000 in a five-year annuity at 3% interest. The next year, you will be accumulating interest on $103,000, with none of the growth going to taxes until you start receiving payments.

Then hypothetically invest the same sum in a non-tax-advantaged vehicle that brings in a 4% return. If they sell it after one year, they’ll have $104,000, but they’ll owe tax on the $4,000 gain. Depending on the tax bracket, and on whether the investment qualifies for capital gains tax or is treated as regular income, the client might be surprised to see that the difference in what they end up with isn’t that much.

Once you walk through that, the client may say, “I’m willing to sacrifice a percent, or half a percent, for the guaranteed peace of mind and tax advantages of an annuity.”

In the end, there may be no financial product where the conversation between an advisor and client is more important than with an annuity. With some targeted questions and a good listening ear, you can pinpoint exactly what your clients are looking for in terms of security, time horizon and diversification, and help them identify the annuities that best fills their needs.