There are myriad annuity products to fulfill a clients' financial needs. Some are fairly basic, while others come with a dizzying array of bells and whistles.
Annuities have never been so popular, and it's no surprise why. In this era of economic tumult and uncertainty, annuities are an appealing way to shore up a retirement plan. This is largely due to their guaranteed principal
and, if properly crafted, an income you cannot outlive. The right annuity can also be the perfect complement to an existing savings plan, such as a pension, IRA or 401(k), or Social Security benefits.
There are myriad annuity products to fulfill a clients' financial needs. Some are fairly basic, while others come with a dizzying array of bells and whistles. But dig directly down to the foundation, and you'll find that all annuities can be characterized by:
1. Their investment type — either fixed or variable, and
2. Their payout timing, which is classified either as immediate or deferred.
So, what does it all mean? While the following information should provide a working knowledge of these different products, there are numerous types of each annuity, warranting a thorough discussion between client and advisor regarding needs and goals. This conversation will help design an annuity product that is most suitable for each client's unique situation.
Typically invested in high-grade corporate bonds or government securities, the money earns a fixed rate of return during this time
period, and the premium and subsequent payments can never decrease. In a nutshell, as long as the client makes premium payments and the insurer remains solvent, a fixed annuity can be structured to receive guaranteed income for life.
Some of the most popular types of fixed annuities include life, term-certain and fixed indexed annuities
, all of which have varying costs, pros and cons.
Designed for investors with an appetite for risk, variable annuities
are insurance contracts tied to the stock market. During the accumulation phase, the insurer invests the premiums into sub-accounts, which serve as investment portfolios, allowing the client to decide how much risk he or she would like to take by determining the types of portfolios in which the money will be invested.
For more conservative investors, these sub-accounts can include money markets or government bonds, while more aggressive investors might elect emerging market, small-cap, mid-cap or large-cap investments. At the end of the accumulation phase, the insurer guarantees a minimum payment; however, income payments can vary based on the performance of your sub-account portfolios. If they've performed poorly, you'll receive lower payments. There are, however, many types of variable annuities configured to mitigate the impact of negative market performance, the most popular of which are living benefit annuities (often referred to as a guaranteed retirement income benefit (GRIB), as well as guaranteed lifetime withdrawal benefit
For investors seeking a product that offers an immediate payoff — and who have the resources to afford it — an immediate annuity is worth exploring. Once the premium is paid — which usually occurs by way of a single lump sum, hence the need for a sizable amount of cash — the investor will start receiving income no later than one year later.
Furthermore, immediate annuities afford a great deal of flexibility in how the investor can elect to withdraw payments, including period-certain, lifetime, fixed or variable payments.
By far the most common and most recommended annuity income model, deferred annuities
are designed to build value over an extended period of time — usually until retirement — before the investor starts receiving income that has accrued tax free during the accumulation phase. Deferred annuities often make powerful additions to retirement plans, and come in many packages.
The investor can choose either a fixed or variable product, which can be funded with periodic payments or a single lump sum.