Answering the most common annuity sales objection
By Chris Conklin
Insurance Insight Group
In April 2008, the television show Dateline NBC aired a segment entitled "Tricks of the Trade." The report secretly filmed annuity salespeople making presentations to senior citizens, observing the transactions to see if the salespeople would review how features such as surrender charges, which the show emphasizes repeatedly, expose purchasers to the risk of loss of assets. This segment is now infamous because of the SEC's use of it in initially justifying rule 151A, which would bring fixed indexed annuities under the SEC's jurisdiction.
Naturally, salespeople are going to emphasize the many positive features of fixed and fixed indexed annuities. These features include guaranteed safety of principal (as long as the surrender charge is not triggered), attractive interest rates, tax deferral, and probate avoidance.
In fact, because of all these positive features, when salespeople fully explain a fixed or fixed indexed annuity, there is relatively little for consumers to dislike. Thus, we find ourselves again and again addressing objections about one of the few negative things that consumers see when they examine annuities: surrender charges. In fact, questions about the surrender charge are quite likely the most common annuity sales objection.
Of course, we should always fully disclose the existence of the surrender charge and how it works; we never want our customers to be unpleasantly surprised by the surrender charge after the point of sale.
The challenge is this: How can we explain surrender charges in such a way that consumers see them as an acceptable product feature? Here are four ideas:
No. 1: The time commitment is how the carrier provides great interest rates. Let's point to something your clients already know from their bank. They have money in a checking account, which gives them excellent safety and access to their money, but it credits little or no interest. If your client wants a better interest rate, what does their bank offer? A certificate of deposit, which requires a time commitment. Typically, the longer the time commitment the client is willing to make, the higher the interest rate on the certificate of deposit.
So, consumers understand that to retain excellent safety but get a better interest rate, they need to give up some access to their money. To allow the carrier to buy the long-term assets it must own to provide a better interest rate to the consumer, it needs a time commitment from the customer.
Notice that safety, high potential growth and liquidity do not coexist well in a single product. A checking account gives you safety and liquidity but lacks growth potential. A stock mutual fund offers high growth potential and liquidity but lacks safety. No matter what financial vehicle you consider, at least one of these features must be compromised. Thus, annuities are not alone in this aspect. In their annuity designs, carriers that offer fixed and fixed indexed annuities choose to emphasize safety and high interest rate potential, with some concessions to liquidity.
No. 2: Who would you rather see the company charge? This gets to the issue of fairness. We saw from the prior point that the company needs a time commitment. Therefore, it stands to reason that customers who take their money out early cost the carrier money. The carrier needs to recover these costs. How would we prefer that it do so?
It can recover these costs by charging all of its customers a monthly fee, providing a lower interest rate to all of its customers, or only charging those customers who have caused the carrier to incur the costs. Most consumers will agree it is most fair for the carrier to penalize only those customers who broke the time commitment they made, and that is exactly what carriers do -- in the form of a surrender charge.
The good news is that customers who keep their time commitments do not pay any of the costs associated with those customers who take their money out early, thanks to the fact that carriers recover those costs through surrender charges.
No. 3: What is most important to you? Let's look at the what your customers really need. If you were to ask your clients what is the single most important aspect they require when they are deciding where to put their retirement savings, most would say "safety." Some would say the potential for a high rate of return. Very few would put "access to all of my money, all of the time" at the top of the list.
We already established that no single financial product provides a perfect combination of safety, high potential growth and liquidity. Since annuities satisfy the safety requirement wonderfully, plus typically provide a higher rate of interest than other safe alternatives, isn't it worth compromising a bit on liquidity, which is usually one of your clients' lower priorities?
No. 4: You have options. Giving your clients choices can soften their concerns about surrender charges. Show your clients that there are annuities available with differing surrender charge durations. Interestingly, for many carriers, their longer-duration products prove to be more popular than their shorter-duration products, at least in part because of the features they offer to consumers, such as premium bonuses.
Also show your clients that the surrender charge does not completely prevent them from touching their money. Most annuities allow annual penalty-free withdrawals of a portion of the annuity's value, and most annuities increase the allowable penalty-free withdrawal under certain hardships.
In summary, the fact is that your client benefits from the time commitment in several ways. Your client receives higher interest rates than if there was no surrender charge. Your client is not forced to bear the expense associated with other customers who cancel their contracts early. If your client honors the time commitment and takes no withdrawals that trigger the surrender charge, your client will have experienced all the benefits of the annuity without paying any fees. Who can argue with that?
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