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Retirement Planning

Annuity FAQs to expect from clients

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For some clients, an annuity is an effective tool to create an income in retirement. But there's a lot of confusion about annuities — not to mention the negative stigma they can have.

So, you should expect clients to have questions. To prepare, consider this list of common questions about annuities. Then, you can use it as a guide to help them learn more.

Annuity FAQs


What is an annuity?

A good place to start with your clients is covering the basics. It may help to start by clearing up some common myths about annuities.

Explain that annuities are long-term investments that are designed to help ensure customers have an income well into retirement and later life. Through the annuity, the customer's payments can be converted into periodic payments.

Make sure clients understand that while an annuity isn't right for everyone, it could be a good fit for someone who wants guaranteed retirement income and has the financial means and discipline to fund one properly. Help clients understand how an annuity could fit into their overall retirement plan.

What are the different types of annuities?

With some of the basics out of the way, break down two main types of annuities — fixed and variable — and how each works. Explain how the names refer to how returns are generated.

Another factor to go over is income payments. Explain that, depending on the type of annuity, they could choose to begin receiving payments right away or years down the road. Having a glossary of key terms may help, especially when breaking down the difference between immediate and deferred annuities.

How do annuities work?

Your client's confusion will probably come from a lack of education on how annuities work. It may help to start by explaining the two phases of annuities and when payouts can begin depending on what type of annuity they choose.

Also be sure they fully understand the mechanisms for growth and the associated risks. As your clients have different risk profiles, one type of annuity over another could be a better fit. They'll want to weigh the risks versus rewards as they consider their options.

Highlight some key differences. Such as how fixed annuities tend to have lower risk, fixed rates and guaranteed income. While in contrast, variable annuities have higher growth potential, also come with greater risk.

What are the benefits and drawbacks of annuities?

As you know, every retirement vehicle has pros and cons. Go over these with your clients so they have a complete picture of the potential advantages and disadvantages of annuities, especially compared to other types of retirement tools.

It may help to create a simple document that lays out each type of annuity with a bullet-point list of the potential benefits and drawbacks of each. For example, list some benefits of variable annuities, including multiple funding and investment options and opportunities for tax-deferred growth. Then, go through each point with your clients and answer any additional questions they have.

When can I start withdrawing money from an annuity?

Your clients may want to know how quickly they can begin drawing an income from an annuity. Explain that the answer varies depending on the annuity they choose. Also, make sure to explain what a surrender charge is and that any withdrawals made before age 59 1/2 are subject to a tax penalty.

Will I need to pay taxes on annuities?

Another consideration for your clients will be taxes. You've probably already helped them create a tax strategy as part of your retirement planning. Show them how annuities may fit into their plans.

Explain that annuities offer tax-deferred growth and then will be taxed at withdrawal. Also, make it clear that there could be penalties for any early withdrawals.

Do I have to pay any fees?

It's reasonable for your clients to want to know if there are fees associated with annuities and what they may expect to pay. Let them know that fees will vary based on the type of annuity and the insurance company, and there are low and no-fee annuities available. If there are fees, let them know how those fee structures work.

This list should help you prepare for some common questions about annuities. Having relevant knowledge can help your clients feel more confident about an often confusing retirement tool and further establish you as a trusted financial partner.

Learn more about educating your clients about annuities.



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