Guaranteed income is possible in retirement, thanks to annuities. Here's a guide to answering clients' questions about guaranteed payment options via annuities.
"What is guaranteed income?"
Explain to clients that guaranteed income is part of an annuity contract with an insurance company that ensures they will receive a fixed amount of money, typically at a later date, in exchange for a lump sum. It can provide assurance during retirement in the form of consistent, predictable payments even when market conditions fluctuate. Clients can get guaranteed income from purchasing annuities, or from pensions or Social Security benefits.
"Why do I need guaranteed income?"
Ask your clients if they have considered how they will pay for basic living expenses after regular income from work stops. Receiving guaranteed income can help ensure that they can cover those costs until end of life. Guaranteed income ensures that the payment won't decrease, even if the financial markets take a downturn.
"What types of annuities offer guaranteed income?"
Educate your clients on types of annuities. Immediate annuities can provide a guaranteed lifetime payout in exchange for an up-front lump sum investment. The lump sum is immediately annuitized (turned into a series of regular payments), without any extended deferral period. These payments are fixed, meaning that they pay a set amount that is calculated based upon the annuity payment option chosen, i.e. for a chosen period or for a lifetime. This prevents volatile interest rates from affecting payments, but it also makes them vulnerable to rising inflation. Clients can sometimes buy riders to hedge against inflation.
Conversely, deferred annuities have an accumulation or deferral period — your client can pay into them over time, with annuity payments beginning at a later date of their choosing.
Explain that annuity investments don't have to be fixed. A variable annuity lets clients invest money into sub-accounts, which are similar to mutual funds. They allow for direct participation in the equity and bond markets during the accumulation period.
Exposure to market performance is also exposure to market risk. Clients can hedge some of that risk, with respect to future income, by purchasing an income rider with a variable annuity. A guaranteed lifetime withdrawal benefit rider guarantees a minimum annual withdrawal amount that will not decrease as long as the terms of the rider are adhered to, such as avoiding excess withdrawals.
"Do I pay taxes on income from annuities?"
Annuity income is taxable, but deferred annuities offer a way to delay those tax payments to your client's benefit. Any growth can accumulate on a tax-deferred basis, allowing the principal to grow over time and avoiding tax payments until the annuity begins paying out. Most annuities carry surrender fees and are subject to tax penalties for early withdrawal, along with other fees charged by the insurance company in order to help cover guarantees within the contract.
"What happens to the money after I die?"
An annuity's death benefit will pay a benefit to a named beneficiary if the owner/annuitant dies during the accumulation period. During the payout phase, a fixed-period option lets your client receive payments for a defined period. This could leave them without income if they live past the payment period. A life-with-period-certain annuity will pay out for life or for a minimum predefined period, whichever is greater. This option would allow for payments to a beneficiary should the owner/annuitant die before the end of the chosen "certain period."
Product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Investors should carefully consider the investment objectives, risks, charges and expenses of a variable annuity and the underlying investment options before investing. This and other information is contained in the prospectuses for a variable annuity and its underlying investment options. Prospectuses may be obtained by contacting PLICO at 800.265.1545.
Learn how to answer frequently-asked questions about annuities, and help clients understand the basic terms and conditions surrounding annuities.
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