Outside-IN

Outside-INblog

Outside voices and views for advisers

Despite misleading ads, annuities can be critical for lifetime income planning

Advisers need to provide investors with clear, useful information on annuities in order to dispel inaccurate perceptions

Aug 23, 2017 @ 10:28 am

By Greg Cicotte

If you're in the annuity industry, a client has probably walked into your office with preconceived notions about annuities for retirement planning, partly due to some critics' opinions on annuities that may not consider the needs of everyone. Critics believe variable annuities aren't right for anybody, and they convince people lifetime income retirement strategies are available elsewhere. For many people, that's not true.

Millions of Americans are approaching retirement with inadequate savings and income. Additionally, many Americans lack a sound understanding of anticipated longevity and practice poor spending habits due to insufficient financial knowledge.

While medicine has experienced great advancements that will allow many to live into their 90s and beyond, the strain on household finances will continue to grow. More people should focus on not running out of money during retirement.

(More: DOL fiduciary rule: Indexed, variable annuities big winners of a proposed delay)

Alarmingly, nearly half of workers said they and their spouse had less than $25,000 saved for retirement, per a report from the Employee Benefit Research Institute. Not surprising, given rising tax rates and the financial strain many American families face. On top of that, the U.S. is too dependent on Social Security. The average payment is about $16,000 a year, which is officially poverty level for a household of two.

To solve this national crisis, we need to provide investors with clear, useful information. Otherwise, it could mean poverty and destitution in retirement for many who don't know their options.

Consumer perceptions of annuities are worryingly inaccurate. As an industry, we can't sit by and let the opinions of a few overshadow how variable annuities can play a critical component of today's retirement planning.

Here are some core truths about annuities that are commonly misunderstood:

1. Critics say annuity contracts are obtuse and confusing, misleading buyers. While the industry could do a better job of eliminating jargon — much of which is regulated by legal entities — most annuity purchasers are satisfied. In fact, a LIMRA consumer investment study found that 75% of variable annuity buyers, 83% of indexed annuity buyers and 86% of traditional fixed annuity buyers are satisfied with their deferred annuity purchase.

(More: Consumer and insurance groups disagree on advice standard for annuity sales)

2. Another common annuity misnomer is that sales reps lie and peddle for commissions. However, commissions have long been the norm in the insurance industry because most of the adviser's work happens upfront in the sales process. Annuities are intended as long-term vehicles. Since some buyers require less ongoing advice, commission-based arrangements are sometimes the most cost-effective option.

That said, many annuities are now available in either fee- or commission-based versions, because allowing consumers to choose the payment structure is important. Both types of annuities can co-exist, and the client's individual circumstances, such as how active or passive they are with their investments, can make a long-term difference in choosing the best option.

3. Interestingly, some critics say annuities have "high" fees, but in the same breath, they are "too good to be true." I believe more advisers should consider a component of lifetime income as part of their clients' retirement plans, and annuities are the only source of guaranteed income for life if this feature is opted in the contract. Despite market fluctuations that can impact underlying investments and principal amount, a guaranteed future income amount would still be available so people don't outlive their money.

It makes sense that a product with a higher-quality feature has costs associated that aren't the same as a product without this feature. Other optional benefits are available for additional fees on annuity contracts, and each comes with its own advantages, charges and potential restrictions. As with any higher-priced product, a buyer pays for the product's features and design, which fills a need other investments can't. Furthermore, the claims-paying ability of the issuing insurance company backs the guarantees.

(More: Retirement plan advisers should bone up on lifetime income)

People don't need to be financial experts to understand the importance of annuities in retirement, but they should consult with a financial expert to fully understand the contract and determine if one is right for their situation. Along with protection and growth, a variable annuity can provide a consistent, guaranteed stream of income throughout the life of the contract holder. Without a lifetime income component, many people will struggle during retirement.

Greg Cicotte is the executive vice president and chief distribution officer of Jackson.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

May 02

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

Events

How 401(k) advisers can use 'centers of influence' to grow their business

Leveraging relationships with accounting, benefits, and property and casualty insurance firms can help deliver new business leads for retirement plan advisers.

Latest news & opinion

Things are looking up: IBDs soared in 2017

With revenue up, interest rates rising and regulation easing, IBDs are soaring.

SEC advice rule may give RIAs leg up over broker-dealers

Experts say advisers will be able to point to their role as fiduciaries as a differentiator in the advice market.

Brokers accept proposed SEC rule on who can call themselves an adviser

Some say the rule will clear up investor confusion, but others say the SEC didn't go far enough.

SEC advice rule: Here's what you need to know

We sifted through the nearly 1,000-page proposal and picked out some of the most important points.

Cadaret Grant acquired by private-equity-backed Atria

75-year-old owner Arthur Grant positions the IBD for the 'next 33 years.'

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print