An annuity is an insurance contract that provides regular income payments, typically in retirement. The contract owner gives an insurance company a lump sum upfront and receives payments for life or a set period.
For years, RIAs stayed away because traditional annuities came with commissions and fiduciary conflicts. Fee-based annuities changed that. Today, you can offer income solutions that fit your clients' needs and your practice model. Read on to see how.
An annuity is an insurance contract that converts a lump sum payment into a steady income stream. The contract owner gives money to an insurance company upfront and receives regular payments in return for life or a specified period.
Annuities play an important role in retirement planning. They address longevity risk by creating income that cannot be outlived. Unlike traditional investments, certain annuities provide income protection regardless of market performance.
The insurance company assumes the risk of paying the contract owner regardless of market conditions or how long the recipient lives. With annuities, your clients often purchase predictability and protection, rather than growth potential. This is what makes annuities distinct from standard investment products.
Annuities have been experiencing growth in the RIA space in recent years. If you're an investor considering this type of asset, the top fee-based RIAs in the US can guide you.
Annuities operate in two phases: accumulation and payout. What happens is the contract owner pays a premium upfront, then the money grows tax-deferred and converts into income payments. Here's an overview of the process:
When a client purchases an annuity, they start by paying a premium to the insurance company. This premium can be a single lump-sum payment, such as rolling over 401(k) funds, or a series of payments made over time. The premium amount determines the future income.
Once the premium is invested, the money enters the accumulation phase where it grows on a tax-deferred basis. The contract owner does not pay taxes on the growth until withdrawals start. This tax deferral allows more money to stay in the account and compound over time.
When clients are ready for income, they choose how to convert their annuity into payments. This process is called annuitization, where the insurance company calculates the payout amount based on age, life expectancy, and projected interest rates.
Clients select from several payout structures, including:
Lifetime payouts are the most common choice because these address longevity risk.
If you want to work out how much a client can receive, this annuity payment calculator can provide an estimate.
Estimate your potential annuity payments and retirement income
Once the payout phase begins, the insurance company assumes the risks your clients face in retirement. In exchange, the client agrees to the contract terms, which may include fees or liquidity limits.
The two-phase structure is straightforward to explain to clients. They fund the annuity, watch it grow tax-deferred, and choose how to receive income. This makes annuities an easy foundation for retirement planning conversations. As you include fee-based annuities in your offerings, consider presenting them as one option for generating income alongside other investments and retirement assets.
However, there are also challenges in using annuities for retirement planning. Find out what they are and how your clients can overcome them in this guide.
Annuities fall into three main categories based on how they grow and how much market risk they carry. Each type serves different retirement income goals and risk tolerance levels.
A fixed annuity is a contract between your client and an insurance company where the insurer guarantees a set interest rate and predetermined income payments. The principal stays protected regardless of market performance.
During accumulation, money earns interest at a guaranteed rate with tax-deferred growth. Clients can start receiving income right away with an immediate annuity or wait until a future date with a deferred annuity.
Fixed annuities come in two main categories:
Fixed annuities work well for conservative clients who prioritize safety over growth. They serve as a bridge between retirement and Social Security or as a safer alternative to bank CDs. Clients nearing retirement who want reliable income without market stress are ideal candidates. Those with low risk tolerance and specific income needs in the next few years benefit most from fixed annuities.
An indexed annuity links returns to a market index such as the S&P 500. It offers higher growth potential than fixed annuities while limiting downside risk. The contract protects the principal from market losses while allowing clients to participate in index growth.
The annuity guarantees a minimum rate of return (the floor), even when the index declines. The insurance company uses formulas called indexing methods to calculate how much index growth gets credited to the account.
Fixed index annuities use three main indexing methods to measure performance:
All three methods use limits on growth. Caps limit maximum gains, while participation rates limit how much of the index growth the client receives.
Indexed annuities suit investors seeking growth above fixed annuities but with less risk than market-linked products. They work well for clients who fear market downturns but want some growth potential. These are ideal for pre-retirees and retirees who need more than the fixed annuity return but worry about market volatility.
A variable annuity is a retirement product where the insurance company invests the contract owner's money in subaccounts similar to mutual funds, with tax-deferred growth. Unlike fixed annuities, the value and income fluctuate based on investment portfolio performance.
Variable annuities operate in two phases: accumulation (growth period) and payout (income period). At retirement, clients can annuitize to receive guaranteed payments for life or a set period. Clients can also make partial withdrawals instead of annuitizing the entire balance.
Clients choose which investment subaccounts to compose their portfolio. This gives them control over asset allocation and investment strategy during the accumulation phase.
Variable annuities come with several fees that increase overall costs. The total annual fees range from 2 percent to 3 percent. These fees include:
Variable annuities work best for investors aged 50 to 55 who have time to recover from market downturns. Clients should have higher risk tolerance and comfort with market exposure. They benefit those seeking growth beyond fixed products but wanting some insurance protection through guaranteed income riders.
Visit and bookmark our Life Insurance & Annuities News section for more information on the different types of annuities.
Annuities serve an important purpose in retirement planning that differs from traditional investments, according to Scott Saffe, senior annuity director, sales and marketing at Annuity.org.
"They're not designed to beat the market but to offload certain risks from consumers to insurance companies. In our space, we usually refer to the client's dollars being used to purchase a product solution."
Saffe adds that the confusion around annuities stems from misunderstanding where they fit in a portfolio.
"The FIAs, fixed annuities, SPIAs, and DIAs have been created to serve a purpose of creating reliable, predictable, and oftentimes increasing income streams for the retirement planner. Never go a year of your retirement without income, which has become the number one fear of Americans."
Learn more about the role of annuities in retirement in our Retirement Planning News section.
RIAs have specific annuity needs that differ from traditional broker-dealer models. Fee-based annuities align with your business structure and client planning strategies.
"RIAs need a guaranteed product solution for people," Saffe explains. "They are filling their protected bucket of money for their clients with insurance products, mostly using FIAs for accumulation and income.
"This allows the advisor or the client to be more aggressive with their investments knowing they've protected or guaranteed a good portion of their retirement dollars already."
The compensation structure also matters for an RIA's practice model. Saffe notes that "insurance products can also be sold as a trail commission versus heaped commissions, which slots nicely into their fee-based structure as an RIA."
The annuity industry expects the biggest growth in the RIA channel over the next three years, according to Goldman Sachs Asset Management research. The report found that fee-based products like registered index-linked annuities (RILAs) jumped 41 percent in the first half of 2024. This growth reflects a shift in how RIAs approach income planning and risk management.
"The consumer has dictated this in many ways," Saffe says. "[Clients are] looking for protection against possible volatility in their market positions, principal protection, guaranteed income they can never outlive combined with some tax efficiencies [like] Roth conversions and spreading tax liability over time."
Beyond personal protection, Saffe notes that firms have realized "there's billions of dollars on the sidelines for people looking to lessen their risk versus add to it." This client demand for safety and guaranteed income has prompted many RIAs to reconsider their product offerings.
RIAs face a mindset shift when integrating guaranteed products into their practice. Some advisors hesitate because of commission structures, but there are practical reasons to consider fee-based annuities.
"The challenge is many RIAs don't like the idea of a commission product, so they shy away, even when it's a great fit for the risk-free or guaranteed funds the client doesn't feel comfortable losing," Saffe says.
He adds that this reluctance overlooks a real client need. "The opportunity for the RIA is to fill a much-needed bucket of money for guarantees that they may not have had the ability to say before jumping into the fixed insurance solutions versus market risk vehicles."
RIAs can position annuities as the safety portion of a diversified strategy, not as a replacement for investment management. Understanding this distinction between commission hesitation and client benefit is key to your annuity growth strategy. Clients need guarantees for essential expenses, and fee-based annuities now allow RIAs to provide them without abandoning their fiduciary model.
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