Finding the ideal customer for fixed and indexed annuities

There’s a lot of noise out there about annuities, and the issues making the most noise revolve around market uncertainty and an evolving interest rate environment.

Advising clients on annuities requires insurance and financial professionals to take a detail-oriented approach. To find the right annuity solution, you must carefully consider each client's financial goals, risk tolerance and retirement planning needs.

This is especially true when it comes to two similar sounding but very different products: fixed annuities and fixed indexed annuities. Although many consumers may not be able to distinguish between these two types of annuities, their outcomes will be distinctly different based on their choice. It’s up to advisors to truly understand their clients’ needs, set realistic expectations and ensure that their annuity recommendations align with their unique circumstances.

Although both fixed annuities and fixed indexed annuities are used to provide a guaranteed stream of income, they differ in several areas and will appeal to different types of consumers.

• Fixed annuity: This offers a guaranteed, predetermined interest rate for a specified period, providing predictable growth and stable returns regardless of market fluctuations. Most of these products are either traditional fixed annuities, typically offering rates of around 3% to 6%, or multiyear guaranteed annuities, which usually provide a guaranteed rate for periods of three to 10 years.
• Fixed indexed annuities: Instead of a guaranteed rate, interest earnings in FIAs are tied to the performance of a market index, such as the S&P 500. This can offer higher potential growth if the market performs well. However, the interest credited can fluctuate and may even drop to 0% if the market performs poorly, although the principal remains protected from market losses.

Ideal customer for FAs: Seeking greater security

Fixed annuities are best suited for clients with a low risk tolerance who seek a safe and predictable investment option. In this instance, “safe” means that it’s not subject to market fluctuations and is guaranteed to pay out the set interest rate. More conservative consumers who are uncomfortable with the volatility of the stock market and prefer a secure investment will find fixed annuities appealing.

Other consumers who will benefit from fixed annuities include those nearing or in retirement who require a steady, predictable stream of income. The guaranteed interest rate, combined with the option for fixed payments over a set number of years or for life, provides a reliable source of retirement income. Fixed annuities can also be a good choice for clients looking to defer taxes on their investment growth. The earnings in a fixed annuity grow tax-deferred until the annuitization phase. This can be advantageous for those in higher tax brackets.

Remember that fixed annuities are designed to be long-term retirement income solutions. They will be most suitable for clients who are willing to commit for a set period and are not concerned about liquidity, as early withdrawals can incur surrender charges and a 10% federal tax penalty if made before age 59½.

Ideal customer for FIA: Looking for higher returns

Clients who want to participate in market gains without the risk of losing their principal will find FIAs more attractive than purely fixed-rate products. Because the interest earned is linked to the performance of a specified index, FIAs offer the possibility of higher returns during years of growth up to a maximum cap. However, unlike other indexed annuities, FIAs don’t lose principal value if the market performs poorly. This provides a safety net for those needing a reliable stream of income.

FIAs are most suitable for clients who have a moderate risk tolerance and are more interested in higher growth potential than fixed annuities. Much like fixed annuities, FIAs also offer tax-deferred growth. This can be particularly beneficial for individuals in a higher tax bracket who want to maximize their tax benefits.

While an FIA offers principal protection from market downturns, it will most likely have some years where the account's credited interest rate is 0%. This can be disappointing for clients who expect a return each year. It’s crucial for agents to set realistic expectations for their clients’ income goals and risk tolerance.

Hitting the right target with your annuity solutions

Ultimately, the suitability of any annuity type for your clients can only be determined by assessing their financial situation, risk tolerance and retirement goals. Now that you know how to identify the ideal clients for fixed and indexed annuities based on their wants and needs, you can recognize the right target for each of your annuity solutions and hit the mark every time.

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Kelly Kleinsasser is the principal of Forward Strategies Insurance Brokerage, an AmeriLife company. Contact him at [email protected].