For the past 18 months, Americans have had their lives turned upside down by the ongoing pandemic. It’s put uncertainty in the spotlight, as well as the critical need for future planning. In fact, 70% of Americans have seen the pandemic as a financial wake-up call, saying it has “caused them to pay more attention to their long-term finances.”1 As a result, we’re witnessing an incredible rebound in annuity sales. According to data from the Secure Retirement Institute, strong equity market gains and lower volatility — as well as rising interest rates — are all contributing factors to annuity sales reaching $129 billion year to date, a 29% increase over 2020.
Despite these encouraging statistics, we know that there is considerable need for annuity education. The word “annuity” still carries a stigma, and many annuity myths continue to circulate in the marketplace. One of the ones you’ve likely heard from clients is that annuities are too expensive. To combat this myth, start by helping them understand the difference between fixed and variable products.
Most fixed annuities assess no front-end or annually recurring charges. Meanwhile, they can offer a fixed rate of growth, or the opportunity to earn interest credits based on the performance of market index if a fixed indexed annuity might be in their best interest. While some products do offer riders that can be added onto the contract for an additional fee, this is clearly disclosed prior to the contract purchase. These riders may offer additional features and benefits beyond what the core annuity provides to address things like terminal illness provisions, enhanced guaranteed lifetime income benefits or inflation protection.
However, the insurance guarantees inherent to annuities and the promise to provide additional interest are not free and, therefore, are considered an expense to the insurance company. Other expenses and acquisition costs for these products may include product development, issuing costs, commission expenses, regulatory compliance and mandated reserve requirements. The beauty of fixed annuities is that these costs are baked into the contract and not charged separately or on an ongoing basis.
Finally, fixed annuities typically carry surrender charges. These may be imposed from two to 12 years, depending on the product design, and typically decline to zero over time. While those who don’t understand annuity products — or those who are actively trying to encourage clients to move money into managed accounts — may speak ill of surrender charges, the reality is that they are assessed ONLY when the annuity owner takes money out of the annuity. Most fixed and fixed indexed annuities allow the owner to take a defined amount of money out of the contract annually without paying any charges, but withdrawals over the maximum will be charged a penalty. Also, if one terminates his or her annuity contract early, before the charges have expired, a surrender charge is assessed.
In other words, surrender charges are a loss prevention tool used by the issuing insurance carrier to ensure the company remains profitable and solvent. This, in turn, keeps annuity purchasers protected while ensuring that all consumers receive the most competitive interest rate and annuity features possible, and that the insurers are adequately protected from a “run on the bank.”
With a growing number of consumers recognizing the need to protect a portion of their nest egg from market risk while locking in guaranteed income for life, it’s more important than ever we are prepared to educate clients about how these products work. NAFA is here to help. Download a complimentary copy of our newest resource to help clearly communicate why surrender charges are not only fair but necessary to provide the consumer protection clients seek.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC.
1 The Four Pillars of the New Retirement: What a Difference a Year Makes, An Edward Jones and Age Wave Study: June 2021
Guarantees provided by annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC. Annuities are long-term vehicles to help with retirement income needs.