It goes without saying that advisors need to know their clients’ wishes and goals. What may be less obvious is that they also should be familiar with the intricacies of the annuities their clients hold. “Advisors should be very clear about all of the pros and cons of annuities,” says Parker. “I’m always careful to point out that while the bells and whistles [such as] living benefits of an annuity can be very attractive, there is usually a high price to pay for them.”
Indeed, many VAs with a guaranteed lifetime income rider come with fees of 2% to 3.5% of their value, she cautions. “There is also a limit to how much you can take out without disrupting or reducing the income benefits,” she says. “So if you need a large lump sum of cash in a hurry, then you could be stuck with high back-end fees or severely reduced benefits.”
The sheer diversity of annuity products reflects the range of goals they’re designed to meet. “That really is the beauty of a flexible, customizable approach,” says Kelli Hueler, CEO and founder of Hueler Income Solutions, a low-cost income-annuities specialist in Minneapolis.
The 5% Annuitization Rate
Ironically, only about 5% of annuity buyers ever actually annuitize—that is, convert their annuities into income payments. It’s as if the longer a client holds onto an annuity—or any other asset, for that matter—the longer he or she feels protected.
“The advantages to deferring annuitization include a growing account balance and a gradually increased payout rate whenever an investor decides to take distributions,” notes Marshall Heitzman, retirement planning and sales consultant at CUNA Mutual Group in Minneapolis. “The disadvantage, similar to saving without ever spending, is postponing enjoyment of an increased income.”
But a careful withdrawal strategy can preserve the comfortable, safe, security-blanket feeling. “There are many strategies that utilize the benefits of an annuity through a withdrawal plan that doesn’t require annuitization of the full contract balance to generate the desired guaranteed income,” says Heitzman.
To other observers, the infrequency of annuitizations may actually indicate a lack of understanding about how annuities work. “Some offices oversell these products,” posits Brubaker at Exit & Retirement Strategies. “Advisors need to provide clients with personalized education on using annuities to generate income, as it truly varies by individual.”
Though annuities aren’t for everyone, he says, “if used in the right way for the right reason, they’re worth every nickel.”