Amid high inflation and market volatility, annuities have been selling like hotcakes. But whether that’s good or bad for clients depends on the situation—and whom you ask.

“Americans are living longer, and financial security through retirement is a big challenge,” said Whit Cornman, a spokesperson for the Washington, D.C.-based American Council of Life Insurers. “Guaranteed products [like annuities] help people live and retire with predictable income and financial peace of mind.”

But Colleen Jaconetti, a senior manager in Vanguard’s Investment Advisory Research Center in Malvern, Pa., has a somewhat more nuanced opinion and says there are other options besides annuities. “For the majority of investors, retirement income needs can be successfully met using their investment assets and implementing a dynamic spending strategy,” she said.

But she adds, “There is the risk of running out of money.”

Annuities can be a “viable option” for solving that longevity risk, she added, but “it is important to note that while [clients] will be getting an income for life and will not outlive their money, there is a cost. They will need to hand over a portion of their investment assets to the insurance company and there will be a fee for this type of guarantee.”

Pre-Retirees Worried About Income
Fear of outliving your savings is a common problem that ranks highly in many surveys of investor anxieties. “Seventy-eight percent of pre-retirees worry that market volatility will impact their ability to retire on time,” said Jared Nepa, vice president and national sales manager for annuities at Lincoln Financial Group in Radnor, Pa., citing data from a recent company survey.

Mike Morrone, vice president of business development for annuity products at Nationwide Financial in Columbus, Ohio, stressed that market fluctuations should have little to do with the decision to get an annuity.

“One of the common misconceptions about annuities is that there is a right or wrong time to purchase one,” he said. “In any economy, and at all stages of the financial life cycle, annuities can provide protection and guaranteed income, helping clients prepare to navigate adversity now and in the future.”

That doesn’t necessarily mean that annuities are right for every client.

Not A One-Size-Fits-All Solution
“Annuities are not a one-size-fits-all financial tool,” said Nepa. “There are many different types of annuities, plus diverse options, riders and features within those annuities that can be customized to an investor’s wants and needs.”

The wealth of options can make annuity selection challenging. “The first step is to see if the insurance protections provided by an annuity resonate with a client,” suggested Wade Pfau, professor of retirement income and director of the Retirement Income Certified Professional program at the American College of Financial Services in King of Prussia, Pa.

Bad Reputation
However, annuities don’t always have great reputations with advisors, some of whom dislike the products so much they will scarcely consider them.

“While statistics regularly report that the average American is woefully unprepared for retirement, very rarely is an annuity the answer,” said Russ Thornton, an advisor at Wealthcare for Women in Atlanta. “They’re expensive, complicated, and opaque [and] often leave consumers confused and not having a full comprehension of what they’ve committed to.”

Proponents are just as forceful in defending the products, however.

“You’re doing your clients a disservice by not bringing up annuities,” said Theodore Saade, a managing senior partner at Signature Estate & Investment Advisors in Los Angeles. “It’s become imperative to give clients an understanding that they can create a bucket of guaranteed income within their portfolio that normally wouldn’t exist outside of their Social Security.”

Dylan Tyson, president of retirement strategies at Prudential Financial in Newark N.J., added, “Not having reliable longevity protection can be a ticking time bomb in an otherwise well-formed financial plan.”

Annuities, he said, can provide “more predictable, inflation-adjusted spending power throughout retirement … in ways that traditional, supposedly ‘safe’ withdrawal rates simply cannot.”

But even supporters say it’s important to distinguish between different types of annuities.

“Immediate annuities may play a role in providing a guaranteed income in exchange for a lump sum,” noted Steven Podnos, a medical doctor and certified financial planner at Wealth Care in Cocoa Beach, Fla. Deferred annuities, however, which pay out either a fixed or variable amount at a later date, are another matter. “Almost all deferred annuities that are sold are indeed misrepresented and oversold,” he argued. “The commissions are high and the returns are very misleading.”

Upside Potential, Downside Protection
One of the most popular types of annuity in recent years is the registered index-linked annuity, also known as a RILA. It’s a type of variable annuity—meaning it invests in mutual-fund-like subaccounts—and it’s structured to give annuitants a percentage of the underlying investment’s gains and a degree of downside protection if the investment loses value.

“RILAs allow advisors to capture market upside [for clients] while shielding their investment from market downsides,” said Tim Munsie, head of RIA, platform distribution and planning at Jackson National Life Distributors in Nashville, Tenn. “Increased interest rates combined with higher volatility have resulted in a very attractive environment for RILA cap rates.” (“Cap rates” refers to the maximum upside potential.)

Besides their ability to generate retirement income, annuities are also championed by some for their use as wealth-transfer vehicles.

They “help keep funds out of probate, which can be important depending on the size of your estate or estate planning goals,” said Doug “Buddy” Amis, an advisor at Cardinal Retirement Planning in Durham and Chapel Hill, N.C. “But annuities are not as efficient as life insurance when it comes to taxes.”

Annuity distributions are taxed as regular income; that goes for inherited annuities, too. “Heirs typically can choose between having it taxed all in one year—lump sum—or over multiple years,” said Amis. (Nonspouse beneficiaries generally have up to 10 years to withdraw all the money.)

Better Education
Whatever the pros and cons of different annuities, their complexity causes some consternation.

“Due to there being many types of annuities, each insurance carrier offering different annuity benefits for each type of annuity, and the complexity of their benefits, costs, etc., the consumer and advisor [often don’t] fully understand them,” said Brett Bernstein, CEO and co-founder of XML Financial Group in Rockville, Md.

Ari Fischman of Telemus Capital in Southfield, Mich., might agree. Misrepresentations of annuities, he said, are “mostly limited to the advisors who are not fully versed in the overall investment marketplace.”

As the variety of annuity products has grown, though, so have industry efforts to keep advisors up to speed. “Education around annuities has improved over the last several years,” said Bryan Pinsky, president of individual retirement at Corebridge Financial, formerly AIG Life & Retirement, in Woodland Hills, Calif.

To be sure, some insurance sales reps will sell annuities purely to earn a commission, whether or not they are appropriate for a particular client. “Like any financial product, they can be misrepresented or incorrectly applied,” said Frank O’Connor, vice president of research at the Insured Retirement Institute in Washington, D.C. “But annuities help address a serious problem for workers, especially most private sector workers who lack pensions—having enough secure income to last throughout retirement.”