Financial planning is one area of expertise that you as an insurance agent can provide to your clients. From estate planning to retirement planning and investments, you can help steer your clients in the right direction and provide a stable long-term plan for financial endurance.
Annuities are one component of financial planning that sometimes get overlooked. Many people don’t fully understand the purpose of annuities and what they provide.
Why your insurance clients should buy annuities
Annuities play an integral role in retirement planning, protecting individuals from outliving their assets. Here are a few reasons your clients should consider annuities:
Portfolio diversification
To get the best return on investment, portfolios should be diversified with a variety of options. Fixed annuities, specifically, offer an exclusive benefit as an asset that is guaranteed not to depreciate. Fixed annuities typically offer a guaranteed interest rate and are a safe and stable choice for long-term growth.
Meet retirement income goals
Contributions to a diverse portfolio of assets are essential, but often those contributions are limited with IRAs and 401k accounts. By the time your client retires, they may not have saved up enough in those retirement accounts, especially if they got a late start on saving for any number of reasons. Annuities can help provide a source of consistent growth and earnings.
Manage investment portfolio
Sometimes it makes sense to “rebalance” an investment portfolio by shifting funds between asset classes when certain investments grow too fast. If you shift money from something like mutual funds, you’ll have to pay capital gains taxes. Variable annuities, however, are much more flexible. Your clients will only pay taxes when they eventually withdraw funds at the normal income tax rate.
What kind of annuities are there to choose from?
Fixed annuity
With fixed annuities, there is a guaranteed principal and interest rate provided by the insurance company, assuming the company is financially sound. The investment will not drop in value. A fixed annuity’s growth may depend on a specified formula, dollar amount, or interest rate.
Variable annuity
A variable annuity functions a bit differently than fixed. Variable annuities grow based on the performance of the underlying mutual funds, providing the possibility of greater earnings. However, variable annuities can also fall in value, making them riskier investment options.
Deferred vs. immediate annuities
Immediate annuity
With this type of annuity, a lump sum investment is made to the insurance company and they start providing a payout immediately. The payout schedule depends on the annuity, person’s age, and other factors. It is often paid monthly for the rest of the buyer’s life.
Deferred annuity
A payment or series of payments are made in a deferred immunity, and the amount grows over time until the buyer is ready to make regular withdrawals. Deferred annuities for retirement can stay in the deferred stage for many years, even decades.
Immediate and deferred annuities can be either fixed or variable, giving the potential buyer plenty of choices for investment options and terms.
The pros of investing in annuities
- Income for life
One benefit of annuities is that they can provide lifelong income that can’t be outlived (most of the time).
- Tax-deferred
Unlike some other investments where taxes are due at the maturity date, annuities work on a tax-deferred basis, allowing people to only pay taxes when making withdrawals.
- Guaranteed rates
In the case of fixed annuities, your clients can enjoy a guaranteed rate of growth and predictability of their investment. This is a safe way to grow funds for retirement with little risk.
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