How to Educate Clients on Annuities

August 5, 2021 | Annuity Leads, Financial Services, Lead Generation

Annuities are confusing to many Americans, just like most other insurance services. On the bright side, they don’t have to be. As an agent, you can explain annuities in a way that is easy for your clients to understand.

Annuities have been a service since the Roman times but weren’t introduced to the United States until 1812. Since becoming available in the U.S., they have been known to be risky and expansive. And if your clients know what annuities are, they’ll likely have a pre-determined and bitter notion about them, all because of their reputation.

This tainted reputation makes it even more important to educate your clients about them properly. Even if they decide to forgo its services, your honesty will work in your favor because your clients will appreciate you.

However, it is still important that you speak with your clients about annuities so that they can understand whether they will work in their best interest. This article will walk you through the steps for educating your clients about annuities.

First And Foremost, Explain What An Annuity Is

Many people who opt for annuities do so for various reasons. However, most clients choose annuities because they can get a return on their investments or want to receive money for a set period of life. Before you begin to explain what annuities are and why they may apply to your clients, you will want first to understand what your client knows and why they are inquiring about them.

The best way to ease your clients into annuities is to explain how they apply to them. You will want to explain how they can serve as a contract between annuitants and insurance companies. You will then want to define them: Annuities are part of life insurance policies and act as savings accounts in which the annuitant will receive sums of money.

Explain How Your Clients Can Pay For Annuities

This can be very easy to explain because the true answer is that annuities are paid through premiums. And in the insurance industry, 99% of your clients know what premiums are because they have to pay them. For example, if your client is over 65, they are likely already paying Medicare premiums.

You will also want to walk your client through the two ways she or she can pay for an annuity plan: through qualified or non-qualified funding. If the clients pay with qualified money, they pay with money from a tax-deferred account.

These accounts could be their IRA or 401(k)/403(b). If your clients decide to pay with non-qualified money, then they are paying with funds with money they’ve already paid taxes on

Explain Annuity Advantages And Disadvantages

This may seem obvious, but you must realize the types of agents and brokers working within the insurance industry. Many of them get excited when describing a service to their clients—so much so that they forget to consider some disadvantages of whatever service they’re talking about.

Some of the advantages to tell your clients include:

This Is A Means Of Lifetime Income

If your client invests in an annuity, they can receive income payments for the rest of their life.

Taxes Are Deferred

While your client is funding the investment, the money will be compounded without being taxed by the government. Because of this unique feature, your client can save more for their future and retirement.

It Could Possibly Complement Other Retirement Resources

These resources could be your client’s Social Security and pension plans. You must discuss their work history and finances with your clients to determine how this feature would benefit them.

Some of the disadvantages to tell your clients include:

Withdrawals Are Taxed.

Although annuities are tax-deferred when your client does not touch the funds, they will be taxed as ordinary income as soon as they begin to make withdrawals.

They Have A 10% Early Withdrawal Fee If You Withdrawl Before Reaching The Age of 59 ½.

In addition to being taxed, you will incur this 10% penalty fee to the IRS.

They Are Not Protected By The Federal Deposit Insurance Corporation (FDIC)

Disclosing this to your client when discussing investing in an annuity is extremely important. The FDIC. Provides your client with extra protection if their bank goes bankrupt.

According to FDIC.gov, an individual is insured for up to $250,000 and is covered for “all types of deposits received at an insured bank, including checking/savings accounts, negotiable orders of withdrawal (NOW) accounts, money market deposit accounts (MMDAs), certificates of deposit (CD) and other time deposits, and official items issued by a bank (such as cashier’s checks or money orders).”

Explain Alternatives

There are alternatives to almost every insurance service, so you can count on alternatives to annuities. Make sure to communicate this to your clients so that they do not feel as though they are stuck signing up for an annuity plan if they seem uneasy about it.

The first alternative is a Certificate of Deposits. This is a specific alternative to fixed annuities because fixed rates are returned to you for your investments. However, the critical difference between the two is that the FDIC federally insures CDs.

Other alternatives can include retirement income funds. These are in place so your client can receive a regular income for retirement. They also come with investment opportunities and more flexibility than many annuity plans. However, the one drawback is that there are fewer guarantees for retirement income funds than annuities.

Research alternatives that may fit your client’s situation so that you can accurately direct them toward the best financial strategy, whether annuities or other plans. Each client has a different financial history, so you must work closely to determine their wants and needs.

Break Up The Information

Because insurance can be an overwhelming subject, it’s essential to break up the information you distribute to your clients so that they can retain what they’re told.

The first step is to understand your client. Do they happen to know a lot about finances and insurance? Are annuities a concept your client will be able to grasp quickly? Or is it the opposite? Do your clients know little about things outside of their current insurance plans?

Do they need you to detail everything you explain intricately? Breaking up information starts with understanding your audience—in this case, your audience. If necessary, you’ll want to simplify your language. Avoid using jargon that would immediately confuse anyone outside the insurance industry. Make sure that your clients can follow along by using some rudimentary language.

The next step is to begin with the basics. While explaining basic things your clients need to know, you will want to let them know if you’re mentioning anything specifically applicable to them. Using examples while explaining some basic things required to understand annuities is also essential. This will help your clients apply their knowledge to scenarios that could impact them.

Maintain Complete Honesty

The most important thing you can do when educating your client about annuities is to maintain honesty. You want to communicate to your clients that you are on their side and will be transparent on every question and challenge they raise.

As we mentioned, your clients may have already heard about annuities, meaning they will likely be less than impressed with their services. If this is the case, prepare for your clients to be curious and work with them to gain their trust.

Every profession has a few bad apples; unfortunately, the insurance industry is not immune. When agents or brokers act in their best interest, they will likely utilize a client’s lack of knowledge to their abilities. Many people who have had harmful exposure to annuities were victims of agents/brokers misleading them to get larger commissions.

However, nearly half of all investors own an annuity, meaning there is something positive about them.

Summary

Understanding annuities is something your clients will greatly benefit from. You can make sure that they understand them by:

• Explaining What Annuities Are
• Explaining How They Can Pay For Annuities
• Explain Both Advantages And Disadvantages
• Explaining Alternatives
• Breaking Up The Information
• Maintaining Complete Honesty

As an insurance expert, there are many ways to talk to your clients about annuity plans, and no one can do it quite like you can. To learn more about handling leads, visit Lead Concepts today.