Fixed Annuities Explained
I often have agents asking how to simplify the explanation process of annuities. You have to understand that some clients don’t have prior knowledge about annuities or how they work. We have to be able to explain them in terms that they DO understand. So let’s dive into fixed annuities.
A fixed annuity is very simple. It’s similar to a CD, but it is not a CD, so don’t call it a CD annuity. A CD is something that comes from a bank, an annuity is something that comes from an insurance company. You have a bank and an insurance company doing something that is completely conflicting with each other because only banks can do CDs, and only insurance companies can do annuities, but it’s a similar concept. Calling a fixed annuity a CD annuity doesn’t make sense, and can cause more confusion for the client.
If you have a fixed annuity with a guaranteed period, they call it a MYGA, multiple-year guarantee annuity. It’s going to be set… Let’s just say at a 3% fixed rate for five years. That means every single year they’re going to have a fixed amount that’s going to come into their annuity in the form of interest. Now some of them will let you pull 10% penalty-free withdrawals. Some of them will let you pull the interest only. Some may not let you have any access to the money including upon death until the end of the term, so it’s very important that you understand how this works.
To go another step further, some fixed annuities may have simple interest, and others may have compounded interest.
It’s important that you use the different benefits or riders with fixed annuities (i.e. penalty-free withdrawals, interest withdrawal, death benefit, etc.) along with the compound or simple interest to determine what product is going to be the best solution for your client. For example, someone taking interest only withdrawals each year wouldn’t inherently benefit from compound interest if there is a simple interest product with a higher rate. If you’re going to set them up with interest withdrawal, compound interest isn’t necessarily better than the simple interest. If someone is not going to take interest, they’re going to let it grow, then a lower compound interest could be better than a slightly higher simple interest.
Further, I always use a death benefit (where the spouse or beneficiary has access to the money upon the death of the owner), and I always use a 10% penalty-free withdrawal benefit because I want the client to always have some level of increased access to their money for emergencies.
The key is to not over complicate things. Annuities (especially fixed annuities) are simple products. It’s our job to show the client how the product works in a way that they understand. And if you understand the product, it’s easy to do. Use the CD analogy, but don’t call a fixed annuity a CD annuity.
I know fixed annuities are simple products, but I hope this post is beneficial to someone out there.