(Image: Thinkstock)
As advisor clients age and retire, the need for guaranteed income grows. Social Security can provide at most a few thousand dollars per retiree per month, but beyond that there are no guarantees. If an advisor perceives a gap between the income that a client needs in retirement and what that client will collect from Social Security and from savings, they might recommend an annuity to fill that gap.
"It all comes down to the client's situation … to longevity risk and sequence of returns risk," says Derek Tuz, partner at Aegis Financial Partners in Boulder, Colorado. "We have no idea when we're going to die and what the market is going to do."
Tuz is an advisor who uses annuities for certain clients to cover a portion of those clients' income needs. Other advisors like Leon LaBrecque of Sequoia Financial avoid most annuities except single premium immediate annuities (SPIAs), which tend to be the simplest kind though not without complications or weaknesses.
(Related: Advisors' Advice: Are Annuities Worth It?)
SPIAs immediately annuitize and start making regular income payments for as along and account holder or beneficiary are living — and longevity annuities do the same but at a later date, often when the client is 80 or older. In exchange for those guarantees, however, the account holder no longer controls these assets; the insurance company does. When the annuity holder dies the contract dies with them unless the annuity holder had chosen an option that will allow the remaining assets to be paid to their beneficiaries or the annuity had a certain term of years which had not yet expired.
That's not the case for variable or indexed annuities (also called equity index annuities and fixed indexed annuities) whose ownership rests with the investor until and unless the contract is annuitized.
