When most people think of annuities, they first think of some investment. This is not an incorrect answer because annuities are investments, but that’s only a tiny part of the picture.
It can be considered both an investment and a form of insurance. Financial planners commonly use annuities to help retirees meet their short-term financial needs.
However, these are financial products that can be confusing for employees. Therefore, as an employer, you must educate your employees about annuities so they can make informed decisions about whether or not they want one.
Basic facts about annuities explained here would help you plan your retirement savings and insurance. If it is your goal to be financially secure when you retire, here are six essential factors to guide you.
Keep it simple.
Retirement can be a pretty serious topic. But, using the correct jargon when discussing it with your employees would be best.
While many terms describe retirement accounts, each time has particular implications.
Unsurprisingly, this means that sometimes using too much jargon could have the opposite effect and put your employees off rather than ensuring they understand the ins and outs of their future retirement plans.
But if you talk to your employees about retirement options and accounts, there’s no choice but to adopt some standard-issue financial jargon.
To make things easier, you can use analogies and metaphors whenever possible. This helps simplify complicated concepts and make them more accessible for people to grasp quickly without becoming bored or confused by too much financial jargon.
You can also bring visuals into the meeting room that show how annuities work.
For example, if you’re talking about an immediate fixed annuity, get a sample policy document so employees can see what it looks like and how it works. This will help them understand what you’re saying better and ensure they understand everything clearly before leaving the meeting room.
Explain the main types of annuities.
There are two main types of annuities — fixed and variable.
A fixed annuity is one where an insurance company guarantees the payout amount for a set period (usually several years) regardless of how well the underlying investments perform.
It’s like a CD or money market account — there’s no chance that the value will fluctuate unless interest rates change dramatically.
The payout amount is based on interest rates and stock market performance, so it could change during your contract term.
However, if market conditions turn out badly, the insurer will make up any losses by increasing its payouts later — the “guaranteed minimum interest rate.“
For example, let’s say an employee is considering a fixed annuity with an interest rate of 1 percent per year. The employee would need to invest $100,000 into the annuity to generate $1,000 per year in income (the interest rate multiplied by the amount invested).
In this case, the employee would receive a guaranteed income stream for life—no matter how long he lives or how much money he needs from his savings during retirement.
Variable annuities, on the other hand, aren’t guaranteed like fixed ones; instead, they change based on market performance. So the “expected rate of return” is an estimate provided by the company that sells variable annuities; it shows what kind of return they expect over time.
They also come with tax-deferred growth, meaning that taxes aren’t paid until you withdraw money from the account.
Here’s how it works, you deposit a lump sum of money into the annuity, and your employer invests it. The investment grows tax-deferred, and you can withdraw the funds at any time without paying taxes on them.
When you reach retirement age, you can start taking distributions from the account without paying taxes on those withdrawals either.
Variable annuities also have drawbacks.
First, they’re expensive — fees can consume as much as 10% of your investment in the first year alone. And if you want to withdraw your money before retirement, you may have to pay steep surrender charges (essential penalties for getting it too early).
Second, there are no guarantees that your investment will grow enough to cover any future expenses you might face; if it doesn’t, you could be in trouble later when medical costs start mounting up.
Define annuity terms.
After explaining the types of annuities, you can discuss the basic terms of an annuity contract. Then, you can include its features and how those features work together to determine the cost of the annuity.
Annuities can have various features, such as fixed or variable payouts, guaranteed minimum values, and lifetime income options.
To help employees understand their options, you can use a table that lists the different types of annuities and provides examples of each type.
You can also create a flowchart or decision tree that walks employees through the process of selecting an annuity product that meets their needs.
Explain the different ways you can use an annuity.
Some people think of an annuity as a type of retirement account, but that’s only one application for these products.
Annuities come in many forms for different purposes, but some of the most common include retirement savings, estate planning, and generating income in retirement.
You should explain how each type of product works and what it best suits, so employees know their options when purchasing one.
Talk about what happens to your money when you die.
Annuities provide income for the rest of your life. But what happens to the money you invest if you die?
Some annuities have a death benefit, meaning the insurance company will pay a certain amount if you pass away. This can be a great way to protect your loved ones if you’re gone before they are.
The amount of money paid out is determined by the type of policy and how long you’ve been paying into it. However, some things can affect how much you receive when you die:
If more than one annuitant is on an account, only one person can receive the death benefit. The other annuitants would have their payments suspended until further notice.
If more than one person qualifies for the death benefit — for example, eligible spouses — each person would receive part of the payout instead of just one person getting all of it.
Don’t forget to tell them they can call you.
Let your employees know that if they have any questions or concerns about their accounts or other issues about their finances, they can always come to talk with you.
If your employees have any questions or concerns about their annuity, make sure they know they can contact you for help. This reassures them that they aren’t left out in the cold if they run into problems and reinforces that you care about their well-being.
In addition, explain that there’s no need to rush into buying one immediately. Annuities aren’t like smartphones or flatscreen TVs — sometimes it pays to wait until a better deal comes along (or until more information becomes available).
You can even suggest that they sign up for some free financial advice before deciding what type of investment would be best.
Annuities might be complicated, but discussing them with your employees doesn’t have to be.
This financial instrument is worth considering because it provides a stream of payments at regular intervals for a specified number of years or life.
It’s similar to buying a bond or saving money in a bank account, except that the payments are fixed and guaranteed by an insurance company — which makes them more valuable than what you’d get on your own by investing in bonds or stocks.