Suitability
When recommending a fixed annuity versus a variable annuity to a customer, the representative needs to know the amount of risk the client is willing to take. A fixed annuity investor values dependable payments for life over a high rate of return. A variable annuity is for those who are willing to endure greater risk for the possibility of higher earnings.
Because annuities often have long surrender periods, they should never be sold to older customers, who may need to withdraw their money before the surrender period is over. Annuities may be appropriate for customers who want to be assured of a death benefit. In addition, the IRS allows the earnings from an annuity to grow tax-free, so annuities can be good retirement vehicles. That said, IRAs and 401(k)s often offer tax deductions that most annuities do not. So a representative should make sure that a customer has reached the maximum amount that can be put into an IRA or 401(k) before investing in an annuity. Because both IRAs and annuities provide similar tax benefits, an annuity should never be put inside an IRA.
If a customer needs money in the near future, she should consider only an immediate annuity, never a deferred annuity.
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Summary Advantages and Disadvantages to Fixed and Variable Annuities |
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Fixed Annuity |
Variable Annuity |
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Advantages |
Earnings grow tax deferred |
Earnings grow tax deferred |
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Death benefit |
Death benefit |
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No contribution limits |
No contribution limits |
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Can take lump sum or fixed payment stream |
Can take lump sum or fixed payment stream | |