For the majority of Americans, when it comes to retiring, there are really three main options that we use in our industry: We have people either taking out money from an investment portfolio, using income annuities or using variable annuities.

My approach has always been making sure that the first thing I do for clients is help them understand all of these options, not just one. I think it is really critical that we lay things out and let people know: “Hey, you can do this, or you can do that. You have options, and these are options that don’t compete against one another.” I feel it’s very important that we don’t pigeonhole clients or steer them hard in one direction over another, at least certainly not at this point. I just want them to be able to reconcile what things are, what they are not and how they work.

This is how I explain variable annuities: If you were to imagine a variable annuity in your head, think of a child floating in the kiddie pool with an inner tube wrapped around the waist. The child in this case is an investment portfolio. I’m sure you see the relationship there. And wrapped around it is sort of a life preserver, or, in this case, a guarantee provided by the insurance company.

The variable annuity allows you to continue to invest and determine how those funds will grow. You have a menu of investment options, depending on the provider you choose from; some have more than others, and you have some control over those investment options. So, you can determine what you invest in and how it works. This way you get market returns associated with your funds, which is certainly something that’s very attractive.

What protection are you getting with a variable annuity? Well, it protects your paycheck. This is the thing in retirement most people want to protect, right? You might use, in fact, an income annuity to get that very guaranteed income that we are looking for that covers our necessary expenses, and we know it’s not going to go down. It’s going to keep pace with inflation. It’s not tied to the market. So, if I can find a vehicle that will still protect my paycheck in a similar manner, maybe that is something worth considering.

But how do they do it? Well, they create a kind of insurance wrapper around that investment portfolio, and they charge you a cost of insurance. To get an insurance company to give you a guarantee, you are going to have to pay for insurance, right? Makes sense. So variable annuities work by bringing those two worlds together: the investment component and the insurance guarantee component.

The advantage with a variable annuity is you still get control. A lot of control, in fact. You get to control the timing of distributions, and you get to control how the guarantees are going to work for you, depending on how much you want to take out and how you want to maximize those types of guarantees. You also get to decide if you want a death benefit because most providers offer that as well. So there is spousal protection if that’s important to you.

The downside, of course, is that you are paying the cost of insurance. There is absolutely a higher cost to grow your funds. And we can very easily explain how that works and how we add up those expenses for our clients.

I like to say, “When you think about your car insurance, what do you have?” You are paying the insurance company to fix or replace your car in the event there is a crash. So, if we want to use that analogy, you are paying a variable annuity provider to protect and preserve your income in the event of a market crash.

One of the easiest ways I find to overcome people saying, “Hey, I don’t believe in annuities” or “I don’t like annuities,” is to say, “Well, all right. Let’s talk about what it is that you don’t like.” And then I ask them to really explain the objection. I ask, “Do you like the idea of an insurance company making sure that if you retire at the wrong time, you would want to have the highest potential paycheck for yourself, even if you didn’t have the funds to support that? Or would you prefer to scale back your lifestyle until you could recover enough to pay yourself at a rate that you were trying to reach in the first place?” Does it make sense to have an expense associated with getting that guarantee? Yes, they are more expensive. The question isn’t the expense; I think it’s whether or not the expense is justifiable.

I also like to let clients know that some providers may have more investment restrictions than others. So, obviously, we want to do provider due diligence. And, certainly, if you are investing, there is still market risk associated with that as well.

Brian J. Haney CFBS, CLTC, is a 12-year MDRT member with two Court of the Table and five Top of the Table honors. He operates an independent, family-owned practice in Washington, D.C., and has presented at many industry events on technology and brand awareness. He has been recognized in The Washington Business Journal’s “40 Under 40” and as one of NAIFA’s “4 Under 40.”