An Annuity Can Be a Safe, Smart Choice for Wealth Protection…
If You Know What to Look Out For.
As pensions disappear, along with wristwatches and payphones, there is a real possibility that most people will lack income streams to support themselves in the latter phases of their lives.
Annuities are also popular with younger people, especially those who have inherited money and seek tax benefits or wish to avoid putting money in the stock market or otherwise expose their money to risk.
Using a variety of structured payouts, annuities have unique advantage over other investments, creating a safe, steady source of income that you can’t outlive.
Coupled with a properly designed Bank On Yourself™ policy or policies, annuities can give you a lot more peace of mind about your financial future.
Common questions about Annuities:
What are annuities and how do they work?
Simply defined, an annuity is an insurance product designed to pay out income over a period of time.
Typically, you agree to make a series of payments or one lump sum payment to an annuity issuer.
In consideration for those payments, the company agrees to make periodic payments to you for a definite time period or an indefinite period (until death) in one of two ways:
Deferred annuities allow you to pay either monthly installments or lump sum payments This account grows on a tax-deferred basis until you start receiving payments at a later date. While the tax deferred status of these annuities is often touted as a desirable benefit, there are potentially adverse tax consequences later on of which you need to be aware.
In contrast, an immediate annuity begins paying benefits the same year as when you deposit your money. Payment amounts vary based on factors such as age, gender, and total amount invested.
What are the types of annuities and which one is best?
Some companies like to market annuity products which feature various whistles, bells, and options designed to convince consumers to choose that company’s offerings over those of another.
Some of these options are designed to address certain inherent issues while others are simply marketing devices which add to the perception of value, but do little to truly improve the product. It’s important to understand the features of any annuity at which you are looking and determine whether or not that feature is a true improvement.
Customization aside, there are essentially only three real types of annuities:
Variable annuities allow the buyer to choose how their account is invested from a variety of options, including mutual funds. This type of annuity’s rate of return is by necessity tied to the performance of the investment options a person selects, as well as the amount of deposits made.
Some people choose this kind of annuity because of its’ supposedly greater growth potential. However, you could wind up with a lot smaller payments should the stock market falter. Variable annuities carry with them the additional burden of not being able to forecast with any degree of certainty how much money you will get when the time comes to receive payments.
With a fixed annuity, the annuity company contracts with the purchaser to pay no less than an agreed-upon interest rate while the account is growing; and the purchaser agrees to make periodic payments of specified amounts.
Indexed annuities provide investment returns based on fluctuations in a particular index, such as the S&P 500. Unlike variable annuities, indexed annuity contracts stipulate a minimum contract value, regardless of the performance of the index. These are often referred to as “guarantees.”
The type of annuity I recommend to my clients is an indexed annuity customized with guaranteed income riders. This product addresses concerns about both the erosion of wealth due to inflation and the need for predictable, guaranteed income in retirement.
Fees and Expenses
Just like other types of financial options, annuities have fees associated with them.
While most of these fees and commission are legitimate, it is worthwhile to train yourself to look carefully at them to determine the impact to your future wealth.
Arguably, the fee to which you should pay the most attention and which has the most potential to damage your net worth is the surrender charge. A surrender charge is the annuity company’s version of an early withdrawal penalty.
Since you never know when some unexpected life challenge will require you to access your money, it is vital that you know EXACTLY how much the surrender charge will be and how long the surrender period is.
Commissions are another factor when assessing the true cost of your annuity. Sales people are sometimes given commissions as high as 10 percent for the initial investment, plus they receive ongoing commissions as the account is growing.
Depending on the type of annuity, you could also be charged an annual fee or fees. These fees could add as much as an additional 2% a year to the cost of your annuity.
When comparing annuities, be sure to take a cold, hard look at the associated fees and have your advisor do some serious number-crunching for you.
When I counsel my clients about their annuity purchase, I break down the various expenses so that they have a good understanding of exactly how much their annuity is costing them. Insist on your financial advisor doing the same.
Other things to be aware of
Always check out the issuing company for stability and claims-paying ability. At Holtz Insurance Services we contract only with top rated carriers who have a history of financial stability.
Before doing changing from one annuity to another, be sure to do a thorough analysis of surrender charges (if applicable), sales commissions, fees, and potential tax liability. If you are considering changing annuities, we will be happy to offer you a free consultation to help you make the right decisions.
If you are using an annuity as a way to create an inheritance for a beneficiary, be sure to consult with a financial planner to find the best kind of annuity for that purpose.