5 simple tips to keep in mind when buying an annuity

First and foremost please understand that annuities are contract driven. Every contract is unique, and you need to make sure you understand the terms of the contract you are purchasing. Below are a few guideline I believe you should think through before purchasing any annuity contract.

1) Are you looking for safety, income or guarantees?
Generally speaking I find most people are looking to purchase an annuity for a couple of different reasons.

– They’re looking for more safety.
– They’re looking for more income.
– They’re attracted to the guarantees that the insurance company offers.

If you are looking for safety, income and guarantees, then an annuity may be a good fit for your situation. But keep in mind the golden egg does not exist. Every financial vehicle has pros and cons. Be sure you understand them and make an informed decision based upon them.

2) Immediate, Fixed or Variable
The second thing you need to decide is whether or not you want to purchase an immediate, fixed or variable annuity. An immediate annuity (sometimes referred to as a SPIA) is a contract with the insurance company designed to provide immediate income. You give the insurance company a lump sum of money and it, in exchange for that money, will provide you with a guaranteed income based upon agreed terms. For example, you might request an income stream that pays every month for five years, or you might purchase a contract that pays you monthly income that is guaranteed to last for the rest of your life. Many people think of these as a self-funded pension.

Insurance companies also offer fixed deferred annuities and these generally pay a fixed interest rate for a set number of years. People who purchase certificates of deposits from a bank would also consider a fixed deferred annuity as they are similar in nature. Of course fixed deferred annuities do not offer FDIC insurance.

Variable annuities are generally invested in securities such as stocks and bonds and most of the contracts I have reviewed use mutual funds/sub accounts to give you exposure to the equity markets. Many people who are comfortable investing in mutual funds might consider a variable annuity if the contract with the insurance company has features that make it an attractive investment.

3) Know the financial strength of the company you work with.

Because most people are purchasing an annuity because of the guarantees being offered in the contract, you need to understand the financial strength of the company that is providing the guarantees. Using independent rating agencies such as S&P, AM Best, or Moodys, you may want to check on the financial rating of the company you are considering. Generally speaking, we recommend that our clients work with companies that are at least A- rated by AM best.

4) Making sure you understand the fees and charges.
If you’re going to purchase an annuity make sure you understand all of the fees and charges that you may experience. Annuities are contract driven and every company’s contract will be unique. You should be sure to ask about the insurance company’s surrender charge schedule, mortality and expense charges, rider fees and charges, caps on your potential gains, sub account fees and annual maintenance fees. Not all of these fees apply to all annuities and some annuities are better about fees than others.

5) What are the liquidity features in the contract: how can you access your money?

Many fixed deferred annuities and variable annuities have surrender charges depending on when and how you access your money. Be sure to understand how the contract provides for access to your money. For example. many of the contracts we see today offer a ten percent free withdrawal every year without a penalty and or endorsements that may allow you to access more of your principal and interest earnings in the event that you become terminally ill or have an extended stay in a long-term care facility. Be sure to understand the terms of the contract you are considering and make sure that the liquidity features keep you in a position where you have plenty of access to your money in the event of an unforeseen emergency.

We offer an annuity review service. If you are considering buying an annuity and would like an independent third party to help you review the features of the contract you are considering please give us a call. Our fee for this service is $500.