Let’s face it, there is a lot of confusion surrounding annuities. Whether you’ve read conflicting information in news articles or heard word-of-mouth experiences from family or friends, there are many misconceptions about the varying features and fee structures offered by these complex investment vehicles. Negative reviews are often driven by fear, which may be relieved with a little investor education and open dialogue with your advisor. Depending on your goals, an annuity could be a beneficial component of your financial plan.
In its most basic form, an annuity is a contract with an insurance company. In exchange for your premium payments/contributions, the company guarantees a future income stream, and a death benefit. Some annuities capitalize on the performance of the stock market and offer higher potential returns on your investment. Annuities also receive tax-deferred treatment (you don’t pay taxes until you make withdrawals), making them a common retirement planning strategy.
Over time, annuities have adapted to the changing needs of investors. The newer, more nimble annuities include provisions for a variety of retirement income stream options, market growth, income and principal protection. In other words, don’t judge a book by its cover – annuities may not only be suitable for you, but may be a more versatile option compared to other investments that provide no protection or guarantee.
When you sit down with your advisor, there are a few questions you can ask to make sure that you’re being properly educated about annuities in today’s market. Then, you can feel confident that you’re making the right decision to improve your financial outlook.
1) What kind of annuity is it? In the realm of annuities, there are many different breeds, and they each serve different purposes. Is it a Fixed Annuity, Variable Annuity, Fixed Index Annuity, Annuity with Living Benefits, or an Income Annuity? Your priorities for long term growth, principal protection, and timing/amount of income stream, can all impact your recommended annuity.
2) What are ALL of the fees are associated with this contract? Sales Commissions, Surrender Charges, Insurance Charges, Investment Management Fees, Riders, etc. Know all the fees to make sure you know how they affect your investment.
3) What guarantees are included in the annuity? We’ve talked about the fees of the contract, but sometimes you have to consider that you get what you pay for. Perhaps the annuity fees are higher than those of other investment vehicles, but if other options offer no guarantees, then you’re comparing apples to oranges. Determine if the guarantees are important to you and your financial plan. If so, it may be worth paying the extra fee.
4) Which optional features may benefit my situation? The bells & whistles of annuity contracts, often called “riders,” may be appealing to investors who are nearing retirement age, are concerned about performance, and want to lock in a predictable future income. There are many ways to customize an annuity to meet your goals.
5) Does your advisor have an affiliation with or incentive to offer you a specific annuity product? This is an important, albeit potentially awkward question. If an advisor works exclusively with one annuity company, you may not be seeing all of the available options. It is preferable to review the features of several annuities prior to making a purchase decision.
When you know the right questions to ask, you can more easily determine whether or not an annuity is right for you. Push aside the confusion and fear, and work with an advisor to develop a financial strategy that fits the needs of you and your family.