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What are annuities?
Annuities are financial products sold by insurance companies, but are very different from an insurance policy. In essence, you buy an annuity in exchange for a series of payments that will be distributed at specific points in time over the life of an annuity contract. Many annuities have an indefinite payout schedule; the longer you live, the more you receive. Some annuities provide payouts for only a specified number of years.
Types of Annuities
Annuity products come in various types. First, you can choose whether you want to receive payments right away ("immediate") or put them off until later ("deferred"). This is the primary difference between immediate and deferred annuities. Additionally, you can choose between a fixed annuity and a variable product. A fixed annuity has an established payment that the company usually announces on an annual basis. By contrast, a variable annuity is effectively an insurance product wrapped in a mutual fund. Under a variable annuity you, as the owner of the annuity, can choose how your annuity funds are invested. Your choices include stocks, bonds and money markets. It has a set payment amount that may be augmented by additional payments depending on how the annuity's investment portfolio has performed.
Personal circumstances dictate what sort of annuity may work best. For instance, many retired people buy immediate annuities to provide a steady stream of reliable income. By contrast, younger people may opt for deferred annuities. The primary reason is that money in the annuity grows tax-free until they set up a regular payout schedule.
Approaching the Decision
You should approach annuities as you would any sort of investment decision. Examine the financial strength of the company that is providing the product. Analyze the fees and expenses that the company is charging in exchange for making the annuity product available. Ask about the penalties you will incur if you decide to withdraw funds out of the annuity.
Annuities can range from simple to complex. It is best to discuss your annuity needs with a financial professional. Insurance Centers, Inc. has annuity products available to meet a wide range of needs. Call to schedule an appointment with one of our agents today to discuss your specific needs.
Before purchasing, carefully review your finances, retirement goals, and anticipated needs. Participate in any retirement savings plan available through your employer. Then determine how much additional savings you can put aside in an annuity.
Questions to Ask
Do you need to supplement your current income?
You can convert assets to steady income right away with an immediate annuity. Many retirees purchase an immediate annuity with cash from a retirement plan, home sale, life insurance benefit, or savings account. You choose whether the income payments continue for life or a specified number of years.
Do you need less income in early years of retirement than you will later on?
A deferred annuity allows your savings to grow tax deferred until the date you chose to receive payments. An immediate annuity that provides a cost-of-living adjustment can also address the need for more income later in retirement.
What is your tolerance for risk?
In a deferred annuity, you decide whether savings accumulate at a guaranteed rate, an indexed rate, or bear the risk of market fluctuations.
Do you need to ensure income or asset protection for a spouse after your death?
Certain annuities offer death benefit protection and the option of continuing payments to a spouse after your death. Some also provide death benefits if you die before income payments begin.
Tips When Buying an Annuity
When purchasing a fixed annuity, ask about the credited interest rate, how often it changes, and the minimum guaranteed rate.
When purchasing an index annuity, investigate the index, formula, and conditions applied to the interest period. Ask how often indexed interest is credited, how factors might change, and the minimum guaranteed values set forth in the contract.
When purchasing a variable annuity, review the investment options and read the prospectus for each subaccount. A prospectus, which by law must be given to potential buyers, outlines objectives and risk levels as well as operating expenses and financial statements. Ask if there are fees for partial withdrawal or full surrender of your contract. Find out how much the charges are and for how long they apply.
Compare similar contracts from several companies. Features, terms, and conditions vary from company to company. Comparing contracts and the relative cost of features may help you make a better decision.
Ask if there is a guaranteed death benefit. Some deferred annuities include death benefits that can exceed the account value; some do not. Know what is guaranteed, how and when the benefit will be paid, and whether increased benefits can be purchased.
Ask how long the "free-look" period is. The free-look period is the time you have to review the contract and return it if you have made the wrong choice. If you decide to cancel, the company then voids the contract and refunds your initial contribution or the market value of the contract.
Evaluate the company issuing the annuity. Make sure the issuing company is reputable, financially strong, and service-oriented. Several services rate the financial strength of life insurance companies, such as A.M. Best Company, Fitch Ratings, Moody's Investor Services Inc, Standard & Poor's Insurance Rating Services, and Weiss Ratings. Ratings can be found in most public libraries or on a service's website.
Choose an experienced agent. That's where we come in. Our agents at Insurance Centers, Inc. can help you navigate the maze of options and questions surrounding the purchase of an annuity. Call us to discuss your needs.