Annuity Purchaser: What to Look Out For
Once the decision to buy an annuity is made, the annuity purchaser needs to understand the fundamentals of the different annuity plans. And as an annuity purchaser, you also need to be aware of the specific factors that will impact your annuity choices.
An annuity is basically a contract by which an insurance firm provides you with a series of payouts on a regular basis in exchange for premiums you’ve paid to the company. Annuities are usually purchased to provide income during retirement, since they can guarantee that an income will continue for the entire lifetime of the contract owner and ensure that funds will grow on a tax-deferred basis as long as they are not withdrawn from the plan. There are several different types of annuities, each with its own advantages and potential negatives. Annuity types include single premium and multiple premium plans, immediate or deferred plans, and fixed or variable annuities.
Causes for Concern
As an annuity purchaser, you have reason to be wary. Many annuities can be obtained only by confronting a variety of confusing details, restrictions, and high fees. And many annuity products also offer various add-ons that provide a significant level of customization for the annuity purchaser’s unique circumstances. If you make the right choice, annuities can make a positive contribution to your investment portfolio.
Critical Annuity Factors
Fees: Determine whether the yearly fees imposed on an annuity plan are worth the benefits you’ll derive from it, and find out if the plan imposes “surrender fees” if you want to make an early withdrawal.
Return Rates: Make sure that the return rate promised by the insurance company selling the annuity is actually the rate you will receive. Confirm the period of time during which that rate will apply. Sometimes, the guaranteed rate of a fixed annuity decreases after an introductory period. And check the long-term financial soundness of the insurer, since it has promised to pay you benefits over many years.
Tax Advantages: Consider that you will have to pay ordinary income taxes on payouts your receive from your annuity program. You will pay a tax penalty if you take money out of the plan before you reach the age of 59.5 years.
Inflation: The income provided by an annuity may decrease in the face of inflationary pressures. You can decide to purchase inflation protection for your plan, which is probably worth the added fee.
Contract Terms: Consult an independent financial adviser before you purchase any annuity contract. These contracts can be extremely complicated. Also be aware of advice to switch to a new annuity plan, however. High surrender charges could apply if you change plans before the original surrender period has run its course.
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