Guaranteed Annuities, Guaranteed Income

Investing in annuities is a strategy for building guarantees into a portfolio in addition to future income. Insurance companies offer annuity contracts, thus can design such accounts to ‘insure’ against certain risks. These protections provide peace of mind as well as enable families to establish reliable income streams for planning purposes.

Not all annuity contracts provide guarantees. In fact, many annuities offer guarantees only for certain aspects of the account. Simply hearing the term ‘guarantee’ may bring a good feeling to investors, however, there are significant differences in the aspects and types of guarantees available. Distinguishing between guarantees of the contract, the securities, and the income are paramount in determining the right choice for each annuity shopper.

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What’s in a Guarantee?

Guarantees are only as strong as the entity that provides the commitment. For example, a friend guaranteeing to pay you back next week is a much different than a owning a security backed by the FDIC or U.S. Government. Consider where the burden will fall if the guarantee is needed.

With annuities, we are dealing with a number of aspects and different guarantees. Fixed annuities with CD’s (certificates of deposit) are holding a security guaranteed by the issuing bank and may carry added protection by the FDIC. The income payments provided by the same annuity will be guaranteed by the insurance company itself.

Other fixed annuities may have separate accounts holding a bond or portfolio of bonds as the investment. The bond carries a guarantee of payment by the issuing entity. For example, a bond issued by Microsoft would be backed by the financial strength of Microsoft. Keep in mind that bonds carry less investment risk than equities, as they have seniority in liquidation.

More on Fixed Annuities

Fixed annuities imply that they will pay a fixed or guaranteed rate of return. Though partly true, the details of the contract may outline something different. Most fixed annuity contracts will offer a fixed rate for a ‘guaranteed’ period of time. For example, a contract may offer a rate of 4% for the initial seven years.

In this example, once the seven years are up the annuity will revert to the market rate for the securities held within the account. If interest rates on CD’s change during that time, the rate the annuity earns may increase or drop. Further, in most contracts they will continue to adjust each year following the end of the guarantee period.

As a general rule, higher rate guarantees will require a longer time commitment. Also, when deposit bonuses or first year rate bonuses are offered, expect some trade off with the guaranteed rate period. All aspects of the contract should be considered when choosing an annuity contract.

Index Annuities and Variable Annuities

Clearly there is no way to guarantee future performance of equities, which are present in the separate accounts of both index and variable annuities. The insurance companies do offer guarantees with both types of accounts, however, the guarantee is from the company itself.

With index annuities the insurance companies offer a guaranteed minimum rate of return. When the market is flat or down, the company will credit the account some agreed percentage of growth. They are able to provide this protection for two reasons. First, they offer a participation rate of 80% or less during up years for the market. Secondly and closely related, they require a longer commitment to the account to insure enough ‘up’ years (thus the longer surrender period).

Variable annuities work somewhat the same way. The insurance companies offer riders for downside protection or guaranteed minimum growth in exchange for a fee and time commitment. In most cases, to take advantage of such guarantees on variable contracts, the assets will have to be withdrawn over time. This allows the insurance company time to recover losses by keeping assets under management and collecting fees over a longer timeframe.

In both cases, the guarantee is coming from the insurance company and not with underlying securities. Their ability to honor such commitments relies solely on the financial strength of the company holding the annuity contract. For this reason, the independent research provided by agencies like AM Best or Standard & Poors is extremely valuable. They measure the financial strength of insurance companies and help consumers choose where to invest their dollars.

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Purchasing an annuity is a big decision. Online research is a good start, but prudent investors should discuss all their options and risks with an independent financial advisor. Request a free, no-obligation consultation today, along with a report of current rates on brand-name annuities.

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Income Guarantees are Fundamental to All Annuities

The core nature of an annuity is to provide a ‘guaranteed income’ for a period of time or a lifetime. To be an annuity, a contract must offer the option of annuitization. This means the owner has the option to trigger a stream of payments, typically lasting for the lifetime of the annuitant.

The guarantee of income is provided by the insurance company and is backed by the company’s financial strength. As long as the company remains solvent and financially sound, they will be around to honor the payment commitment.

Guarantee Against Outliving Assets

A frightening risk for all families, especially middle class families with limited retirement savings, is the danger of outliving their assets. With medical advances and healthier lifestyles than decades past, retirement can last twenty or thirty years. This length of a retirement life can be taxing on retirement savings.

Annuities are the financial industry response to such a risk. The guarantee of lifetime payments exists even if the annuitant lives to be one hundred and twenty years of age. Being able to rely on this income forever creates a peace of mind for the annuity owner and family.

Building a Financial Plan with Guaranteed Income

Utilizing annuities and the lifetime payment options can assist in building an income stream to supplement pensions and social security payments. Holistic financial planning will include cash flow analysis, which will influence the amount of a portfolio that should be directed into annuities.

Most families want to achieve a particular retirement lifestyle, which will require some amount of savings and future income. The idea behind the planning process is to build as much certainty as possible into creating a nest egg that can support the income needed for such a lifestyle. The guarantees provided by annuities are an important component of such a financial plan.

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