Helpful Annuity Advice

Annuities have long been established as an effective means for securing a lifetime income stream while protecting principle and, in the face of increasing market volatility and economic uncertainty, they remain popular today. Because the annuity purchase is a long term commitment, choosing the right kind of annuity from the right provider is a critical decision that requires a thoughtful and deliberate process of due diligence.  The decision is made much more daunting due to the wide array of annuity products that are available from a vast marketplace of providers.

Relying solely on the advice of an annuity sales person (who also come in the form of a life insurance agent or a financial advisor) as to which annuity is right for you may not be the best course.  As part of your due diligence it is recommended that you interview several annuity providers, but it is important to acquire a base of knowledge on the product and an understanding  of your own needs before you do. That way you’ll be able to narrow down the choices which can save you a lot of time, energy and frustration.

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Know Yourself

Annuities are not for everyone and, there are several different kinds of annuities which serve different purposes.  Understanding your needs, risk tolerance, preferences and priorities is key to being able to determine if an annuity is right for you and to zero in on the right kind of annuity.  Annuities are primarily retirement planning vehicles, so it would be important to determine your desired income goal and calculate the amount of savings that would need to be set aside each month.  The key factor in this equation is the rate of return you would expect to earn on your money. 

This is where you risk tolerance and preferences need to be considered.  If you are risk adverse, you may want to consider a fixed annuity. If you are willing and able to accept risk for the possibility of a higher return then a variable annuity may be the right choice. If you are somewhere in between, then an indexed annuity might be more suitable.

The same risk tolerance and preferences can be applied to the income side of an annuity. If you’re looking for more security and predictability you would probably not want to consider a fixed or indexed annuity. If you’re concerned about inflation and being able to maintain a better lifestyle then a variable annuity may be the right choice.

Go with Quality

You can narrow your search pretty quickly if you abide by the “go with quality” rule.  Quality in the marketplace of annuities means those that are offered by the highest rated life insurance companies.  Annuities are purchased, in large part, because of their safety and security as investment vehicles.

Because their safety and security stems from the backing of the underlying assets of the company, it is advisable to only consider annuities from companies with the strongest balance sheets.  Life insurers are held to very strict reserve standards which lessen the possibility of one of them failing to meet their obligations.  For greater peace of mind, and as a way to narrow the selection quickly, it’s advisable to stick with A-rated companies or better.

If you are considering a variable annuity your due diligence needs to include a study of the performance history of the investment sub-accounts.  While it is important to work with strong, stable companies, if the investment experience of the sub-account managers is subpar, you will want to move on.

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Look Under the Hood

When you approach an annuity provider, they will be all too happy to lay their product brochure and sales pitch on you.  Armed with your knowledge of how annuities work and your own financial needs in mind, you can skip the pitch and ask for a copy of annuity contract.

Look for fees, charges, and provisions that impact their long term performance and your access to your funds.  Each company has a specific way of determining the rate of interest and how they are applied. Some offer a high, teaser rate or a rate guarantee for a fix period of time.  Others might have tiered interest rates that apply to different levels of investment.

Some annuities are offered with built in features or guarantees while others offer the features or guarantees as an option and your cost of ownership can be affected in either case.  The more guarantees a product offers the more it is likely to cost.

Surrender charges are a big consideration if you are concerned about having access to your funds. The schedule and amount surrender charges varies. Sometimes they start off high and gradually reduce over the first seven to ten years, and some are fixed for a period and then drop off. 

In the end, you can use this information to determine the annuities total cost of ownership and whether it provides the value you are looking for.

Diversify

As safe as annuities, especially those provided by highly rated insurers, it is always sound advice to diversify.  A systematic approach to saving in an annuity  over a long time frame will result in a substantial accumulation.  Plus, there is no way to determine which company might outperform another in crediting competitive interest rates. 

One company might offer better payout rates while another seems to offer more competitive current yields. If they’re both high quality spread your savings between the two.  Be sure to consider whether there are any break points on fees or interest credited for greater accumulation.  You’ll want achieve those break points as quickly as possible.

Yes, there are hundreds of annuity products offered through hundreds of life insurance companies.  The choice of an annuity is an extremely important one and it should be based on your own sound due diligence not snappy sales pitches.  By following this helpful annuity you can take control of the  process and choose the right annuity for you.

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