How to Purchase Life Annuities
When you have made the decision to purchase a life annuity you need to take the time to do your homework on annuities. Don’t just rely on someone to sell you on one. The more information you have when making your choice the better your results will be. This article is designed to walk you through the process of how to purchase life annuities.
Get out a notepad and start writing. You will need to first answer the question of what you expect to get from your annuity. Do you want to have a fixed, guaranteed income that you won’t outlive? Do you want to get the highest return you can on your annuity contract? What kind of risk are you willing to accept to potentially get a higher return? What will happen if you don’t get the high return?
Deciding the Type of Life Annuity that is Right for You
There are three types of annuities that you can choose from. If you don’t want to deal with any fluctuation of your principal then you should purchase a fixed annuity. This will guarantee that your principal will be there when you retire and you won’t have to worry about any stock market fluctuations. The only problem with a fixed annuity is that in the current marketplace the interest rates are very low. You will not receive much gain if you lock in these low rates, but you also won’t have severe market downturns to worry about either. If you have time to make gains though, you may be able to renew down the road at better rates.
At the other end of the risk scale is a variable annuity. Variable annuities are invested in a variety of mutual funds and go up when the stock market goes up and obviously they go down when the stock market goes down. You will more than likely get a better return over a long period of time with a variable annuity. If you only have a few years until you retire though, you may want to be careful in the variable annuity market.
One benefit to the variable annuity market is that you can purchase riders to go on your annuity contract at the time that you purchase it. Most of the riders are designed to give you more protection of your principal and the future income that your annuity will pay while you are exposed to the stock market. These riders need to be studied so that you can select the ones that are right for your situation. There are many good ones available. You usually need to add these riders at the time you purchase your annuity so don’t sign until you have done your homework.
More recently Equity Indexed annuities have become popular. These annuity contracts have some aspects of the fixed annuity and some of the variable. They work more like a fixed annuity however; if you are willing to take a lower guaranteed rate of return they will allow you the opportunity to potentially get a better return if the stock market goes up.
If you could get a fixed rate of around 3% guaranteed for 5 years, you might get a guaranteed rate of return of about 1.25% on an equity indexed annuity. However, if the stock market goes up, you will get a higher rate of interest. You will participate in the market upside based on your participation ratio. If you have a 70% participation rate and the market goes up 10% in one year, you should get a rate of return of 7% for that year. The top rate is usually capped out at around 7% to 8% on this type of contract. Your principal investment will not go down if the stock market goes down.
Don't Just Shop, Implement a Solid Retirement Strategy
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.Speak with an advisor over the phone about annuities for FREE.
Compare Costs and Fees
Another consideration when considering how to purchase life annuities is to look at the cost and fee structure of the contract. Most annuities will have early surrender charges. Make sure you know what they are and make sure that you can keep the money in the annuity so that you are not hit by these early surrender charges.
Each annuity is different but you will usually have a surrender charge for up to 7 years or even longer on an annuity. The best ones to purchase are the contracts with the least restrictions which also includes the shortest surrender period if you plan to use the funds soon. If you have a number of years until you will be retiring this is not as big a deal, but having access to your money no matter what the situation seems to be a better situation.
Many annuities will start out with a 7% first year surrender charge and this will decline over the first several years. It may stay at 7% for the second year and then drop to 6% for the third year and then go down 1% a year until the early surrender charge drops off the contract. You must be 59 ½ when you withdraw from an annuity to avoid the 10% tax from the government for early withdrawals
Other fees you need to look at are the M & E expenses. This is known as the Mortality and Expense charges. Because most companies guarantee a return of at least your principal in the event of your premature death, they charge a mortality fee. They have to cover the difference between your account value if the market has been down and your original investment. They also have to cover all the other fees with handling the account.
Compare the fees charged by the top companies to find the lowest costs.
Purchase Life Annuities from Insurance Companies with High Credit Ratings
Finally, check the credit ratings of the insurance companies with the contracts you like. You want to purchase life annuities from an insurance company that will be around for the rest of your life. This is especially important for fixed and equity indexed annuities. Your payments and principal are secured by the financial strength of the insurance company. With variable annuities, your money will be held at the various mutual fund companies so this is not as serious. However, if you have a variable annuity with protective riders, the riders are only as good as the ability of the company to honor them.
To find the best annuity products request a free, comprehensive quote comparision. Secure your retirement today, Get Started Now.