No Load Annuities
An investment that charges a load is simply charging a sales fee. The fee can be an upfront fee, meaning that it is charged when the investor purchases the investment. An investment that charges an upfront fee is called a "front loaded" investment. If the investment is "back loaded", it means the fee is charged upon the sale of the investment. Annuities and permanent insurance policies are typically "back loaded" because they charge a fee upon the sale of the investment if it is not held for a specific number of years. In the insurance industry, this "back load" fee is known as a surrender charge.
Where to Buy No-Load Annuities
There are a number of no-load investments available, including no-load annuities and no-load mutual funds. In most cases, no-load investments are purchased directly from the company that issues the contract, rather than through a broker or other type of salesperson. The load, then, is the commission that is paid to the broker for selling the annuity. When the annuity is sold directly by the insurance company or a representative of the company, a commission is not paid. Rather than being paid for each annuity he or she sells, the salesperson is paid an annual salary. He or she may be paid a bonus based on the number of annuities sold, but his or her salary is considered to be an expense of the company's operations rather than an expense of the annuity.
Even though commissions are not charged on no-load annuities, there are still other fees and charges associated with them. For example, management and mortality charges, which are the expenses incurred by the insurance company to manage the account and administer the benefits, are still assumed. While they can be lower on no-load annuities than on other annuities, they will still be deducted from the annuity balance each year.
While it is common practice to do so, it still strikes some investors as odd that life insurance companies are allowed, as part of "M and E" expenses to include charges for distribution and marketing. An investor considering no-load annuities is always advised to thoroughly review the prospectus before purchasing an annuity. The prospectus, which is required to be distributed by law, will clearly outline all expenses associated with the annuity, even if no commission is charged.
Why Buy No-Load Annuities
One of the biggest advantages of no-load annuities, aside from the fact that there are no commission charges, is that there are no surrender charges. As stated above, surrender charges are the amounts that are paid by the investor if he or she chooses to end the annuity contract prior to the maturity date. Surrender charges are the balance of the salesperson's commission.
For example, if an investor purchases a 10-year contract and chooses to surrender it in year five, he or she is normally responsible for paying surrender charges. Surrender charges are nothing more than the balance of the broker's commission. In other words, the broker is paid a commission on an annuity over a period of several years. He or she is paid a specified amount each year until a certain number of years based on the earnings the annuity generates for the insurance company. But, because a no-load annuity does not pay a commission, there are no surrender charges because there's no balance of commission to pay if the owner of the annuity wishes to "cash out".
For investors who want to be able to purchase an investment product that provides for a relatively short investment term with few or no penalties, no-load annuities can be a terrific choice. Investors are advised, however, to make sure that they speak with a qualified tax advisor before attempting this strategy. Because all annuities represent tax-deferred income, an investor will want to make sure that he or she is not subject to additional withholding or tax penalties if he or she surrenders a no-load annuity prior to age 59 ½.
Disadvantages of No-Load Annuities
Most insurance companies offer certain riders or guarantees with the annuities they sell. Investors looking for guaranteed income, lifetime income or guaranteed minimum withdrawal benefits will not find them with no-load annuities. These additional riders and benefits are normally only available with annuities that charge a sales fee, as there is a cost associated with them.
The cost is associated with both the agent's time and expertise and with the risk that the insurance company is assuming with the annuity product it is selling. It's also important to remember that insurance brokers must only prove their clients are "suitable" for a particular investment. They are not bound to the higher standard of fiduciary duty like Certified Financial Planners.
These riders, especially lifetime income and a cost of living adjustment (COLA) can have a significant impact on an investor's financial situation. The cost of living adjustment will increase the amount of money that is distributed each year based on the rate of inflation. For investors with fixed annuities, in particular those on fixed incomes, inflation can have a devastating impact on retirement savings. If inflation advances at rates as low as 2% each year, it won't be long until the amount that is distributed from the annuity is less than what it takes to live each month.
What Type of Investor is Best-Suited for No-Load Annuities
Experienced investors with a vast knowledge of financial services and products are best suited to no-load annuities. Remember: No-load means no commission, which, in some cases, will mean an investor is purchasing a product without the expert advise of an annuity professional who may also have expertise in additional areas of financial planning.
While an agent of a particular company will be able to provide specific examples of how his or her company's product will help the investor, he or she will not be able to provide the investor with information about competitive products offered by other companies that may be better suited to his or her needs.
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