Annuity FYI Blog

While demand for variable annuities is still very high, many insurers are stepping back from them quite a bit.  According to Investment News’s Darla Mercado in the article “VA carriers hunkering down,” life insurers have had a hard time hedging their variable annuities with living benefits.  Stock market volatility and low interest rates are making it expensive for insurers to offer variable annuities.  Genworth Financial stopped selling annuities at the beginning of 2011 and Sun Life Financial stopped their sales earlier this month.  Some of the biggest companies; like Jackson National, MetLife, and Prudential Financial; have stopped offering some of their living benefits and started using less risky investment options.

John Hancock Life plans to stop selling a lot of their annuity products as well as limiting their distribution channels.  As more companies do the same, there will be less competition in the industry and prices could rise.  Most advisors still send their clients to the top three sellers, MetLife, Jackson and Prudential.  There may be more room for the smaller companies in the future.  If living benefits drop below 5%, many advisors will be playing up the tax deferred growth benefit of variable annuities.  With fewer living benefits offered, advisors will go back to the root benefits of variable annuities, death benefits and tax deferred growth.  One advisor believes that 2013 will see a big focus on those benefits over the living benefits of variable annuities.

Written by Rachel Summit

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In the Investopedia article “The Best Retirement Account for You,” Mark P. Cussen reminds us that the best account is different for each individual.  It was back in 1974 that we started seeing qualified retirement plans like pensions and 401k’s.  Eight years later came the IRA, which helps people without an employer plan have tax-deferred retirement savings.  Roth IRA’s were introduced in 1997, then Roth 401k’s and 403b’s.  Annuities are another way to accumulate tax-deferred retirement savings and are not under the umbrella of ERISA regulations.

While the author adamantly points out that no plan is best for everyone and individuals must do their research, he does give his opinion as the most important options for certain groups of investors.  IRA’s, SEP plans and self-employed 401k’s are best for self-employed individuals.  An IRA or Roth IRA is good for lower income individuals, while people looking to save more than $20,000 a year should look into one of the last two savings plans.  Anyone who has an employer sponsored retirement plan, especially if they match any of your contributions, should definitely look into that.  When you retire, you can transfer it to a 401k annuity to have guaranteed lifetime income.

If your income is too high for Roth IRA contributions, you can look into an employer Roth IRA plan.  Those whose income exceeds all qualified plans should look into non-qualified plans like executive bonus plans and deferred compensation plans.  Annuities are a product that any investor can use to accumulate money tax-deferred.  The money placed in an annuity is not deductible, but there are no limits on how much you can invest.  The IRS can give you more information on tax savings if you need it.

Written by Rachel Summit

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I found an Insurance News Net article listing three very basic questions to ask before purchasing an annuity.  In Maureen McLaughlin’s “Guide Clients Down the Right Annuity-Route,” she says that the questions are just as important for advisors as they are for those purchasing the annuity.  It is crucial for clients to trust their annuity advisors and get the most reliable and understandable information from them.  Understanding annuities can be a time-consuming endeavor, but with the right expert advice it doesn’t have to be difficult.

First of all, you’ll want to decide the type of annuity that will work best for you.  Do you want to receive payments right away with an immediate annuity or use a deferred annuity to grow money tax deferred?  You also have the choice of a fixed annuity or one with variable annuity rates.  Make sure that you know why you are purchasing an annuity product in the first place.  It’s important for advisors to explain all of the benefits offered by annuities to clients and potential clients.  You’ve got to have a long term investment and financial plan in mind.

The last question to answer, and the one that frightens many clients, regards the fees associated with annuities.  Be up front with your clients if you are an advisor; if you are the client make sure to ask for all of the fees to be spelled out for you.  In addition to your annuity rates comparison, you’ll want to compare the fees associated with variable annuities, fixed annuities, and immediate annuities.  By knowing any product fees up front, you can better plan your retirement and use your annuity for a lifetime income stream.

Written by Rachel Summit

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The new generation of fixed index annuity products offer excellent guarantees with market downside protection, and they also have lower fees.  Annuity FYI’s article “Fixed Index Annuities Getting a Fresh Look,” says that last year’s sales of $31.4 billion broke sales records for the second year in a row.  Fixed indexed annuity products are very complex and while they are an excellent investment for many people, you definitely need to research the underlying index, the formula which credits interest, the guaranteed minimum return, the participation rate, the spread fee, any cap, bonus possibilities, and the type of indexing method that will be used.

A fixed index annuity is a hybrid of a traditional fixed annuity product.  Investors are guaranteed that they won’t lose any of their original investment because they are guaranteed that their rate of return will always be above zero.  What makes fixed indexed annuities different from fixed rate of return annuities is that the rate of return varies based on a specific equities market.  You will usually have a guaranteed minimum interest rate that can increase based on the performance of the index on which the FIA is based.  FIA’s are an investment somewhere in between a fixed annuity and a variable annuity.  FINRA says that while you will have more risk and more potential return than a fixed annuity, you will have less risk and less potential return than a variable annuity.

The fixed index annuity is worth a look because the newest products have lower fees and better lifetime income guarantees than previous FIAs.  You also get the tax-deferred growth that is so popular with all annuities, shorter surrender periods, walkaway options, choice of an index, and a waiver of annuitization.  The Wharton school found that fixed index annuities have performed better than many alternative investments.  They have been competitive with many of the most popular and safest investments and have even performed better than some variable annuities and mutual funds.  FIA’s are best for investors nearing retirement who want to protect their money, especially after the past couple of market collapses.

In the article “How to Use Annuities for Retirement Income,” by Philip Moeller, the author offers 15 bits of information about annuities.  The U.S. News & World Report article confirms that the guaranteed lifetime stream of retirement income offered by annuities is more popular than ever in these uncertain economic times.  One benefit of annuities is the tax deferral savings if you don’t take your payments as an immediate annuity.  There is no limit to how much money you can put in an annuity, but there is for other investments like IRAs.  Annuity investors are essentially in a pool together, so they can get higher annuity rates.  While some may live very long lives and put a strain on the insurance companies, others may not.

It is crucial to comparison shop when looking at annuities.  You not only want to compare different annuities and those from competing insurers, but also compare equity linked CDs and other investments.  Be sure to include the safety of annuities to the risk you take with some other investments.  All annuities have fees and service charges attached to them because that is how the insurance companies make money.  Comparing the fees is another crucial step to take in your annuity research process.  This article says that annuities and Social Security are very similar in style.  Social Security is essentially a flexible premium deferred annuity because your payments vary based on your income and you wait to receive monthly payments until a later date, usually after retirement.

Annuities can be purchased through a lump sum payment or a series of payments over time.  Fixed annuities offer a fixed payment over time whereas variable annuities are invested in market subaccounts and can offer the potential for a greater return.  The fixed equity indexed annuity combines the fixed returns with some market upside potential and has become increasingly popular.  Annuities can be very complicated investments and are best purchased with the help of an expert.  Some investors worry that their money will be wasted if they die prematurely.  There is the option available to receive payments for a fixed period of time or even to last throughout your spouse’s lifetime.  With each guarantee you will be charged accordingly, so finding the best annuity for you can be like putting together a puzzle.  You’ll want to work with an expert to get the right options with the right payments and costs for you.