Walter Updegrave, editor of Money magazine, recently wrote about the conventional wisdom of annuities being a safer investment and wondered if that is still true today. He believes that an annuity continues to be a good option, but that you need to keep several guidelines in mind when you compare annuities.
- Number one on your checklist is to make sure that the insurer you buy your annuity from is healthy and solvent. If an insurance company fails, you will lose whatever money you put in it. Purchasing only annuity products with A.M. Best or Standard & Poor’s ratings of A or better will assist you in deciding which insurers are financially strong.
- Walter also suggests dividing your investment into multiple annuities from different companies. Since states provide about $100,000 per insurer from guaranty associations, purchasing from several insurers will hedge your bets in the case that one or more of them fails.
- Ask and receive detailed and clear information about all fees attached to the annuity; including surrender fees, investment fees, rider and guarantee fees, and insurance charges. Understand what the percentages are and when they are due.
- Of course, the best way is to protect your investment is to know exactly what you are buying and to make sure if it’s the right product for you. According to Walter, many guaranteed variable annuities add their promised growth rates to a ‘benefit base’ (that the insurer calculates as a hypothetical amount you’re allowed to draw from an annuity) as opposed to your true account value. Such accounts could result in a nasty shock if you cash out, because you will receive only your actual account value.