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The Good and Bad of Annuity Products

Terry Savage of the Chicago Sun Times wrote such an honest review of annuity products in her article, “Annuities: Weigh them carefully, and scrutinize the details.”  I completely agree.  Annuities offer excellent benefits, the most popular being exposure to market upsides, protection against market downsides, and a lifetime stream of income.  This is why Ms. Savage points out that she actually owns annuities and is very happy with their performance and the lifetime income for which they will provide.  But the article points out something very important that we also try to stress at Annuity FYI: make sure that you know all of the details, fees, and costs associated with your annuity product.  Rather than having someone sell you an annuity, make your own decision to buy the product.

Let’s start with benefits.  Tax-deferred annuities with a rider guaranteeing a lifetime withdrawal benefit are one of the only ways to get yourself a pension-like return if you don’t have one through work.  The lump sum payment you give to an insurance company grows tax-deferred based on the type of return in your contract.  It can be tied to a stock market index or sub-accounts.  You usually have a guaranteed rate of return regardless of how markets perform and a floor level that your returns cannot go below.  With each guarantee, there is an added cost that you will pay.  Surrender periods exist so that insurance companies can make up the commissions they paid when the annuity was purchased.  Your rate guarantees are not typically available before some type of surrender period, so make sure you know the details of that.

Even better for many people than the tax-deferral benefits are the guaranteed income payments.  After you receive a lifetime of annuity payments, your heirs will get death benefits in the amount of any remaining account balance.  The payments you receive are based on your particular rider, your age at withdrawal, and the growth in your account over time.  Each annuity statement shows you your income base, the amount off of which they’ll base your payments, and your cash value, the amount you could withdraw after your surrender period.  If you aren’t happy with the amount of your monthly payment, you can choose to increase it.  But keep in mind that your money may not last over your lifetime and your heirs might not have any left to receive.

Now for the parts that you really need to look into.  Some annuities can have high fees; make sure you know what fees yours has and where they are going.  They also have sales commissions which are around 4%, the main reason for your surrender period.  Indexed annuities offer the potential for market gains, protection against market losses, and do not have investment management fees.  Just make sure you know about any caps or participation rates so that you aren’t caught off guard with lower returns than you expected.  Also check to see if the dividend component is included in your earnings, since it can be around 40% of the total return.  With variable annuities, your returns are shown net of the fees on your investments, so be diligent about checking all of the fees and costs associated with both your annuity and your investment accounts.

The article’s biggest piece of advice is to make sure you have time to invest in an annuity so that you can take advantage of the benefits you are offered without incurring penalties.  As you approach retirement, buying the right annuity for your situation will give you guaranteed lifetime income and tax-deferred growth.  We’ve said it before and we’ll say it again: do your research when it comes to buying an annuity product.  Speak with an expert and use only a portion of your retirement savings to buy your annuity.  You’ll be happy with the guarantees, especially if you live a long life.

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