The New York Times says that “Annuities (are) not for everyone, but they have a place.” In Conrad De Aenlle’s article, he says that basic annuities are a wonderful tool to use in financial planning. Annuities in their most basic form, single-premium immediate annuities, help guarantee lifetime income during your retirement years. Inevitably, products change and innovators come up with new ideas in trying to make things better. From the simple SPIA, annuities branched out to include variable and indexed annuity varieties. These are the products that may not be right for everyone, but still have their place in the industry. The payments or cash values tied to variable and indexed annuities change with the markets. The guarantees are smaller and some of these annuities don’t have any guarantees.
Variable annuities base your income payments on the movement of a group of investment funds. You pay them to receive a minimum payment each year for a certain time frame, then either convert to a SPIA or take the rest of your money. With indexed annuities, your income payments are tied to a specific stock market index. At the very least, you will not lose any money after your time period is up. At best, you will reap the benefits from a gain in your stock market index. LIMRA research found that of all the annuities sold in 2010-2013, 80.8% of them were either variable or indexed. In the seven years before that time period, 74% of the annuities sold were variable or indexed. Despite their popularity, a lot of financial advisors think that variable annuities are too expensive. Shop around before purchasing variable and indexed annuities to make sure that you know their costs and what your contract entails.
Indexed annuities attract their share of negativity as well. While your premium is guaranteed over the ten year period, additional income is not guaranteed to rise. If your market index falls or stays flat, inflation could actually make your premium guarantee worth less than it was ten years prior. Indexed annuities also have caps that take care of the annuity fees and commissions. With that said, indexed and variable annuities do offer the benefit of growth not seen with some simpler annuity products. The costs are added in because of the potential benefits that they offer. These are the types of annuities that certainly are not best for everyone, but that do have their niche of clients.
One member of life insurance industry association Life Happens, says that variable and indexed annuities do have their place in the financial industry. The specific guarantees that they offer are more valuable to some people than they are to others, but that certainly doesn’t negate their overall value. He points out that their downside protection has helped quite a lot of people who are close to or in their retirement years. Annuities shouldn’t be anyone’s entire financial plan, but rather a valuable part of a successful plan. Annuity assets accumulate tax-deferred and there is no limit to how much money you can put in, unlike other tax-deferred savings strategies. The complexity of annuities must be explained and understood before making a purchase. These products are good for savers who have maxed out other savings contributions, especially those who are trying to catch-up from not saving enough in their younger years.
Written by Rachel Summit