Annuities are a big business, both for advisors and the insurance companies and other channels who sell them. But just because there is money to be made selling annuity products, it doesn’t negate the benefits that consumers receive from these products as well. In an article for Main Street, Mark Henricks says that “Buying an Annuity Should be Part of Your Retirement Strategy.” From 2010 to 2015, individuals bought more than $1 trillion worth of annuities. 2015 was an especially good year for fixed indexed annuity products, one branch of the fixed annuity market. In addition to all of the individuals planning for retirement with annuity products, corporations are also buying annuities at record levels to lower the risks and costs associated with offering pension benefits.
LIMRA Secure Retirement Institute reported $237 billion worth of annuity sales in 2015. Annuities are sold through insurance companies, banks, independent broker-dealers, and mutual fund companies. Some annuities offer higher commissions to advisors than others, but the commission structure of variable and fixed indexed annuity products will be changing after recent DOL guidelines. It’s important for advisors to take the individual needs of their clients into account when recommending an annuity product. One advisor who was interviewed for this article said that guarantees are now one of the biggest requests from clients. He said that growth was always number one in the past, but that most people are searching for safety first now because of market volatility. Annuities guarantee lifetime income regardless of what happens with the markets or with interest rates. Different annuities offer different guarantees, benefits and drawbacks though, so you have to really know what you are getting into before making a purchase.
The variety of options and costs keeps some people away from annuity products despite their incredible retirement planning benefits. Shopping around is the best way to learn what options are out there and what the exact costs will be. A financial planner can be helpful with this process. When making annuity comparisons, be sure that you are looking at the same products from different companies because benefits vary widely. Your annuity can be either immediate or deferred. Fixed annuities guarantee a minimum interest rate, while variable annuities offer a return that fluctuates with the product’s underlying investments. Fixed Index annuities link your returns to a particular stock market index, which has become increasingly popular over the last few years. Compare annuities based on the type, payout you will receive, and any fees you will have to pay. Fees can range from 1-8% depending on the surrender charges, administrative fees and any mortality and expense fees. Sometimes fees are hidden, so make sure you ask about all of the potential charges you will receive.
Although annuities can be complex and need to be fully researched, they are an important piece of any individual’s retirement planning. The article refers to annuity guarantees as “bullet-proof”, something that you’ll be hard pressed to find anywhere else. It’s rare for an insurance company to fail, but it’s still important to check the financial strength ratings of any companies you are considering buying an annuity from. Use a portion of your retirement savings for an annuity and then invest the rest elsewhere, so that you aren’t putting all of your eggs in one basket. Annuities offer a lifetime income stream, tax deferral and security in your retirement plan that cannot be matched. It’s wise to have an annuity as one part of your complete retirement plan.
Written by Rachel Summit