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Keep It Simple When Shopping Annuities

One of the most common phrases surrounding annuity product is that they aren’t bought; they are sold. The saying originates from the fact that annuities are often very complicated and can sometimes be very expensive, often carrying heavy commissions for advisors who sell them. Unfortunately, the saying has proven to be true in many circumstances.

It’s important to keep a few key ideas in mind when considering the purchase of an annuity. Remember that annuities are insurance products that are often marketed for investment-like features. Usually, the more complicated a product is, the more expensive it ends up being. Your best bet is to stay focused on why you need an annuity and what features really matter to you.

According to a recent article from The Motley Fool, the best reason to consider an annuity is when you have money set aside for retirement but are not at all interested in managing that money. You might find yourself in this situation if you’ve worked your whole career without thinking about investing and then find yourself receiving a lump-sum distribution from your retirement plan.

In most cases, the best bet is to stick with the simplest form of annuity, known as a single premium immediate annuity. You make a one-time investment in the annuity and the company begins immediately paying you a monthly income. These products are easy to compare across providers because they are the simplest, and many companies offer competitive deals on these straightforward plans.

The biggest benefit for you when purchasing your annuity is the reliable, predictable income stream that your lump sum of cash can become. Keep in mind though that as soon as you get beyond a “plain vanilla contract” (i.e. adding inflation protection, second-to-die rights, or a guarantee your estate will get back at least what you put in), the cost will significantly increase. The insurance company is aware that many buyers want these features, which allows them to charge a hefty price for them.

Another type of annuity you can often find with a reasonable price tag is the single premium deferred annuity. This is a similar product that you purchase with a one-time investment, but the annuity starts paying out at some agreed-upon time in the future. These can be particularly useful if you have temporary income early in your retirement, like a severance benefit, but will need income in a few years. The key when shopping deferred annuities is to keep it simple there too. Once you start adding extra features, again the cost will increase. For example, variable annuities may be suggested to those looking for a deferred annuity. These offer the potential of higher returns while you accumulate money, followed by a guaranteed payout based on the unknown future value of your account once you annuitize.

Beware though, once you start down the path of variable deferred annuities, the insurance companies start to stack the deck in their favor. For example, if they offer “stock-market like returns,” they often charge a “participation rate” or other caps that limit the total percentage you can earn. Mixing insurance and investments in an annuity sounds like a great idea, but the costs and fine print can add up to make them less useful for you. Basically, if you want to invest, then invest. If you want a guaranteed fixed income for life, consider an annuity. When you try to combine the two, you most often find yourself paying more than you bargained for.

Written by Rachel Summit

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