SMART SHOPPING FOR AN ANNUITY
by Laury Adams
Shop for an annuity? We all understand the concept of shopping, but how many of us apply it to annuities?
If we need a new car, we shop for it by getting information on various models, comparing the features that are most important to us, scouting for the best price, and selecting the dealer who can best serve us.
We often spend more money and less time purchasing an annuity than buying a car, yet that decision has a far greater affect on our financial security.
My clients are very bright professional people, but during the 28 years I have been in business, I have not had any who understood the annuity they bought. Annuities are complex investments. There are many different types and they all have their own unique features. “Indexed annuities are sometimes referred to as ‘snowflake’ products because no two are alike,” said Timothy Pfiefer with Milliman USA Inc. of Seattle when he was quoted in Investment News 6/27/05.
“Comparison shopping” is difficult, but we still must do this when we consider adding annuities to our investment portfolios. The following questions will help you gather information.
An annuity is an insurance company product, sold in the form of a contract that guarantees the annuitant a fixed or variable payment at a future date.
Equity Index Annuities invest annuitants’ money in various securities. Because they are insurance products they are regulated by state insurance regulators, not by the SEC. Rules governing stock and fund sales require brokers to have a security license. They must recommend appropriate investments and provide clients with a prospectus and a balanced assessment of risk and potential returns. These federal rules do not apply to sales of insurance products.
If the purpose is to make tax deferred investments remember:
Although tax is initially deferred on investment profits, the money withdrawn from an annuity is taxed at one’s ordinary income tax rate. If you buy a variable annuity with investments in mutual funds, you lose the advantage of capital gains tax of 10 or 15%.
If you have many years before retirement, there are other ways to get tax deferral investments: IRAs, employment tax-savings plans, etc. It is neither necessary nor wise to buy an annuity within an IRA.
If the purpose is to assure income for your lifetime, remember:
You may already have one source of income that acts like an annuity. If you have Social Security or a pension plan, your Social Security payments act as a type of annuity. Perhaps your other investments need to be invested for long-term conservative growth to keep up with inflation.When a person is in good health with a chance of outliving life expectancy projections and savings are limited, fixed income annuities may give peace of mind by having a guaranteed lifetime monthly amount. But once you annuitize and start receiving monthly income, you lose control of your money. There is no longer a lump sum available for unexpected medical expense or other purposes that you may choose.
3.Do you know how the sales person is being compensated for the sale of the annuity? Be sure to ask!
“Sales commissions on annuities are lucrative for brokers, giving them added incentive to push them. Commissions average 7.6% and can climb above 13%.” Wall St. Journal 10/15/05
Fees on annuities are very difficult to determine. Carefully read the company materials and ask questions.
What is the annual insurance company fee for the annuity?
What is the expense ratio for mutual funds in a variable annuity?
Other?
What is the rating of the insurance company selling the annuity?
How will you pay?
Exercise: ASSUME A $100,000 ANNUITY INVESTMENT?
What dollar amount could I walk away with
after 1 year? $________
after five years? $________
after eight years? $________
INFORMATION:
The purpose of this web site is to give you other web sites that will provide you with the best information regarding a matter you are researching.
The following web sites give a lot of detailed information about annuities.
You must determine the “pros” and “cons” for your personal financial situation.Copyright 2008 Laury Adams