INTRO: Annuities are a very popular investment. But before buying an annuity, you'd better be sure you know what you're getting into.
1. WE HAVE MADE A LIST OF QUESTIONS SAVVY INVESTORS SHOULD ASK BEFORE PURCHASING AN ANNUITY. FIRST ON YOUR LIST: WHAT TYPE OF ANNUITY IS THIS?
A. There are two types of annuities: Immediate and Deferred.
B. The Immediate annuity is immediately annuitized into payments, like a pension. For example, if you pay the insurance company $100,000 for an immediate annuity, you might get payments back of $1000 per month.
C. The Deferred annuity grows based on investments until you are ready to start taking payments.
D. There are three types of deferred annuities. A fixed annuity is where a fixed rate is being paid during the growth. Indexed annuities have your money mirroring an index such as the S&P 500 during up markets. Lastly, there are variable annuities, where your money is invested in various underlying investments which are called sub accounts and these look like mutual funds.
2. NEXT: HOW LONG DO I HAVE TO WAIT TO TAKE MONEY OUT, AND HOW DO I GET AT IT WHEN I AM READY?
A. A surrender period is the amount of time you have to stay in the contract without incurring a penalty for taking your money. [Is this just for Deferred, not immediate?]
B. There are annuity products out there that are completely liquid, but you have to pay more money per year to be in them.
C. Most annuity contracts may be anywhere from 4 years to 15 years.
D. You have to be careful. Some annuities have an unending surrender period that never goes away. That means there is always a penalty to withdraw! You have to annuitize your money to get it; otherwise, they only let you walk away with a portion of what you put in.
E. Before investing, a person needs to decide if they really feel they can commit this amount of money for the required period of time.
3. THEN: WHAT ARE THE PENALTIES FOR WITHDRAWING MORE THAN WE ORIGINALLY PLANNED?
A. Often times, you are allowed to take 10% of your original investment per year without a penalty.
B. If you purchased an income rider [define] with your annuity, chances are that rider will be adversely affected if you take more than the rider allows. So, even though you can take 10% penalty free, your guaranteed income may then go down.
C. If you have an emergency and take more than 10%, that extra money is then subject to the surrender penalty charge.
D. I recommend keeping other liquid resources available so you don't have to pull extra money from your annuity.
4. THE FOURTH QUESTION TO ASK: WHAT ARE THE COSTS INVOLVED?
A. There are several different costs that can be a part of an annuity.
B. The M&E fee, which stands for Mortality & Expense, is the base cost of the contract.
C. You can also add on top of that the cost of any riders guaranteeing any number of things.
D. And if you choose a special death benefit rider, that will cost extra as well.
E. One expense people don't pay attention to is the cost of managing the underlying investments. Sometimes companies keep the other costs low, but mark up the operating costs of the underlying investments where most people are not looking.
F. Before buying, ask about the total cost.
5. AND FINALLY: HOW DOES MY RIDER WORK?
A. Riders on an annuity are guarantees that the insurance company sponsoring the product is promising you. For example, they may guarantee you 5% compounding each year until retirement.
B. People generally misunderstand these riders. First, it is the insurance company making the guarantee. So in order for them to keep their promise, they need to still be in business. Pick big insurance companies who are more likely to keep their promises. And check their financial ratings with Best, Moodys, and STP.
C. Also, people misunderstand the guaranteed rates. You can't just walk away with that value after the waiting period. You can only walk away with your cash value, which is based on how the underlying investments do. If your underlying investments do poorly, the guaranteed rates are there for you to draw income over time.
6. ANY OTHER ADVICE ABOUT PURCHASING AN ANNUITY PRODUCT?
A. I highly recommend purchasing the annuity as part of a complete financial plan and not an arbitrary investment.
B. To find out more, give us a call and we'll send you a free brochure further explaining annuities.
CLOSE: Lots of people make costly mistakes when buying annuities. Before you make a purchase, arm yourself with the facts.