Today, Certificates of Deposits are at an all time low causing people to take a closer look at annuities. To help you understand them better we have put together some brief questions and answers.
Q. Why would someone want an annuity?
A. The main reason is to obtain guarantees. Annuities provide:
• Guaranteed Interest rates- no matter what happens to the stock market. The insurance company assumes the risk in a bad economy, not you. At certain times, annuity interest rates are higher than Certificates of Deposits (CD’s)
• Guaranteed payments- collect as long as you live. If you live longer than your normal life expectancy the insurance company must continue to pay.
Q. I’m confused. I hear a lot about annuities but I’m not sure I fully understand exactly how they are supposed to work.
A. A simple way to understand is to compare an annuity to a life insurance policy. With a life insurance policy you pay a relatively small amount of money (the premium) to an insurance company. When you die they pay your beneficiary the full amount of insurance you purchased. The annuity works in the exact opposite way. With an annuity you pay a relatively large amount of money to an insurance company which then pays you a smaller monthly amount for as long as you live. Think of an annuity as something that keeps on paying and doesn’t stop until you die. That kind of annuity is called an Immediate Annuity.
Q. But I see advertisements saying people can “invest” in annuities, could you explain that?
A. Similar to CD’s, you can purchase an annuity with a guaranteed interest for a period of time. The term could be for 3, 5, and 7 years or longer. Instead of collecting monthly payments right away (which is called annuitizing) you can defer receiving payments. That is called a Deferred Annuity. You simply let the money grow and accumulate before you take it out.
Q. When can I take money out?
A. At the end of the term, you can withdraw the money without any penalty or charge, keeping all the interest earned. You may take money out sooner but there will be a stiff penalty. Some annuities allow you to take out the interest earned free of charges each year while others allow up to 10% to be taken out each year without penalty.
Q. At what rate can the money grow?
A. That depends on the type of Deferred Annuity you purchase. There are three main types:
• Fixed annuities – They pay a guaranteed rate of interest. The insurance company determines what interest rate they will offer and guarantees the payment (for example 3 1/2% for a 5 year period). The principal and the interest are both guaranteed. This is the safest type of annuity.
• Variable annuities – The rate of return varies depending on the investment performance of the underlying investment. For example, you may have a choice of mutual funds to invest in. If they perform well you may earn more income. On the other hand, if the mutual funds do poorly you could lose money.
• Equity Indexed annuities – The rate of return is tied to how well an index performs (i.e. the S & P 500). These annuities combine aspects of the first two annuities. They typically guarantee a minimum rate of return (for example 1 to 2%) yet offer the potential to earn more than the minimum rate should the investment results do well.
Q. What is the downside to annuities?
A. Typically there are surrender charges if you decide to cash in an annuity before the term of the contract expires. For example, if you purchased a 5 year annuity and you cashed it in before the 5 years were up- you will be charged a penalty. Penalties range from 10% to 1% depending on how long you have kept the annuity. Unlike bank CD’s which are backed by an agency of the U.S. government; annuities are backed by the full faith and credit of the insurance company.
Q. Are there other things I should know?
A. Everyone’s circumstances are different. Before you make a decision seek out a trusted advisor for guidance.
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With full income taxes when you receive payments, and inflation over the years isn’t this a loser which might just tread water or worse?
With 30 years in the Financial Planning Business, Stephen and Davis are “Right on the Money” with their explanations about annuities. Keep in mind that these are tools to be used in the retirement planning process and are one piece of the puzzle. If you want to have some piece of mind and plan for an absolute guaranteed amount of monthly income that can include some tax advantages,(regardless of what the market does) than annuities can provide that without risk. Remember, everyone’s situation is different, and must look at each situation on an individual basis. No one thing is right for everyone. These discussions are valuable because they cause everyone to start exploring different scenarios and asking questions. It’s funny how no one questioned the managers of their 401K programs, but just went along with the program.
I have seen no comments on taxable income. As proceeds of the annuity are received how is taxable income calculated. I recently received a 1099-R showing a gross distribution of $36,000. in box 1 and a taxable amount of $20,000. in box 2. No other information was given. If in fact the box 1 amount was the total annual payout from an initial investment of approximately $530,000. should not the taxable amount be $0. The original investment was made with after tax dollars.
Any comments would be appreciated.
An advisor would need more information about your father, but yes, an annuity would be a great income producer.
My father was just 84. He has his life savings in an account that’s now down to paying only about 1%. Would he benefit from a Fixed Annuity without putting his entire savings at risk while providing him with, perhaps, a monthly income?
Just read Davis Garrison’s accurate but complex post, and wanted to remind everyone that all investments can be good for the right need. It definitely isn’t a ‘one pill cures all’ situation. Fixed Indexed annuities can be a tremendous financial tool, but so can variable annuities. Have an expert financial advisor who has all financial concepts available to him give you his advice. He will undoubtedly recommend a blend of different investments to solve your needs. Diversity is the key!
Don’t be afraid — find the right advisor!
Have a great October 7th! I know I will. It’s my birthday =]
I would like to propose to those seniors over 65 and their children to contact their Congessman/woman asking them to propose a bill that would allow those seniors over 65 to withdraw from their IRA’s tax free, up to 35K, for 3-5 years. We lost a heckava amount(10-30%) of the value of our portfolios in this recession.It would take more years than we have to get back to where we were. This tax free money would get back into the economy as we would buy necessities that we are now doing without, or pay for our incresing health care costs. The Fed. Government wastes more money each year and this bill would do more good than bad.I just read that the government can’t account for 30+ billion dollars spent in Afghanistan and Iraq. If they can just write that off, don’t let them write us off. Don’t we deserve a break? Please, write to your representative to get this ball rolling. Get your family involved. They might be having to help you out financially and this would give them some relief.
30 years in the Insurance/Financial Services business. Fee based RIA (Investment Advisor Representative), Series 65 securities licensed – the import of this, I must act as a Fudiciary, meaning – I must put the best interest of my clients ahead of mine. Important? – ask your current advisor if he is a Fiduciary. #1, the annuities most of you are referring to as Equity Indexed Annuities, are actually called Fixed Indexed Annuities, been around since 1995, and are one of the finest “safe money” vehicles in the marketplace. You can actually control a volatile market, using yield, as opposed to exposing your principle to market volatility. Your principle is guaranteed, your principle is not exposed to the market, but is used to purchase a AAA government long -term bond fund that produces an annual yield each and every year. This annual yield is the only thing that is at market risk, and is used to purchase an option on the performance of an Index, i.e., the
S&P 500 Index, the Nasdaq 100 Index, etc., or a combination of Index allocations, that can be reallocated annually. At the end of each year, any gains of that Index/Indexes are automatically captured, added to your account value, locked-in (called annual reset) and you cannot go below that level due to downside market, ever! A down year in the market – worst case scenerio – you have the same amount of money at the end of the year, as you had at the beginning of the year. Put in context – take the recession of 2000,2001,2002. S&P 500 Index down 50%. Let’s say you started with $100,000, at the bottom you now have $50,000. Now, 50% gain and you are back to where you began, right? Wrong – that gets you back to $75,000 – it takes a 100% gain to get back to $100,000. With the Fixed Indexed Annuities, you would have had no gain until the Index bottomed out and then bagan to rise. While you are recovering from your 50% loss, which is where many people were when the market tanked again in 2008-2009, you are being credited with gains with the Indexed Annuity. The new Lifetime Income Benefit Riders available for Fixed Indexed Annuities, are very reasonably priced, usually under 1%, guarantee a lifetime income, and you can literally run out of money, but never run out of income. Variable Annuities – get with a good advisor, get on a recorded speaker phone and call the Insurance company. Have the policyholder ask a list of questions regarding the fees, both disclosed and hidden, they are required to do this. Get the fee information directly from the company, not the advisor or agent who sold you the Variable Annuity – I think you will be surprised at the level of fees you are paying that you were not aware of, typically 2.5% to 4%. Decreases your gains by that amount, increases your loses by that amount. Variable Annuities are nothing more than Mutual Fund Sub-accounts wrapped in an Insurance wrapper. Beware! As far as Insurance companies as risky, check out how they are regulated, by each state insurance commissioner, they are required to put one dollar in surplus for every dollar that they have at risk. Example: AIG – Insurance Division very profitable, always has been, but they are totally separate from the bailed out investments unit of AIG. Last comment – why are we in the shape we are in, since the beginnign of the housing collapse? Do your own homework – after the crash of 1929, two Congressmen, Glass & Steagal, composed an Act, the Glass/Steagal Act – put a wall between Insurance Companies, Brokerage Houses, and Banks. Did this so the Crash of 1929 couldn’t happen again. Banks couldn’t do Brokerage business, Insurance Companies couldn’t do Banking business, etc. Separtion. In November of 1999, the Glass/Steagal Act was repealed by Bill Clinton – walls come down, now Brokerage Houses such as Bear Stearns can securitize toxic mortgages, Fannie, Freddie, Countrywide, Bof A, etc., and sell them globally. Don’t believe me, check it out. Get in front of a unbiased qualified advisor and check out Fixed Indexed Annuities, don’t have one client who has lost one dime!
Stay far away from Indexed annuities until you understand the negatives as well as they positives that the insurance salesman tells you about. Many of the people don’t really understand the complicated formulas in these annuities. Get a second opinion from a fee based RIA that doesn’t sell indexed annuities before buying one.
MetLife is a great company. But, the annuity you are talking about is a Variable annuity with high fees and can lose money. It’s not a bad product, but you said you wanted out of market. It is in the market.
Here is the bottom line.
Equity Indexed Annuities.
1. Your money grows 2 ways. Stock index goes up, your money goes up. The index ( Dow or S&P or NASDAQ etc.) is tracked for a time period ( Monthly, Qtrly, Yearly, etc.) and then your money or return is based on the performance of the index. For example if the the S&P goes up 5% in a year and the insurance company contract states it will pay you up to 5% per year based on the index, you get 5% return on your money tax deferred until age 59 1/2 or income distributions.
2. You do not have to annuitize your annuity to receive income from the product. Many things determine income streams. Your age, your return, the product type, etc. There is no one size fits all.
3. Important fact for most if not all EIA’s. If the markets go down, you lose no money in the investment. Zero is your hero. You may lose some buying power from inflation but no capital loss. Same as a CD here. CD’s today don’t even outpace inflation.
As far as risk goes, I ask my clients how they feel about losing money. If they say I want the chance to grow my money and income later own with guarantees and no chance of losing what I have accumulated, and I do not want to outlive my money no matter how long I live or what happens to my health, and finally I want to pass on as much as possible, then an equity indexed annuity is the only thing that I have seen that will do this.
This cannot be done with 401k’s, mutual funds, stocks, bonds, or anything that may lose value. If there is something out there then please inform me so I can go and start helping my clients with that product.
stephengarland@yahoo.com
South Carolina
Annuities, Life, Health, Planning.
I want to get out of the market. My broker suggested MetLife an annual step-up compounded enhanced death bennefit annuity. Garranteed 4% yearly, is this a good deal ?
My insurance agent says if one insurance company goes belly up, other insurance companies will make your investments, policies good. Is this true?
If an annuity is ONLY guaranteed by the full faith and credit of a particular insurance company, such an investment seems very risky. Can you say AIG, General Motors, Fannie, Freddie or Enron?
My reply to Steve would be yes.
Find an independent financial advisor who is well versed in all investments including annuities, and make sure he has been in business long enough to know what he is doing.
If you believe he is trustworthy after your interview, then follow his advise.
Annuities can be right for people wanting to protect assets from age 45 to 90.
At a healthy 65 should I bother?
I might add, I have a long term care policy that I bought when 55 years old.
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I prefer mutual funds rather than annuities. (I am an insurance agent)
The Vanguard Mutual Fund company is where my money is residing. They have a large array of options for retirees. No, I do not represent Vanguard. I merely invest there.
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To Molon Labe,
That’s the most ludicrous and blatantly false statement I’ve seen anyone make, here. Ridiculous. In fact, one of the MANY features of fixed annuity is the fact that the owner gets to name a beneficiary for the funds in the annuity, if and when death occurs. Further, the principal and interest pass to the beneficiary outside of the probate process, typically in a very expedient way. And your principle is NOT at “risk”.. where did you get such information? And, the “never trust an insurance company” comment makes you sound even more out of touch with reality. Ridiculous… and you should be ashamed for disseminating blatantly erroneous information. Obviously, this person thinks they have a reason to attempt to “hurt” an otherwise stalwart and reliable industry. (The worst thing about this is that you end up “hurting” someone who reads your comments, and might otherwise have been “miles ahead” by including an annuity in their planning. SAFETY, TAX-DEFERRED GROWTH and various INCOME OPTIONS are only some of the impressive benefits of an annuity. I helped my own parents place important funds in annuities years ago, and they’ve continued to grow in a predictable fashion all of this time. Mom and Dad were VERY pleased, to say the least.
The big hook with Annuities is that if you die the month after you opened one the insurance company keeps your Principle. So insurance companies are banking on this as a money maker, they know the statistics and they set the probabilities to favor them, just like Vegas. So if you put all their annuities together and look they are one not paying you the rate they should and your principle is at risk. Don’t do it, never never trust an insurance company.
my financial planner has had me in bonds and safer market areas, now I am 62 and newly retired.. but has never mentioned annuities. Does he have a reason for me not to buy then? does he lose commission if I do?
In my experience, more often than not, annuitant’s caregiver’s are distressed because of the decision to purchase an annuity. Almost always, too high a percentage of liquid assets are placed in an annuity. Then unforeseen illnesses, injuries, Alzheimers, disabilities, deaths, accidents occur. Will you have enough liquid assets to cover loss of income and additional expenses? Do you have $5,000+ a month to pay for a nursing home for an extended period of time and then have resources for spouse to live, for funerals, etc? When you die, will your spouse have sufficient funds to live on when he/she receives reduced retirement benefits or other income? Will this annuity, impact your ability to plan for Medicaid or Veteran’s benefits?
I do have annuities but what concerns me is that the only money I have received from them is my own. They have absolutely not increased in value at all. I do think that there are certainly advantages to annuities but sometimes i do get frustrated with them. I really appreciate your comments regarding annuities. Thank you so much for further education on annuities.
Perhaps Ken will share with us exactly which ways, other than an equity indexed annuity, will provide much higher guaranteed income with equivalent guarantees that you’ll never lose your principal? Annually, many equity indexed annuities lock in the gains made during the year creating a new, higher principal amount. If the market falls during the next year, none of the higher principal amount is lost from your equity indexed annuity but the variable annuity is another story. With a variable annuity, you may lose your principal if the market declines. For many people in or nearing retirement a desire for income will be balanced with a desire to leave a financial legacy. I agree with Greg and others who have made the comment – find a good advisor who has your best interests at heart. Annuities are not a panacea, they’re just a tool that might work for you.
Just almost anything else there are good and bad annuities, the problem is with Index Annuities most people selling and buying them do not fully understand them. Don’t fall for big bonuses and outrageous 7-14% guarantees, it is your money that comes out first for income and only if you live long enough do you get into the insurance companies pocket. There are ways to get a much higher Guaranteed income than in an index annuity.
I just read through all of the comments listed about annuities and most are pretty accurate. Having been a financial advisor for over 34 years, my office uses all different types of annuities with over 20 of the most secure companies we can find. When you shop for annuities, make sure your advisor is competent and independent (which means he can hire and fire companies to represent and has no quotas). He should find out your total financial picture so he can make an appropriate recommendation. Annuities are a tremendous retirement product if bought for the right reason.
Protecting retirement assets should be top on your list when it comes to your financial requirements — annuities can do that!
Next on the list would be to find an independent advisor you trust so you can take advantage of his expertise.
With the fixed indexed annuities watch out for the rate caps and participation rates. Most of the indexes are based on the S&P 500. The bonuses are also
vested over a certain amount of years and if you pull out early you could lose some of the bonus. The best available right now give a 10% bonus and an 8% garanteed rate of return. Be sure to get a booklet from the insurance company and read all details carefully. The annuity is only as good as the company selling it. Pick a highly rated company that will be here in the future. You could lose all of your money if the company fails.
My wife and I have a variable annuity and it pays us 5% yearly. What I like about it is if the market goes higher and our account increases in value then on our anniversary date that higher amount is locked in and our 5% is calculated on this new higher amount. If the value of our account due to a poor market goes way way down then our 5% is still locked in and is payed to us irregardless of our account balance. I hear that it is very expensive to have an annuity but how expensive is it to watch you portfolio go down down down, that is money you will never be able to recoup. While with the Annuity it’s guaranteed at the rate you sign up for for you life time and you never have to watch the market and can sleep at night whether the market is up or down. I don’t care. It also has a death benefit if either one of us dies and it will go to our children upon the death of both of us. I think it a win win investment.
I have had a variable annuity for over 8 years, invested in aggressive mutual funds. Every 5 years I am able to “step up” my annuity value to the existing value at that point. If the value drops and never recovers, when you start to withdraw the money, you do it from the step up point, rather than actual value. My annuity is stepped up to a point where it is 68% above my original investment and 11% above today’s actual value. The only drawback that the agents didn’t mention, is that the annuity expenses are quite a bit higher than purchasing the same mutual funds on the open market. But, my original investment is protected and the value will never fall below that point, even if I hadn’t chose to step up. I am 70 years old.
My wife and I just purchased fixed indexed deferred annuities. No one investment is right for everyone, but it you want premium bonuses with lifetime income and other optional choices with guaranteed rates from a reliable company, then annuities are a good way to go. The key is to choose great, long standing companies and an honest agent. Variable annuities, for many people, are a fee quagmire, don’t go there.
This article has really helped me to understand annuities. All I’ve ever heard, including from my Mothers Elderlaw lawyer, is “stay away from annuities”. I can see their value. I also would like to hear from those posting “stay away” as to why they think that way. Every investment is risky. Is it just because those funds are not guaranteed like some bank plans?
Is there a typical or minimum investment amount for annuities?
I used a variable annuity to lock in recent stock market gains. The principle is guaranteed and if (on the policy’s anniversary date) the value has increased, the new, higher value is locked in. (There is a small fee for this guarantee)
The annuity L Joslin writes about is a good example of the diversity in annuities. If interested, find a financial planner who you trust and likes annuities. The planner can show you the broad range of annuity products out there.
There is an another annuity product out there that pays 4% guaranteed with no risk but you still have access to your money without penalty. I have it.
There is no one answer to D. Schwoyer’s question. Annuities vary but the ones I have will pay anything left to the beneficiaries.
I find the “Fixed Index Annuity” a great investment that allows me to plan ahead. Using my pension plus Soc Sec plus (up to) 10%/yr of my qualified annuities, I know how to budget every year. Besides the annuities, I have other investments that I hope will do well in the long run but if not, just the income from the annuities alone will be enough to pay the bills. So knowing I will be able to pay the bills allows me to take a little more risk (and hopefully a little more reward) in my other investments.
Question—If you die before all of your money is distributed,what happens to your money? Like maybe you die shortly after investing in an annuity?
As a 40 year veteran of the insurance industry and one who has written both variable(which I no longer offer my retirement clientele), fixed and fixed indexed annuities, I suggest that you seek out a professional (either a Chartered Financial Consultant or Certified Financial Planner) and ask about fixed indexed products. All of the ones with whom I have experience not only guarantee your principle, but have many additional features including bonuses (from 4% to 10%), income riders (which guarantee your lifetime income) from 4% to 8%, nursing home riders (which will double your income after a 6 month stay in a nursing home), terminal illness riders (which will refund your money (plus any interest earned) in the event of a terminal illness. You can’t outlive the income and the returns based on the index you choose can be quite attractive. Some fixed indexed annuities allow up to a 10% no-fee withdrawal the first year. Hopefully, that will assist our membership to understand what these products can do for you.
Well, now I’m even more confused than before I read the article and the respondents’ comments. Could Dale and Giff write more details to support their respective positions? Just saying “Yes They Are” or “No They Aren’t” doesn’t help anyone trying to make an informed decision.
To: Dale–congrats for 20 yrs in the business. I’ve been in the business for 50 years and you are so wrong. To say annuities are a sham and are the worst investment are great examples of the ‘blanket statement’ argument which indicates a closed mind.
To Dale: I assume you didn’t sell Fixed Indexed Annuities(FIA), right? With a FIA, the principal is never at risk. If you are referring to variable annuities, that is a totally different story.
Let me tell you !!!! I sold life insurance for 20 years and Annuities are the absolute worst investment for retirement…In most cases, you will not even get back the amount you put in…It is a sham………