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Archive for the ‘Annuities’ Category

Fixed annuities are typically thought of for their safety. After all, you can’t lose money due to stock market declines when you are in them, right? Yes, but that does not necessarily mean they are safe.

Even though fixed annuities are safe in terms of not losing money in the market perspective, one thing you must consider is that there are other facets to them that may make them unsafe. The first thing is their lack of liquidity. Sure there is a tax deferral component, however, one thing to consider is that if you NEED the money, you might have to pay some penalties to get to it. This is often referred to as the surrender charges. Often times, these surrender charges can be quite steep on your annuities. This makes them risky from a liquidity stand point.

Another factor to consider is the rating of the insurance company. Now, if you ask me, ratings aren’t necessarily the ‘end all’ when it comes to safety. In a non apple-to-apple comparison, Merrill Lynch had Enron rated as a buy as the stock slid from its peak to single digits. Ratings aren’t always to be trusted and this holds true for insurance companies as well. The safety of an insurance company determines the safety of your annuity as well. It is important to do your due diligence and do it well when choosing an insurance company.

There are also many other factors to consider when it comes to choosing your fixed annuities that will determine their safety.

Last week I shared with you the real reason advisors push IRA accounts into variable annuities: the commission. If you’re getting ready to retire with a large IRA rollover, or your current IRA account is nearing the end of any surrender penalties, chances are you’ll be pitched this product. So this week I’m going to reveal more secrets about the truth behind the variable annuity sales pitch.

One of the biggest draws advisors use to get you to take the plunge is the promise of the big bonus. They’ll pay you 6%, 8% or even 10% extra, right up front, just for putting your money into their variable annuity. Sounds great, doesn’t it? Who wouldn’t want such a big boost to their nest egg, especially with the stock market returns of late? But remember, there’s no such thing as a free lunch.

In return for this lovely bonus, you end up paying higher recurring annual fees, usually .15% higher (or more) than regular variable annuities. These fees are charged on all of the money in the annuity and are a continued drag on performance. Surrender penalties are higher and longer, too. The truth is that when you take into account the increased fees and the extra years you have to stay in the annuity, you really aren’t getting a ‘bonus’ at all!

These bonuses aren’t just used to entice you to invest your original IRA rollover when you retire. They’re also used to encourage you to transfer out of an annuity you already own that’s still in the penalty period. Advisors will tell you that the bonus on this ‘new-and-improved’ annuity will ‘pay you back’ for the penalty you’ll pay to get out of your old commission-based investment. The truth is, by getting you to switch to the ‘bonus’ annuity, they earn a fat fee up-front. You end up with pretty much the same thing you had but now are locked into it for much longer. What kind of a ‘deal’ is that?
The promise of multiple investment choices is another feature of the variable annuity sales pitch that doesn’t live up to its claim. It’s true that many variable annuities offer a multitude of mutual fund choices in various sub-accounts, including funds investing in bonds, small companies, large companies, international stocks and more. Surely out of all of these choices, anyone could create a balanced well-performing portfolio, right?

Not necessarily. It’s sort of like fishing. Who wants to fish in a pond full of minnows? Wouldn’t you rather drop your line where you have a greater chance of catching the big one? The mutual fund universe is full of thousands of choices. But only a small group of them are consistent top performers. Unfortunately, few variable annuities offer these big fish.

Some variable annuities feature a well-known fund already offered to the general public. But beware. This same fund will have much higher management fees within the annuity than it does outside of it, hampering its performance. I believe insurance companies make special deals with mutual fund companies to gain access to their management and then charge higher fees.

When you invest your money into a variable annuity, you’ll no longer have control over the choices at your disposal. The insurance company can change the investment choices whenever they want to and you have no recourse. Since your money is locked in for years, it will be very costly to change course a few years down the road should you be dissatisfied. What kind of choice is that?

So here’s the bottom line: variable annuities make big promises but don’t really deliver. Every feature they offer — be it a big bonus, a multitude of investment choices, death benefit, or a guaranteed income stream — comes at a very high price. High management fees and long, costly surrender penalties hinder your performance and rob you of your flexibility and control. The ones making the most money off of variable annuities are the advisors and the insurance companies. It turns out that variable annuities are a great investment–for them.

I’m kind of tired of all the opinions about variable annuities. From all I’ve seen, the “expert advice” goes either strongly for or against the product. If the believers were correct, every sales office would have a line down the street but if the non-believers were correct, every insurance company would be shut down because of fraud.

I know that sounds extreme but it really does show you the difference in the type of advice you are bound to get. So if you are familiar with my work, you’ll know that I try to be objective and provide solid evidence as to the pros and cons of various products.

It’s been a long time coming but I’ll tackle the variable annuity debate in this article. Before I go further let me state that I’m not overwhelmingly for or against variable annuities and there are times when they work great and others when they are completely inappropriate.

Pros

Guarantees:

Death Benefit- This allows the heirs of the contract to inherit the full principal balance in the event that the contract owner passes away while the contract is in force and the account has lost value

Income- This allows the contract owner to lock in a predetermined level of future income regardless of account performance.

Principal- This allows the contract owner to recover the principal investment or the highest contract value achieved regardless of the account value at time of surrender.

Tax Deferral: Taxes are deferred on the growth of assets inside an annuity giving the contract owner the added benefit of greater compounding. Many critics suggest that excessive fees mitigate tax deferral benefits. If tax deferral is the sole focus of purchasing an annuity, expensive optional riders can be waived so that total fees will run no higher than the average mutual fund.

Unlimited Contributions: Retirement plans have contribution limits. If you ever come in to a larger sum of money, much of it will not be eligible for allocation in a 401K, IRA, etc. Annuities have no contribution limits.

Cons

High Fees: Many annuities have optional riders that push the overall fees to 3% or more. Plenty of products allow an investor to elect out of the options but some don’t. If you are purchasing an annuity with high fees, there had better be compelling reasons to do so.

Limited Investment Choices: Asset allocation options are limited within an annuity. Some contracts have predetermined portfolio balances and others will list a limited number of available mutual funds.

Surrender Charges: As with all annuities, variable products have surrender charges so your money is tied up for a specified period of time except for the usual 10% annual free withdrawal. Be positive that the surrender schedule works with your investment time horizon.

Immobility: The combination of investment limitations and surrender charges means that your money is much less mobile than it would be in an equivalent securities account.

As you can see, the analysis is pretty simple. If you are looking at the prospect of a variable annuity just weigh the pros vs. cons to figure out if it works for you. Unfortunately, most of the cons seem to kind of be deal breakers if even one is intolerable. That supports my thought that variable annuities have specific uses for a small class of investors. It either works for you or it doesn’t. Make sure to seek solid advice from an open-minded advisor.

Most Americans are under the false notion that annuities are only for the very wealthy. However, annuities are a great savings plan; they can take care of your money and grow it like no other financial instrument can. To understand the advantages better, we need to first learn what an annuity is, and dwell on the types of annuities. Let’s learn more…

What is an annuity?
In general, an annuity is any investment that guarantees an annual income. However, the annuities we are referring to, are issued by a life insurance company, and work in reverse to the way a life insurance policy works. It is a contract between an annuitant (investor) and the life insurance company through which you make payments to the company, and the company in turn assures you of a regular income in the future in a variety of payout options that we will understand better when we learn the types of annuities

Types of annuities

- Fixed annuity: Is ideal if you are looking for a regular future (possibly retirement) income. You are promised the principal amount, along with a minimum rate of interest.
- Deferred Annuity: The payouts are deferred to a later date, so this is ideal for someone who is well off now, but needs to keep aside income for their retirement years, or future years of need.
- Variable Annuity: Variable annuities pay out depending on the fluctuations on the stock market. It is recommended only for those with a penchant for taking risks that come with investing in the stock market. These days mutual funds are very popular and they are an example of variable annuities.
- Equity-Indexed Annuity: They are a mix of the fixed and variable annuity types. The investor is assured of a minimum rate of interest, while the investment is also linked to the stock market.

There are many other variants of annuities, but the ones outlined above are sufficient to give you an idea of the way annuities work.

Advantages of Annuities
Every investor wants a good rate of interest on their money, while being sure that their money is safe. Annuities measure up to this, and much more, as we can see from the many advantages that annuities represent.

Safe and low-risk
In these uncertain economic times, annuities are probably the safest option open to investors. This is because annuities are regulated by the State, and in addition the Federal Securities and Exchange Commission regulates some annuities. For example, according to federal law, insurance companies must hold reserves that equal the total withdrawal money of every policy. Because of this, only top-rated insurers can manage to issue annuities, and you can be sure your investments are safe.

Tax Deferred
Annuities are one of few tax-deferred financial vehicles currently available in the market. This is a huge benefit, because your entire investment grows unhindered by taxes, year after year. This puts annuities right on top of the list of investment options, even ahead of CDs and even those taxable investments that offer high returns.

Withdrawal tax
Annuities are charged at the withdrawal stage. However, even this is non-draining because it is taxed as ordinary income. Also, most annuitants opt to time their withdrawals with their retirement. This means that they would be in a lower tax bracket, too.

Guaranteed rate of interest
Annuities offer guaranteed returns. Some annuities these days are guaranteeing a 3 – 4% interest for as long as five years.

Lifetime income
Some annuities offer you the choice of opting for a lifetime monthly income that you cannot outlive. This is something that no other financial product gives you, and makes it a perfect retirement planning tool.

Flexible
Annuities are very flexible. For instance they offer you flexibility in paying your premiums, and flexibility in payout options as well.

Absolutely secure
Annuities cannot be included in bankruptcy judgments neither can the courts seize them. This makes them a very safe investment avenue.

No limits
There are no limits on the amount of money that an individual can invest in annuities. Also, there is no set age limit after which you can be entitled to start receiving your annuity income.

Full control
Annuities give investors control over how they want their income and how often. Also, investors have control over how their policy will function after their death. For instance, they can opt for a beneficiary to continue to receive income from the annuity.

Annuities offer peace of mind
In these uncertain times, annuities are a welcome avenue to ensure not only that your investments grow unhindered, but also that you have peace of mind as you approach your retirement years. They offer excellent advantages over other forms of investments. For those looking for assurance of future security, safety of their principal amounts and the flexibility to choose the withdrawal patterns, annuities are an unbeatable choice.

Everybody should be familiar with the term annuities by now. It has become a very important concept, especially when it comes to pension annuities. Some people take the responsibility of taking a pension annuity off their backs and just sign the first agreement offer. This is a completely irresponsible way of handling your obligations. Even if you are not interested in getting one single annuity during your whole life, you should be familiar with the term. Because if you live to be 75, you will be in trouble when you are faced with the decision about something you know nothing about.

Understanding annuities is not as complex as people may imagine. They are contracts between you and an insurance company. There are many types of them available, but the basics behind them remain the same. You just have a few basic points to consider, the rest you can leave to the experts and lawyers. It is their job to struggle with the details, but it is your responsibility to understand what you are choosing.

Basically, the division between the annuity options is on which type of rates it offers. These can be fixed or flexible. These are the most important parts to consider on any annuity. The rates can also depend if it is a standard or enhanced annuity, but for the most part, standard are considered fixed and enhanced flexible most of the times. Also, enhanced annuities offer better rates only based on the presumption that your lifestyle and health status will not enable you to live long enough.

Still, no matter what the options are and which annuity type you are applying for, you get to choose between accounts with either fixed or variable rates. Many people who like playing it safely will instinctively go for the fixed rates. This can be a rash and big mistake. Fixed rates can include hidden costs which they are not obligated to list in the actual agreement. However, they cannot hold that information back, but you will have to ask them to display it in great detail. The fixed rate agreements can also have poor security deals, so make sure to look out for these as well. A good floor policy is important even if it is a fixed rate.

The variable rates are dependent on the market and investments. They can be considered something like mutual funds. The risk is higher, but so is the return. People usually run away from these investments because they do not understand them properly, but the only things to keep an eye for are the floor policy and preferably a minimum rate guarantee. These are usually very well secured and regulated in agreements because of their unpredictable nature. Since nobody is stupid enough to throw away money mindlessly, they make sure your investments are well-protected.

With this basic knowledge of annuity rates, you will significantly decrease your shopping time for annuities. But it is still important to ask for advice from experts on the subject because it is highly complex when you go further into exploration. Different people require different agreements, and an expert is here to help you find the best one for you. Retirement can be a very daunting time for those approaching it.

An annuity is often an important component of a strong financial plan, but many consumers don’t quite understand the fundamentals and there are often questions regarding the safety of money invested. Before an individual agrees that an annuity is the best product for their specific situation, it is important that they understand exactly how the funds are protected and what guarantees are in place.

Deposits made in bank accounts are subjected to Federal Reserve requirements that mandate approximately 3% of funds be kept on hand. A deposit of $100 therefore only requires $3 to be made readily available, which may make some depositors nervous. Annuities are also regulated by the Legal Reserve System and there are strict financial requirements that must be met by the insurance company. The reserve amount for annuities must equal the withdrawal value of every account, which means that an insurance company must keep $100 for every $100 invested.

Annuities are contracts that are offered by insurance companies, so the full assets of the organization back the policies. An important consideration that must be made before purchasing an annuity is the strength and stability of the issuing company. Business should only be placed with companies that have exhibited responsible past behavior.

Each state has precautions in place that are designed to protect policyholders in the event that their annuity insurance company is simply unable to fulfill their obligations. Most states have guidelines that will allow other insurance companies doing business in the state to simply take over the contracts of a failed annuity carrier. If there are no carriers that have the ability to comply with the requirements of each contract, there is a state pool that is funded by contributions from each insurance company. The state pool can provide funds to guarantee the values as required by the annuity contract itself.

Annuities offer an amazing chance for an individual to ensure that they will not outlive a needed income stream, and safety of assets should not be a concern. The various protections that are in place are designed to prevent any type of loss. The fact of the matter is that if an annuity carrier happened to fail, they would then be backed by other insurance companies. If other insurance companies were unable to meet the obligations of the annuity contracts, the state department of insurance would step in and provide assistance using the state pool. Money placed in an annuity is definitely safe and probably more secure than any other investment.