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Despite what you may think, Annuities can be a good thing. But abusive or naïve agents certainly have given the industry a black eye.
If you’re considering using an annuity for your retirement, you have nothing to fear. Save your anxiety for the real problems retirees face like the longevity of Social Security and Medicare benefits.
Choosing an annuity as a retirement investment vehicle is a science. First off, to determine the suitability for whomever is purchasing, you will you will need to consider a wide range of factors that differ which each person. You then have to select one. After surviving the suitability process, screening products can seem like a daunting challenge. And, it many ways, it really is.
The process of selection is usually the part where the greedy salesperson will make their move. The purchase of any annuity will pay someone a commission, so you need to get over the fact that an agent is looking to make money. It’s a fact of business. If you just stick to what you need, you’re good. Here is a quick list of the things to look for so you can avoid the purchase of an inferior product.
Surrender Charges- Most deferred annuities have no upfront fees so the insurance company protects themselves by charging you for canceling your contract early. Longer surrender schedules indicate a higher cost to the company. Most of the time this is linked to upfront bonuses and higher than average agent commissions. You’ll get the short end of the stick. If the surrender schedule is seven years or longer, just skip it. Although there are some decent products that have a longer schedule, they will need a compelling reason for the contract to be extend. Research very thoroughly!
On a side note, try to ensure that you are 100% in the know about all additional restrictions that are placed on your surrender of a contract. Some contracts state that you can only surrender early if you take installments over a certain period. Contracts like these will also impose the same restrictions on your heirs if you should pass away prior to the expiration of your schedule. Avoid contracts like those at all costs. There is no academic benefit to annuities like this. Keep your money as far within your realm of control as you can.
Interest Rates - Make sure that you know how the interest rates factor into your contract. Get educated on guaranteed minimums, the yield to surrender and premium bonuses to get the best deal.
Premium Bonuses - A lot of upfront bonuses are meant to draw customers in. They won’t work out in the long run. The company pays out more to draw you in, which it makes up for with longer surrender schedules. Don’t let the sirens lure you in. Just say no and move on to the next one.
Guaranteed Minimums- This rate tells you how much interest you will make in the worst-case scenario. 3% is the absolute minimum you should ask for. If a company pays out less than that, this means one of two things. Either they are trying to cut costs or they don’t have a clear enough picture of their future financial performance. You want to look for a good strong company that survived 2008’s financial meltdown and expect business to run normally in the present and future. Your money deserves no less than the best.
Yield to Surrender- This number is the cumulative rate of return that you should expect once your contract expires. This is the part where the useless bonus rate is shown for what it is and your solid minimum guarantee will shine through. Bonus rates likely lose ground over time and a good minimum guarantee will provide you with reasonable expectations.
Credit Ratings- Annuities are supposed to be a safe investment. Make sure that the company that you invest in is secure and isn’t going anywhere for awhile. Turmoil will weed out the weak companies apart from the stable ones and it will also further strengthen the already strong companies. Contact them first. You can trust them with your money.
This is about all you need to know about annuities. Those are the areas where you’ll probably run into some trouble. Captive agents have little choice but to sell specific products and commission motivated agents will often overlook many potential pitfalls. Understand the ground rules and learn the basics and you have nothing to worry about. Don’t be unnecessarily fearful of annuities, as they won’t hurt you.
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