Broker Check
"411" on Annuities

"411" on Annuities

| July 09, 2018
Share |

For some advisers and people, mention the word "annuity" and they might turn and walk away, maybe even run away. For others, they feel differently. It has met a specific need for either them or their families or clients. I have rarely used annuities with my clients but with markets close to all-time highs, I recognize that they may have a place for certain clients in certain circumstances and thus I am prepared to address.

Definition. Annuities, a life insurance contract, were first developed to provide guaranteed income payments to individuals during their retirement years. In their purest form, they still do. However, there are many more iterations, bells and whistles today making it hard to know what you are truly buying. They also typically provide tax deferred growth, possibly a death benefit but it comes at a cost. Fees are usually on the high end. In the end, they can be right for some but they are certainly not right for everyone.

Who could consider an annuity? Primarily, I think those who are concerned they will run out of money in retirement, constantly worry about fluctuations in their retirement accounts and/or simply want to create a consistent and predictable income stream. For such people, annuities could be one tool in the tool kit to utilize for a portion of their assets.

For instance, if someone wanted to cover their basic retirement expenses with guaranteed income sources and their social security benefits were not sufficient they might consider an annuity to augment their social security and potentially cover those basic needs in full. They could still maintain a fully invested retirement account with exposure to market gains and losses, but their basic needs, ideally, would be met by Social Security income and the annuity (subject to the financial strength and claims-paying ability of the issuer).

What's out there?

Well, therein lies the challenge. As mentioned above, there are a multitude of choices with so many different features, it is enough to make your head spin. It is very complex. Working with a credible and knowledgeable licensed professional who truly has your best interests at heart (acts as a fiduciary) is a good place to start if you want to know more. Below are some of the more well known choices:

Income (Immediate Annuities) For those seeking a consistent income stream now. In effect, you are creating an income stream "guaranteed" by the insurance company (subject to the financial strength and claims-paying ability of that issuer). Regulated by the state insurance commissioner.

Fixed Annuities. Provide a minimum rate of interest on your investment for a period of time and a fixed benefit amount if you choose to annuitize (lock in a consistent predictable income stream). Regulated by the state insurance commissioner.

Variable Annuities. For those seeking tax deferred investment growth (you determine the level of risk you are comfortable with) and possibly the opportunity to secure predictable lifetime income at some point in the future (via a rider that you pay additional fees for). Variable annuities are subject to market risk and are regulated by FINRA and state securities regulators.

Index Linked Annuities. Provides opportunity for growth (usually capped) while typically providing some level of protection from market downturns. Regulated by the state insurance commissioner.

Annuities are designed to be long-term investment vehicles and are generally illiquid. They typically have surrender charges and possibly tax consequences if you should liquidate your investment within the first 5 to 10 years or take income prior to age 59 1/2. Additionally, when annuitized, there is usually "no going back" (this is different than a "withdrawal"). Your lump sum contribution has been permanently converted to an income stream and the initial contribution is no longer accessible should there be a family emergency or the roof needs fixing. Depending on choices made and product chosen, there may or may not be something for your heirs in the event of your death.

This is just the tip of the iceberg. This is a serious decision as annuities can be complex, often difficult to understand and expensive. As mentioned above, for the right situation, the right person and circumstances, it might have merit and meet an important need.

Please consult with a professional whose interest is in providing you and your family honest and transparent counsel and education on this subject so you can make an informed decision that is right for you.

Share |