Do You Know Your Annuity?
Many of my clients own annuities. Many do not know what type of annuity they have. Here are some Q & A’s on annuities. I hope you find them helpful.
Q: What are the different types of annuities that can be purchased?
A: Fixed, indexed, variable, and immediate annuities are all available in the marketplace now.
Q: What is a fixed annuity?
A: An insurance company guarantees your principle and your interest rate for a certain period. It could be 5-7-10 years. There is no market risk to this type of annuity. It is a very conservative tax deferred savings vehicle.
Q: What is an indexed annuity?
A: An insurance company guarantees your principle for a certain period of time. It could be 5-7-10 years. They do not guarantee the interest you will receive. The interest you receive is based on a complex formula whose main component is a stock market index. That index could be the S & P 500, NASDAQ 100, Russell 1000, Russell 5000, the DJIA, or many others. This type of annuity is designed to pay higher interest over a 7-10 year period than other “safe” vehicles such as bonds, CDs, treasuries, or fixed annuities. I have seen years where these annuities have paid 0% interest and years where they have paid 18% interest. It is my opinion that over a 7-10 period of time they should average between 5-7% if history is any guide.
Q: What is a variable annuity?
A: An insurance company does not guarantee your principle or your interest. You have a choice of 1-10 years on contract periods. They usually guarantee your principle to be paid out to your heirs in the form of a death benefit. Your money is invested in a diversified portfolio of stocks and bonds whose performance is dependent on the money managers overseeing the accounts. Many insurance companies now offer for a fee a rider that will guarantee you income from your variable annuity even if the value of the annuity slips due to a poor market. For some people, these types of annuities with these riders make a lot sense. These types of annuities are designed to offer you the chance to stay ahead of inflation.
Q: Can you give me an example of how a variable annuity with an income rider may have benefited an actual client of yours?
A: In 1998, my clients Susan & Marvin (names changed to protect actual clients’ privacy) retired to Henderson, Nevada in their 60s with a $1M mutual fund portfolio. From 2000 thru 2003 the value of the portfolio declined to $400K. If they would have had a variable annuity with an income rider in 2000 they would have been guaranteed (subject to the claims paying ability of the insurance company) a $50,000/year income for the rest of their lives. Furthermore, there is the option in good markets to reset the withdrawal at a higher level. Withdrawing 5% of $400,000 would only provide a $20,000/year income.
Q: What is an immediate annuity?
A: An insurance company guarantees you an income for a certain period of time after you make a deposit. They guarantee to pay you interest & principle over what can be a 10-year period, or a lifetime period. Sometimes the payments will continue to a spouse after you die or they may cease upon your death. This would be a way to guarantee you would never outlive the payment stream. These types of payments can carry inflation risk.
Q: Are annuities a good deal?
A: It depends on your objectives. If you need a lot of liquidity then they may not be for you. Most annuities allow you to withdraw 10% annually of the value of the annuity. If you withdraw an amount beyond that you will pay a penalty. If you do not like having your money tied up for a long period of time you should choose a shorter contract period.
Q: What are the fees with annuities? Aren’t they high?
A: There are no fees with fixed, indexed, or immediate annuities. There are spreads similar to the spreads on CDs. The insurance company earns a certain amount on their bond portfolio and pays you that less their “cut” for administration costs (which includes commissions payable to the agent) & profit.
A variable annuity can have high fees relative to no-load mutual funds. They are often criticized for that in and of itself. What is not reported is what you receive for the fees. You receive a death benefit, tax deferral on your money, high quality money management services, and when chosen, the income rider to guarantee you an income from the portfolio. If you feel those things are not worth the fee then you should not purchase this type of an annuity. If you feel they are worth it, then it could be a good fit for you.
For a free review of your annuity please call me and I will tell you exactly the type of annuity you have and whether it is a good deal.
Phone (949) 489-2380 or
email at paulpendorf@bakerjensen.net
to get the answer any specific annuity, health insurance or long term care insurance questions you may have.