“What’s the deal with annuities?”
Jerry Seinfeld is an excellent comedian and his show Seinfeld used to start with his monologue about a certain topic and it always started with “What’s the deal with….”
So, this week I wanted to cover a couple topics regarding annuities. First, let’s answer 3 basic questions concerning annuities.
- What is an annuity?
- Do I even need an annuity?
- What are the 3 main types of annuities?
What Is An Annuity?
An annuity is a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid. Annuities are most often bought for an immediate or future retirement income. These would be called Immediate Annuities or Deferred Annuities. Annuities are designed to give investors long-term income as a retirement planning vehicle.
Do I Even Need an Annuity?
When people are asked “Why do individuals buy annuities?”, the top 2 answers are usually safety of principle and guaranteed lifetime income. The problem is when you work with a commission-based broker, advisor or bank representative, they typically want to sell you an annuity for the commissions they’ll receive. So the question I think you should really be asking is, Do I even need an annuity?
What Are The 3 Main Types of Annuities?
There are generally 3 types of annuities: Variable, Fixed and Indexed. Understanding the 3 main types of annuities will help you determine which one, if any, are beneficial for you and your financial goals. It will also give you a better understanding of the potential risks and benefits these products provide.
The insurance company agrees to pay you no less than a specified rate of interest during the time that your account is growing. e insurance company also agrees that the periodic payments will be a specified amount per dollar in your account. ese periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse. In other words, you are guaranteed a minimum rate of return over a specified period of time and generally don’t suffer losses because of these guarantees, but that return guarantee can be too low for your financial goals
In a variable annuity, you can choose to invest your purchase payments from among a range of different investment options, typically mutual funds. e rate of return on your purchase payments, and the amount of the periodic payments you eventually receive, will vary depending on the performance of the investment options you have selected.
The insurance company credits you with a return that is based on changes in an index, such as the S&P 500 Composite Stock Price Index. Indexed annuity contracts also provide that the contract value will be no less than a specified minimum, regardless of index performance. Be aware these benchmarks for this annuity do not pay dividends.
Variable annuities are securities regulated by the SEC. An indexed annuity may or may not be a security; however, most indexed annuities are not registered with the SEC. Fixed annuities are not securities and are not regulated by the SEC.
You can learn more about variable annuities by reading the publication: Variable Annuities: What You Should Know.*
To be specific, there are a number of other annuities out there so here is a more detailed list.
- Single Premium Immediate Annuity
- Deferred-Income Annuity
- Qualify Longevity Annuity Contract
- Multi-Year Guarantee Annuity
- Fixed-Index Annuity
- Variable Annuity
- Charitable Gift Annuity
A lot of these are self-explanatory and I wanted to get to a comment that gets over-used out there.
“All annuities are bad.” Or “Don’t buy an annuity.” Gets passed around at dinner tables and social gatherings faster than the drinks do.
In my opinion, this is just a lazy statement or a comment to make because you heard it from someone else.
Let me be clear, not everyone needs an annuity and that’s why it’s the second question stated above. Hating all annuities is like saying I hate all mutual funds. Some are good, some are below average, but not all are bad.
Annuities are contracts that help transfer risk.
There are 4 primary areas of risk that annuities are used for.
- Lifetime income
- Principal protection
- Wealth transfer
- Long Term Care
If you do not need any protection with one or more of these risks, then guess what? You probably don’t need an annuity. End of story.
As Mr. Jerry Seinfeld always asks, “What’s the deal?” So should you about your current financial situation before having a knee-jerk reaction about a topic that has helped many people plan for retirement.
There are many strategies on how annuities can help investors plan for retirement, but it’s helpful to have an honest conversation with an advisor who has your best interests in mind, who puts their clients first, and who will help you achieve your retirement goals versus one looking for a commission sale. I hope this information helps you on your financial journey.
*Source: www.sec.gov/answers/annuity. Securities and Exchange Commission and National Association of Securities Dealers (Now called FINRA , Financial Industry Regulatory Authority, Joint SEC/NASD Report on Examination Findings Regarding Broker-Dealer Sales of variable Insurance Products (SEC and NASD, 06/2004)
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