Posts Tagged ‘investment’

Dealing with Annuity Brokers

An annuity is a life insurance product that promises payments to a beneficiary throughout his or her lifetime (or a set number of years, known as “period certain”) in exchange for prior payments to the life insurance company. An annuity has two stages during its lifetime: an accumulation phase in which funds are deposited into the product either at regular intervals or as a single lump sum, and a distribution phase when the insurance company pays regularly to the beneficiary. The primary difference between an annuity and a traditional life insurance contract is that an annuity is designed to be payable to the policyholder during his or her lifetime.

These products are also regulated in various degrees by the IRS depending on the product’s structure. While annuities are commonly used as retirement funds similar to pensions, they can be useful for just about any purpose in which a guaranteed income is desirable at a later date.

Who Can Sell an Annuity?

By law in the United States, only life insurance companies can sell annuity products. Therefore, only a properly licensed insurance professional with an appointment from a life insurance company can sell an annuity. In the United States, the terms “annuity broker” and “annuity advisor” are somewhat synonymous. In general, annuity brokers are the professionals of record licensed to sell annuity products by a state insurance commission. In addition, annuity brokers who sell variable products must also hold the relevant FINRA securities licenses (usually Series 6 and 63 depending on the state). “Annuity advisor” may refer to someone qualified to service the annuity product after the sale, but not necessarily the agent of record who sold the product.

What Kinds of Annuities Are Out There?

Fundamentally there are three varieties of annuities contracts. Fixed annuities, or annuities with a contractual, predetermined return on investment, and variable annuities, or annuities in which the return of investment is determined by market conditions. Fixed annuities are somewhat analogous to savings accounts, with a low but stated interest rate. Variable annuities are akin to mutual funds, utilizing funds based on stocks, bonds and other financial vehicles called “separate accounts” which are in practice very similar to mutual fund subaccounts. While variable annuities traditionally outperform fixed annuities over the long term, they are subject to risk. It is possible to lose money on a variable annuity, something any potential investor should be keenly aware of.

Conceived in the mid 1990s, the third type of annuity contract is a fixed indexed annuity (FIA), or simply an indexed annuity, which is a hybrid of the fixed and variable annuity. Like the fixed annuity, rate of return is based on a stated formula and it does not use special accounts. Like the variable annuity, the rate of return is based on market performance. Rate of return on a fixed annuity is based on the performance of a stock index (commonly the S&P 500, although others can be used). Many indexed annuity products employ caps and floors on their products, which means that the annuity can never make more than a certain amount (say 9 percent) or less than a certain amount (say 2.5 percent) in any given year regardless of the stock index’s performance. The indexed annuity is often a good fit for an individual who wants better performance than a fixed annuity can provide but is hesitant to assume the risk required with a variable annuity.

What Annuity Brokers Will Ask You

First and foremost, annuity brokers will ask what the annuity is intended to be used for. While retirement funding may be the most common answer, it isn’t the only one. Annuity brokers will also ask you questions on your retirement timeline, your investment tolerance (i.e. how much experience and comfort you have in various investment vehicles), and of course how much you expect to invest over time. If looking at a variable product with an annuity broker, these questions are required by government and industry regulation.

Annuity brokers may also ask you how you would like to pay into your annuity. Some annuity products can be started up with as little as $25. Others, such as a single premium option, require substantial amounts. Single premium is what it implies; pay a large lump sum into the annuity once then let it accumulate until it’s time to annuitize, or switch from the accumulation phase to the distribution phase.

What To Ask Your Annuity Broker

Ask your annuity broker about the surrender charge schedule on any annuity product. A surrender charge is the percentage of a annuity’s value the life insurance company will hold if the product is liquidated in the first years after its creation. This is in addition to any government withholding that may apply. For example, the company may charge a surrender charge of 10 percent in the first year, 9 percent in the second year, and so on. Surrender charges are typically in force for five to seven years; however surrender charge schedules lasting longer than 15 years are not unheard of.

One should also consider what whether to invest in a qualified annuity – usually in the form of a regular or Roth IRA – or in a non-qualified annuity. With qualified annuities, yearly contributions and disbursements are limited (currently $5,000 per year across all IRAs you own, but increasing to $6,000 in 2011 if one is age 50 or over, with disbursements without penalty allowed only after age 59 ½), but one enjoys tax free or tax deferred status. Usually non-qualified annuities have fewer restrictions regarding contributions and disbursements, but are not as favorable from a tax standpoint. A qualified annuity is designed to serve as a retirement fund and should be used accordingly. Non-qualified annuities may be a better fit for other situations. Both qualified and non-qualified annuities are generally available as fixed, variable or indexed products.

If looking at an indexed product, ask the annuity broker how often the cap and floor changes, when was the last time it changed, and if he expects it to change again in the near future.

What is an Immediate Annuity?

Annuities can be very confusing. Many people think of an annuity as a long term investment that you can add money to each month until you retire so you can have a retirement income. This is one way an annuity is built. Another kind of annuity is an immediate annuity. This is an annuity that you purchase with a lump sum of money right at the time you need to start drawing an income.

This was why annuities were originally developed in the first place. People who had saved money all during their working years would put the money into an immediate annuity that would start paying them a monthly income right away. This was a primary way that people could guarantee that they did not out live their retirement savings.

Who Would Purchase an Immediate Annuity?

The purchaser of an immediate annuity would be someone who needs to use the money right away as a source of steady income. This would more times than not be a person who is 65 years old and is retiring from the work place. They may have a company pension and social security benefits starting, but they want to supplement these two income sources with another source of guaranteed income for life.

Many people have become concerned about their pension money because of the economic downturn in recent years. If the company they worked for and get their pension from goes bankrupt they may not be able to rely on their pension for income. A lot of people are also concerned about the future of Social Security benefits. An immediate annuity can help to diversify the risk with their retirement income.

Another type of person who would purchase an immediate annuity may be a guardian for a disabled person. They may be caring for a disabled child or other family member and they want to make sure that they have a stream of income that their disabled family member cannot outlive. This is one way of making sure that the person is cared for even after other family members have died.

What Should You Consider When Purchasing an Immediate Annuity?

One important thing you should consider when purchasing an Immediate Annuity is the credit rating of the insurance company you are purchasing it from. An immediate annuity will more than likely be invested at a fixed rate for a certain period of time. It is critical when purchasing fixed rate annuities that the insurance company not have financial trouble. It is rare for an insurance company to go bankrupt but if they do, fixed annuities can be in jeopardy. The interest and principal are tied to the ability of the insurance company to make payments.

Another thing to consider is obviously the rate of interest you will receive and the other contract options that are available on the annuity. Make sure that you understand the death benefits and chose your contract options appropriately. This would involve deciding if you want the income stream based only on your life or on your life and your spouse’s life.

If you have it based only on your life, you should consider having a 10 year certain or 20 certain. This means that if you die before receiving the majority of the benefits you pay into the contract, your beneficiary will receive at least 10 years minus what you received. If you have a 20 year certain they will receive 20 years of income minus the years you received.

In the event you select to have the income stream based on both you and your spouse’s life, the income payments will be a little bit lower each month, but they will cover two lives instead of one. These are just a couple of examples of how you may choose to have your immediate annuity pay benefits. You should read all the options available to you before you decide which one to select. It will difficult to change later.

How to Fund an Immediate Annuity

You can fund an immediate annuity with money that you have saved over the years in a savings account or in CDs. You may fund it with money that you were putting into a deferred annuity for a number of years.

Many people roll over qualified retirement money into immediate annuities. This would be 401K money or IRA accounts. Qualified money means that taxes have not yet been paid on this money. However, many people opt to use annuities for their retirement money because they feel that the money will be safer and steadier.

They want to have a set income that they can count on rather than dealing with the ups and downs of the investment accounts inside their 401K accounts. An immediate annuity will be set and although the interest rates may change the income stream is much easier to predict.

What Companies Offer Immediate Annuities?

Almost any insurance company that offers annuities will offer immediate annuities. They all have customers that are retiring every day so it would be unusual if a company did not have this product. Just a few names of insurance companies with immediate annuities are MetLife, ING, MassMutual, Prudential and John Hancock. These are just a few. As stated most insurance companies that offer annuities will have an immediate annuity product.

Just make sure that the insurance company has a strong financial ranking. As mentioned before, the insurance company will be the one that determines the security of your future income stream, so just make sure that they are solid. You will want to do some comparison shopping to see who has the best rates for the longest period of time. Also check the income options that each company offers to make sure that you have the best option for your particular situation. If you have a solid company that will pay you a good interest rate, you should not have to worry about this portion of your retirement income.