Annuities, perhaps more than most financial products, are sold rather than bought – meaning people need convincing, if not cajoling, before they're ready to sign on the dotted line.
That's partly because annuities can get complicated fast, though their basic feature – an investment that yields payments for many years or even life – is fairly straightforward and has been around for centuries.
Stan Haithcock, or Stan the Annuity Man as he calls himself, has devised a simple way to help determine whether you might need an annuity. In his book "The Annuity Stanifesto," he boils down the decision to four key purchase considerations. He sums these up with the acronym PILL, which stands for principal protection, income for life, legacy and long-term care.
Simplicity is good when it comes to annuities, as these investments are difficult to categorize in the same breath. Some products, such as the fixed-rate variety, are conservative vehicles that generate yields similar to bank accounts, while more aggressive variable annuities offer stock-market risks and returns. The costs that investors pay also vary, and buyers have different options for making investments, such as all at once or over time. These and other features contribute to annuities' well-deserved reputation for complexity.
Among the few common features shared by annuities are the ability for investors to receive lifetime income (if they choose) and the tax-deferred growth of income and gains until money is withdrawn.
Using Haithcock's four screening tips, here's how you might evaluate your need for an annuity:
P: Protecting your principal
Conservative types of annuities, especially fixed-rate annuities, can be good vehicles to protect your money. For safety, Haithcock lumps them with bank certificates of deposit, money-market funds, Treasury securities and insured municipal bonds. This assumes you buy a fixed annuity from a very solid company, especially those rated AA or AAA for creditworthiness by independent rating agencies."An annuity guarantee is only as good as the issuing company, so 100 percent of your buying decision should revolve around that company's ability to stand behind those contractual promises," he wrote.
Don't confuse fixed-rate annuities, which are conservative contracts, with another category called variable annuities. These feature investments that can and do fluctuate with the stock and bond markets, similar to mutual funds. Most people investing in variable annuities do so for appreciation potential, not protection. Variable annuities, in fact, are regulated differently as securities, not insurance products.
Yet another version, the "equity indexed" annuities, are different still. They're essentially conservative but offer modest stock-market growth potential. The problem, Haithcock said in an interview, is that these products are hyped by commissioned salespeople for their appreciation potential, which might not pan out.
My take: If you're mainly looking for protection, stick with alternatives such as bank CDs, which offer FDIC insurance, or Treasuries, which are directly backed by the federal government. That way you can avoid the complexities of annuities without needing to worry that the insurance company could get into serious trouble.
I: Generating income for life
This is why annuities were created centuries ago, and it remains the fundamental reason to buy one. Fixed-rate annuities provide various options for buyers to get tax-deferred income. You can structure an annuity to receive payments now or later, for you and/or a spouse, for life or for a specific number of years, and so on.With fixed annuities, the income depends on your remaining life expectancy and how well the insurer manages its portfolio, with payments or yields roughly corresponding to returns offered by bonds with short-term maturities.
Annuities typically come with surrender periods, typically lasting several years after you invest, during which time you would face a penalty if cancelling the contract and withdrawing money.
The reason for surrender charges is that the insurance company goes into a financial hole because of the need to pay commissions to the person who sold the contract. "When you initially purchase an annuity, the insurance company actually loses money," Haithcock wrote. "That is why there are surrender penalties to recapture those losses if you cash out."
Still, surrender periods and penalties are best avoided, so don't buy an annuity if you're not sure about it.
My take: Steady, tax-deferred income through retirement is the main reason to buy an annuity, though you might not need this. If you're like most people, you already have access to a regular stream of payments in retirement, though Social Security.
L: Leaving a legacy to others
Annuities can be a decent way to generate assets to bequeath to others, as proceeds pass directly to beneficiaries outside of probate. However, annuity assets don't transfer tax-free, as do life insurance proceeds. For this reason, Haithcock considers life insurance the better product of the two for estate planning, though he noted people with serious medical problems likely can't qualify for life coverage.If you're looking to generate big returns that you can leave to a spouse, children or others, you might want to favor variable annuities, which provide investors with a range of growth-oriented stock funds, with greater appreciation potential (and more risk). Conservative fixed-rate annuities just aren't likely to generate much appreciation in today's low interest-rate environment.
My take: Other types of investments also can pass directly outside of probate, including Individual Retirement Accounts, regular life insurance and 401(k) accounts, so annuities don't have special merit in this regard.
L: Meeting long-term care needs
Some annuities can help you pay for long-term care, should you need this type of assistance. This could be attractive if you can't afford, or don't think you could medically qualify for, a regular long-term care insurance policy for which underwriting can be more stringent.Haithcock cited certain fixed annuities that offer long-term care riders – contract additions providing added benefits, for which you pay extra. A rider might double what you normally would generate from the annuity, assuming you someday need help eating, bathing, walking and so on. For example, if you otherwise would be in line to receive, say, $10,000 a year in annuity payments, the rider might double that to $20,000, helping you meet the costs for caregiving.
My take: The long-term care feature can help generate extra money to meet care costs without obtaining a long-term care insurance policy. But if long-term care is your focus, it probably makes more sense first to look at an insurance policy, rather than an annuity with this feature.
Fixed Annuities are long term insurance contacts and there is a surrender charge imposed generally during the first 5 to 7 years that you own the annuity contract. Withdrawals prior to age 59-1/2 may result in a 10% IRS tax penalty, in addition to any ordinary income tax. Any guarantees of the annuity are backed by the financial strength of the underlying insurance company.
Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. Withdrawals are taxed as ordinary income and, if taken prior to 59 ½, a 10% federal tax penalty. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated.
Please consider the investment objectives, risks, charges, and expenses carefully before investing in Variable Annuities. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from the insurance company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The investment return and principal value of the variable annuity investment options are not guaranteed. Variable annuity sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the annuity is surrendered.
by Russ Wiles | June 28, 2018
Author: Russ Wiles
Source: Gannett
Retrieved from: www.usatoday.com
FINRA Compliance Reviewed by Red Oak: 544704
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