Annuities can provide a steady flow of retirement income. But there are many types of annuities and not all of them are right for everyone. Insurance companies and agents are sometimes over aggressive in trying to convince a consumer to buy a particular annuity. Just because an annuity comes with a recommendation doesn’t always mean that it is the right one for a person’s unique portfolio. It is always better to do the research to find the right one for your own situation.
Benefits and limitations of different annuities
By knowing the benefits and limitations of each type of annuity, you can find the right one for your needs. The immediate annuity is a good starting point. With an immediate annuity, the customer gives the insurance company a lump sum cash payment in exchange for a guaranteed monthly income payment that continues until the end of the client’s life. With this type of annuity, the customer cannot outlive the money. The problem with this type of annuity in today’s low long term interest rate climate is that the monthly income payments are not sufficient to justify the original large outlay of principal to buy the annuity.
Consumers shopping for an immediate annuity may also be comparative shopping for a fixed annuity. Many investors who are looking for a hedge against losses in the stock and bond markets look to the immediate annuity which offers a guaranteed return of principal. Conservative investors who normally keep their money in Money Market funds and CDs prefer the higher rates which insurance companies offer on fixed annuities. But because the owner of the annuity can only withdraw 10 percent of the principal a year, this would not be the right annuity for a consumer who needs to be able to withdraw larger amounts. This problem can sometimes be overcome by selecting a shorter annuitization period, thereby increasing the monthly payments.
For consumers who want to maximize growth rates and take advantage of tax deferral, the best option may be variable annuities. Variable annuities can offer the potential of a professionally managed capitol appreciation combined with tax-deferred earnings growth. When the stock market is in a high growth period like the last decade, the variable annuity has been widely sold because of its unlimited growth potential. Additionally since the capitol gains and dividends are deferred until withdrawal, the returns can be much greater. The biggest drawback to the variable annuity is this type of annuity is not guaranteed. Thus, in a major stock market decline the annuity can suffer a significant loss in value.
An investigation of annuities should also include the index annuity. The index annuity is one of the newer annuities to be offered to consumers. The appeal of this type of annuity is the growth potential in periods of rises in long-term interest rates. Index annuities owners benefit from increases in the stock market at rates that are higher than fixed rates. There are stop loss features which protect the principal from big market swings. The annuity is also guaranteed as long as the owner does not cash out the contract before the end of the surrender period.
The Use of Annuities for Retirement
With more people retiring and living into their 80s and 90s, it is important to have a plan that provides both income and growth. Annuities can be valuable additions to consumers financial portfolio. Finding out the different types of annuities and understanding their benefits and limitations can help in selecting the right product for your own financial situation. Whether you are looking for a guaranteed income from an immediate annuity or if you just want a higher return on your savings from an index annuity, annuities offer solutions to help meet your needs.
Harold Read has been a licensed Life, Health, Property and Casualty agent since 1988. For more information and articles on insurance visit www.theinsuranceledger.com |
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