Although annuities have the ability to offer you lifetime income, they are not technically investments and this is one of the many misconceptions surrounding annuities and how they work. Here are 16 things you should know about annuities before signing up for one.
- Annuities are ‘transfer of risk’ contracts between you, the annuitant, and an insurance company. They have been around forever, dating back to Ancient Rome, as a method for legacy planning, covering long-term care costs, income and a variety of other things.
- Annuities offer life long income no matter how long you live and have less restrictions surrounding contributions than other retirement options.
- In exchange for transferring life risk to the insurance company, the annuitant pays a premium (monthly or lump sum) that is then paid back incrementally for a predetermined time.
- The main difference between life insurance and annuities is that life insurance provides benefits after death and annuities provide benefits while living.
- There are two main types of annuities deferred and immediate and within each of those two categories exist fixed, variable and fixed indexed annuity options.
- Immediate annuities provide income immediately: in 30 days for monthly payouts and in a year for yearly payouts. Deferred annuities provide income at a predetermined later date after the accumulation period has ended.
- Fixed annuities offer a minimum rate of return and a fixed series of payments upon annuitization by investing the premium payments into high quality investment vehicles.
- Variable annuities carry high investment risks due to them investing premium payments into a very of sub accounts based on each own’s separate objectives. The return and interest rate is then based on the performance of these sub accounts.
- Insurance companies don’t guarantee variable annuities.
- Annuities carry steep withdrawal fees that may decline over time.
- Taxes are paid on annuities upon withdrawal. If you make payments using pre-taxed money, you will be taxed at your ordinary income rate. If the money invested is considered ‘after tax dollars’ you will only be taxed on your earnings.
- Annuities are expensive and there are a lot of fees involved. Some annuities may not carry an annual fees but plenty do (between 2.5% and 3%). The more complex the annuity, the higher the fees.
- Commissions absolutely apply, even if their “built into the price”. Commission rates can be anywhere between 1% and 10% depending on the complexity of the annuity.
- Your annuity, or “guarantee” is only as good as the insurance company that issued it. Verify the insurance company and triple-check their ability to uphold their end of the bargain. A.M. Best, Moody’s and Fitch and Standard & Poor’s provide insurance company reviews and the Comdex rates the best and work insurance companies.
- Additional riders and benefits to the contract reduces the amount of income given in an annuity contract.
- You can reduce your risk with annuities by buying into them slowing so you can assess the risk, lock into a desirable interest rate and determine if annuities are for you.
It’s also important to consider whether or not annuities are a good tool for you. If you have more than enough money to retire or are suffering from chronic illness, annuities won’t benefit you. Annuities are ideal in supplementing other, pre-existing retirement tools in the event that your lifespan extends beyond your planned income needs. Contact Hornet Capital Solutions to start working towards financial freedom today.