5 Questions to Ask When Buying an Annuity
Fixed, fixed index, variable, immediate, deferred—with so many different types of annuities, it’s understandable that many people have questions to ask about annuities and which one would be right for them. We can help you simplify your decision. Here, we answer five of the most common questions people ask when buying an annuity.
1. Are annuities safe?
That depends. When considering the answer to this question, it’s important to note the differences between types of annuities. Immediate, fixed, and fixed index annuities are very different from variable annuities.
Variable annuities are much more subject to market fluctuations than other types of annuities. The annuity proceeds are invested directly in mutual funds—meaning that when the market goes down, so will the value of your variable annuity.
Fixed index annuities (FIAs), on the other hand, are far less risky. Your principal (along with a minimum interest rate) is protected from the ups and downs of the stock market. You can never lose your annual gains or your original investment, no matter how the market performs.
Another important thing to know is that all types of annuities are protected against business risk (the risk of the insurance company going under) by state guarantee associations and reinsurance (insurance that’s purchased by insurance companies in order to mitigate risk).
In general, fixed, immediate, and fixed index annuities are the safest options. In this article, we’ll focus on FIAs.
You may be wondering then, are FIAs the right choice for you?
2. Are fixed index annuities a smart choice?
There are a few factors to consider when deciding whether buying an FIA makes sense for you.
First, take a look at your retirement assets as a whole and consider what portion of these assets you absolutely cannot afford to lose. It’s smart to protect those funds by investing them in FIAs. FIAs generate a steady income stream once you’ve reached retirement, and they also offer more opportunity for growth than other types of principal protected investments (PPIs), such as CDs.
Another thing to think about is whether you’ll be able to live comfortably without accessing your funds in the short term. Although all FIAs allow you to withdraw a small percentage of your money each year without a penalty (typically 10 percent), an annuity should be looked at as a long-term asset in your retirement portfolio. If you choose to cash out before the end of the contract term, you could be charged a fee.
While no financial product is right for every consumer, FIAs are a good fit for many people. But you might be wondering, what’s the tradeoff? Let’s talk about gains…
3. Are your gains limited?
Some people may worry that when they opt for the safety of a fixed annuity, they’re missing out on the possible higher returns that a variable annuity could offer. We’ve all heard the expression, “nothing ventured, nothing gained,” right?
However—and fortunately— in the case of FIAs, that old saying could not be further from reality. You don’t have to risk anything in order to take advantage of the opportunity an FIA offers. When you purchase an FIA, you’ll lock in market index gains, while your principal remains protected.
For even more growth, you have the option to add an Income Rider to your annuity contract. This adds separate income values that are designed to grow faster than your annuity’s cash value. There are several different types of Income Riders, and they may incur additional fees, so it’s important to go over the different options before deciding whether to go this route.
Some newer FIA products offer uncapped growth with no spreads. And some even have 100 percent participation, or higher. (That means when the stock index realizes a gain, the account is credited with all or more of that gain—a rarity, as most annuities offer only between 80 and 90 percent participation.) Chat with one of our financial experts to find out more about all the ways to lock-in gains.
4. How will my annuity make money?
When the stock market goes up, FIAs reap gains. Your FIA will receive a portion of the stock payout, and those funds will be added to the initial principal. If the stock market goes down, there’s no need to worry, because the FIA contract has a “lock-in” feature that secures what it’s already earned. That means your annuity is protected from any downturns in the market.
Keep in mind that there are different levers the insurance company can move to determine exactly what your gains will be. Make sure you know how each works, so you can make an educated decision about which crediting method to choose.
5. What do I need to understand about a contract?
Before you sign on the dotted line, it’s important to understand exactly what you’re agreeing to. There are several moving parts of an annuity contract, including the contract term, surrender fee schedule, and liquidity limitations.
Let’s look at what those mean, one by one—
Contract term: The length of time the contract remains in force in order to avoid fees or penalties for withdrawing more than a certain percentage of your funds. Until the contract term is over, you may incur penalties and fees for withdrawing funds beyond what the contract allows (known as the liquidity limit, typically 10 percent per year, explained below). After the contract term is met, your funds will be 100 percent liquid.
Surrender fee schedule: The “surrender period” is the amount of time before you are able to access all of your funds without incurring a penalty. A surrender fee schedule outlines what the penalties are for withdrawing more than the allowable annual limit. The penalties decline over the contract term.
Liquidity limitations: Although you can withdraw funds from your annuity before the contract term is up, there will be a limit on the percentage of funds you can access without penalty. If you withdraw more than this percentage, you may lose interest earned on deposits, incur fees, or both. Be sure you know what these limitations are before you decide on an annuity product.
Do you have more questions about annuities? Are you ready to find out more about annuities, and how a fixed index annuity can be a vital piece of your retirement planning package? Download NAIC’s Buyer’s Guide for Deferred Annuities today.