When discussing investment tips for annuities, you need to split the discussion into two parts. This is because fixed annuities are much different than variable annuities when you look at the investment factors. However, many of the characteristics of fixed annuities and variable annuities are the same, and these can be discussed together.
Fixed and Variable Annuity Investment Tips
An investment tip for any annuity is to never use an insurance company product as an investment over the short term. These products all involve commissions and fees which are higher than normal investment products, such as mutual funds. While you may like the guarantees or investment potential, it will take a number of years for the expenses to smooth out. In other words, much of the expenses in these contracts are charged up front, so you don’t want to buy an annuity for only 2 -3 years and pay the full expenses. If the up-front expenses are spread over a 25 year contract, the annuity makes more sense as an investment.
Another tip is looking at the quality of the insurance company. You are making a long term commitment of 20, 30, or even 40 years into the future. You want to confident that the company will still be inexistence to pay your retirement benefits. Some insurance companies do become insolvent. While the state you live in may have some statutes that could protect part of your annuity, you simply do not want to have to go through this situation. There is no government agency that guarantees your money, such as how the FDIC guarantees bank deposits. So, stick with the major insurance companies that are highly rated. Check the ratings done by A.M. Best, which is a well-known company that rates all insurance companies.
Understand all the fees, commissions and hidden charges. These expenses will be fairly high and they will come under many different names. You are receiving insurance guarantees and you will be paying for these assurances. Some contracts with many guarantees can charge expenses of 7 – 8%. If you do not see all the fees, management expenses, and surrender charges clearly presented, exclude the company from your search. If after reading the material, the product appears to be too good to be true, walk away. Again, there is no free lunch in buying annuities.
Ask about the withdrawal charges prior to retirement. All contracts will permit you to terminate the contract if it has not gone into payout status. However, you may be charged a stiff surrender fee, especially if you terminate in the first few years of the contract. These fees are reduced with each year the contract is active.
Make sure of the guarantees at retirement. Most annuities are guaranteed to be paid for your entire life,and even to your beneficiary if you elect one of the options. Some annuities are not designed to be payable for life and they may be advertised with your receiving higher payments. So, make sure you are getting at least a life annuity rather than just payments for a certain period of time.
Fixed Annuity Investment Tips
Most fixed annuities are purchase for the security the contact offers for your entire life. Realize that the amount you receive from a fixed annuity will not change. If you have all your retirement assets in an annuity, inflation could create problems for you later on. So, it is never advisable to all your assets in one basket. Take a portion of your assets to buy a fixed annuity if this is the product you want. Put the remainder of your assets into investments which will keep pace with inflation, such as stock and bond mutual funds.
When shopping for a fixed annuity, search online and do comparisons. Fixed annuities are fairly straight forward. The costs and payout projections should be fairly close to each other. You can then select the best and strongest company. Doing this online is the easiest you will have the information for each company in one place. If you try to call each company, they will each assign you to an insurance agent. Each agent will want to make a presentation. Doing the search online eliminates most of the presentations.
Variable Annuity Investment Tips
The variable annuity involves your selecting the mutual funds to be used as investment during the accumulation phase of the contract. You need to do a lot of reading about variable contracts so that you know what to expect when you go shopping for the best product.
The first tip is to look at the selection of investments offered by the insurance company.Some companies will only offer their own funds as investments. Others will offer a wide array of name brand funds from which to choose. You want the largest number and variety of funds possible. There should be a large number of stock funds and bond funds. You should be able to recognize the names of the fund families, such as Fidelity, T Rowe Price, or Vanguard. If the company only offers their own funds, they are trying to lock you in so that they get the management fees.
You should focus on companies whose menu of mutual funds consists mostly of no-load funds. There is no reason that the funds should impose a sales charge up front. You are already paying quite enough in fees and you don’t need the addition of mutual fund sales charges.
Look at the expenses. The fees and investment management charges can be steep under a variable annuity contract. If you find a contract with relatively low fees, check the fund offerings under the first tip above. The company may only be offering their own funds so they get the management fees. In exchange for this, they can advertise that their other contract fees are the lowest to be found in the industry. So, you have to look at the whole package. Again, if one part of the contract appears to very cheap, you need to analyze the other provisions to find if there are hidden fees.
Read, Understand, Shop
You need to keep reading material to educate yourself on the pros and cons of both fixed annuities and variable annuities. If you don’t understand a concept, ask questions. Once you understand, start shopping online for the contract provisions you want and compare the costs. Only then should you contact an insurance company and speak to an agent. You will be in a position to ask intelligent and meaningful questions.
In the end, you will be able to buy the product that suits your own financial situation.