Tag Archives: fixed annuities

Helpful Annuity Investment Tips

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.


An Explanation of Indexed Annuities

An Index annuity is an interesting twist in the world of annuities. It has many of the attributes of a fixed annuity and some aspect of a variable annuity. It is marketed by insurance agents as being both, depending upon the sophistication of their audience. Legally, an index annuity is a fixed annuity. However, to understand why this is true,we first need to review particular aspects of fixed and variable annuities.

Fixed and Variable Annuities

We don’t need to review items that are similar between fixed and variable annuities. These would include making contributions, withdrawal rules, taxation of withdrawals or fees ; though fees are higher under variable contracts. The area we want to focus on is the accumulation phase of the contract and how interest and investment earnings are credited to the contract.

In a fixed annuity, your contributions are credited with a fixed rate of interest. The insurance company guarantees that you will not lose any principal, nor receive less than the stated interest rate. This is one of the big selling points of a fixed annuity. You have certainty and guaranteed returns, even though you always wish the interest rate was higher. Since fixed annuities carry a fixed interest rate, they are not considered securities and do not come under the rules and oversight of the Securities and Exchange Commission.

In a variable annuity, your contributions receive investment earnings, but these are not guaranteed. You select your desired investments from a variety of mutual funds, usually high quality stock and bond funds. In this way, you have the advantage of potentially higher investment gains, and, therefore higher eventual annuity payments when you retire. Of course, you also have the potential of earning reduced investment returns due to drops in the stock market. However, over long periods, it is expected that your investment returns should outperform a fixed interest rate. Due to the exposure to the stock market, the variable annuity contract is subject to the rules and oversight of the SEC.

The Indexed Annuity

Index annuities are also known as equity indexed annuities since their investment returns are usually tied to the performance of equity or common stock investments.

An index annuity is a fixed annuity that has some relationship to a variable annuity. During the accumulation years of the contract, you receive a guaranteed interest rate which is reset periodically. On the surface, it looks just like any other fixed annuity.

However, during the accumulation phase, the interest rate to be credited is based on the investment returns of a basket of stocks or a stock index, such as the S&P 500 Index. The insurance company looks at the returns of this index and calculates an interest rate that produces a similar return. This interest rate is set and guaranteed for a certain period of time, such as 1, 3, 5, or7 years. A new rate is then calculated based on the returns of the stock index and applied for the following period.

The insurance company usually guarantees a minimum rate of interest that will be credited to the contract. This rate will be set relatively low, but it does give you the assurance that you can never lose your principal in case of a severe downturn in the stock market.

The Participation Rate

The insurance company does not provide you with the minimum guarantees and actual guaranteed rate without their getting paid for these benefits. So, you can’t simply look at the return of a stock market during a certain period and calculate your interest rate yourself. First, you won’t receive the entire return. The insurance company states a participation rate which is the percentage of stock market return that you will get. This rate might be 70%, 80% or 90%. So if the S&P 500 rises 4% in a given period, they may consider 3.2% (.80 times 4%) when calculating your interest rate at the reset date. The higher the percentage, the closer your interest rate will reflect the actual returns of the stock market investments.

Methods of Calculating Interest

There is considerable difference in how each insurance company calculates your interest rate based on stock market performance. There are 3 standard methods that may be used by the insurance companies.

  • Annual Reset or Rachet Method – This method is a calculation of stock market performance between the beginning of the year and the end of the year, and it locks in the increases. Possible decreases in market performance the following year will not affect interest you have already received. So, this method of calculating your rate may produce greater interest when the market index is moves up and down a lot during the reset period. On the other hand, to reflect this potential for greater interest, you may receive a lower participation rate under this method. Also, many companies using this method impose an interest rate cap.
  • The High Water Mark Method – This calculation will look at the highest level of the stock index during the year, and compare his point to the start of the next year. Interest may be higher with this method if the index is high at the beginning of the year and falls later in the year. However, interest does not get credited until the end of the reset period. So, if you terminate the contract prior to the end of the term, you will not get the higher interest for that period. Use of this method may also reduce the participation rate and impose an interest rate cap.
  • The Point-to-Point Method – This method calculates the change in the stock index between values at the beginning and end of the year.But interest is not credited until the end of the reset period.You will probably get a higher percentage rate under this approach, which could be several years.

Administrative Expenses

You may get hit with a host of fees and expenses. Some companies will impose management fees which are calculated as a percentage of your account value. These fees will be taken your of your earnings. Others will advertise that they have no administrative fees, but they impose higher investment management fees.
The areas of expenses, management fees and other negatives to your account must be reviewed, understood and compared to ensure you get the best deal.

Advantages of an Indexed Annuity

These annuities are designed for conservative investors who want exposure to stock market investments, but cannot afford a large drop in their assets. Older investors nearing their retirement age may consider his type of annuity to get the stock market participation without fearing loss of principal. The indexed annuity may also be appropriate for high income investors who are over the maximum limits in their other retirement plans.

Understand and Compare the Contracts

The contract provision above can be found in all index annuity contracts.  However, the provisions come under different names, and the will be slightly different among the insurance companies. You need to understand each provision and compare among the various contracts. You are investing for your retirement and you need to ensure you know what you are getting for your long term commitment.