Baby Boomers are buying a record number of annuities –
insurance products that offer guaranteed lifetime income – and in so doing are
taking a wise step toward mitigating the fear of running out of money in
retirement. Most are not careful buyers, however, and that means they are not
purchasing annuities that best fit their needs even though many are making one
of the biggest investments of their lives. Here are eight tips to weigh before
consummating a purchase:
Know why you are
buying an annuity in the first place. Annuities are meant to be a safety
net to supplement your traditional portfolio. If the stock market tanks while
you are in your golden years, you’ll be glad you own an annuity. The tradeoff
is that annuities do not have the liquidity of stocks and bonds.
Make sure the
benefits of the annuity fit your needs. If you are married, for example,
you probably want a joint annuity, which means if one spouse dies, the other
still receives lifetime income. Many couples, however, are sold single annuities,
which means if one spouse dies, the survivor gets only the residual cash value
of the annuity as the lifetime income generally ceases. Single annuities are
often sold to couples without discussion because the payments are higher and
seemingly more attractive.
Shop for annuities
with at least three financial planning firms and make sure one of them is
independent. That means they are not “captive” to an insurance company and
the limited selection of products that the insurance company or the broker/dealer
To determine if an
advisor is an independent, full service advisor, ask if he sells securities
– specifically, stocks and bonds, mutual funds and variable annuities. If he
does, he is associated with a broker/dealer or is a registered investment
advisor. Make sure any advisor you deal with has at least 10 years of
Compare all the major
types of annuities – variable annuities, index annuities, fixed annuities
and immediate annuities – and once you decide which one you want, compare
several choices in that sub-category. Make sure the salesman fully understands
the annuity and backs up what he says with illustrations showing how the
product works, as well as written documents.
Make sure you
thoroughly understand the annuity fees. On a variable annuity, for example,
a salesman will probably show you mortality and expense and so-called rider
fees covering your fees for death benefits and income benefit – but not mention
the fees you pay for the management of your sub accounts (mutual funds) within
Know the surrender
fees you would face if you had to liquidate your annuity prematurely.
Surrender fees range from 1 to 20 percent.
When you zero in on
an annuity, check the credit rating of the insurance company selling it. At
minimum, go with an investment grade rating. At A.M. Best, the biggest rater of
annuities, that is B+.
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