Although annuities can offer a long list of benefits, these products are also known for being somewhat tricky. One reason for this is because many annuities come with a plethora of features – along with accompanying “fine print” that quite frankly is a bit intimidating.
Because annuities require a long-term commitment, as well as what could be a large chunk of your savings, it is imperative that you determine which annuity is right for you before you move forward.
Making Sure an Annuity is Really Your Type
The first step in comparing annuities is to determine which type of annuity will best fit your specific needs. There are several types of annuities available in the market today, including:
- Fixed Annuities – A fixed annuity provides you with stated returns and protection of principal – in any type of market. These annuities will also pay out a set amount of income that you can count on. So, in return for a lower rate of interest, fixed annuities offer some nice guarantees.
- Variable Annuities – Variable annuities offer the opportunity to earn a higher rate of return, based on market performance. With that, however, there is also a market-related risk, so while you may be able to earn more, you could face the loss of principal, as well.
- Fixed Indexed Annuities – Fixed indexed annuities offer a return that is based on the performance of an underlying market index. Some of the more common indexes that are tracked by fixed indexed annuities are the S&P 500 and the DJIA. These types of annuities offer growth – oftentimes up to a set cap, or maximum – as well as principal protection if the index performs in the negative.
Calculating an Annuity’s Return
Although many annuity sellers will provide you with information on the products’ returns, the truth is that pinpointing the return from an annuity is not quite as simple as you might think. One reason for this is because, unlike most other financial vehicles, annuities can provide you with a predictable stream of income that pays you a set amount on a regular basis in return for an upfront contribution.
Given that, you could determine the annuity’s internal rate of return or IRR. This can be done by taking the present value of your investment, along with the number of your payments, and the number of payments you will receive.
The prices of annuities are oftentimes quoted in terms of the monthly income that the annuity pays out, or alternatively, the annual payout rate that they offer. For instance, if you purchase an annuity for $100,000, the price of that annuity could be quoted as $500 in monthly income. This, in turn, would give you an annual payout rate of six percent.
Should You Add More Benefits to Your Annuity?
Many annuities today come with the opportunity to add more features, based on your needs. Some of these benefits will require you to pay an additional amount of premium. So, before you opt for various items, it is important to make sure they will truly provide a benefit, or if they will instead just add to your costs.
Some of the most common added features that you may find with annuities (depending on the type of annuity) include the following:
- Death Benefit – If an annuitant (the person on whose life the annuity is based) dies before all of the contributions have been paid out, many annuities will pay the money in the form of a death benefit to a named beneficiary. There are also some annuities that offer enhanced death benefits, where the amount of the benefit actually grows over time.
- Income Rider – In some cases, an income rider can make sense – especially for those who want added guarantees with their annuity payouts. You’ll typically find these riders on fixed indexed annuities.
- Cost of Living Protection – Because prices tend to rise over time, you may be able to add cost of living protection to your annuity income payout. This feature will increase the amount of your annuity’s payout – usually by a certain percentage – which can help you to keep purchasing power intact throughout the years.
- Illness / Long-Term Care Rider – You may also find that certain annuities offer penalty-free withdrawals if you contract a terminal or chronic illness and/or if you must reside in a nursing home.
Because many of these annuity features can come at a cost, it is important to compare apples-to-apples when considering a purchase between two or more annuities.
Make Sure You Consider the Source
Even if you think you’ve found the ideal annuity for you, there is still some homework to do. That entails considering the insurance company that is offering the product. The purchase of an annuity involves making a long-term financial commitment.
With that in mind, make sure that you review the financial strength and stability, as well as the claims-paying reputation, of the insurance company that is offering the annuity. One of the best ways to do this is to check the insurer’s ratings from Standard & Poor’s, A.M. Best, Fitch, and/or Moody’s. In this regard, sticking with carriers that are rated as an A or better is typically a smart move.
What to Do Before You Get Started
If you’re in the process of comparing annuities, it could be that your insurance or financial advisor is “pitching” a particular product to you. If this is the case, you need to be sure that they are doing so because that product is truly right for you – and not because it is the only product that he or she can offer you from their “inventory”.
Any time you are considering a high-dollar financial decision, it is best to get advice that is as objective as possible from a knowledgeable source. That’s where the Annuity Gator comes in. For years, we’ve made the annuity comparison process easy and understandable – which in turn, can make the annuity buying process much less complicated.
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