Many advisors think they're doing their clients big favors by telling them that they'll never put them in an annuity. And with all the negative press that annuities get, it's not too surprising.
However, I think annuities are fantastic – in the right situation.
There are at least 15 reasons why some people shouldn’t buy an annuity. If you’ve done much research on the subject, you’re probably already aware of a few of them.
But you also need to know that annuities serve very specific purposes, and if you happen to fall into one of these scenarios, then an annuity can be a game-changer:
1. The stock market freaks you out
Typically when a financial advisor offers you a guarantee, you have to tread carefully. But if just watching CNBC elevates your blood pressure too much, then an annuity is the answer.
Equity-based investments tend to fluctuate in value, which is to say that they can go down as well as up. But annuities can protect your principal value, ensuring that your investment remains fully intact to earn income in the future.
This can be especially important if you are very close to or already retired. Annuities can provide an immediate income and eliminate the worry of making up potential losses.
Does this describe you? If you think you might benefit from an annuity, then I strongly recommend you work with a reputable agent to find the right terms for your unique situation. Fill out this simple quote form and we'll put you in touch with someone you can trust.
2. You want to know to the penny how much interest you're going to make
Annuities – mostly fixed annuities – offer guaranteed returns. Once again, if a steady income is your primary motivation for making the investment, annuities can provide just that.
Some annuities will provide you with a variable return, allowing you to participate in higher risk/higher yielding options, but will also assign a guaranteed minimum return. This might be just what you're looking for.
Fixed annuity rates usually pay more than bank CDs, although you'll have to lock up your money for 3-5 years to get it. Last year I had a client that wanted absolutely nothing to do with the market and wanted a guaranteed return. CDs were paying nothing and the best rate I could find him was a 5 year fixed annuity paying 3%.
I even tried to talk him out of buying it but that was the only thing that would make him and his wife feel safe (he had a bad experience with a previous advisor). If a guaranteed is what you're after, an annuity might make the most sense.
Does this describe you? If you think you might benefit from an annuity, then I strongly recommend you work with a reputable agent to find the right terms for your unique situation. Fill out this simple quote form and we'll put you in touch with someone you can trust.
3. You want guaranteed and predictable income
As I wrote earlier, annuities are investment contracts, and one of the more important provisions you can include is guaranteed income. You can do this with immediate annuities or the income riders that fixed index annuities offer.
You can buy an annuity and have it begin paying out an income stream immediately. Some deferred annuities with income riders will increase each year until you decide to start taking an income (like how your social security benefit increases each year you don't touch it).
With annuities that offer an income stream, you'll know exactly how much you're going to get and for how long, once you decide to take it.
This is an excellent option in retirement since it operates as something very much like a standard pension. The big difference though, is that unlike a pension, if something happens to you or your spouse, the remaining funds would be passed on to your family.
Does this describe you? If you think you might benefit from an annuity, then I strongly recommend you work with a reputable agent to find the right terms for your unique situation. Fill out this simple quote form and we'll put you in touch with someone you can trust.
4. You can't get life insurance (and want to leave more to your heirs)
You can use an annuity to provide some of the same benefits as a life insurance policy. But, because an annuity is an investment contract, you don't need to qualify for it the way you do life insurance.
If you have a health-related condition that makes life insurance impossible to get or prohibitively expensive, an annuity might be a really good alternative.
Name your spouse as a beneficiary and the contract will automatically pass to him or her after your death.
Some annuities also offer death benefit riders that can pay out a bit more than others. With an annuity, you won't get as much death benefit as a life insurance policy, but you will get some.
Does this describe you? If you think you might benefit from an annuity, then I strongly recommend you work with a reputable agent to find the right terms for your unique situation. Fill out this simple quote form and we'll put you in touch with someone you can trust.
5. You want long term care protection, but don't want to pay out of pocket
With people living longer than ever, there is growing concern for long-term care. Straight long-term care insurance policies are expensive, particularly as you get older.
Most of my clients who have purchased long term care policies have done so because they had a personal experience with a loved one (usually a parent) that spent time in a nursing home. For them, purchasing the insurance was a no brainer. For others, however, learning how much a premium costs each month is enough to convince them to risk it.
But there's another solution: buy an annuity. Here are two to consider:
- Hybrid Annuity or Insurance Products w/ LTC Benefit. There are products that offer either an insurance benefit to your heirs or a guaranteed return (albeit small) as the primary function. In the event you needed nursing home care, then policy would convert to a LTC policy paying a portion of the costs for a determined period of time. The amount and time depends on how much you pay up front and your age. Clients like this option because it's not a sunk cost of paying the LTC premiums each month and offers some flexibility of getting your money back if you need it.
- LTC Double Benefit from Income Riders. For the annuities that offer a guaranteed income stream in the form of an income benefit, some carriers will also offer a “LTC doubler” benefit. How this works is let's say that your income benefit is determined to be $20,000 per year from the annuity, and you needed LTC care. Instead of $20,000 per year, your benefit would then double to $40,000 per year while you're in the nursing home. This benefit would last for 5 years and then revert back to the original $20,000 annual benefit lifetime income. Every carrier is different so it's important to understand all the moving parts.
Both of these options aren't meant to completely pay for 100% of your LTC costs, but it does help pay a portion of it.
Find an Annuity
15 Reasons Not to Buy An Annuity
Hopefully I've convinced you that annuities do serve a purpose, and can be a great option for some people. But they don't get a bad rap for nothing, either. Here are 15 reasons why you might not want to explore the annuity side of things.
1. You can invest your own money
If you can and are willing to invest your money – even if only through mutual funds and exchange traded funds – you don’t need an annuity. Annuities are excellent for people who either know little about investing, or want guaranteed returns.
2. You’re conservative with spending
Some people simply don’t know how to manage money, and an annuity is a perfect way to avoid burning through all of their retirement savings. Annuities are long-term contracts, generally set up specifically to parcel out money for the rest of your life.
But if, on the other hand, you're pretty good at managing your own money, an annuity might be restrictive and unneccessary.
3. You aren't comfortable paying a lot of fees
Annuities can provide many valuable benefits, but they do come with a price. Unlike mutual funds (where you can buy the no-load and low-load funds) or certificates of deposit (where there will be no investment fees at all), annuities tend to have several fees associated with them.
Here's the kicker though: many of these fees are hidden, so that you never really know what you're paying unless you read the 157 page prospectus.
Side note: If you suffer from insomnia, I hear keeping a copy of an annuity prospectus on your nightstand is a great remedy.
You should also remember that this is a very long-term contract, and that there are surrender charges that can be as high as 20% (but usually in the 8-10% range).
All of these fees can reduce your investment and returns if you end up in an annuity that doesn't perfectly match your financial situation. Make sure you get quotes from a reputable agent, and that you understand what you're buying!
4. You want pure investment returns
Though insurance agents are fond of telling people that annuities offer guaranteed investment returns, those guarantees come at a bit of a price. These guaranteed returns can be well below what you can typically get in investment markets, but that's the same if you choose to save your money in a CD.
Additionally, these guaranteed returns can come with limited upside gain. For example, though a given market index may return 12%, the insurance company may cap your return at 9% (some are as low as 3% right now).
And who gets the extra investment return that you didn’t? The insurance company, of course. If you don’t like that kind of arrangement, you'd do best to avoid annuities entirely.
5. You want control of how your money is invested
As a rule, annuities are not investment democracies. In fact, the insurance company will invest your money in the insurance company's equivalent of mutual funds. Only they're typically not publicly traded mutual funds, of the kind you will find with your friendly, neighborhood investment broker.
The insurance company will usually choose the funds, and even the allocations, leaving you little choice as to how the money is invested.
If this seems somehow unfair, you have to remember that annuities are primarily designed for people who don’t know how or don't want to invest their money. And for that type of customer, having control over their investments is a non-concern.
6. You don’t like strings attached to your investments
Annuities are not at all like mutual funds. When you invest in mutual funds, you invest your money, the terms and fees are commonly understood, and you can generally exit at any time you like. Annuities however are contracts that come with numerous stipulations. For the most part, those stipulations are put in place to protect the insurance company.
Surrender charges are an excellent example. If you know that you will have to pay an 8% charge in order to liquidate your annuity, you’ll probably never do it – especially if you paid a similar fee when you first invested in the annuity.
Such stipulations attach strings to your investments, and remove your ability to make investment changes after the fact.
7. You have no need for additional tax-deferral
Much like IRAs and other tax-favored retirement investment vehicles, annuities provide tax deferral of your investment earnings, allowing your money to grow without being reduced by annual income taxes. One major difference however is that you will not get a tax deduction for your contribution to an annuity the way you will with conventional retirement investments.
If you are comfortable with the amount of money that you have in tax-deferred investments, you have no need to gain additional tax deferral through an annuity. And for what it’s worth, at least some of your retirement money should be held outside of tax-deferred accounts. That will give you access to at least some of your money without having to pay taxes on the withdrawal. Think of it as a form of income tax diversification for your retirement.
8. You don’t believe the one-size-fits-all hype for one minute
Another favorite pitch of insurance agents is that the annuity they are offering will solve all of your problems.
Newsflash: there is no investment product in existence that will solve ALL of your problems.
If you are being given that kind of sales pitch, run away as fast as possible.
9. You’re only being offered one product from one company
Investing your money is something like buying a new car. You’ll want to look at a lot of different makes and models before settling on your ultimate choice. And naturally, you’ll do the same thing if you’re looking to invest in stocks or mutual funds.
If you’re working with an insurance agent, and you are being offered only a single annuity product from one company, it’s likely that agent has only one product to sell – the one he's offering. Chances are that product will not work for you, and you need to move on.
10. You came in to buy life insurance but you’re being sold an annuity
There’s usually one major reason why an insurance agent will attempt to sell you an annuity when you are looking for a life insurance policy: The agent will get a far bigger commission on the annuity than he will on a life insurance policy. For most people, even if you bought a 5 million dollar life insurance policy, the agent would make more on an annuity.
That may be really good for the agent, but it’s really bad for you.
11. You’re not entirely sure of the terms of the annuity
There isn’t just one type of annuity, there are many. Each of those annuities comes with a battery of its own provisions and stipulations. Make no mistake about it, annuities can be extremely complicated.
If you have any doubts at all about the annuity you are being offered, or certain provisions within the annuity that are not adequately explained, you need to walk away. Rest assured that if you are uncomfortable with one provision, there are probably others that simply have not caught your attention.
Anytime you invest money anywhere, you need to be absolutely sure of what it is you’re getting into, what specific benefits you will receive, and what risks you are taking on in exchange for those benefits.
12. You’re not concerned about outliving your money
One of the biggest reasons for anyone to buy an annuity is to avoid outliving their money. You purchase an annuity, and you begin receiving income payments as of the certain date. Those income payments can go on for the rest of your life, which means you will never run out of money.
But if you have enough money in savings and investments that the prospect of outliving your money is no better than remote, then an annuity is not for you.
13. You don’t want an investment that will lock you in
Typically, most people will invest their money in a given investment vehicle for a few years, and then move on to something else. This is not how annuities work. Not only are annuities contracts, but they generally will lock you in for the rest of your life.
Should you change your mind after five or 10 years, the only way to get out of the annuity will be to pay a stiff surrender charge. The charge may be high enough to make it impossible for you to profitably shift into a different investment vehicle.
14. The insurance agent is pushing too hard
Regrettably, for some life insurance agents the sale of life insurance is just a loss leader. The real money is in selling annuities. The sale of a life insurance policy could get the agents a few hundred dollars – the sale of an annuity could get him a few thousand dollars.
If you sense that the agent is pushing you to hard toward an annuity, there’s an excellent chance that he is doing that more for his own reasons than for your benefit.
Never allow anyone to push you into any type of investment. If you sense that the agent is trying too hard to get you to purchase an annuity, this should set off alarm bells in your mind, letting you know that it’s time to make an exit.
15. Your gut is telling you that this isn’t the right investment for you
If after considering an annuity, and all of its various provisions, you’re still feeling some doubt inside, you need to walk away. Sometimes the reason that you have a bad feeling about something isn’t so much about a disturbing provision or two, but rather about the complexity of the whole deal.
If you feel the entire annuity contract is simply too complicated when taken as a whole, that’s sufficient justification to avoid entering into it. With any type of investment you get involved with, it’s important to be able to sleep peacefully at night.
Moral of the Story:
Most people shouldn't buy an annuity. But there are certain people in certain circumstances for whom an annuity would be a great choice. If you have questions about annuities, whether they would work for you, or need an annuity quote, just ask.
The post When You Should Buy an Annuity: 5 Real Life Scenarios appeared first on Good Financial Cents.
Source Good Financial Cents http://ift.tt/2r9Tygh
ليست هناك تعليقات:
إرسال تعليق