Picking the Right Annuity
There are many variations when it comes to annuities, and there is always a little overlap between them. We’ve broken things down as best as possible for your easy understanding. As always, if you have any questions, please contact us and we will provide whatever help we can.
There are two main types of annuities when it comes to returns: fixed and variable. Within each, there are a few different subclasses.
Fixed Annuities: Fixed annuities have a guaranteed rate of return that you will have applied to your policy each year, regardless of what the market does. Typically, fixed annuities are deferred, meaning that you will have your money in the policy for a minimum of one year before you start receiving benefits. Like all other types of annuities, these are tax deferred, and payments are taxed on a last in, first out basis when you do start receiving your money back.
Compare fixed return annuities here
Variable Annuities: Variable annuities have rates dependent upon the market. They are usually connected to some sort of fund, or they can be connected to an index. This bigger subclass is called an equity indexed annuity, and thanks to their simplicity and popularity, they have become very popular recently. An equity indexed annuity has a performance tied to a major index, like the NASDAQ 100 or the S&P 500. These are variable in nature in that they can go down in price, but many have a fixed hybrid component so that even during a bad market year, they do not lose value.
Compare variable annuities here
Besides these two major types of annuities, there are many little things that you will need to consider. The major things to consider are the riders that go along with these policies. Below, we’ve included the major categories to consider.
Living Benefit Riders: A rider is not an annuity, but rather an add-on that you can have with your annuity. Living riders are benefits that you can enjoy while you are still alive, and these include Guaranteed Minimum Income Benefits, Lifetime Withdrawal Benefits, and Guaranteed Account Value Benefits. These typically have a cost associated with them in the form of an upfront fee or commission, but when used right, they should more than pay for themselves. Riders are meant to benefit you, but what you need in particular is based upon your individual circumstances.
Death Benefit Riders: This type of rider is just what it sounds like. If you die before your contract is fully annuitized, your beneficiaries will reap additional benefits. This doesn’t help you, but it will help your loved ones and it reflects the annuity’s life insurance qualities.
No Surrender: The surrender period during your annuity contract’s life is the fee that you will pay for withdrawing your money too quickly. As the contract ages, the surrender rate goes down. After a year, for example, there might be a 7% surrender fee. After two years it could be 6%, and so on. No-surrender policies circumvent this fee so that if you need your cash earlier than expected you will not be penalized. IRS fees may apply if you are younger, but the company will not punish you with a surcharge.
No Load: A no-load annuity will not charge you a commission for purchasing your contract. Depending upon where you purchase your contract from and how much you put into it, commissions can be costly. A no-load policy avoids these extra fees and helps you to keep your money growing interest more quickly right from the beginning.
Finally, there are a few other things to consider if there are special circumstances surrounding your need for an annuity. Here are a few examples.
Secondary Market Annuities: This is an atypical type of annuity. Sometimes when an individual is given a large sum of money–such as through a lawsuit or lottery–they elect to have that money set aside so that it is kept safe and not wasted. This is where secondary market annuities step in. These can have high rates of return and are worth a close look.
Immediate Annuities: Immediate annuities start paying benefits right after you purchase a contract. These are lump sum (single premium) annuities, and are perfect if you have a large amount of money that you want to stage into disbursements to help fund your retirement.
Bonus Annuities: Some life insurance companies will pay you a bonus to go along with your annuity upon purchase as a thank you for your business. These are typically used in lump sum annuities (see above). So, if you purchase a contract at $50,000, the company that you purchase your policy from might reward you with a 5% bonus right off the bat. This would take your balance from $50,000 up to $52,500 from which you can start compounding your interest on right away. These can be fixed or variable in nature. The typical bonus is between 3 and 5%.
If you aren’t sure which type of annuity or which riders are best, contact an agent. They will go over goals with you and help you determine which is best for you and your needs. They can also help you formulate a tried and tested strategy to ensure that you do not ever run out of money during your retirement.