Annuities Are Life Insurance Too?
Annuities are a world of their own and come in a plethora of varieties each with a purpose. Other than Variable Annuities that are classified as securities, specifically fixed annuities have much in common with life insurance, primarily in that they are issued by life insurance companies. Like life insurance, they have guarantees. Also they are suitable to hedge risk, just like life insurance. They also provide a future income stream (like Social Security) with specific annuities. Visit our annuity FAQ for more.
How Do Annuities Hedge Risk?
Annuities are a tool and there are different tools that apply to a particular purpose. Some annuities like Multi-Year Guaranteed Annuities (MYGAs) will hedge or insure against inflation and are commonly used as a substitute for Certificates of Deposit (CDs) as they return better and have more flexibility with early withdrawals.
Other annuities like Indexed Annuities are designed to provide lifetime income streams and insure against longevity risk (outliving your money) in retirement. They have become increasing popular with retirees and pre-retirees who wish to be immune to losses in the market yet still participate in market gains. They have other features that provide guarantees as well. They are safe money options growing in popularity.
These annuities can also help offset nursing home costs with certain features. There is a particular insurance company that issues annuities designed to provide true Long Term Care insurance that for older persons, especially those with health concerns may be very suitable.
We shy from Variable Annuities as they tend to be fee heavy and still contain risk of loss during market drops. That said, you should be objective concerning your appetite for risk and especially what risks you wish to avoid over both the short and long term. Please check out our FAQ on annuities below for more and our blog for even more detail and guidance.
Our agent owners are indispensable for their understanding of the niches different companies favor and their varying standards of acceptance for a given rate class. Their services are free and have no effect on annuity deposits.
Do annuities have high fees?
Most fixed annuities have no fees. Certain riders attached to an annuity like a “lifetime income” rider may carry a fee and you should get full disclosure of all fees and charges. Like life insurance, annuities come with a “free look” provision where the transaction may be cancelled without penalty prior to the end of the free look (usually 30 days.
Still like with any life insurance a fixed annuity is a need based solution. Establish need first.
Aren’t annuities really complicated?
Some annuities are no more complicated than a CD (Certificate of Deposit) that you would get at a bank and designed as an alternative to that financial product. Others do carry numerous attributes like bonusing, roll up rates, indexing strategies and have a number of added benefit options referred to as “riders”.
These tend to act as basic income streams (like a pension) in retirement. Just like a pension, they are intended to move the risk away from you and in this case to the insurer. It is vital to get clear unbiased advice and give substantial weight to the size and strength of the company issuing the annuity.
Isn’t my money tied up for long periods?
Again it is in context of the annuity type. Annuities have surrender periods. They also have withdrawal options. A surrender period is the time that your withdrawals must adhere to the withdrawal option criteria without incurring a penalty for excess withdrawals.
We take very seriously the need for extensive analysis of a client’s financial picture to establish stability in ownership of an annuity where the prospect of an early withdrawal would be remote. Life happens for sure but knowing one’s need for liquidity over the period and planned events that would contribute or detract from it is an essential part of considering annuities as a solution.
We are motivated to keep your business. Sometimes a client may wish to make changes and we are there to make it work anyway possible. All annuities are subject to a “free look” provision as regulated by the state of residence. It is a “money back guarantee, no questions asked” that is available up to 30 days after the policy is issued. Any cancellations during that period returns 100% of all monies paid toward the plan.
What is the risk of loss with annuities?
To put it another way, an annuity is a contract. With fixed annuities you are guaranteed a rate of tax deferred gain over the contract period. With indexed annuities, you may opt out of the guarantee to take market gains instead. It is measured as some portion of one or a combination of market “barometers” called indexes. Should your indexing strategy measure in the negative there is no related loss.
Of course taking a “no loss” position also means not participating in the entirety of the gains. It is important to assess your toleration of risk, age and timing of anticipated life events in the near and far.
There is always loss potential whether in unrealized gains through the overemphasis on annuities or through ineffective indexing strategy. Solid, holistic planning can reveal the extent of risk that should be transferred to an insurer by way of annuities. Staying with top rated, strong and well sized companies can maintain a very, very low level of business risk.
What happens if I die?
Like life insurance, you may name one or more beneficiaries. They will receive the actual value of the annuity contract at your passing.