Annuities (information supplied by Jackie Johnson at RBC Capital Markets, the Johnson Host Investment Group in Denver, 303.595.1102)
Annuities are contracts. There is much fine print on these contracts and it is appropriate to take an extra moment or two before signing. Here are some money tips:
First – most earnings on an annuity are tax deferred. Purchasing an annuity inside a retirement plan provides no additional tax deferral savings. Other annuity contract features available for purchase – lifetime income, death benefits may warrant consideration when purchasing within a retirement account, but generally annuity contracts are not attractive retirement plan purchases.
Second – be comfortable with the types of annuities available. Types include:
Immediate where income is paid soon after purchase and can last for a lifetime or agreed time period
deferred income annuity – earnings accumulate and then are paid out at and agreed upon start date in the future.
Fixed – a guaranteed interest rate is earned for a predetermined period of time.
Fixed index – a specific type of fixed annuity where the rate earning is based on an index change formula (these are the ones to spend more time analyzing)
Variable – the earnings are based on the performance of an array of investment options (typically equity and bond investments). It is important to know the expected future performance of these investment options.
Third – contract riders. Insurance companies are constantly adding contract provisions (called riders) which can seem puzzling but attractive depending on purchasers emotional reaction. These riders cost more money and provide lucrative additional fees for the insurance company. The riders may include guaranteed minimum death benefitss, guaranteed minimum income benefits, guaranteed minimum accumulation benefits, and guaranteed minimum withdrawal benefits. Remember, most distributions will be subject to a 10% IRS penalty if withdrawn prior to age 59 1/2.
Fourth – other charges. Other charges include mortality charges (as usually there is a death benefit feature), administration, and surrender charges. Surrender charges typically last 7 years from the purchase date, and reduce the monies available for withdrawal including withdrawals necessary due to life changing events (for example catastrophic health conditions)
Fifth – commissions are paid to the representatives who sell these contracts. The insurance companies selling these products will pay the representative directly, and the cost is incorporated into the surrender charge. Thus part of the reason for a surrender charge (in addition to the commitment the insurance company invests with the contract purchase amount) is to recover commissions paid at purchase. There may also be trailing commissions paid in the years following the purchase.
Annuities have a place, especially if you are invested fully in an employer retirement plan, and if you have concerns about your mental acuity later in life. Declining mental acuity may make investing decisions difficult if not impossible. So having a steady monthly receipt with investment management or elder financial abuse makes annuities worthy of further examination.
Finally, it is important to know the credit worthiness of the insurance company issuing the annuity contract. There are rating agencies which monitor the credit quality of insurance companies.
Call us, 720.635.3180 to discuss annuity features and benefits especially if you are actively receiving proposals.