Annuities. Good Or Bad?

Paul K. Dunn
May 22, 2017
3 min read

The worst thing you can do when planning for retirement, is to fall into a financial trap that benefits the Insurance Salesman, more than it benefits you.

The best way to avoid this is by:

Doing your homework
Figuring out if the product is suitable for your short/long term financial goals
Make sure you are getting your monies worth vs. the fees that you pay
Making sure that you only deal with trusted companies. <------ Search Here
Finally, trust your gut! If it sounds too good to be true, it probably is!

Although Annuities are a great product to achieve long term financial security for retirement, they can be complex and you may buy into something that is unsuitable to your financial situation, if you don't educate yourself.

Here are some things that you should understand before buying an Annuity.

How does an Annuity work?

An annuity is an insurance product: You make a lump sum payment or series of payments, and the money grows tax-deferred at a fixed or variable rate (the accumulation phase). In return, the insurer agrees to make periodic payments to you for the rest of your life (the payout or annuitization phase). Annuities also have a death benefit (this is where the insurance comes in) that entitles your beneficiary to the value of your annuity or a guaranteed minimum, whichever is greater.

But there are lots of twists. With an Annuity you can't access the money until you're 59½, or you'll be hit with a 10% tax penalty on earnings, but you can move it to another qualified product (401K, 403b or IRA). Annuities carry surrender charges. If you access more than 10%, before a certain period of time, which will be laid out in the contract (usually 7-10 years) you will pay a surrender fee. This is why at J & Sons Retirement Advisors, we recommend only putting 50 - 75 % of your retirement savings into an annuity, so that you are not left with no savings on hand, before the payout period.

As the saying goes "Never put all of your eggs in one basket"

You should also make sure that you plan to have solid cash flow assets going into retirement, as it is always wise to have more than one income stream anyway.

You should know: Earnings are taxed as income rather than at the long-term capital gains rate, but can be offset by having a business entity. Please make sure that you consult a Tax Professional to learn more. SOME annuities charge more than 1% a year for the death benefit, but it pays off only if you die when your account has fallen below the minimum guarantee. Make sure that you check for 'rider fees' (a rider fee is an add

What Types of Annuities are there?

There are many types of annuities, but Deferred Annuities fall under three main categories.

Fixed, Variable and Indexed.

Here is an article we wrote earlier, to help you understand the difference between the three types.

Know the difference!

What are the fees?

Its important to understand the fees involved before signing any contract. Here are the main fees involved some Annuities.

Insurance charges

Also known as mortality and expense (M&E) fees and administrative fees, these charges pay for insurance guarantees that are automatically included in the annuity, and the selling and administrative expenses of the contract.

Surrender charges

Most insurance companies limit the amount of withdrawals one can take during the initial years of a contract, and place a surrender charge on any withdrawals above that preset limit (typically, to help cover the commissions the company paid). Be careful, as surrender charges can be significant and can be imposed for an extended time period. Be sure to ask for details on any surrender charges to help ensure that you have enough flexibility.

Investment management fees

These are assessed depending on the investment options within variable annuities, and are similar to management fees on mutual funds. Check the annuity prospectus for any underlying funds to learn how much you might pay for investment management fees.

Rider charges

Riders are optional guarantees available in some annuities. For example, an Annual Increase Rider is an optional feature that increases payments each year by a predetermined percentage, typically 1% to 5%, to help keep pace with inflation. There is typically an additional cost to purchase a rider in an annuity.

Who should invest in an Annuity?

Here is a 10 minute video, to help you understand the

TOP 5 REASONS NOT TO BUY ANNUITIES