For people seeking guaranteed income in retirement, one of the most effective products available today is also one of the most misunderstood. Let’s face it, annuities have been given a pretty bad rap over the years, and it’s time to clear things up.
Let’s start with the word “guaranteed.” One of the benefits of owning certain types of annuities is that they can give you payout options such as guaranteed income payments for life—income you can never outlive. So what’s the catch? Well, for starters, annuities are long-term products. This means you buy them with money you don’t expect to need for several years (generally five or seven, depending on the type of annuity). If you withdraw your money before the end of the five- or seven-year period, you may be penalized in the form of a [surrender charge].
Why surrender charges?
For some annuities, such as fixed deferred annuities, the insurance company uses your purchase payment to buy government bonds and other securities to ensure your money will be available when—and for as long as—you need it. If you withdraw your money early, the insurer may have to sell securities at a loss to repay you. To protect themselves from these losses, insurers impose surrender charges on amounts you withdraw above what may be allowed in the contract. As long as you leave your money in for the full contract term, you will never owe a surrender charge. Some insurers allow you to withdraw 10% or more of your contract value each year without any charges at all.
The important thing to remember is that annuities are the only product that can provide guaranteed income payments for life.
Speaking of charges, many people believe annuities are loaded with them. These fees come in the form of optional benefit charges, contract fees and transaction costs, to name a few. But in reality, some annuities have few or no charges beyond surrender charges.
Paying for additional benefits
While most annuities provide a death benefit payable to beneficiaries upon the contract owner’s death, they may also offer specific benefits known as “riders” that may have additional costs.
Riders provide options such as enhanced death benefits or living benefits that offer lifetime withdrawals from your annuity even after the contract value is withdrawn to zero.
Every charge has a purpose, and an explanation of each charge should be provided within product brochures, fact sheets, contracts and prospectuses. So if an annuity’s fees and charges aren’t clearly described, be sure to ask your financial professional or insurance producer for a complete explanation of all charges before you purchase.
The important thing to remember is that annuities are the only product that can provide guaranteed income payments for life. So if you’ve written them off as too expensive or complex, they may be worth a closer look. Talk to your financial professional or insurance producer to find out if annuities are a good fit for you.
