Knowing the Products - Annuities

You are now nearing retirement and you have saved diligently. Your options are a) receive a lump sum payment and manage the nest egg you have accumulated or b) purchase an annuity. The lump sum payment might seem like a no-brainer, but let’s take a few minutes to examine the annuity option before the time comes to make this important decision.

An annuity is a contract sold by an insurance company that provides for a guaranteed annual payment. There are generally two types of annuities, Fixed and Variable.

A fixed annuity is somewhat like a fixed deposit, in that the insurance company issuing the annuity agrees to pay a fixed amount to the investor, while the investment, along with the associated profit or loss, is the responsibility of the insurance company. The performance of the investment is not directly linked to the returns the investor gets. The insurance company acts as a barrier between the performance of the investment and the investor, minimizing the impact by siphoning off spikes in both profit and loss, while passing along stable returns to the investor.

Variable annuities on the other hand are merely pooled investment accounts. The returns from variable annuities are directly related to the performance of the securities and if the invested securities lose value, the investor may lose.

Like any investment product, there are some issues to consider before investing.

Make certain that you understand all of the details of your annuity product before you sign on the dotted line. Annuities are high-profit products for sales agents so you should be sure that the product is the right fit for you and not just a great pitch by a zealous salesperson. There are also administrative costs and annual fees that may cut into the net returns an annuity holder may expect. A fixed annuity with minimum guaranteed returns will likely deduct these costs from the returns.

Annuity rates (which determine the monthly payment your money will buy) depend on several factors, such as your life expectancy. The greatest variable, however, is the market interest rates. Lower interest rates mean a lower monthly payment, so annuities should be a less popular option during low interest rate periods. Additionally, when considering purchasing an annuity, check the financial strength (credit risk) of the issuing insurance company and always bear in mind that annuities once entered into are difficult to unwind.

As mentioned earlier, annuities are products that require one’s full understanding before you enter into any agreement. We will now discuss some of the different types of annuities that are offered in our market.

Period Certain Only Annuities

5, 10, 15 or 20 Year Period Certain: The annuitant can expect to receive equal payments for 5 – 20 years depending on the “period certain” selected. If the annuitant should die before the end of the period certain, payments will be paid to the designated beneficiary. No payments are made to the annuitant after the end of the specified period. (You might outlive this type of annuity; compare against straight life or non-refund immediate annuity explained above.)

Single Life with 5, 10, 15 or 20 Years Certain

The annuitant will receive equal payments for his lifetime. However, if the annuitant should die before the end of the 5, 10, 15, or 20-year period selected, payments will be paid to the designated beneficiary until the end of the 5, 10, 15, or 20-year period selected.

Joint & Survivor Annuities

Joint & Survivor (50%-75%) reducing on FIRST or EITHER death: Full equal payments are made as long as both the annuitant and joint annuitant are alive. Upon the death of either the annuitant or joint annuitant, the equal payments will be reduced by (50%-75%) and the payments will continue to the survivor for as long he/she is alive.

Adding a Period Certain provision to a Joint & Survivor (50%-75%) annuity accomplishes the following:

Even if the annuitant or joint annuitant dies before the end of the period certain, payments to the survivor will not reduce until after the end of the certain period (5-20 years). If both the annuitant and joint annuitant die before the end of the certain period, full equal payments will be paid to the designated beneficiary until the end of the period certain.

Joint & Contingent (50%-75%) reducing ONLY ON DEATH OF PRIMARY ANNUITANT:

Full equal payments will be made for as long as both the annuitant and contingent annuitant live. Payments are never reduced to the Primary Annuitant. Payments are reduced to the Contingent Annuitant should he or she be precedeased by the Primary Annuitant.

Adding a Period Certain provision to a Joint & Contingent (50%-75) annuity does this:

If the annuitant dies before the end of the period certain, payments to the contingent annuitant will not reduce until after the end of the period certain (5-20 years). If both annuitants die before the end of the period certain, full level payments will be paid to the designated beneficiary until the end of the period certain.

Joint & Full Survivor (100%):

Equal payments are made for as long as either the annuitant or joint annuitant is alive.

Joint & Survivor (100%) with Period Certain:

Adding a period certain provision to a Joint & 100% Survivor annuity does this-- If both the primary annuitant and joint annuitant should die before the end of the specified period certain (5-20 years), full equal payments will be paid to the designated beneficiary until the end of the period certain.

As explained above, there are many types of annuities and I’ve only mentioned a few. It is advisable to consult a financial advisor when deciding to purchase as there may be many clauses that should be fully explained. That said, annuities are still a preferable investment for investors who are looking for more stable returns than those offered by traditional investments, but without the associated risk. If you decide to got the route of purchasing an annuity, please be sure you understand all of the facts before you sign on the dotted line.