Last week I wrote about what the experts think about annuities; how leaders such as Tony Robbins, Suze Orman, Dr. David Babbel, after doing much research, state that for the right person, at the right time, the right annuity can be very beneficial to enhance one’s retirement.
So, what is the right annuity? Well, it depends on each and their specific needs and goals. I will be writing next week about who is right for an annuity, but this week I hope to clear up the confusion on the different types of annuities and how they have changed over the years.
1. Fixed Annuity; this is the simplest of annuities, very similar to a CD. Quite simply you receive a fixed rate of return for a fixed number of years. Upon the end of the contract, you receive your principle and all gains, or you have the option to renew the contract. The terms of this type of annuity, also known as an MYGA (Multi-Year Guarantee Annuity), range from a 1 year to an 8-year term. Some companies will allow you to take the interest out; some allow you take anywhere from 5 – 20% out annually.
2. Immediate Annuity; this annuity has been around for decades and is what most people think about when the word “Annuity” is mentioned. SPIA (Single Premium Immediate Annuity) is another name for this annuity. With this annuity, you give the insurance company the premium and then the insurance company will pay you X amount of dollars for a certain period; you have several choices; from a certain period, for your life, or even for the life of a spouse who may live beyond you. The amount of time you choose for a payout will change the amount you receive annually. You also have the choice of accepting protection against inflation.
3. Variable Annuity(VA); this annuity linked directly to the stock market. The insurance company will place your premium into sub-accounts which will be invested in stocks or bonds — thus the account can go up with the market, but it can also go down with the market. One of the benefits that some variable annuities have is a guaranteed death benefit regardless of market conditions. Fees accompany this type of annuity, so when considering this annuity, it is important to ask for all expense, sales, and management fees upfront.
4. Fixed Indexed Annuity(FIA); this annuity was developed in 1995 and has gained huge popularity. This annuity offers a wide variety of benefits. It offers stock market like returns with 100% protection against loss of principal due to stock market volatility. The insurance company offers you a percentage of the upside; the amount of percentage you receive depends on what each company offers with each of each product they hold. Within each annuity, there are several indexes to choose from which will be factor on how much you receive in gains. When the market goes down, the insurance company guarantees that your principal and any locked in gains will be retained. There are many benefits within a Fixed Index Annuity; you can opt to have income for life or even income for a surviving spouse; any remaining funds left in the account are passed onto the heirs. You can also have the option of allowing the account to grow at a market like pace (again with protection against downside risk), thus enabling you to pass along a more sizable estate to your heirs. Some companies offer what is called a “Living Benefit” meaning that if you need additional income to help cover the cost of in-home care or assisted-living costs that is available.
So, is an annuity right for you? If so, which one? This is what I cover in my next installment.