There are ton’s of popular searches on the internet that surround search terms like, buying an annuity or how to buy an annuity. Clearly there’s a great need for consumer’s to get the know-how’s as to buy such a product. Let’s first address a few common reason’s why people buy annuities.
1) Safety. Preservation of principal is a hot key feature of a, fixed index annuity, fixed annuity, deferred income annuity, (MYGA) multi year guaranteed annuity.
2) Income. An annuity buy it’s very nature must have annuitization options. In layman’s terms, guaranteed income options for a specified number of years (5,10,15, 20) or income for life, single premium immediate annuities are generally used for this need. Lifetime income rider’s also can give you a guaranteed lifetime income.
3) Death Benefit Protection. If an annuity protect’s principal it therefore protect’s the policies death benefit value, which generally is one in the same.
4) Minimum Guaranteed Interest Rate. An Annuity must have a minimum guaranteed interest rate. At the end of the term if the account value is lower than this set minimum then you may withdrawal this value. A common minimum guaranteed interest rate is 1%-3%.
5) Market Linked Growth Potential Without Risk. This one is only for a fixed index annuity. Fixed index annuities offer multiple index options to have your interest credit’s based upon. Common crediting strategies include, S&P 500, Nasdaq 100, Russel 2000, Dow Jones (DJIA), many other’s have been introduced into a wide range of product’s.
Types Of Annuities
At its core, an annuity is a guaranteed income stream. This income is generated through a process called “annuitization.” The annuity provider, usually an insurance company, pays you a guaranteed stream of income for life or for some other defined period. The income amount is based on your age, the amount of money you contribute to the annuity, interest rates, and other factors.
In an immediate annuity, the annuitization process happens as soon as you open the policy. You contribute a lump sum amount and that contribution is converted into a guaranteed income stream. You essentially convert some of your savings into a lifetime pension. An immediate annuity can be a good choice for those who want to maximize their guaranteed income in retirement.
With a deferred annuity, the annuitization process doesn’t happen right away. It may happen years after you open the policy. In many cases, a deferred annuity is never converted into annuitized income.
In a deferred annuity, your contributions fund a cash value account inside the annuity. That cash value account can grow tax-deferred. The manner in which the cash value grows depends on the type of deferred annuity that you own. Some of the most popular types of deferred annuities include:
a. Fixed Annuity
In a fixed annuity, your cash value can grow via interest payments. When you open the annuity policy, you sign up for a guaranteed interest period. These periods can be as short as one year or as long as 10 years. The length of time depends on the specific carrier and the terms of the policy. Your interest rate is locked-in during this guaranteed period. After the guarantee period is over, your interest rate may fluctuate. Fixed annuities are often attractive to those who want some growth opportunity, but don’t want exposure to market volatility.
b. Variable Annuity
In the case of a variable annuity, your cash value is invested in a portfolio of “subaccounts,” which are similar to mutual funds. Most variable annuities offer a wide range of investment choices, so you can build an allocation to meet your risk tolerance.
A variable annuity could be appealing if you want the potential for higher returns and are willing to withstand some level of risk. Also, many variable annuities offer optional benefits that allow you to limit downside losses and even create guaranteed streams of income.
c. Fixed Indexed Annuity
Like the risk-free aspect of a fixed annuity and the upside potential of a variable annuity? There’s a middle option that could be right for you. It’s a fixed indexed annuity, which offers downside protection with growth opportunity that is linked to market returns.
With a fixed indexed annuity, your cash value receives interest on an annual basis. However, that interest rate is dependent upon the performance of a specific market index, like the S&P 500. If the index performs well, you receive a higher rate. If it performs poorly, your rate could be lower. However, many indexed annuities have minimum interest rates, meaning you won’t lose money even if the index declines in value.
3. Income Annuity
An income annuity is similar to an immediate annuity with one big difference – the annuitization is deferred until some point in the future. An income annuity can be helpful in planning future cash flow needs.
For example, you may want to guarantee a stream of income that will begin five, 10, or even 20 years in the future. With an income annuity, you can contribute a specific amount today and then have the certainty that you will receive a specific amount of income in the future.
Hybrid annuities are those that include a variety of different benefits. The specifics of each hybrid annuity depends on the provider and the terms of the policy. For example, some hybrid annuities offer a combination of a fixed, risk-free interest rate and a variable, market-linked component. This allows you to enjoy both growth potential and financial stability.
Other hybrid annuities combine income guarantees with other benefits, like a death benefit similar to that provided by life insurance. Some policies may offer long-term care protection or accelerated benefits in the event of terminal illness. There are a wide range of hybrid annuities designed to meet many types of retirement needs and goals.
Starting The Process Of Buying An Annuity
Now that you have the basics of annuities, let’s start with the process. Choose an annuity specialist.
Just like your health care needs, when it comes down to something other than general medicine that your primary care doctor provides, you need a specialist. Cardiology is a very specialized type of medical practice. Cardiologist know matter’s of the heart better than a physician. This is why physician’s refer to cardiologist, because it’s not the physician’s specialty.
Annuities are no different. There’s nothing general about annuities that any basic investment/financial advisor can fully understand. It’s highly recommended that you choose to work with an annuity specialist. America’s Annuity is the specialist that 1000’s have trusted to design a very specific annuity plan/retirement plan. But whomever you choose, make sure to ask about their knowledge with annuities. Does this advisor sell, stocks, mutual funds, bonds, ETF’s, REIT’s, etc.? If they do then there’s a very high probability that they only dabble in annuities. Big banks, brokerage houses, investment firms, all offer annuities but I’d stay away if you are looking for an annuity specialist, odd’s are, they are not. Make sure they are an independent financial advisor. Ask them to show you a list of annuity companies they work with. If they show you a list of 15 or less annuity companies, run the other way. This is a recipe for you purchasing an annuity which is likely inferior to another.
Lastly, ask the advisor to prepare for you a list based upon your need’s. I generally will show my client’s 2-3 top companies and product’s that surround their need’s. When it’s done this way, you can be certain you are getting the best of the best, and that’s how to buy an annuity.