How do I Choose the Best Annuity Products?

Dale Marshall

Once you've made up your mind to purchase an annuity, there are a number of decisions to make before you can choose from among the wide variety of annuity products available. First, of course, is the question of risk. Are you willing to lose any of the funds involved, especially if that means the potential for a much larger gain? You should also consider your purpose for the annuity. Is the annuity's main purpose to provide you with retirement income, or are you using it to accumulate value for some other purpose? If you're planning to use the annuity for retirement, you'll need to decide whether you want to start the monthly income payments immediately, or give it time to grow in value. Another factor that will have a bearing on the type of annuity you go with is whether the annuity will be funded with a single payment or you'll continue to make payments into the principal. Once you've gathered all of that information, you'll be able to choose the best type of annuity product for your needs.

Fixed annuities may be a good option for individuals who prefer steady growth.
Fixed annuities may be a good option for individuals who prefer steady growth.

Risk tolerance takes priority because regardless of the other factors, if you're not comfortable with the risk represented by your choice, it's not right for you. There are annuity products, like variable annuities, that have the potential for greater gain, but also the potential for loss of principal, sometimes dramatic. Younger annuity purchasers may be more comfortable with the risk associated with variable annuities because of the potential for higher gains, but older consumers are much more risk-averse. They've saved all their lives for their retirement, and aren't willing to expose their nest eggs to any potential loss. If you're risk-averse, you should choose a fixed annuity — one that's guaranteed not to lose any principal value. If you're more risk-tolerant, variable annuities might be suitable.

Your purpose in purchasing the annuity is another critical piece of information. Some annuity products begin paying a guaranteed monthly income immediately, while others are meant to grow until being annuitized, or converted to the income stream, in the future. If the annuity is to provide income immediately, you should look into immediate annuities. If your plan is to let the annuity accumulate value for some years, you should determine how you want it to grow: at a slow and steady pace, or with the possibility of larger returns in years the economy does well, combined with zero growth (but no loss) during years the economy declines. If you want steady growth, look into fixed annuities, whose interest rate is declared annually by the insurance company and cannot be less than a minimum stated in the contract. If the potential for greater growth appeals to you, even if it means there may be some flat years, there are annuity products called fixed indexed annuities, also known as equity indexed annuities (EIAs). The growth of an EIA is based on the performance of a market index like the Standard & Poor's 500 (S&P500), except that when the index declines, the value of an EIA remains steady.

There are annuity products meant for the long-term saver, who will make additional contributions to principal over the years, but the majority are single-premium annuities, structured to be funded by one initial payment, following which all growth is accumulated interest.

Another consideration is how long you want your money tied up, because an annuity ties up your funds for a set period of time, during which withdrawals incur penalties on a declining scale. There are annuities that only impose this "surrender charge" for the first five years; others take significantly longer to mature, but generally provide greater growth potential. Most annuities provide a number of ways to withdraw funds without penalty, and there's no penalty either for annuitizing an annuity or distributing it to the beneficiaries upon the owner's death.

With the exception of variable annuities and immediate annuities, all the annuity products discussed here can be combined. For example, you can choose a deferred single premium annuity with a short surrender period, or you could choose a single premium, deferred EIA with a surrender period of nine years.

All of these other issues aside, you also need to consider the relationship you're establishing with the insurance company. Part of your due diligence is to learn whether they routinely nickel-and-dime their clients with all sorts of charges. The charges and fees applicable to your annuity should be minimal, because whatever your annuity is earning you, it's also earning a great deal for the company. All charges should be spelled out in your contract. If the company wants to charge you for sending you a paper statement, though, or wants to charge your salesman's commission against your account balance, it's not offering you the best annuity product available.

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