Finding the Best Annuity

Finding the Best AnnuityBy Toma Franklin, Staff Writer

Annuities were designed to be a tax deferred alternative for conservative investors stuck in between risky direct forays into the markets on one side and woefully inadequate returns from interest accruing retirement plans. Annuities offer a great deal of flexibility to investors in terms of selecting sub-accounts, period and amount of investment, whether or not to take on any risk as also the methods of investment accumulation and distribution.

Flexibility leads to Multiple Choices

But this admirable flexibility presents a bewildering array of annuity choices for the investor. Fixed or variable, immediate or deferred, split or hybrid…the list goes on and on. The choice of both annuity and the issuing insurance company can and does make a big difference. It is therefore a necessity to understand how annuities work, and to find out which annuity most closely matches your needs and resources.

First and foremost, select your financial planner carefully. You are likely to encounter two types of annuity advisors – The first affiliated with specific companies, who are marketing said company's annuity products. Annuities are highly profitable for the insurance companies, and they provide significant commissions to the agents too. Unbiased advice from such a financial planner is a highly remote possibility. The second kind of planner would likely be someone who deals with annuity products in general, and is not restricted to a single company. You have a better chance of getting a good deal with this kind of person or company, due to their non-allegiance to a particular company.

Steps to take before you buy an Annuity

Knowing what questions to ask will generally allow you to make a more informed decision, while ensuring that you do not miss out any special features or additional benefits. Before buying an annuity, you should:

  • Compare annuities and annuity providers. Go through each plan in detail, find out what each plan offers, or does not offer.
  • Review each potential annuity issuer to verify safety and performance history.
  • Make a list of the guaranteed minimum interest rates.
  • Collect detailed information about early surrender charges, annual charges and any other administrative or otherwise hidden charges.
  • Collect detailed information about withdrawal and transfer options during specific periods of the term of the annuity.
  • Request a clear picture of the each company's options and rules governing annuitization and/or withdrawal upon maturity.

Understand and determine your personal risk tolerance. How far you are willing to go, or have experience going in the past, will generally be a good indicator of the kind of annuity most suitable for you. The hinge on which this decision turns is generally a decision as to whether or not to safeguard principal.

If you want your principal untouched, and are looking at maximizing the returns from investments, that leads you to variable or split annuities. If you have a planned strategy to spend your principal and enough resources to cover your likely life span, that leads you to various forms of fixed annuities, and maybe even annuitization.

It goes without saying that a newly retired investor with $200,000 or less heads in one direction, while someone who is still part of the workforce and is 'planning' for retirement, with more than $500,000 in hand, will head in a different direction. Which annuity you choose will depend a lot on your particular situation.

However, irrespective of your situation, it is a necessity to thoroughly investigate and compare multiple annuities and their issuers, consult with an objective financial advisor and plan an investment which not only maximizes returns, but also offers a feasible exit strategy.