Annuity sales have been on the upswing in recent years as more and more Baby Boomers approach retirement age. Those who have already retired are living longer and are worried about outliving their money.
- According to LIMRA’S 2022 Individual Annuity Sales Survey, consumers purchased $312 billion in total U.S. annuity sales in 2022, a 23% increase from 2021 and 18% higher than the prior record of $265 billion in 2008.
- “Rising interest rates will allow insurers to improve crediting rates while protecting the principal investment from equity market volatility, making these products more attractive to investors for the foreseeable future,” noted Giesing. “As a result, LIMRA projects 2022 FIA sales to reach as high as $76 billion and increase each year through 2026.”
While there are many financial advisors who think that annuities can be an excellent investment for retirement, there are also critics who don’t like giving up liquidity or paying fees on income-producing investments. Finance professor Moshe Milevsky of York University in Toronto thinks that financial planners and advisors should take a second look at annuities.
Investors should understand that there are a number of different types of annuities that you can buy, and the terms can vary from one particular annuity to another. A fixed annuity index annuity is an example of an annuity that provides a guaranteed rate of return with the potential to earn an additional annual return. An immediate annuity can guarantee you lifetime income and the stream of income starts right after your purchase.
You are probably considering the purchase of an annuity because you like the idea of having a stream of guaranteed income for life and you don’t want to risk your “safe” money in a volatile stock market. Before you invest, you should also know these 5 things about annuities.
Company Ratings
An annuity is a contract between you and an insurance company. When you buy an annuity, the insurance company makes a promise to make payments to you exactly as specified in the contract. While annuities are among the safest investments around, ultimately they are only as safe as the insurance company that stands behind them.
Insurance companies that sell annuities are rated for financial strength by three major rating agencies. A.M. Best, Standard & Poors, and Moodys look at management, operating performance, and the balance sheet before they assign a rating. With more than 2,000 insurance companies in the United States selling annuities, it is important to know that you are buying your annuity from a highly-rated insurance company.
If you check insurance company ratings, you will see some very familiar names with excellent ratings. New York Life, Principal Life, Mass Mutual and MetLife all have assets in excess of $100 billion and top ratings. There are many smaller insurance companies that also are highly rated and a few that you might want to avoid.
Terms of the plan
When you are shopping for an annuity, looking at current annuity rates and trying to find the highest annuity rates are just part of the things you need to consider. You want to take a look at the complete picture. Make sure you are aware of the different fees that may be associated with the particular type of annuity you are considering. What is the length of the contract? What are the early surrender charges if you want to get out of an annuity during the surrender period? Remember that the fees and charges for a fixed or variable annuity may be quite different from a longevity annuity.
Growth potential
You can buy an annuity with a lifetime income rider and receive a specific amount of income for the rest of your life. However, what if you need more income? You might want to consider an indexed annuity, but before you make your decision, you should ask questions to get a better idea of the growth potential of that annuity.
- What are the caps and margins?
- Is there just one index or do you have a choice of indexes?
- Is performance only tied to the US market or also to foreign markets?
Income and Liquidity
Even though your number one goal may be to create a future stream of income for life, you should not put all of your assets into annuities. Annuities are not a liquid investment. While most annuity plans offer limited access of around 10%, you should have other, more liquid assets to address more immediate financial needs.
Beneficiary Provisions
Make sure you understand what will happen to your account balance if you die before it is depleted. In some instances, 100% of the account value will be available at the time of your death, while in other instances, payments may be spread out over 10 years or longer. While it won’t matter to you, how your account balance is distributed may or may not create a tax liability for your heirs.
When you are considering an annuity, it is best to sit down with an annuity expert who can explain all of the finer points about the different types of annuities. Using an annuity calculator, he or she can show you how much income you can generate with a particular annuity. Ask questions and take your time before deciding which annuity will best meet your needs.
