Questions To Ask When Annuity Shopping

It is extremely important to understand all of the terms, fees and expenses associated with any annuity product.  We believe every client deserves to have a complete understanding of what they are buying, and a realistic expectation of how their chosen annuity will impact their retirement.  It is good practice to ask the following specific questions:

What types of annuities are available?

There are a number of different types of annuities, but the most common are variable annuities and fixed annuities. Variable annuities are typically invested in an underlying portfolio of investments and the account value can fluctuate based on the portfolio’s performance. A fixed annuity is typically invested in a fixed account so the principal value is guaranteed. In exchange for the guarantee, the rate of return is typically lower. A fixed indexed annuity offers a combination of market linked crediting and returns and guaranteed principal values.

What are the opportunities for growth?

Annuities with optional benefits typically provide two opportunities for growth of your retirement income: the roll-up rate (or income rider), and the opportunity to lock in account highs.

When you purchase optional benefits, the roll-up rate is the guaranteed growth rate of the annuity. It is set at the time your application is signed and does not change for the life of your benefit.

Some optional benefits have lock-ins, which help you capture market gains for your annuity account at a specific point of time. Typically, annuities offer the ability to lock in account highs annually, quarterly, or monthly. Fixed Index Annuities also offer market linked interest credits.  The participation rate indicates the percentage of the gain that you capture based on the appreciation of the underlying index.

What income options are provided by the annuity?

Annuities traditionally offer either immediate income or deferred income. Immediate income begins either right after or shortly after the contract is issued. Deferred income begins at a future date, which allows the account value to grow tax deferred before turning on the income feature.  Be sure to ask your financial professional about the cost of adding an income rider as different income options may have different fees depending on the annuity provider.

What is the withdrawal rate?

As part of a living benefit, the withdrawal rate is the percentage of your total account that you can withdraw each year without penalty or reducing your income benefit. This rate is set at the time of your application and does not change for the life of your benefit. The amount of guaranteed income that you can withdraw each year may grow depending on when payments begin.

What fees are associated with the annuity?

Different annuities in different structures have different fees.  It is important for investors to understand the exact expense associated with the product they are buying.  Fees to keep an eye out for are annual maintenance, insurance, and portfolio fees; and certain guarantees offered by variable annuities, such as optional living or death benefits, usually have additional fees. There may also be additional fees depending on the annuity provider.  Fixed indexed annuities often offer substantially lower fees than their variable cousins.

What are the annuitization options?

When the time comes to start receiving income from your annuity, you will need to select a payment schedule to meet your needs. These may include payments for life, for a specified period of time (often 10, 20 or 30 years), or for a combination of the two (e.g. life with 10 years).

Are there any early termination (surrender) charges?

If you withdraw money from an annuity within a certain time period after each purchase payment, the insurance company may assess a surrender charge commonly known as a contingent deferred sales charge (CDSC). Generally, the surrender charge is a percentage assessed on the amount withdrawn in excess of any free withdrawal (usually 10% of purchase payments per year) and declines gradually over a period of years – the surrender period.

Are optional benefits available?

The suitability of these guarantees depends on your investment needs and financial profile. Your financial professional can help you determine if optional living benefits or optional death benefits are right for you.