Annuities – What you need to know

An annuity is a financial product that can provide you with a secure retirement income and other key benefits. Annuities offer security and guarantees, as they are not subject to market risk, making them a great option for those looking for stability in their retirement planning. Additionally, annuities provide the power of indexing, allowing you to benefit from market gains without the risk of losses. Furthermore, annuities offer guaranteed lifetime income and tax deferral which helps you maximize your retirement savings. Finally, an annuity can help you avoid probate by transferring your assets directly to your beneficiaries upon death.

The key benefits are based on a fixed indexed annuity.  There are several types of annuities but this is one of the most common types of annuities.  

1. Security & Guarantees
2. No Market Risk
3. Power of Indexing
4. Guaranteed Lifetime Income
5. Tax Deferred
6. Avoid Probate

Fixed Indexed Annuities (FIAs) are one of the most popular types of annuities on the market today. They are a single premium deferred annuity that provides a guaranteed return and protection from market losses. FIAs offer a variety of features such as guaranteed income, death benefit options, and tax deferral benefits. They also offer the potential for growth linked to an index such as the S&P 500. FIAs provide investors with a safe and secure way to build wealth over time while protecting their principal investment.

A Multi-Year Guaranteed Annuity (MYGA) is a type of fixed annuity that offers a guaranteed rate of return for a specific period of time. It is an investment product designed to provide stability and security, as well as the potential for growth over the long term. MYGAs are typically used by retirees and other investors who are looking for a safe, secure way to generate income in retirement. With an MYGA, your principal is guaranteed to be returned at the end of the contract period, regardless of market performance. This makes them an attractive option for those who want to ensure their money will be available when they need it most.

A Variable Annuity is a type of annuity that offers the potential for higher returns, but also involves more risk than other types of annuities. With a variable annuity, your money is invested in stocks, bonds, mutual funds and other financial instruments. The value of your investment can go up or down depending on the performance of the underlying investments. Therefore, you are taking on more risk than with other types of annuities such as fixed-rate or immediate annuities.

403(b) is a monthly premium annuity for certain employees of public schools, tax-exempt organizations, and ministries. Individual 403(b) accounts are established and maintained by eligible employees. The employer may determine the financial institution(s) at which individual employees may maintain their 403(b) accounts.

One of the key reasons that people look toward an annuity is the ability to provide you with a guaranteed lifetime income. When you choose an annuity that is designed to provide a lifetime income, you can rest assured that your money will last you a lifetime. There are many different companies so always work with your financial professional to choose the right annuity for your situation and educate yourself.  

The single biggest risk people have when it comes to annuities is working with a financial advisor or life insurance agent who is not properly trained, educated, or experienced with annuities.  Just because they can offer them does not mean they know how to guide you to choose the right annuity for you.  There is a big difference between a Variable Annuity and Fixed Indexed Annuity.  Most of the bad things you hear about annuities are based on a Variable Annuity where you have fees and risk.  

We have clients who have used their family lifelong advisor that was strongly against annuities.  As a result, they lost 60% of their retirement during the financial crisis of 2008.  It can take years to regain what was lost if you ever do. 

A good financial professional or licensed life insurance agent has access to multiple insurance companies and annuity products.  Make sure they take the time to run illustrations and educate you on all the options so you can choose the right annuity for your situation.  

Some financial professionals that don’t understand annuities say the risk is not having the ability to gain higher returns.  Yes, that may be true that you forgo higher returns but you eliminate any downside risk altogether. 

See our section on understanding the real market risk and your personal retirement risk score.  

Not understanding the surrender charges during the initial contract term could be perceived as a risk.  See our section on surrender fees and withdrawal charges.  

When your money is in the stock market you are exposed and have major financial risk and the market can turn on a dime right when you are ready to retire and lose year’s worth of retirement savings. 

You have worked hard for 20, 30, 40 years or more to accumulate what you have and many retirees and those nearing retirement have experienced a devastating loss from 20%-60% or more in a very short period of time.  This has a major impact on what your retirement will look like and when you can retire.  A fixed indexed annuity because it is a contract is the only retirement solution tool that can Guarantee to protect your principal and provide you with peace of mind.  

This has nothing to do with how well you know your financial advisor or how long they have been a financial advisor.  It is a mere fact that they can not provide in writing a contractual guarantee that you won’t lose a dime due to a market downturn. 

We educate our clients on the power of market gains and losses. Take a look at the charts below. If you lose just -10% in your portfolio you need 11.1% cumulative gain just to get back to even before the loss occurred.

Extremely powerful! The solutions we focus on with our clients have 0 market risk. If the market dives your gains are locked in and can not go backwards.

Steady consistent growth is the key to a successful retirement.

There are some bad annuities and there are some great annuities.  The reason we focus on educating you is so you’ll know the differences between a bad and good annuity.  Annuities are not always the right solution for everyone and it requires you to work with a financial professional who has access to several different annuity providers and products. 

 A financial advisor is required to operate in the best interest of the client and if they are not familiar with annuities or don’t offer them or for some reason not willing to offer you a guarantee of not losing your principal then they are not working in your best interest.  It is your retirement income, not theirs. 

If your financial advisor says annuities are bad ask these key questions to determine their experience. 

1. Do you offer annuities and how many have you placed in the past year with other clients?
2. When you say they are bad what type of annuity are you talking about? A variable annuity or a Fixed Indexed Annuity? 
3. If you are so against annuities, what other retirement solution products are available that can provide me with guaranteed 100% principal protection, guaranteed lifetime income, with modest gains? If your financial advisor suggests that he or his company through diversifying the market can provide you with similar results they are not operating in your best interest.  Simply put there is no other product that offers a contractual guarantee like a fixed indexed annuity. 

Here’s a real story to put things in perspective.  Back in 2008 when the market dropped nearly 40%, Mark & Tammy nearing retirement in 12 months had accumulated nearly $2 million for their retirement.  When the market dropped 10% they lost $200,000 overnight.  Mark called his advisor to ask what we need to do.  Advisor said just hang tight, markets are always up and down and it will recover.  Another three months goes by the market is down another 10% and now they have lost nearly $400,000 in 4 months.  Mark again phoned his broker and the broker said we are nearing the bottom and the market will rebound at some point. Just hang tight and have faith.  Well fast forward to Mark retiring and the market took their $2 million of retirement savings they had worked 40 years to accumulate and wiped away $950,000 and now left with $1 million to survive. Mark made one last call to his advisor hoping he may have some good news.  Mark said “We have now lost nearly half of our retirement in less than 12 months.  I have been trying to hang tight as you advised.  I’m retiring next week and hope you have some good news for the future for me?” Advisor: Mark I’m so sorry you experienced the losses.  You are not on the only one. To be honest I don’t what to say the entire market is down and we have seen anything like this before.”  

The problem Mark & Tammy face now is they are retired and taking a distribution from $1,000,000 which means they are taking less and have very limited opportunities to regain what they have lost and will most likely run out of money.  Statistically if you lose 50% you need to have 100% cumulative gains to restore you loss and the chances of that happening in 5 year period is 36% in a 10 year period is 76% and that does not factor in taking a distribution of 4% to live on.  

Again, when you advisor telling you annuities are bad think twice about your future.  No one has a crystal ball and advisors based their advice on historical data and can not predict the future. They can not predict the next 2008 or the next pandemic that can put your retirement at risk. And that is fact!

The power of a Fixed Indexed Annuity is protecting what you have worked hard to accumulate so you can retire happy.  Don’t lose sight of protection and peace of mind when it comes to planning our retirement.  

Your money is tied for the term of the annuity typically 10 years and have limits on how much you can pull out per year during the term.  If you decide to surrender before the end of the term there is a surrender charge of typically 1%-10% depending on the company and remaining term duration.

Some financial professionals would argue that they can achieve greater returns in the stock market which could be considered a downside to an annuity.  Opinion and speculation are not guaranteed.  When it comes to retirement, protecting what you have accumulated and creating a guaranteed lifetime income is what is most important for a majority of retirees.  Your money in the stock market cannot provide principal protection or a guaranteed lifetime income and there is no financial professional in the world that can guarantee you principal protection in stock market products. 

One of the most misunderstood items of annuities is fees.  Most fixed and fixed indexed annuities as a standard do not have fees but there are additional options that can be added which may have a fee attached.  For example;

A rider fee – a fee for additional riders which are options that can be added to the annuity such as lifetime income rider.  Some carriers may have it included others may charge an additional fee.

Index fee – An additional fee for certain index options you can choose which typically provide you with a higher participation rate.  

Surrender fee or withdrawal charges – The fee you are charged only if you fully surrender the annuity prior to the initial contract term. It’s not based on performance and is not charged unless you surrender.

Surrender fees are a fee that is charged if you surrender the annuity prior to the initial contract term.  Some annuities allow you to take partial each year like 10% without incurring a surrender or withdrawal charge.  

Typical surrender fees are 10% for a 10-year contract term and each year the surrender fee typically reduces by 1%.  At the end of the initial 10-year term you are no longer subject to a surrender charge.

Always make sure you check the annuity to contract so you know what fees and surrender charges are before you sign the application.  

No you can’t and no you shouldn’t put everything into an annuity.  Proper planning for retirement income is about diversifying your retirement income portfolio.  In working with your financial professional it is best to determine based on your retirement risk score, other retirement accounts you have, your retirement age, life expectancy, and other factors to determine how much of your retirement savings is best to be placed into an annuity.  

What Happens When an Insurance Company Fails?

Insurance is monitored and regulated by state insurance departments, and one of their primary objectives is protecting policyholders from the risk of a company in financial distress. When a company enters a period of financial difficulty and is unable to meet its obligations, the insurance commissioner in the company’s home state initiates a process—dictated by the laws of the state—whereby efforts are made to help the company regain its financial footing. This period is known as rehabilitation.

Guaranteed Coverage

While laws governing maximum limits and types of policies covered vary from state to state, most states are consistent with the NAIC Model Act and provide coverage at least in the amounts specified below. Check your state association’s website to confirm the applicable benefit levels in your state.

• $300,000 in life insurance death benefits
• $100,000 in cash surrender or withdrawal values for life insurance
• $250,000 in present value of annuity benefits, including net cash surrender/withdrawal values
• $500,000 in major medical or basic hospital, medical and surgical insurance policy benefits
• $300,000 in long-term care insurance policy benefits
• $300,000 in disability insurance policy benefits
• $100,000 in other health insurance benefits