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9 Need-to-Know Tips for Buying Annuities… And Knowing When They’re Not For You


 -- Published: Thursday, 31 July 2014 | Print  | Disqus 

By Dennis Miller

You're probably something of an expert in your own field—and that field probably isn't insurance or annuities. How, then, can you work through the minefield of clauses, guarantees, and pages of small print? Here are nine ways to start.

While you may feel uncomfortable doing this, you're the one putting down thousands of dollars, and you have every right demand this. Remember: caveat emptor! It's the buyer who must beware; you must protect yourself. Ultimately, the language in the annuity contract is what matters, but it doesn’t hurt to memorialize your verbal agreement with the agent in writing.

Hopefully your agent is totally honest and will help write the agreement, and both parties can sign and date it. If the agent starts to waffle, trust your instincts.

  • Tip No. 1 – Buy an annuity only for the contractual guarantee. You're only guaranteed what's written into the contract. The language must be simple to understand. If you don't understand it, don't sign it.

    For example, one contract I've seen said: "If I paid them a $100,000 premium, the annuity would pay me $587.97 for the rest of my life. Furthermore, if I did not receive my $100,000 in payouts, my total payments would be subtracted from $100,000, and the difference would be paid to my beneficiaries."

    The language was plain, simple, and easy to understand. There were no "if the investment does well" or "maybe" and "depending on" clauses in this deal.
  • Tip No. 2 – Protect yourself against default by the insurer. At a minimum, the insurance company should be A rated or higher by all rating agencies. In addition, many states have a fund that insures annuities up to a certain point. If your state has a $100,000 per policy limit, and you wanted to spend $200,000 on annuities, you're better off with two separate $100,000 policies. While annuities seem low risk, many people who had annuities written by AIG were quite concerned when the company went under.
  • Tip No. 3 – Demand full disclosure of fees. Many variable annuities can have management fees as high as 3%, but the fees are often hidden. There is, however, a simple way to make them very clear. Insurance agents often have a program that can project the yield from the variable component of the annuity based on any number that they put in. Ask the agent to run the projection at 0%.

    In many cases you will find they have built fees into the system; they want to charge you to manage your money even if it's held in cash. When the projection is set at 0%, you can see how much smaller your funds are getting as a result of the fees. If the agent will not or cannot run the numbers at zero, then you have good cause for concern.

    And remember, if you're interested in investing, there are cheaper ways to go about it than paying a middleman at an insurance company.
  • Tip No. 4 – Avoid a "captive" agent. Instead of buying directly from the insurance company (a captive agent) consider dealing with a general agent who represents several companies. The agent can shop prices and coverage and get the best package to suit your needs.

    If you are dealing with a captive agent, then you might consider talking with several agents and getting quotes from them. Make sure the comparisons are apples to apples, assessing like features of each company. Avoiding captive agents won't guarantee you an agent with your best interests in mind, but it sure does improve the odds.
  • Tip No. 5 – Consider taxes. While no one I know enjoys paying taxes, keep them in perspective. The right product with a safe company should be the first issue you deal with. However, the tax structure for each product is slightly different. The agent should be able to easily show you your liability per payment.
  • Tip No. 6 – If it sounds too good to be true, it normally is. You may have heard of annuities offering great yields – well above what you could expect to earn in the current market. Much like credit cards offering big rebates, when you read the small print, you are likely to find it's only for a short period of time or there's some other limit on it. Don't get caught up in the hype. The better it sounds, the more due diligence you should do.
  • Tip No. 7 – Get the agent to sign on his promises. When both parties finally come to agreement, you (the party writing the check) should look at the other person and say something to the effect of: "To protect both of us, let's agree upon what we agreed upon." Write the date and the names of the parties, and then start numbering the points. For example:
    • Agent Mr. Smith says the fees are 0.5%, and there are no other hidden fees in the product.
    • While there is a variable component in this annuity, I am guaranteed a minimum of 5% yield on my investment.
    • The variable portion of this policy is indexed to the Consumer Price Index.
  • Tip No. 8 – Demand a quote for a single premium immediate lifetime annuity with a death benefit, and compare it to the other options. The monthly income for the single premium life annuity should be your base number, as it’s one of the simplest annuities out there. As the agent starts to add "smoke and mirrors" to the equation with additional features, compare the payout to your original single premium immediate lifetime annuity.
  • Tip No. 9 – Compare one annuity feature at a time. Don't let the agent bamboozle you with multiple new features at once. If he wants to sell you an inflation rider, a death benefit, and a ramp-up period, don't compare this annuity to the basic one.

    Instead, ask for a quote with just the inflation rider feature. Compare it to your basic single premium annuity. Then, tell him to give you a quote for an annuity with just the death benefit feature. Once again, compare it to your basic annuity and evaluate the difference. This way, you can tell how much each component costs. The agent won't be able to bundle a bunch of features to confuse you.

The Miller’s Money Forever team and I want to un-complicate annuities. The topic is filled with exceptions and complications, and this short list can't cover every piece of minutia in an annuity contract. However, anyone who owns an annuity and anyone who's ever considered buying one should read our comprehensive special report, The Ultimate Annuity Guide. It's one of the only resources out there written by financial educators who do NOT sell insurance or annuities, and it's chalked full of vital information written in easy-to-understand language. Download your copy of The Ultimate Annuity Guide today.


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 -- Published: Thursday, 31 July 2014 | E-Mail  | Print  | Source: GoldSeek.com

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