Understand an annuity before buying it


There are many types of annuities, and some are quite complicated. As a result, many savers approach these products with justified trepidation. I believe that there are some important cost-effective annuity options with significant advantages. It is important that you get an unbiased opinion of the pros and cons of each of the annuity type before you buy one.

For example, many retirees want assurance in retirement that they will have a consistent guaranteed income for all their life in addition to Social Security. Single-premium immediate annuities (SPIAs) will do that. There are no internal fees associated with this product, and the associated commissions are the lowest of any annuity. All the commissions are built into the product, so once you purchase it you know the amount of income you will receive for your lifetime.

Another example is a fixed-rate annuity, also called a multi-year guarantee annuity (MYGA). This product also has no internal fees, and commissions to the agent or adviser are low. Generally, you will receive a higher contractual interest rate than a CD if you invest for more than two years. For investors looking for a safe, conservative investment with guaranteed income, this is an attractive option.

All annuity contracts are issued by life insurance companies. When you buy an annuity, your primary objectives are usually to provide a lifetime income stream or principal protection. Since you are transferring this risk to the insurance company, naturally you want to be sure that the company you select has the claims-paying ability and financial strength to meet your objectives.

When it comes to your safety, the most important factor is the company that issues the policy to you. Annuity guarantees are only as good as the company standing behind their promises. Your agent/adviser should also be able to advise you regarding the safety of a specific company. Insurance companies are rated for safety by several companies, specifically, A.M. Best, Standard & Poors, Fitch, Moody’s and Weiss.

Stan Haithcock, an expert in the field, recommends the use of COMDEX, which is a composite index score based on the ratings from several rating agencies. The advantage of this rating is that it is based on a scale of 1 to 100, which is easier to understand than the alphabetical ratings used by the other companies. Naturally, if you are buying a product that will protect you for life, you should only be selecting companies with the highest ratings.

Most annuity types are classified as fixed annuities and are regulated at the state rather than the federal level. Each state has a specific guaranty fund that backs all annuities up to a specific dollar amount. If you want to determine the coverage in your state, check with the National Organization of Life and Health Insurance Guaranty Association at www.nolhga.com. If your insurance company runs into financial difficulty, your next level of protection is NOLGA. A good agent should explain to you how your state coverage applies to any annuity you are considering.

Some annuity products whose benefits are tied to equity performance, such as variable annuities, are regulated other agencies such as FINRA and the SEC.

Again, it’s very important to understand an annuity before you buy one. Haithcock’s website, www.theannuityman.com, is a great resource. It provides, at no cost, brochures explaining every type of annuity, clarifying the features and pros and cons of each, as well as safety issues. His company also publishes Annuity Lifestyle Magazine, a weekly publication which is also available at no cost.

I have worked with Haithcock for many years. He has the required expertise, and will only recommend cost-effective personalized annuity options.