3 Questions to Ask Before Buying an Annuity
An annuity is one of several income sources in retirement, and its purpose is to turn your wealth into a steady stream of income once you retire. However, you still need to buy it with caution and careful planning.
Whether you’re near retirement or still have many years left, deciding to place part of your retirement savings into an annuity is a big deal.
Simply put, annuities are not for everyone, and it can only answer specific retirement needs, such as taking care of your future daily living expenses.
If you are considering annuities, here are three questions you need to ask before finally deciding to do so.
1. How does an annuity work?
Of course, you already know that annuities are contracts that entitle you to receive income in retirement. However, annuities may come in different shapes and sizes, so you need to know how your preferred type specifically works.
There are annuities that require you to pay a lump-sum payment upfront and provide payouts immediately. Other types would allow you to make periodic payments, grow your money taxed deferred provided that you will only receive payouts beginning on a particular date on the future. Meanwhile, others let you decide where and how you will invest the money in your annuity.
Remember, you shouldn’t buy a product without knowing its ins and outs, what it’s for, and how it benefits you. So don’t be swayed by mere marketing talk. Do your homework, conduct research, and seek objective financial advice.
2. Does the insurance company have a good rating?
On brochures and other promo materials, you may see the word reliable, strong, and caring describing the company and its products. Though they may be true, remember that these adjectives are usually used for marketing and to simply highlight their best features.
The best way to get an objective perspective on a company’s performance and financial stability is through ratings. A.M. Best, Fitch, Moody’s and Standard and Poor’s are independent organizations that rate companies. You can check their websites to see how they conduct their ratings, as well as the results.
No matter how good your annuity contract is on paper, it will all be for nothing if your provider is not strong enough to stay in business and make payouts. If you have an annuity that will pay you for the rest of your life, make sure that your chances of outliving your insurer is very slim.
3. What is the total cost of the annuity contract?
Depending on the type of your annuity, there are several types of fees that you also need to pay. Before signing on a contract, determine what these are and how much they cost. Some of the fees that annuity contracts may charge are administrative fees, mortality and expense fees, additional options benefits or riders, asset management fees, and surrender penalties.
Understand the purpose of these fees and compare rates as you shop around for an annuity. If you opt for bigger guarantees, expect bigger charges.
Annuities can be instrumental to your financial security in retirement, but just like with any major purchase, you need to proceed carefully when deciding to buy this product. Asking these three questions is a good start.
Photo by: Stefan Baudy