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Annuity Cautions and Reminders

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Annuity Warnings

Unfortunately, some annuities are hardly worth the investment. Learn about the possible pitfalls in getting an annuity.

If you haven’t done so yet, please go through the pre-buying checklist before continuing below so you can cover some of the more general annuity concerns.

Here are several issues you need to look out for in your annuity investment:

Fixed Rates vs. Banded Rates

Companies typically offer attractive rates on a fixed annuity but then decrease this rate after a year, though this won’t be often advertised. This is actually called a banded rate annuity and may not generate the same returns as guaranteed fixed rates.

Also, the company will have no obligation to renew your rate above the minimum two or three percent interest rate, and penalize you if you leave within your surrender period. Look instead for fixed annuities that guarantee your rate for three to ten years with an equal surrender period.

Variable Annuity Transfers

Beware if your agent or financial advisor is recommending you to transfer your variable annuity to another that looks to be performing better. Doing so may penalize you with a hefty surrender charge even when using a 1035 Tax-Free Exchange. Moreover, this generates new commissions for your advisor, and they may be doing this for their gains and not for your best interest.

It’s recommended to contact FINRA in these occasions, or to ask for second opinions from other experts. Making small adjustments in the annuity’s sub-accounts may improve its performance, so switching should only be your last resort.

Fixed-Indexed Annuities

Fixed-indexed annuities are complicated and its details can be confusing. Be thorough in understanding how this annuity works to maximize your investment. Get a solid grasp on the concepts behind participation rate and cap rate. Ask if market returns include dividends, and review the historical performance of the index tied to the annuity.

L-Share or Short Surrender Annuities

With a shortened surrender period, L-Share annuities may seem attractive offers, but this is usually offset by higher Mortality, Expense and Administration (MEA) fees, resulting in lower returns. Instead of the average 7-year surrender period, L-Share annuities only have 3 to 4 years before you can withdraw more than the typical 10% amount per year without charges.

Because of the higher MEA fees, a short surrender annuity will grow less than a standard annuity with the otherwise similar terms and features. Beware of agents recommending these as they usually get higher commissions from L-Share annuities.

Next, you will need to know the different types of annuities that you can purchase so that you can make the best investment choice for your retirement.


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