10 August 2012 0 Comments

Annuity Tutorial (Part 4)

Here are my final comments on Deferred Annuities (DA).  A few years ago I testified as an expert witness before a California Senate Committee hearing regarding misleading practices in the sale of annuities to seniors.  Their greatest concerns had to do with:

  • Inability to access funds without a surrender charge.
  • Renewal interest rates less than the original rate with fixed annuities.
  • Loss sustained with Variable Annuities.

Surrender charges are important to understand.  Charges that extend beyond 7 years or start at a rate greater than 8% probably indicate a policy with high agent commissions and can be very detrimental if you need funds or the renewal rate is not competitive and you want to move to another company or investment.  You should have the right to withdraw an amount annually, usually 10%, without being hit with any surrender charge.

Renewal Interest Rates on fixed DA’s can be disappointing, especially if a Bonus Rate was used in the first year as a sales enticement.  Always ask what the guaranteed minimum renewal rate is and what the company’s history has been on paying renewal rates above that guarantee.  If the interest rate being credited in the first year is substantially higher than the current market, don’t expect anything above the minimum in subsequent years.

Variable Annuities are like investing in the market and, as such, can experience losses as well as gains.  Seniors who are concerned with preservation of principal, but want the advantages of a bull market would probably be better served by an Indexed Annuity.

Here are a few more important elements when considering a DA:

  • Current fixed DA’s do not have minimum interest guarantees as good as those that were issued a few years ago.  Don’t drop one of these higher minimum guaranteed interest policies for the promise of a high initial rate.
  • DA’s are not short term investments.  If you don’t have at least 7 years before you need to access funds, they may not be a good option.
  • If something sounds too good to be true, it probably is.
  • If you have no need or intention of accessing any funds in a DA during your lifetime, there is probably a  better way to leave funds for your heirs…

…And that subject leads me to my next entry.

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