I hear a lot
of questions and concerns about annuities when meeting with my clients. Many of
them are worried if an annuity can help them meet their retirement goals and
needs, while others ask about the volatility of the financial markets and the
potential of market loss.
As people have
looked over the years for alternatives to help protect from market loss,
certain annuities have become increasingly popular among those with retirement
in mind. An annuity is a financial product available through insurance
companies. There are many types and uses for annuities; today, we’ll look at
annuities in two categories: variable and fixed.
A variable annuity, which is categorized as a security, generally
produces gains based on underlying investments, such as mutual funds. Many
variable annuities may also offer fixed accounts where an investor can allocate
funds; instead of participating in the underlying mutual funds, these funds may
even receive a fixed rate of growth for a certain period of time. The rate at
which the fixed account grows varies by product and can often be similar to certain
market rates.
A concern some people express is that variable annuities not only
grow based on the underlying investment choices but can also be reduced when
the underlying investments suffer a loss. Market gains or losses can, of course,
vary by investment and time, but if someone is looking for added market risk protection
to preserve those funds, variable annuities should be considered.
Variable annuities can also often carry substantial fees and
charges, which can lower the product’s yield and are usually charged even if
the annuity experiences a loss. Some of the fees associated with variable
annuities are for riders for certain benefits, such as death benefits and
income riders.
Fixed
Annuities
There are several types of fixed annuity products. Some offer
different riders and benefits, but they all have protection from market loss in
common.
Some fixed annuities offer a guaranteed rate of growth for an
agreed period of time. This type of fixed annuity is known as a multiyear
guaranteed annuity (MYGA). These annuities have a time frame when the rate can
be guaranteed, similar to a CD. Unlike many CDs, however, numerous MYGAs will
often allow client access to some of the funds during the guarantee return
period; this is known as a “free withdrawal.”
Although free withdrawal amounts vary by product, a 10% annual
free withdrawal is fairly common; check your contract for any restrictions and
limitations. If a client were to withdraw more than the allowed amount, they
would be subject to an early surrender charge on the excess funds withdrawn.
For example, if someone has a 10% annual free withdrawal and withdraws 12% that
year, generally only 2% over the free allowed amount would be subject to a
surrender charge.
Commonly, the early surrender charge amount decreases over time
until it is no longer applicable, at which time all funds are available. Both
variable and fixed annuities often offer annual free withdrawals.
Another type of fixed annuity is known as a single premium
deferred annuity (SPIA) and is usually purchased to convert that asset into an
income stream. This annuity will often have a choice of income payout periods available
at the time of purchase, which allow for an income for either a specified
period of time or the lifetime of the client and the client’s spouse. If a
lifetime income is selected, the product may offer a provision that payments
are made to the named beneficiaries if the owner were to pass before all the
funds were paid out to them.
Although the guarantee of a lifetime income that you cannot
outlive certainly has appeal and fits in some cases, several of my clients
raise a concern that a SPIA doesn’t accumulate growth in the traditional sense.
Another concern raised is that, once this type of annuity is purchased, the
client doesn’t have access to the asset if they change their mind and want to
withdraw a lump sum.
The next type of fixed annuity is known as a fixed index annuity (FIA).
Lately, this type of annuity has become a popular option, as it offers some
unique advantages.
This product offers clients gains based on indexes, many of which
are market-based. The indexes vary and can be based on the S&P 500, NASDAQ,
Dow Jones, bonds, commodities, or real estate. Certain products offer volatility
control indexes, which may combine the growth potential of a combination of the
above. A volatility control index will often regularly shift its allocation
based on the movement and volatility level of varying underlying assets. This
method is traditionally designed to produce a more consistent, less volatile
growth potential.
The client generally has a choice of indexes and can change at the
end of each index period, which can last one or two years. In addition to being
able to change indexes, clients can also allocate to a combination of multiple indexes
to use simultaneously.
Depending on a client’s needs and goals, the appropriate type of
annuity can benefit their portfolio. Whether the goal is added protection from
market loss, a consistent growth rate, or creating a guaranteed income that
cannot be outlived, the right annuity can be an integral part of a diversified
portfolio and deserves careful consideration. Working with a financial
professional can help you decide which indexes to focus on and when to make any
changes.
This content was brought to you by
Impact Partners Voice. Annuity guarantees, including optional riders, are backed
by the financial strength and claims-paying ability of the issuing insurance
company. Insurance and annuities offered through Frederick M. Orentlich, MA
Insurance License #1720917. DT5454-1019
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