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    Top Reasons to Buy Annuities

    As a financial planning tool, annuities are among the most versatile and effective vehicles when used for the right reasons. With the variety of different annuity products available, and the many unique features they include, they can be applied in any number of situations for achieving long term savings objectives. The key is to understand your financial situation well enough to know if you have solid reasons to buy annuities. That usually requires a thorough assessment of your financial picture including your current investment strategy, your long term objectives and your need to balance risks. With that, you can more easily determine if you have reason enough to buy an annuity.

    Reason #1 – Increase the Safety and Stability of Your Investment Portfolio

    Smart investors apply an asset allocation strategy in order to achieve the necessary diversification and proper balance in their portfolio which will maximize long term returns while minimizing risks. Unquestionably, it is important to invest in a mix of asset classes that will ensure your portfolio performs well in all economic conditions. The younger, or more aggressive you are, the more your allocation will lean towards equities. However, even aggressive strategies need to have balance because all of the markets do not move in the same direction, and, certainly, any one market doesn’t move in a constant direction. Many savvy investors will use fixed deferred annuities as a stabilizing tool to offset the volatility that can be expected with stocks and bonds. All portfolios can use a degree of certainty along with some guarantees that, no matter what happens, there will a guaranteed income in the future. No other vehicle can provide that assurance as well as annuities.

    Reason #2 – Decrease Sleepless Nights

    If, as an investor, you lived through the stock market turmoil of the last decade, you may have grown accustomed to sleepless nights. Most people would rather get back to normal sleep routines. After the stock market crash of 2008, billions of dollars flew from the market into deposit accounts, CDs and annuities. For people with shorter retirement timelines, annuities provide a higher degree of certainty, flexibility and security than other fixed yield vehicles. If you are lying awake at night worrying about outliving your retirement savings, annuities are the best “sleep insurance”. Many types of annuities have minimum rate guarantees, so you can be assured of achieving some growth on your money in declining markets. Annuities can also provide financial security assurance through guaranteed income payments will last as long as you do. Even variable annuities, with their investment accounts, offer guarantee options that will protect your principal or your future income.

    Reason #3 – You’ve Maxed Your 401(k) Contributions

    In today’s economic environment everyone is encouraged to save as much as they possibly can in order to secure their retirement. Presently, there are no better vehicles for accumulating retirement assets than your 401(k) plan or your IRA. For people who are fortunate enough to be able to contribute the maximum amount to their plans, and who want to be able to save even more, deferred annuities may present the best option. Like their qualified plan counterparts, annuities enjoy tax deferred accumulation. But, unlike qualified plans, there are no required minimum distribution rules, so annuities can be allowed to accumulation well into retirement to act as a cushion for your retirement plan.

    Reason #4 – You’re Tired of Paying Taxes on your Earnings

    Annuities enjoy the same tax favored status as qualified plans in terms of accumulated earnings. By enabling your earning to grow tax deferred they have the opportunity to grow more quickly. The earnings are not taxed until they are withdrawn at which point they will be included with your ordinary income. However, if you elect to receive your annuity funds in the form of guaranteed monthly income, you can continue to defer income taxes because they aren’t payable until you actually receive the income. Even then, only a portion of your monthly annuity income is taxable because it is comprised of both your principle (not taxable) and your earnings.

    Reason #5 – You Need to Protect Your Assets

    We live in litigious society which makes us all vulnerable to lawsuits or debt claims that could decimate our assets. In most states, annuities are exempt to some extent from claims that arise from litigation or debt collection. They won’t work if it is found that you invested in an annuity merely to avoid a claim against your assets – that would be considered to be fraud. Also, all states have their own rules and exemption amounts. Some states exempt annuities as a whole, while some don’t exempt them at all. If you are a business owner, or are in a high profile position, you need to consider all available means to protect your assets. Annuities are a logical option if you live in the right state.


    No matter the investment vehicle, you should have a good reason for choosing it. And the reason needs to be your own, based on a thorough understanding of your financial needs. For the reasons listed here, there are annuity products, or some combination of annuity products that will help achieve these objectives. For some people, the choice of an annuity won’t be based on any one specific reason; rather it will be based on the fact that they can be very versatile in addressing a host of financial needs including tax reduction, safety of principal, income guarantees, competitive returns, and as a way to balance an investment portfolio.


    Understanding Annuity Fee Structures

    For the right people, and in the right situation, annuities can be the best solution for addressing long term needs; however, they tend to receive their share of bad press for being too “complicated” or too “expensive”. For people who have not taken some time to understand how annuities work and how their fees are structured, these criticisms may very well hold true. The reality is that annuities are fairly straightforward in their actual applications – to save money or to generate guaranteed income. But, as with other types of investments, they are laden with fees and expenses that, if not understood, could make the product seem more complicated and expensive than it really is. The key is to be able to weigh the expenses against the long term benefits received to really determine if it makes sense as an investment. The outcome will vary depending on your specific situation.

    It’s about Cost vs. Value

    Unlike standard savings vehicles such as deposit accounts or bank CDs, annuities include many features that can enhance the accumulation results for the saver. Features such as tax deferral, minimum rate guarantees, withdrawal flexibility, death benefit guarantees, minimum income guarantees all serve to provide savers with the ultimate in accumulation and financial security opportunities. But, a reasonable person would agree that these extra features would likely come at some cost in any type of savings vehicles. The real question is how important these extra features are to you and whether they are worth the added cost. The answer will differ from one person to the next. It would be important, therefore, to take some time to understand annuity fee structures so you can be in a position to weigh the benefits.

    Annuity Fee Structure Components

    Mortality and Expense Charge:

    At their core, annuities are insurance contracts issued by life insurance companies. The insurance element is the death benefit feature which protects your principal investment, at a minimum, and your total account value, at a maximum, for the benefit of your survivors. Life insurers need to cover the cost of this insurance risk, so they apply a mortality charge which is a fixed percentage of the account value. The charge also covers other costs associated with marketing and administration. On average the M & E charge ranges between .5% and 1.5%.
    Savings Tip: M & E charges for annuity products are published in the prospectus (in the case of variable annuities) or the sample contract. Shop and compare to find the lower M & E charge and you can add hundreds, if not thousands to your accumulation account over the long term. Be on the lookout for contracts with low M & E fees that try to offset them with higher surrender fees.

    Surrender Fees:

    Surrender fees present the biggest challenge for savers as they do vary greatly and they can be somewhat convoluted in their structure. They also represent the single biggest expense if the unexpected need for a sizable withdrawal occurs. So, it is vitally important to understand how it works. The good news is that annuities do allow for annual withdrawals. But if the withdrawal exceeds 10% of the account value, and it occurs within the surrender period, the excess will trigger a fee. Typically, the surrender fee starts out high, somewhere in the range of 7% to 12%, and then it declines by a percentage point each year. When the fee percentage reaches zero, the surrender period expires and withdrawals can then be made without fees. So, if you do the math, the surrender period can last as many as 12 years. For many annuity owners, the surrender fee is not a concern because of their commitment to the long term for their annuity savings. At the very least, annuities do offer flexibility and liquidity which, if the need for funds arises, can be a good source of emergency funds.
    Savings Tip: Again, surrender fee structure is published, so they can be compared to determine which contract has the most flexible or liberal provisions. Be aware of the contracts that have very short surrender periods or low fees, because the insurer may find ways to offset them by charging higher fees elsewhere or with lower minimum rate guarantees.

    Management Fees:

    Variable annuities include an additional fee to cover the cost of managing the investment accounts. These are similar to the fees charged by mutual funds, ranging between .4% and 1% depending on the type of investment account. More actively managed accounts such as a small growth stock account, may have more trading activity so the fee would be higher than a high quality bond account which requires minimal activity. It is important to note that, when looking at an investment account’s net asset value performance, the return percentage does not usually reflect the cost of the management fee.
    Savings Tip: Shop and compare. There really is no correlation between the size of management fees and investment performance, so lower fees are better in the long run.

    Sales Charges:

    Most annuities do include some sort of sales charge. The more commonly applied method is the contingent deferred sales charge in which the sales cost (including commissions paid to the annuity salesperson) is recovered through the surrender fee at the time an excess withdrawal is made. So, with this method, nothing is deducted from your deposit or account value up front. The other method is through a front-end sales load, in which a percentage is deducted from the deposit or the account value.
    Savings Tip: More annuity providers are moving away from front-end sales loads. Most annuity contracts are structured with a contingent deferred sales charge and are referred to as no-load funds. Variable contracts are more likely to include a front-end sales charge; however, no-load contracts are becoming more widely available. Shop, compare, and save.

    Other fees and expenses include state premium taxes (not in all states) which amount to an annual 2% charge; an annual policy fee which is usually a flat dollar amount like $30; transaction fees which may apply in a variable contract if excess transfers between accounts occur; and fees for any optional features.


    OK, it does seem like a lot of nickel and diming, and in some contracts, the fees can really add up. As with any type of purchase, the cost should be weighed against the expected value to be received. Unquestionably, the costs in some annuity contracts could very well counter the extra value that the annuity is expected to deliver. Using these simple savings tips, you can keep your costs to a minimum which will ensure you receive the maximum value from your annuity.


    Selecting an Annuity Advisor

    At a time when more people are worried about their financial security and looking to create more certainty for their retirement, annuities are quickly moving to the forefront of financial options.  The level of safety and guarantees they offer is unparalleled; however, even for the more financially savvy investors, they are a complex financial instrument that may require professional guidance.  The sheer number of annuity products alone is reason enough to engage an qualified annuity advisor, but understanding all of the components – the accumulation account, the withdrawal provisions, the rate guarantees, the income options, the riders, the beneficiary designations – is crucial to getting the maximum benefit from owning an annuity.

    First, do your Homework

    It is always recommended that, when considering any complex financial decision, you engage a financial professional.  A truly competent advisor is better positioned to match your specific needs with the right product, saving you a tremendous amount of time, and eliminating frustration and second-guessing.  However, it is important to spend some time doing your homework so that time you do spend with an advisor is well spent and productive.  Advisors can only be as helpful and accurate in their advice as the information they have on your financial situation, including your goals, your priorities, your current investments, and your tolerance for risk.  Additionally, it would be important to not go into an annuity advisory session without having done some research on annuities, so that you are able to ask the right questions.

    Your first step should be to conduct a thorough assessment of your current financial situation, taking inventory of your current savings and investments, analyzing your cash flow, and mapping out your short and long term objectives.  It is also important to understand your risk needs.  For instance, if you have most of your retirement assets invested in equities, you may need to balance your risk exposure by choosing a more stable annuity to counter the volatility of your portfolio. A good annuity advisor should be able to help you in this process, but you should be as prepared as possible with your own assessment.

    The next step is to conduct some research on annuity products to learn how they are structured and to understand the differences in various types of annuities.  The best source for this research is the Web on sites such as this one. You will be able to learn how the different types of annuities work and how they each can be applied to your situation.  You should study the information enough to develop a list of questions to ask your advisor. Questions pertaining to minimum rate guarantees, surrender periods and fees, savings options, fees and expenses are all important in deciding which annuity product best serves your needs.  These sites will also enable you to do some comparisons between annuity products so you can better understand how they can work for your situation.

    Annuities Explained

    Advisor Selection Checklist

    Armed with your homework, you will be in a position to interview several different advisors to determine which one is best suited to work on your behalf. Your best source for finding prospects if through referrals from trusted friends or relatives who have existing relationships with annuity advisors. Alternatively, you can search for qualified advisors through various directories compiled by various consumer and industry organizations.  It is important to establish a list of criteria and requirements to use in narrowing your selection. Among the more important criteria are:

    Education level –

    five years of annuity advisory experience should be a minimum.

    Education level –

    Look for advisors who have committed themselves to excellence by acquiring certifications and credentials, such as Chartered Financial Consultant (ChFC), Chartered Life Underwriter (CLU), Certified Annuity Advisor (CAA) or Certified Financial Planner (CFP).

    Independence –

    Avoid working with an annuity salesperson who is limited in their product offering.  A true advisor has access to a number of annuity providers and is in a position to work on your behalf rather than on the behalf of a specific provider. It is especially important to know that he works with the top rated companies. Ask for a list of the annuity providers he works with, and make sure there are a sufficient number of A+ or AAA rated companies included.

    Process –

    A good advisor asks a lot of questions and conducts his own assessment of your situation before recommending any products.  Ask a prospective advisor to describe the process he uses to determine which products are most suitable. If, within the first 30 minutes of meeting with an advisor, you are handed a product brochure, you should probably walk away.

    References –

    It’s always important to learn as much about your advisor as possible, and one of the best ways is through client references. Ask for references. You are likely to be referred to their most satisfied clients, so you can expect nothing but positive reviews, however, you can still learn about the advisor’s relationship skills.

    Background –

    When checking the background of advisors, Google is your friend.  You should be able to pull up information on your advisor including LinkedIn profiles, community involvement, industry recognition, etc. If your Google search comes up completely empty, it could also be a red flag.  Also, be sure to check for any disciplinary record with the Financial Industry Regulatory Authority (FINRA) and your state’s insurance regulatory agency.


    Selecting the right annuity product can be a daunting experience, but when you know you have the right annuity solution in place it can feel very rewarding.  Qualified annuity advisors should be able to facilitate the process and increase your comfort level with their knowledge, their ability to communicate (and listen), and their demonstrative willingness to put your interests first.  Annuities are long term investments that can address your most important goals. With so much at stake, it is worthwhile to take the essential steps described here to be able to select the right annuity advisor.



    Annuity Funding Options

    At their core, annuities are contracts between and individual and a life insurer in which a promise to protect principal, pay a guaranteed rate of return and/or pay a guaranteed income stream is made by the insurer in exchange for a sum of money.  The contract is not executed until it has been funded by the annuity contract owner. Depending on the circumstances there are a couple of different annuity funding options that can considered: Single premium, periodic or flexible premium. Additionally, charitably-minded people can use an asset-funding through a charitable gifting method.

    Single Premium Funding

    The most common form of annuity funding is with a single premium which means that the annuity is fully funded with one lump-sum deposit.  This method is used for funding immediate annuities which are contracts that promise the annuity owner a guaranteed stream of income payments over a specific period of time or for life.  Typically, the income begins at some time between 30 days and one year following the single premium deposit. With immediate annuities, the single premium payment  irrevocable once the income payments begin.

    Single premium funding is also used with deferred annuities which, as the name implies, defers the income payments into the future. Up to that point, the funds are allowed to accumulate in an account and taxes on earnings are also deferred until the funds are withdrawn or the income payments commence.  The tax deferral is a great advantage of deferred annuities, however, there may be a penalty for withdrawing the funds prior to age 59 ½. If, instead, the funds are paid out in equal payments for life, the penalty does not apply.

    Single premium annuities are commonly used in structured settlement cases in which the court awards a sum of money to a claimant that is to be paid out in a series of payments. The payments can be deferred as in the case of an award made to a child who has to wait until he reaches adulthood to begin receiving payments. The settlement can call for payment to be made over a certain period of time, or for the life of the claimant.  Lotteries also use single premium immediate annuities in those instances when the winner elects to receive the winnings in annual installments.


    Flexible Premium Funding

    Alternatively, deferred annuities can also be funded through periodic payments made in monthly installments or in flexible payments throughout the accumulation phase of the annuity.  At the end of the accumulation phase, at a time of the annuity owners choosing, the annuity can be converted to an immediate annuity for guaranteed income payments.  At anytime during the accumulation period, annuity funds are available for withdrawal (the same for single premium deferred annuities).  Most annuity contracts allow for withdrawals of up to 10% of the annuity value without any additional charge.  After a period of time, typically seven to 12 years, unlimited withdrawals can be made without charge.  But, there could be a 10% IRS penalty if the withdrawal occurs prior to age 59 ½.

    Charitable Funding

    Some people are in a position to donate a portion of their wealth to charity. In some circumstances a charitable donor can generate current tax advantages as well as future estate tax benefits in a properly structure charitable gift arrangement using an annuity.  The most commonly used arrangement is a charitable remainder annuity trust in which a donor irrevocable gifts asset to a trust with a charity as the beneficiary.  The trust them pays an income to the donor until his death at which time the trust assets become the property of the charity. The donor is allowed a current tax deduction for a pro-rata portion of the gifted assets, and, at his death, the asset is removed from his estate which will lower the potential estate tax.

    Variable Annuity Funding Options

    Variable annuities are different from fixed deferred annuities in that, once they are funded with a single premium or flexible premiums, the annuity owner must also fund the investment accounts inside the annuity.  Variable annuities usually include a choice of investment funding options including various stock accounts, a bond account, a fixed account and a money market account.  Funding these accounts consists of allocating the premium deposit among the various accounts in a way that reflects the annuity owner’s investment profile.  Should his investment profile change, the funds can be switched between the accounts.


    While it’s nice to have a number of funding options, it’s important to know your financial situation and your financial objectives well enough to focus in on the option that is most appropriate.  A single premium option may produce the best long term results, but, it may not be appropriate for someone with limited assets. And, certainly the funding options available for charitable gifting and variable annuities should be considered along with the guidance of a qualified financial professional.



    Top Rated Annuity Companies

    As annuities continue their resurgence to the top of investor preferred vehicles  for safe, secure, long term savings, the spotlight once again returns to the top rated annuity companies. As their popularity increases, so too does the proliferation of annuity products on the market which, at best, broadens the choices that investors have, and, at worst, adds to the overwhelming confusion.  With dozens of companies offering hundreds of annuity products in a variety of colors, the task of selecting the right annuity can be extremely daunting if not totally discouraging.  It doesn’t have to be that way.  By limiting your search to the top rated annuity companies you will significantly reduce the expense of time, resources, and second guessing.

    Why Financial Strength is Important

    Fixed annuities have long been considered to among the safest of investments.  Their safety is rooted in their structure as well as the strength of the life insurance companies that back them.  Structurally, they are a contract between you and a life insurer in which your deposit becomes a legal obligation of the insurer.  Depending on the contract, the life insurer becomes obligated to protect your principal while paying you a guaranteed rate of interest for the term of the contract.

    Your deposited funds are then invested in the general account of the life insurer, so they are both an asset of the company as well as an obligation.  Unlike banks, that loan out as much 98% of their customers’ deposits, life insurers are required to keep as much 98% of their deposits in reserve.  Depending on the state’s regulatory requirements, life insurers are also required to maintain capital surpluses. In addition, most states have a guarantee fund that protects policyholder benefits up to $500,000 (the amount varies from state to state).  Putting it all together, an annuity contract owner is more likely to be bitten by a shark than lose a dime of his principal.

    Still, there are degrees of safety.  Even with all of the protections built into the structure of the annuity contract and its adherence to state reserve requirements, life insurance companies do vary in terms of their financial strength and stability.  Some companies are better at managing their portfolios, and some companies ascribe to a more conservative approach, which can reduce their vulnerability when the economy turns sour.  Companies with portfolios invested in lower quality bonds, or with weak balance sheets, can expose their policyholders to a higher degree of risk. Fortunately, you don’t have to be able to study investment portfolios or know how to read a balance sheet to know which companies  might experience problems in the future. The independent rating agencies take that task on so you don’t have to.

    Look to the Ratings Agencies

    The rating agencies, such as A.M. Best, Standard & Poor’s, and Moody’s, audit, track, compile and publish the financial data of life insurers, and then, based on their assessment of their financial strength and long term stability, assign a rating that enable you to benchmark the quality companies and compare.  Each has its own system of ratings criteria, but they all reserve their top ratings for the strongest companies. A.M. Best issues an A++ to the most financially sound companies of which only a few qualify. But it’s A+ rating is considered to be a top rating as well.  Standard & Poor’s and Moody’s apply triple-A (AAA) rating to their most highly rated companies.  In total there are about 25 companies that have earned the very top ratings of A+ or AAA.  Companies with slightly lower ratings (i.e. an A from A.M. Best, or an AA from Moody’s) would also be considered to be financially sound.  There are about 50 companies with ratings of A or better (A.M. Best), or AA or better (Moody’s).

    Given the large number of life insurers deemed to be exceptionally strong by the rating agencies, there is little reason to look beyond them to the other 120 companies that offer annuities.  You are not likely to find much more competitive rates, and, if you do, you would have to weigh the benefit of a slightly higher interest rate against the reduced peace-of-mind  that comes with it.


    Beyond financial strength, the other key aspect to look for in a top rated annuity company is their level of customer service.  Annuities are not among the simplest of financial instruments to understand, and there are a lot of considerations and options that need to be weighed before and after their purchase.  In order to maximize their benefits over the long term, they may require some proactive management.  Most annuity investors aren’t able to do this on their own. They require the assistance of their provider. So, it is important that your provider have a robust and responsive customer service department.  Owning an annuity from a highly rated life insurer may not be of much comfort if your customer service needs aren’t being met.

    When you combine the financial quality elements with the customer service elements, the number of top rated companies might be reduced to just a couple of dozen.  If you can assume that the top 20 or 30 companies offer solid and competitive annuity products, then your two most important criteria should come down to quality and service.

    Financial quality ratings and levels of customer service are in a constant state of flux.  If we listed the top rated companies in both categories here today, the lists will likely change next month, or when the next assessments are conducted.  Your best bet is to search an annuity site with the most current data and sort by ratings. Then, conduct a quick review of the companies’ websites and consumer forums to see which companies offer the most robust customer service facilities.