While most people understand the importance of life insurance, many do not understand the importance of annuities. As life insurance protects your family from early death, annuities are a form of insurance that protects you from living too long.
Annuities are a criticized insurance product, but this is often due to a lack of understanding. If annuities are purchased by the wrong person for the wrong reasons, of course it is a bad deal; But, for many people, annuity insurance can be a great deal under the right circumstances.
First off, it is important to understand the basics of annuities and each type of annuity, including:
Fixed Annuity
Fixed annuities are more stable as they provide a fixed payment until a specified date or until death, depending on which you choose. With a fixed annuity, the insurer assumes the risk in how the annuity performs, not the client. When the payments start, the amount is determined by the consumer’s life expectancy as well as how much money is in his or her account.
Variable Annuity
Variable annuities are for the riskier consumer because they assume the risk of the performance of their own portfolio. This means that the payout amounts cannot be predetermined like they are with fixed annuities. The risk here can either pay off, with larger payments, or cannot, with smaller payments, all based on how the money is invested. For most people, a variable annuity is not the desired insurance, especially if the client is close to or in retirement.
Immediate Annuity
With an immediate annuity, the consumer starts receiving payments right away. Immediate annuities are not as common, and normally are used when someone is quickly approaching retirement. With an immediate annuity, there is a larger risk of losing money as payments are only guaranteed until death.
Deferred Annuity
The most common annuity, a deferred annuity, is when the consumer makes payments now and makes withdrawals in the future- mostly in retirement. Deferred annuities are left to accumulate money, giving the consumer more choices.
While these four terms explain the basis of annuities, annuities are much more complicated. Some annuities can be paired together while some cannot. For example, you can have a deferred fixed annuity, but you cannot have an immediate variable annuity.
Also, the options and riders that potentially come with selecting an annuity can seem overwhelming. This is why many people stray away from annuities when choosing insurance or retirement plans.
An example of a more complicated annuity that Cardinal Advisors suggests for some clients is a fixed index annuity. With a fixed index annuity, the client’s money is tied up for several years, and while there are fees associated, a fixed index annuity comes with some great guarantees. First, the consumer is guaranteed to never lose any money put in initially; In fact, the client can even get a share in the upside gains their money receives. In addition, an income rider will guarantee payments either annually or monthly as long as the client or their spouse lives, even if the initial payment is depleted. Another positive to a fixed index annuity is that long-term care benefits can be added, which will double or even triple the consumer’s payments for a period of time if they need long-term care.
Annuities seem complicated, and they are, but guaranteed income annuities can be a lifesaver for people who need a steady stream of income in retirement besides a Social Security check. Annuities are also indispensable when someone needs long-term care.
Make sure to consult with a professional before making any decisions about annuities. Without the help of an insurance agent or financial advisor like the experts at Cardinal Advisors, annuities could be costly rather than beneficial.
Cardinal Advisors Are Here to Help
At Cardinal Advisors, our team of advisors, made up of independent insurance agents and financial advisors, are familiar with many different annuity products. The advisors at Cardinal Advisors also take the time to get to know their clients and their unique situations before suggesting any insurance product or form of insurance. If you’d like further information on annuities or need help finding the right annuity or insurance plan for you, call Cardinal Advisors at 919-535-8261.
Hans Scheil is the author of “The Complete Cardinal Guide to Planning for and Living in Retirement” and the accompanying workbook. He can be reached at Hans@CardinalGuide.com.
