Dear First Mates,
I hope you are doing well! Given the relative safety of some annuities during periods of economic weakness, I’ve had several clients ask recently for more information about this investment vehicle.
With that in mind, I thought I would share an overview with you today. Take a look at the key points I’ve provided below and reach out with any questions.
What is an annuity?
An annuity is a contract between you and your insurance company, encompassing an investment by you and a payout by them. The payout is based on certain guidelines, depending on the type of annuity you choose.
There are three types of annuities you can choose from:
Fixed annuities – With this option, the insurance company agrees to a payout based on a fixed interest rate regulated by the state. In this scenario, the insurance company assumes all the risk, minimizing some of the unknowns that come with investments.
Think of fixed annuities as CDs issued by insurance companies. You will earn the stated interest rate but are typically locked in for several years. There could be stiff surrender charges if you surrender the policy before maturity.
Indexed annuities – This option ensures a return based on the stock market index. State insurance commissioners regulate these. The major benefit here is that your principal is protected at the cost of only achieving a portion of the market upside in the form of a cap.
Variable annuities – If you choose a variable annuity, you will invest in a variety of stock and bond subaccounts that are similar to mutual funds. The payout varies based on how much interest is earned. This option is best suited for retirement plans or obtaining other long-term financial goals.
Certain insurance companies offer lifetime income guarantees to variable annuities. This feature adds a phantom account that grows at a specified rate (even if the market is flat or down). This phantom account can then be used to draw income levels in retirement, providing a level of security for investors concerned about outliving their savings. However, it is important to carefully consider the fees and expenses associated with these products, as they can be relatively high compared to other investment products.
Within each of these categories are other considerations, such as immediate and deferred payment options, and there are several questions I encourage clients to consider before making a decision.
If you’d like to discuss annuities further, know that I would be happy to share more information and recommendations based on the current market. Reach out by phone or email, and we can set aside some time to chat.
Dave’s Picks
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