Annuities used to basically come in two varieties–fixed or variable. Fixed annuities, you would drop a lump sum of money into a policy, usually a high dollar amount, and over a certain number of years, at X percent interest per year, your money would slowly grow tax deferred. Or, you could invest in a variable annuity which was invested in the stock market. Problem there potentially was that you could lose your priniciple as it was not guaranteed. Actually there was a third type, the immediate annuity. These were great because you would take a large sum of money, often the proceeds of a retirement account or a life insurance policy, and depending on the amount of money, combined with your life expectancy, you would generate an income stream that you couldn’t outlive. BUT, if you had the misfortune to pass away a year or two after your purchase, the money was gone. But if you lived longer than the projected life expectancy, you really scored.
Now days, with the economy in the toilet and jobs being lost, people are wondering what to do with their retirement accounts such as 401Ks. If there’s anything left. They want more than a money market account or CD will pay, if they are in their late 40s or older, they aren’t sure they want to risk the volatilty of the stock market.
So annuities are really attractive again but you have to know what to look for. One thing that is a point of concern is that should be considered long term investments. There are penalties for early withdrawals, which is if you take money out before the specific time period of the annuity. With most annuities, after the first year you can take out 10% after the first year without a huge issue. But if you’ve set it up as some type of IRA then you will be subject to income taxes as well as a 10% penalty. So you need to view these as a long term decision, the last place you’d want to go if you needed money. These are NOT where you would place the ’emergency fund.’
For a long time I’ve suggested people take a product no longer than a 10 year surrender period. Now, some insurance professionals try not to go beyond 5 or 6 years. Reason is twofold. First, in the past few years new product designs have been developed that are more flexible than older products so it would be nice to have the option to change. Also, if you may need money sooner, you don’t want a 17 year product. So talk to a couple of people and make comparisons in annuity products before making a decision. There are lots of options, and a lot of them very good options!
Next–learn about the fixed indexed annuity. It can be a great hybrid of the fixed and variable annuities. And a couple other tips in what to look for when selecting an annuity.