If you are thinking about putting your money into an annuity, ask yourself these two questions: Who do I want to have possession of my money, me or an Insurance Company? Should I follow the advice about an annuity given by someone who makes a commission on the sale of that annuity?
An annuity is a contract between you and an Insurance Company. You give money to the Insurance Company (your part of the contract), and at some point in your life the Insurance Company gives your money back to you, usually over a defined period (the Insurance Company part of the contract). The primary reason you have an annuity is to receive periodic payments during your retirement years. At the end of the “accumulation period” (money in), you “annuitize” the contract (money comes back to you). After annuitization, the Insurance Company takes full possession of your money and gives it back only under the terms of the contract. There are many types of annuities and each comes with bells (costs you more) and whistles (costs you even more).
The first key question on whether you should own an annuity is “who do I want to have possession of my money?” In my Money Coach practice I encourage clients to take full responsibility for their own finances so I’m not real big on losing control of money to an Insurance Company which is trying to make a profit with my money. In the accumulation stage (while you are putting money in), there are many restrictions on taking your money out. Here are a couple: it is retirement money so there is an IRS penalty of 10% if you need the money before age 59 1/2; there often is a “surrender charge” in the years following the start of the contract. And, as noted above, once annuitization begins, the money no longer is yours. There may be times when you, in fact, desire monthly income automatically from an outside source. An example would be monthly payments for your spouse after you pass (a joint life annuity). Just make sure there is an inflation rider (a whistle) which will increase the monthly payments in line with inflation.
The answer to the second question, “should I follow the advice about an annuity given by someone who makes a commission on the sale of that annuity?” is obviously “no.” Seek advice from a fee-only financial advisor. Annuities sold by salespersons have high commissions, and everyone must realize that the salesperson is working in his/her own best interest much of the time. If you and your financial advisor determine that an annuity is in your best interest, consider purchasing the annuity from a no-load (no commission) financial company. Here’s what one no-load company said of its variable annuity – lowest annual annuity costs among the top 250 selling variable annuity contracts; no surrender period or fees, no complex options or riders. Check out a company like this.
Bottom line: investigate before investing. Learn both the pros and the cons of annuities from a source other than an annuity salesman. Make a wise decision.