With the resurgence of variable annuities as a retirement vehicle, comes a whole new generation of investors who are looking at them for the first time. There is a lot to consider when buying a variable annuity. They are complex instruments to begin with, and the intensively competitive marketplace creates more confusion when trying to determine how to get the best variable annuities.
There are a number competitive features found in variable annuities that can differentiate the best from the rest. This guide will help you streamline the process of comparing variable annuity features that can separate the best from the rest.
The primary differentiator of a variable annuity is the investment performance of its subaccounts. Naturally, you want your money working with the winners. An investment in a variable annuity actually goes into subaccounts which are mutual fund-like, managed accounts that pool your money into stock and bond portfolios.
Variable annuities must be sold with a prospectus. The subaccount performance history is listed in the prospectus along with the investment manager’s investment objectives and philosophy. The best variable annuities tend to have subaccounts with longer track records of at least 10 years. Also, there should be an adequate mix of portfolios that range from aggressive growth to low risk, low return type investments.
The best variable annuities are the ones that consistently outperform the market, both in up markets as well as down markets.
Variable Annuity Costs
The many advantages of variable annuities do not come without a cost. The fees associated with variable annuities cover the costs for investment management, providing a death benefit along with administrative costs. There are also additional costs for adding riders that provide minimum withdrawal and minimum death benefit guarantees.
As with anything, the lowest costs don’t necessarily translate to the best variable annuity. Costs can be easily compared by going on line to an annuity comparison site where you can sort by a number of different features. Detailed breakdowns of fee structures are available.
With a variable annuity you do tend to get what you pay for. Most no-load or low-load variable annuities are fairly stripped down models that don’t offer the level of guarantees or options for additional guarantees that are available in loaded annuities.
The best variable annuities are those that have a reasonable fee structure, and also provide a high level of services that can assist you in making investment and income decisions as your financial situation evolves. The extra 1% or 2% you might pay in fees will be offset by your tax deferral and the services can be priceless should you need the extra help in making future decisions.
As part of your contract with the annuity provider, you are committing your investment for a long term. In order to dissuade you from taking early withdrawals the provider will charge a surrender fee. This usually occurs during the first five to ten years of the contract, after which, there will be no more charges. Providers compete for your business by structuring very liberal surrender schedules and fees. Some offer short surrender windows of three to five years, and others charge lower fees. These can be compared at the same annuity comparison websites. If you invest in a variable annuity with no intention of withdrawing funds within the first five to ten years of the contract, then this may not be a feature that you would use for comparison. The best variable annuities are the ones that meet your liquidity needs.
Death Benefit Guarantees
One of the unique advantages of variable annuities is the protection of your principal against market risk. Essentially, you can invest in a variable annuity with the peace-of-mind knowing that your beneficiaries will not receive anything less than your original investment. The death benefit provision are fairly standard among providers, however, some offer additional guarantees. For instance, some variable annuities include a valuation step-up which ratchets up your base account value as it grows. So, instead of receiving the original principal, your beneficiary could receive your accumulated value. Many variable annuities offer this feature as a rider at an additional cost. You would need to weight the added security against the fee to determine if it is a good value for you.
Minimum Income Guarantee
All variable annuities come with a minimum income guarantee that protects your income against adverse market fluctuations. The minimum payout rate is also a competitive feature and should be compared. Some providers also offer additional income guarantees that can increase the minimum payment, again, at a cost.
The best variable annuities offer the most competitive income and death benefit guarantees along with the options to enhance the guarantees. Don’t let the additional costs of minimum income guarantees deter you as they can payoff in the long run when your income needs to keep up with inflation.
Get the Best from the Best
Guarantees such as return of principal and minimum income withdrawals are generally backed by the financial strength of the life insurance company providing the annuity product. As these are long term guarantees, it would be important to narrow your choices to those insurers that rate the highest for their claims paying ability. There are plenty of A+ rated companies from which to choose a great variable annuity. The best variable annuity is the one that will be able to pay you regardless of the state of the economy at the time.
To get the best variable annuity you’ll need to do your research which is made easy by any number of online annuity websites. By comparing investment performance, fee structure, level of service, death benefits, and income guarantees you’ll be in the best position to find the best variable annuity for you.
Since their introduction in the United States over 200 years ago, annuities have stood the test of time as valuable retirement planning vehicle. After serving a vital role during the economic turmoil of the Great Depression, annuities have evolved and proliferated to the point where buying an annuity today is like walking through a warehouse store filled, end-to-end, with nothing but annuities. For those people who have determined that an annuity can best fit their needs for a secure retirement, they are left to wonder what’s the best place to buy an annuity.
Annuities vary in flavor, complexity and investment purpose. While they are all designed as a way to fund a lifetime of income, there are differences between the various types of annuities that may require a different approach as to how and where one is purchased.
If it was possible to buy annuities from a large warehouse store, investors would be left to their own devices for getting the information or services that is needed for making the right decision on some of the more complex product such as variable annuities.
There are, in fact, warehouse stores in the form of on line annuity product aggregators. On these sites you can find an inventory of all annuity products along with tools for researching and comparing them based on their different categories. Sites such as AnnuityAdvantage.com list hundreds of annuities in various categories and provide the capability of sorting and comparing those using key factors such as company ratings, available options and current yield.
Fixed yield annuities such as CD-type and fixed deferred can be shopped on these sites with full consideration for the quality of the provider as determined by rating agencies and its ability to offer competitive yields or payouts. Other factors such as minimum investment requirements, product guarantees and surrender schedules are available at the touch of the “learn more” button . This can truly streamline the process of narrowing your selection down to a manageable number of providers.
For most of these annuities, you are directed to a company representative to complete the purchase. While it may be your desire to avoid having to deal with a salesperson, your shopping experience has provided you with enough information and competitive knowledge so that you can be in control of the conversation. The value of a salesperson is in his ability to answer any questions and to handle the processing. It will be in his interest to make sure it gets done correctly and to ensure that you receive the proper service.
Immediate annuities can be shopped through an online annuity store, but, because the payout rates are gender and age based, you may be required to submit a request form in order to get a quote. Immediateannuities.com offers a 9-page report with a full listing of quotes from providers along with the promise of no contact from a sales rep.
This is best way to shop for immediate annuities because you’ll be able to identify which of the most highly rated companies offer the most competitive payout rate. The report will include detailed product descriptions along with payout options, inflation riders, and refund options. Again, if you’re using this site, you will most likely need to contact the provider in order to complete the purchase. With immediate annuities it is recommended that you work with the provider through its reps in order to ensure that you’ve structured the product in a way that best fits your needs.
Variable annuities are more complex than fixed annuities in that they include an investment element. They can still be shopped on annuity store sites such as AnnuityFYI.com and the information that is available is very detailed. Most of the key features and provisions that competitively differentiate one product from the next are included. Expenses and surrender fees are key factors in comparing variable annuities and they are detailed within each product’s description. Optional guarantees and product bonuses are also competitive features that each provider wants to highlight and they can be compared on the site.
The overriding factor for comparing variable annuities is the investment performance of the subaccounts. While there are descriptions of the asset allocation models and investment objectives, the past investment performance information is generally not found on these sites. Variable annuities can only be sold by prospectus and it there where the provider will provide this information. Again, you will need to contact the provider for additional information and a prospectus but, the on line store will help you to quickly narrow your choices.
When purchasing a variable annuity, it is recommended that you work with a representative of the provider. The better providers provide valuable assistance in the allocation of the subaccounts and variable annuities, more than their fixed yield counterparts, do require ongoing servicing and consultation to ensure it continues to fit your changing financial situation.
What’s the best place to buy annuities? Let your fingers do the walking on your keyboard and you’ll be able to get through 80% of the shopping experience. The annuity provider will be the checkout stand and your service provider.
Immediate annuities are designed to do one thing and that is to convert a lump sum of money into a guaranteed stream of income for a predetermined period of time, either a fixed period or for the life expectancy of a person. That’s it. As simple as that may sound, there are several factors that should be considered to determine when to get an immediate annuity. The time to get one may very well be when you need the income, but it may not be the best way to optimize the benefits of an immediate annuity. With some understanding of how an immediate annuity works, you can get the most out of an immediate annuity and get the income you need.
In order for a life insurer to make the immediate annuity appear so simple, there are a few actuarial machinations that must occur along with some contractual commitments on the part of the insurer and the annuitant (the person receiving the income). Let’s cover the contractual commitments first.
An immediate annuity is a contract which obligates the insurer to its part in providing an income stream in consideration for a lump sum deposit made by an individual. The contract requires that the individual relinquish his rights to the deposit money in return for the guaranteed income. Once both parties enter into the contract, it is irrevocable. The contract specifications are determined by the individual, his age, the amount of money to be deposited, and his specific need for income. An individual may need to secure an income for the remainder of his life, or he may need the income for a specific period of time.
When the money is accepted by the insurer, its actuaries go to work to determine the amount of income that the annuitant will receive. For a lifetime income, the annuitant’s age and the cost of money are the primary determinants. Using current life expectancy tables, the insurer determines how long the annuitant is expected to live. Factoring in interest rates that will be applied to the remaining principal, the insurer comes up with a payout rate that is based on a systematic return of the principal and the payment of interest earned.
Said differently, the income payment and annuitant receives consists of both a return of their principal and interest earned. The number of years of remaining life expectancy is the key factor in determining how much of the income will be return of principal and how much will be interest earned. This is where it gets to the issue of when to get an immediate annuity.
For anyone to have considered a purchase of an immediate annuity, they probably have concerns about the prospect of outliving their income. It also means that they would probably prefer not to have to concern themselves with having to manage the assets or administer any accounts. Also, they prefer more stability and predictability in their retirement income.
It would also seem that the most appropriate time to buy an annuity is at retirement age when earned income stops. The goal for most retirees is to be able to maintain as much of their preretirement lifestyle as possible and the supplemental income from an immediate annuity would help them fill in the gap.
Ideally, the newly retired person has at least a couple of sources of income such as a qualified retirement account and, maybe, income from a part-time job along with his Social Security. With proper planning, it may be possible to have the existing income sources provide enough to meet his basic lifestyle needs. Having a sum of money that can sit in cash for emergencies or near term purchases would be even more ideal. Under these circumstances, the best time to buy an immediate annuity is as long into the future as possible. Let’s explore the reason why.
Because of the role that life expectancy plays in determining the payout rate, the older a person is when he annuitizes, triggering the payout calculation, the higher the payout rate will be. This is because the insurer must be able to distribute all of the principal and interest in a shorter period of time. Should the annuitant live past his life expectancy, the insurer is obligated to continue income payments at the same payout rate.
Positioning for a higher annuity payout later could allow for bigger current withdrawals from other retirement accounts. Because the future annuity payout will be based on prevailing interest rates, the actual rate cannot be accurately predicted, however, using different assumptions for the direction of interest rates in the future, one could arrive at reasonable forecast.
The key is to take the lump sum that was allocated for an immediate annuity and put it to work in a deferred annuity so it can accumulate safely at competitive rates and without current taxation of interest. At the time the income is needed the deferred annuity can be converted to an immediate annuity without penalty or tax consequences.
The most important factor to determine when to buy an immediate annuity is when you have the need for a secure, guaranteed stream of income. That’s why they were created, however. with some foresight and some effective planning, it’s possible to get most out of an immediate annuity and get the income you need.
As annuities gained in popularity back in the 1980’s, the number of products and companies offering them skyrocketed. With over 200 life insurers offering hundreds of different annuity products, the consumer is left bewildered among the overwhelming number of choices.
Fixed annuities became especially popular due to the high interest rates that were available back then. It was possible to lock in a very favorable rate, typically higher than the prevailing bank CD rates, for a period of time. Because of the tax deferral of interest earned in a fixed annuity, they held a tremendous, competitive advantage over taxable equivalents.
The primary lure for investors was the high interest rates that were heavily promoted by insurers with some “teaser” rates that were in the stratosphere. These high rates captured a lot of high yield seekers, who were then brought back down to earth once the rates adjusted to current market conditions.
After the collapse of Executive Life in the 1990’s, investors developed a new awareness of the possible dangers of high yielding investments. High yields typically meant, high risk as far as the underlying investments were concerned. In order to generate high yields for a fixed annuity, or a CD in the case of a bank, the investment managers of the life insurance company had to dig down deep into the ditch of low rated, high risk bonds to fashion together a portfolio.
The hard lesson for investors was that, a guarantee of principle was only as sound as the quality and creditworthiness of the underlying assets of the company. Although most of the investors manage to salvage their principle from the collapse, they walked away with little or none of their gains.
So, the question as to who to get fixed annuities from suddenly took on a much greater significance.
How to select a fixed annuity provider
Look at the top
The life insurance industry has a much better track record than banks as far as maintaining solvency and stability even during the worst of economic times. During the depression, as banks were closing left and right, life insurance companies became the source of much needed capital for the government to provide services and arm our military.
Still, when you purchase a fixed annuity from a life insurance company it becomes an obligation to pay you back based on the terms of the contract. That obligation and the guarantees within the contract are backed by the strength and creditworthiness of the life insurer which are measured and ranked by several rating agencies such as A.M. Best and Standard and Poor’s.
The very first step in selecting a fixed annuity provider is to narrow the choices to those that sit near the top of their rankings. The list of A-rated companies, or better, still numbers over 35 which is still a good-sized selection.
You may find that B-rated companies offer higher initial yields, but, if you remember the lesson, they do so for a reason. Either their portfolio quality has been deemed questionable, or the rating agency has determined that the company’s financial condition is trending in the wrong direction. With so many higher rated companies offering fixed annuities, it would seem an unnecessary risk to settle for less quality.
The devil is in the details
Fixed annuities are time tested as solid retirement vehicles, however, they are not all the same and your search needs to include a close look into the contract details. There are several aspects of the contract that can vary from one provider to the next. Charges, surrender fees, interest crediting, withdrawal provisions, and payout options, all nestled in the small print of the contract, can have an impact on the performance of the annuity and its total cost of ownership.
The most prominent charge or expense found in the contract is the mortality charge, or cost of insurance. These should be somewhat standardized as the insurer relies on published life expectancy tables. However, they are also affected by the company’s actual experience, so if a company has poor experience they might charge more. Other charges that are deducted as a fixed expense include administrative fees and sales costs. All of these expenses should be examined and compared.
Surrender fees can also vary from one contract to the next. One of the advantages of fixed annuity is the ability to access your funds, up to 10% of the accumulate amount in a year, but, to do so, the insurer will deduct a surrender charge. The variables in surrender charges include the amount of the charge, typically in the 7% to 10% range, and the number of contract years in which the charge is assessed. The typical contract begins with an initial surrender charge at the top end, say 7% and then it is reduced by a point in each subsequent year. In this example, there would be no surrender charge after 7 years, however, the withdrawal may still be subject to an IRS penalty of 10% for an early withdrawal prior to age 59 1/2 .
Interest crediting methods, a key aspect of the competiveness of the product, also vary. Fixed annuities usually provide an initial fixed rate that is locked for a specified period of time, after which, an adjustment is made for another period of time. The basis for determining the adjusted rate should be spelled out as well as any new lock period. Be on the lookout for contracts that reset the surrender charges after a new rate lock. You can also review the company’s experience on yields generated from its investment portfolio. Look for companies that consistently produce stable yields over time.
The payout options for income disbursement are also an important consideration. Some payouts are based on a variable interest rate which can cause your income to fluctuate along with interest rates. Others may apply a fixed rate for a period of time. Your preferences are important in determining which is most suitable for you. Inflation riders also vary between Cost of Living indexes and Consumer indexes each producing a very different rate of growth on income payments.
Determining who to get fixed annuities from doesn’t have to be a daunting experience. This guideline can streamline the process and put you in control so you’re not at the mercy of the annuity sales person.
Annuity fraud can be committed by the underwriting company, the agent, or both. Fraud is usually associated more with variable annuity products than with fixed annuities, but it can be committed with any product.
Agent-driven annuity fraud
Generally speaking annuities pay higher commissions to agents than other insurance products. This fact is often the proximate cause of agent-initiated fraud. One of the more common forms of annuity fraud committed by agents is a practice known as “churning.” Churning is defined as the unnecessary replacement of an insurance product with another insurance product, resulting in excessive new business commissions paid to the agent. By contrast, churning often results in the client needlessly losing money thorough surrender charges and other unnecessary fees. In extreme cases churning can be done multiple times on the same portfolio in a relatively short amount of time. Churning is an illegal practice according to SEC regulations as well as state insurance laws. Policy replacement may only be done if there is an appreciable benefit to the client in doing so.
Other agent practices which may be considered fraudulent include “tied selling,” or basing approval of one insurance product on the purchase of another, selling an unsuitable product to obtain a higher commission, verbally guaranteeing a specific return on investment that’s not plainly stated in writing (especially on a variable annuity), and recommending an investment in a variable annuity just under a breakpoint, or a funding level where service charges are reduced, without disclosing that fact.
Company-driven annuity fraud
Annuity fraud at the company level can range from blatant theft through phony products to more subtle indiscretions often involving failure to fully disclose all fees associated with otherwise perfectly legitimate annuities.
Beginning in 2001, Massachusetts insurance agent Bradford C. Bleidt sold through his company, Allocation Plus Asset Management Company, what were purported to be products akin to fixed annuities targeted primarily to senior citizens. On the surface Bleidt looked legitimate; he was properly licensed as an agent and broker/dealer in Massachusetts, and Allocation Plus was registered with the SEC. Even so, Bleidt used the proceeds from his investment sales to prop up his failing businesses – including a Boston-area radio station – in what effectively amounted to little more than a Ponzi scheme. By the time the scheme fell apart in 2004 Allocation Plus had defrauded investors of approximately $30 million. It was also found that Bleidt failed to disclose his license in Maine was terminated due to an administrative action in 2001. Because of this and other infractions related to his fraudulent operations, Bleidt’s Massachusetts insurance licenses were permanently revoked in January 2005. Soon after he was sentenced to 11 years in prison.
Although established insurance companies are highly unlikely to commit fraud to the extent of Allocation Plus, even respected companies can occasionally run afoul of established rules regarding annuities. In 2004, Prudential suspended two employees over complaints of undisclosed fees charged to some of its clients’ policies. The company was also accused of providing false information concerning commission rates.
Annuity fraud against senior citizens
Senior citizens are especially vulnerable to annuity fraud, and as such the topic of annuity fraud is often inextricably linked to insurance fraud against seniors in general. Fraudulent activity directed against seniors with respect to annuities is often linked to suitability. Placing senior citizens in annuity products, especially variable annuities, must always be done with particular care to suitability concerns. For example, it would not be suitable to place a 75-year-old in an annuity product with a 15-year surrender charge schedule. It would also be unsuitable to sell a senior citizen a variable annuity with an abundance of aggressive (and therefore high-risk) separate accounts, especially if the client has little to no investment experience. As a general rule the older a client is, the less risk tolerant they’re likely to be.
What recourse do annuity fraud victims have?
Annuity fraud victims have several places to turn for help. Most states mandate a “free look” provision regarding annuities and other life insurance products which allow a customer to return a policy with no adverse consequences within a certain time frame, usually within 21 days. Some life insurance companies have a free look policy in excess of the state-mandated requirement.
If stronger action is needed, assistance can be obtained from the state attorney general, the state insurance commission and the SEC.
How to avoid annuity fraud
Education and research are the best tools to fight annuity fraud. Both the client and the agent should have a clear understanding of one’s financial picture before money exchanges hands. As long as that simple guideline is followed, the chance of any client being defrauded decreases significantly.
Since by definition annuities are issued by life insurance companies, one should ensure that the life insurance agent they’re dealing with and the life insurance company he or she represents are legitimate. Remember, both the insurance agent and the insurance company must be licensed in any state they do business in. In most states this can be easily checked with a visit to the state’s insurance commission web site. Links are readily available at the National Association of Insurance Commissioners (NAIC) web site. If a life insurance company isn’t registered in your state, or the agent isn’t correctly licensed – or both – steer clear. If an agent or company is in trouble with a state insurance commission, that information is available as well. Today a simple Internet search would likely expose irregularities in an agent’s record similar to Bradford Bleidt’s.
Another useful research source on a prospective insurance company is A. M. Best. The vast majority of reputable insurance companies are audited annually by this independent, third-party credit rating organization on a variety of metrics, most importantly reserves, or the amount of cash and assets a company has on hand. After all, it’s very important to deal with a life insurance company that can consistently demonstrate an ability pay its claims. A. M. Best ratings are similar to school grades: A++ is the best rating, followed by A+, A, A- and so on. Anything lower than a B+ should be considered suspect.
Suitability is a key component of any annuity sale, especially a variable annuity. The agent should have a clear understanding of the client’s needs and risk tolerance before recommending any annuity product. In addition to age, planned retirement date, expected rate of return and assets available, he should know what sort of experience the client has in investments, how the client feels about investing in higher-risk instruments such as stocks as opposed to lower-risk instruments such as government securities. The agent should never suggest exchanging one insurance product for another unless doing so provides a clear benefit for the client. If any sort of variable product is considered, the agent should make sure you have a copy of all relevant prospectuses. Be very wary of anyone who is even remotely hesitant to provide you with a prospectus.
No reputable insurance agent will ask for or accept cash to fund an annuity, or any other life insurance product. Among other things, cash receipts on life insurance products have been tied to illegal money laundering practices. It’s a serious violation for any insurance producer to accept cash payments on variable life insurance products, one which could result in license revocation and possibly criminal action. As a matter of policy many reputable life insurance companies prohibit cash receipts entirely.