Annuities Revisited-Part II

“Annuities Revisited- Part II”



Last week I began a discussion about the options available under annuity contracts.  Over the past few years, annuities have become increasingly sophisticated and, unfortunately all the more confusing to the consumer.  This week, I’ll finish my review of annuities and explain what you should be aware of when choosing a particular contract option.


Guaranteed Minimum Withdrawal Benefit.  The insurance company guarantees you can withdraw a fixed dollar amount based on your initial investment.  With some contracts, this withdrawal is limited to total premiums paid.  Others guarantee the fixed payment for your lifetime or your lifetime and the life of your spouse.  The amount of the withdrawal varies but is typically between 5% and 7% of your initial investment.  Beware: If you elect to withdraw more than the fixed payment guarantee, you may void this benefit.  Also, withdrawals are taxed on a ‘last-in, first-out’ basis, meaning all of your gains are taxed first and then your contributions come out tax-free.


Guaranteed Minimum Accumulation Benefit.  The insurance company guarantees that your account value will not dip below your total premiums paid after a certain number of years, typically ten, no matter what happens to the stock market.  One strategy you might consider under this option is to choose the stock fund option rather than the bond fund, blend fund or fixed income option.  Stock funds should significantly outperform bond type funds over time, but if you’re wrong, you’ll at least be guaranteed to get back all of the money you invested.  Beware: This option is not available with all companies, so you may have to check with several insurers.


So far, I have discussed living benefits.  Annuities also offer a variety of death benefits as well.  There are many variations, but here are a couple of the more common:


Rising Floor Benefit Option.   Under this benefit option, the insurance company guarantees a minimum value at death, which may be the net premiums paid or the greater of the current value or the net premiums compounded at a stated rate such as 5%.  Beware: Some contracts ‘cap’ total value, typically at 200% or 250% of total premiums paid.


Maximum Anniversary Value Benefit.  Here the contract provides that your death benefit will never fall below the highest value achieved on any anniversary.  This is a way of ‘locking-in’ peak performance.  Beware: Some contracts stop the ‘look-back’ at age 80 or 85.


With their high costs and complexities, why are so many people willing to invest in annuities?  Allan Chappelle of Chappelle Consulting Group in Birmingham offers these insights.  “Annuities are ideal for people seeking a high level of guarantees both during the accumulation phase and distribution phase.  These guarantees add 2%-3% of annual expenses but many investors are willing to pay for guarantees against stock market losses.” 


As pensions become extinct in America, the guarantees of annuity products are likely to become more important to consumers.  As when purchasing any financial product, you should insist on full disclosure of policy expenses, alternative policy options and agent compensation.