The boomer woman’s guide to annuities
November 11, 2013 by Melody Juge
Annuities are all the rage right now, especially for the risk-averse boomer women planning for their retirement. There are many reasons someone may require, or simply feel more comfortable with, an annuity in their retirement portfolio. But the annuity sales process can be unforgiving if you are not prepared. Annuities are complicated and usually have limited liquidity. Here are five simple steps to help keep you organized and on track as you do your research and prepare for your potential annuity purchase.
1. Before getting involved in the actual purchase of an annuity, take a step back and ask yourself: Why do you want an annuity? Whose idea was this? Do you have a clear need in your retirement portfolio for the specific benefits that can only be gotten through the placement of an annuity? And if so, what are the benefits that you are seeking? If you do not have an adviser that is helping you through your retirement planning process, this would be a good time to get one.
2. To determine the kind of annuity that may best suit your needs, start by making a list of the results you are expecting from the purchase and placement of this product type into your retirement portfolio. Here are a few questions to consider: Do you require an exact amount of additional monthly income to supplement your Social Security or pension benefits? Do you need this income payable to you for 5 years? For 7 years? For life? Are you going to use the annuity as a replacement for bonds in the conservative portion of your portfolio? Are you using the annuity to defer taxes during retirement? Are you using the annuity as a certificate-of-deposit replacement? Will you require access to the principal premium dollars invested at any future time? Be clear about the results that you want. There are many types of annuities and each one of those types has numerous provisions that have different contractual offerings as well as different potential benefits and detriments to you. It’s complicated, so be careful.
3. How do you know what kind of annuity will best serve your needs? The bells and whistles of a specific product being presented to you may sound exciting, but those very bells and whistles that piqued your interest may actually be irrelevant to you once you are clear on the exact results you are seeking. Keep your list of “results wanted” as a handy reminder of your specific requirements throughout your research process. This is a good way for you to stay in control and to avoid getting yourself into a sales cycle where you could end up with a much more complicated product that does not suit you and is not in keeping with your expectations and your list of requirements.
4. Do not cross-compare different types of annuities with the expectation that they will all be the same. They can be very different in structure, costs, liquidity and benefit options. Be careful about comparing variable annuities with traditional fixed annuities and equity index annuities. Here are some things that will be important for you to know and evaluate prior to your purchase: What are the surrender charges? Is there an annual policy fee and if so how much is it? What percentage or dollar amount are you eligible to withdraw penalty-free each year? What is the length of the surrender-charge period? Are there fees in addition to the basic surrender charge for early, partial or full surrender of the contract? Is your annual penalty-free withdrawal cumulative? Are there internal fees charged for investments; if so what is the exact amount of the charges?
5. Know the person you are talking to and his or her professional expertise and licensing. Most consumers are unaware of the differences in licensing requirements for investment advisers and insurance salespeople. A simple state insurance license will allow someone to sell fixed and equity-indexed annuities as well as life insurance. However, the state insurance license is limited and only allows for the review and evaluation of annuities and life insurance; it does not allow for the evaluation of a client’s entire investment portfolio. The licensing requirements to look for are: state insurance license plus securities licenses 6, 63 or 7, and of course a series 65 license, which is an investment-adviser license that allows evaluation of a portfolio and the giving of advice. This type of licensing often indicates a more knowledgeable planner, and certainly indicates one who is licensed to provide more product choices.
The majority of retirement annuity products on the market are not offered direct to the public, so you will need an insurance-licensed adviser to help you. It is also important for you to choose someone to work with who is licensed to take your entire portfolio and retirement goals into consideration prior to making a recommendation.
About Melody
Melody Juge is managing director of Life Income Management. For over 30 years she has specialized in creating income for life for people age 50-plus. Her experience, passion and sense of humor have made her a sought-after speaker on the subject of retirement planning. You can contact her at melody.juge@corecapinv.com.
