Compare Annuities to Each Other
Since there are four different types of annuities,
each section below will explain how to compare annuities
to others of the same type. Comparison of these annuities is explained
here: fixed annuities, variable annuities, immediate annuities,
index annuities.
Compare Fixed Deferred Annuities
You want to compare the annuity rate (the interest rate)
and how long the rate is guaranteed. For example, one annuity
may guarantee 4% for one year and then nothing more than
2% for the rest of the term. Another annuity might guarantee 3.5%
for 5 years.
Next is to compare the annuity term. Although you can cash
in an annuity at any time, there will be surrender charges
if you do so before the end of the term. You might prefer
a 5 year surrender term as compared to a 15 year surrender
term to give you more flexibility. However, if you take the 15
year surrender term, you may also get a better interest rate or
other features.
Next, compare the withdrawal privileges if that is important
to you. How much you can withdraw from the deferred annuity
is usually not a concern as most people buy deferred annuities
to build a nest egg for the future. However, if possibly
making withdrawals concerns you, most annuities allow a 10%
withdrawal annually, with some permitting 15% or even 20%.
Last is the safety rating of the annuity company. The easiest
source we have found for judging this is the September issue
of “Insurance Forum.” It’s a monthly publication and the
September issue is devoted to ranking several hundred companies.
If you are working with an annuity agent (an insurance agent
licensed to sell annuities), ask them for a Vital Signs report
on each of the companies you consider. You can then compare
the Comdex ratings—the higher the better.
Some people rely only on the rating from A.M. Best, a well
known annuity rating agency and seek a rating of “excellent.”
But the sources we recommend above are more comprehensive
and include the rating from A.M. Best
Compare Immediate Annuities
Most people select immediate annuities to gain a life time
income after they retire. Therefore, there are really only
two issues to compare—the amount you receive per month and
safety of the company. Comparing the annuity safety is done
the same way as with a deferred annuity as described above.
The only other issue may be a “commutation” feature. This
allows you, should you change your mind, to return the annuity
to the insurance company and get some of your original premium
returned. Even though this adds flexibility to the annuity,
it’s a feature that is expensive to use and you should think
twice if an immediate annuity is the right choice for you
if you think you need this flexibility.
Compare Variable Annuities
Variable Annuities are much more complex than fixed annuities.
First, you want to compare the investment options. One annuity
might have 100 different options and another only 20. But
if the annuity with 20 options has all of the investment
choices you desire, then it may be the right choice for you.
Next,
you can compare the 10 year performance histories of those
investment options. This is data to get form your financial advisor
who is offering the variable annuity or you can find in better
libraries that have the Morningstar Variable Annuity service.
It may be possible to also get this data from the variable annuity
company web site.
Next, compare the “mortality and expense” fees often called
M&E fees. You will find these in the prospectus.
Last, compare any fees for riders. Many variable annuities
have riders, extra beneficial features, you may desire.
For example, you will commonly find a guaranteed income rider.
A typical such rider will guarantee that you can withdraw
5% of your balance every year after you keep the annuity
for 10 years, regardless of the investment performance.
Some companies charge reasonably for this benefit, others
over charge and by reading and comparing these costs and
terms in the variable annuity prospectus, you can see the
differences.
ING and GE have become two of the larger issuers of variable
annuities with various riders.
Compare Index Annuities
Index annuities are a type of deferred fixed annuity so everything
above regarding comparison of deferred annuities to one another
applies except for the interest rate. Index annuities have
an interest rate formula that depends on the performance
of the stock market. The insurance companies make these index
formulas sufficiently complex so that just by reading them,
you won’t be able to compare one index annuity to the other.
What you want, from the annuity agent or the insurance company,
is an illustration of how each annuity performs in a rising
market, a sable market and a falling market. In fact, you
should be able to provide your own market forecast for each
of the next 10 years and then get a printout of what each
annuity will yield under your scenario. Index annuities
have several moving parts including participation rate, minimum
interest rate guarantees, rest features among others helping
to obfuscate comparison.
To see more on these topics, please visit
the annuity page on our sister site: Retirement-income.net To
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