A salesman is somewhere at this very moment posting an outrageous claim about an annuity that “has some AWESOME benefits for YOU!”
I know because I see those statements regularly. And somewhere in this country, a 65-year-old widow is being asked to put her life savings into an annuity. I know because it happened to a relative of mine.
An annuity is an insurance product that pays out income, and can be used as part of a retirement strategy.
So, I spoke with some experts — including Emeka Ohanyere, a finance professor at the Lagos State University; Biodun Adedipe, a chartered financial analyst and CEO B. Adedipe Associates — to find out what questions to ask before buying an annuity.
Here, they tell that, before you get pitched into an annuity, arm yourself with the following list of questions to ask the person doing the selling. (The following applies mostly to variable annuities with guaranteed living benefits, but some apply for fixed annuities also.)
Is this right for me? How does this product fit my needs and objectives?
Often agents sell the sizzle before the steak. Consider, for instance, this pitch for a fixed index annuity that appeared on an online discussion group: “Get a 5 percent bonus on the initial premium; Get an ADDITIONAL 25percent bonus added to the income rider to boost your income amount; liquidity for nursing care and terminal illness; guaranteed death benefit; guaranteed NO LOSS; 10 percent free withdrawal through year 10 then 100 percent; seven fixed payment options guaranteed for life; and you get all that with only a 10-year surrender schedule.”
Now, all that might be true. Then again given the comments on the discussion group from actuaries and others, it’s possible those claims stretch the truth.
Some critics say selling annuities this way is really the equivalent of handing out prescriptions in the absence of a diagnosis. It should be the other way around — first the diagnosis, then the prescription — said Biodun Adedipe of Sensible Financial Planning, a financial advisory firm.
With annuities with guaranteed living benefits, ask the following:
· How much does this cost?
· What are the fees charged against the investment? What does each fee pay for?
· Which fees are optional? What do they pay for?
· What are the surrender (or early withdraw) penalties? This should always be revealed.
· What are the fee ranges? Many variable annuity contracts allow providers to modify their fees in the future. According to the experts, most annuities with guaranteed living benefits have maximum rates, but many can rise to whatever the rate is at the time the triggering event, which typically invokes a step-up provision, occurs.
·How do you get paid?
·I have heard that insurance companies offer many series (or share classes) of the same annuity chassis, based on the surrender-charge schedule selected. Can you please walk me through my options here? You might not want this much detail. Then again, if you are buying an annuity, you just might want this much detail, not to mention a second opinion.
·I understand that it only makes sense to pay for a guarantee on a portfolio or collection of subaccounts that need protection. Can you confirm that this variable annuity allows for ample risk exposure? In other words, can I allocate 60 percent or 80 percent or 100 percent to equities? According to one expert, no variable annuity issued today allows 100 percent allocation to equities when a guaranteed living benefit is chosen.
· What are the options for the underlying investments? Sometimes, it’s good to invest more aggressively inside the variable annuity, since you already have the guarantee protections. According to one expert, it’s always better to invest aggressively when you have elected a guaranteed living benefit.
How it works
· What exactly is the guarantee?
·What if I need more than the guaranteed withdrawal amount? For example, ask the adviser to run an illustration of what happens if you don’t touch the money for 10 years, then begin minimum withdrawal amounts and then, three years later, you need to withdraw a one-time amount of N300, 000. This presumes that the agent’s software can model that scenario.
· In some cases, you can choose a living benefit for one life or two. What’s the withdrawal amount for both lives? And the cost of that benefit? Sometimes, you pay more for two lives and get the same withdrawal amount; sometimes you pay the same for two lives and the insurer reduces the withdrawal percent - understand which it is.
· If I don’t buy the annuity with the guarantee, how much higher would my account value be in 10 years? This is the real cost of the benefit.
Of note, the answer to this requires modelling that may not be available to the agent.
There are two basic types of annuities: deferred and immediate.
With a deferred annuity, your money is invested for a period of time until you are ready to begin taking withdrawals, typically in retirement.
If you opt for an immediate annuity you begin to receive payments soon after you make your initial investment. For example, you might consider purchasing an immediate annuity as you approach retirement age.
The deferred annuity accumulates money while the immediate annuity pays out. Deferred annuities can also be converted into immediate annuities when the owner wants to start collecting payments.
Within these two categories, annuities can also be either fixed or variable depending on whether the payout is a fixed sum, tied to the performance of the overall market or group of investments, or a combination of the two.
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