Welcome to the Weekly SUMmary - 06/11/2021
What are Annuities?
“An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.”1
Annuities can either be extremely easy or extremely difficult to understand.
Let's break them down into the different types that are available.
These are fairly straightforward. One gives an insurance company a sum of money and the insurance company guarantees either an immediate income (Single Premium Immediate Annuity or SPIA) or an interest rate (eg. $100,000 for 5 years @ 2.5% interest).
Fixed Indexed Annuities:
These are typically quite complex. One gives an insurance company a sum of money or payments over time and the insurance company attempts to track the market in some way, minus expenses and fees.
“The market” can mean any number of options. It could mean a major index like the S&P 500, one of the international markets, the Barclays Aggregate Bond market, myriad others, or a blend of these.
Some complexities of these annuities are how the expenses work. Potential examples include:
- Set fees: Maintenance fee of 1% per year
- Participation Rates: the owner receives a percentage of the return of the index.
- S&P does 10%, participation rate is 50%, owner receives a 5% rate on their investment
- Rate Cap: the owner is capped at a certain maximum performance.
- S&P does 10%, cap is 5%, owner receives 5%
- Spread: the insurance company sets an amount that will be charged as a fee to the contract irrespective of how the markets perform.
- Spread is set to 3%. If the S&P does 10%, owner would get 7%
To make these more complex, there have been some products released over the past few years that are considered “buffered” indexed annuities. These products provide a buffer against the downside. For example, the S&P is down 20%, but there is a 10% buffer, therefore the owner incurs a 10% loss instead of 20%.
These can be relatively simple, in that they are an investment inside of an annuity. Variable annuities can have a few or hundreds of investment options. They can be varied in expense.
For more complexity, there are a myriad of benefits to choose from or stack onto base annuities. Some options are:
- Death Benefit - ability to provide a guarantee that a beneficiary will receive a minimum agreed to within the contract.
- Guaranteed Income Base - typically will provide access to income without annuitizing (see below for definition) the contract. There is a possibility to guarantee income benefit base growth, minimum distribution rate, and other options/combinations.
- Chronic Illness - can function similarly to a Long Term Care (LTC) contract allowing access/immediate access to benefits due to physical incapacity similar to LTC requirements.
- These are just a few of the many options available.
Surrender charges are likely if funds are attempted to be withdrawn from these contracts within set timeframes.
As you can see there are many options. Think of the insurance companies out there, typically each will have multiple variations around each of the options above. This adds to the complexity or confusion that could stem from a decision around these investments.
If you have any questions, I highly recommend seeking a professional or doing extensive research. The links provided offer a good start. When inquiring about this kind of investment you will typically receive an illustration/quote that can range from a few pages to hundreds. If you don’t know the questions to ask, you may not receive the answers you need. Upon agreeing to one of these, one will typically have an application that could be hundreds of pages, as well. Upon putting the contract in place, you should have a “free look” period, and I strongly encourage exploring technology, customer support, etc, as this may be something that will be in place for some time, if not forever.
Do SUMthing smart with your money.
Merriam-Websters definition of Annuitize:
: to convert an amount of money (such as an accumulation of retirement savings) to an annuity https://www.merriam-webster.com/dictionary/annuitize
The content provided is meant to be educational in nature only and not to be construed as investment advice. Investments referenced are for example only and should be considered strongly prior to selecting for your portfolio. Investors should research or seek professional advice prior to buying and selling securities.
The S&P 500 index is unmanaged and you cannot directly invest into an index. Past performance is not a guarantee of future results.
All guarantees are based on the financial strength and claims paying ability of the issuing insurance company.
Annuities are sold by prospectus. Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.