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07-13-2008 by Colleen King
Annuities can be a good things for a lot of people depending on their retirement status, financial situation and age. There are essentially two categories–fixed and variable. In the fixed category, you have the regular old fixed annuity and fixed indexed annuities.
Variable annuities I’ll touch on briefly–only briefly because I don’t sell them, but want to share with you what they are. Variable annuities are directly invested in the stock market. The advantage of these that are touted is that when the market goes up there is big money to be made. But if things go down, your principle isn’t guaranteed. There are riders that can be purchased to help safeguard against this but obviously, if you are purchasing them, it eats into your profit potentially. Not going to spend a lot more time on this, again because I don’t sell them. If you’re interested though I’d be glad to refer you to reputable agents that will give you good advice. They may be good for your situation, most certainly.
On the fixed side, the plain ole vanilla fixed annuity is what your parents and grandparent would be well versed in. Your principle is guaranteed! You accumulated a large amount of money, $100,000+, bought an annuity from an insurance company, and you were guaranteed an income for life. You would get monthly payments for life, and the amount per month would be based on the amount you deposited and your life expectancy. Annuities are sold as a source of income you can’t outlive. What makes this different from one other particular product, there’s a bad old insurance saying that explains it–life insurance is in case you die too soon, and annuities are in case you live too long.
You can now find fixed annuities for lower opening amounts, most of them have no associated expenses. Deposit it, let it grow, and as you approach ‘the golden years,’ your nest egg will help provide for you. The ways payouts can be calculated has changed a lot too, defeating a lot of the complaints and concerns from days gone by–especially from beneficiaries when their benefactor died not long after opening an annuity.
Fixed indexed annuities are a little more adventurous. But like all fixed annuities, your principle is guaranteed. In this case, you have multiple ways to allocate your money. Your gains and losses are tied to different stock market indices, but not directly invested in the stock market. Sounds like a contradiction in terms, but trust me, it works. If the market goes up, depending on the crediting strategy you select, you value goes up. But if the market plummets, you don’t lose, your balance stays the same. Another bad old insurance-ism, ‘Zero is the Hero.’ Good market things go up, bad market, you stay the same, your balance doesn’t drop.
Recently, due to a popular NBC television show, Fixed Indexed Annuities and the agents selling them were branded as being deceptive and a bad thing to put money into. While Chris Hanson was able to point all the bad, he apparently passed on the option to present any of the positives. Love you Chris, but I was disappointed in how lopsided your show was. They are a safe product to put your money into, but there will always be the loser agent that will be more interested in their commissions rather than finding a suitable vehicle for their clients. The way you lose money in a fixed indexed annuity is by pulling too much money out of the policy too soon, thus incurring the wrath of the surrender charges. But more on that in a future post.
So, if you are looking for a safe vehicle to plan for retirement, or you have left a job and want to figure out what to do with your old 401k or 403b, consider an annuity. If you’re in your late 40s or up, this can be a safe place to plop that nest egg. You can also consider a stock account, mutual funds or things like that, but be sure to ask what kind of guarantees on your principle they will make. I’ve got two indexed annuities, and I’ve sold some to family members. Believe me, as most will know when you do business with family, you better have the strength of your convictions behind what you offer them!