company that’s issuing the annuity or visit www.annuityadvantage.com.
Keep track of which annuities are becoming less popular. Even the stalwarts, fixed annuities, are losing their attractiveness. Insurance companies have used the recent plunge in interest rates to convince the National Association of Insurance Commissioners to endorse cutting the minimum guaranteed returns on fixed annuities by half, to just 1.5%. Several states are moving to switch to the lower rate. “That takes a lot away from a fixed annuity,” says Gott.
7 STEPS TO SELECTING AN ANNUITY
Step 1
What do you want to do with the money? If you’re saving for retirement, go to Step 2. If you’re hiding money from potential litigation, check your state’s laws. In some states, annuities are exempt from seizure against lawsuits and bankruptcy. If this is the case in your state, go to Step 3. If you’re setting aside money to leave as an inheritance, first check term and whole life insurance policies, particularly if you’re young. If you’re trying to protect principal, first check the costs of new principal-protected mutual funds or CDs that are partly invested in the stock market. If you’re saving for short-term needs, choose another investment option because the IRS charges a 10% penalty if the money is withdrawn before age 591/2. Insurance companies also deduct surrender penalties unless the withdrawal is due to the holder’s death or disability.
Step 2
Have you maxed out other tax-deferred savings options, including 401(k) and 403(b) plans and SEP, Keogh, traditional, and Roth IRAs? If yes, proceed to Step 3. If no, max out these cheaper options first.
Step 3
Which is more important: guaranteed payments or maximizing growth? If guarantees are paramount, choose a fixed annuity because the risk is lower. Otherwise, consider a variable annuity or hybrid.
Step 4
Get a broker or salesperson to provide comparative data. For fixed annuities, compare how long you would pay surrender penalties, starting dates of surrender penalties (at signing of contract vs. when each deposit is made), percentage of guaranteed return, length of guarantee, typical rates at renewal, and financial rating of insurance company (limit choices to ratings of A and above). For variable annuities, also look at annual insurance fees (often labeled M&E charges) and annual management charges for the portfolio.
Step 5
Pick the cheapest annuity with the best guarantees based on the investment goal identified in Step 3. Fixed annuities usually charge about $30 a year in administrative fees. For variable annuities, those fees are built into M&E charges.
Step 6
After the surrender period has ended, review annuity terms against newer annuities. Most insurance companies deduct a surrender penalty if you switch before the surrender period ends, except when the owner begins receiving annuity payments. You can switch between annuities without paying federal tax penalties by filing Form 1035 with the IRS.
Step 7
When you’re ready to start taking annuity payments, shop around for the best annuity payment plan—which could very well be the annuity you’re with.