Eight Questions to Ask About Income Annuities

An increasing number of baby boomers are seeking a paycheck in retirement from an annuity. Here are the top questions you should ask your agent if you’re considering the purchase of one of these insurance contracts:

1. What are the fees associated with owning this contract?

Fees are a point of concern with any financial instrument. The greatest myth about annuities is that they have a high fee structure. While this may have been true for some variable annuities, it isn’t true for many fixed annuities. It is essential, however, when purchasing an annuity that you understand all of the fees in your contract. Some common fees to look for are mortality fees, sub account fees, rider fees, administration fees, and distribution fees.

Sometimes the contracts may not have a fee but instead have a “spread,” “participation rate,” or a “cap”. It’s important to know and understand what these are as well. Even though in most cases they won’t eat into your principal, they may limit the interest potential in a given year.

2. Can I lose money?

Protection of principal is one of the primary reasons people purchase annuities. However, not all annuities are created equal in this area. Fixed and fixed indexed annuities typically offer protection of principal from market losses. A fixed indexed annuity is not a registered security or stock market investment and does not directly participate in any stock or equity investments — or index.

The applicable index is a factor that in part determines the interest to be credited. The value of a variable annuity changes as the value of investments in the selected sub accounts fluctuates up and down. If preservation of principal is important to you, it’s important to know what’s at risk.

3. What is my paycheck?

Annuities can have many moving parts — income rollups, payout factors, bonuses, and more. All these factors help the insurance carrier compute the payment due to the annuity holder, but they generally don’t have a lot of value independently of each other. The most critical value to focus on is the amount that you can actually spend once you trigger the benefit — or your paycheck. It is important to work with an agent or adviser who is able to tell you how much income you can expect to receive when you turn the income on at a given date in the future.

4. How long is the income guaranteed?

Annuities pay income a variety of different ways. In some cases, the income payment is guaranteed for life — or even can cover a spouse’s life as well. Others will only pay until the account value is depleted or until a specified point in time. If lifetime income is important, it’s crucial to make sure your solution is contractually guaranteed to provide payments for life. Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. They are not insured by the FDIC.

5. Can I get more income by using multiple products together?

Sometimes using an income strategy consisting of multiple products will provide higher income than using a single product solution. An agent well versed in retirement income should be able to price various options for you. Remember it’s the amount of your paycheck that matters.

6. What if I need the money?

If having access to the principal in the annuity is important to you, make sure that your product or strategy allows access. Some income annuities allow access to all or a portion of the cash value, even after income has begun. Others provide no access to additional funds after income has begun. You should also be aware that in the early years of the contract there are typically surrender charges. Many annuities will allow you to take annual penalty-free withdrawals up to a limit — typically 10 percent.

Annuities are long-term insurance contracts designed for retirement. As a result there may be fees or penalties for early withdrawals, including surrender charges, and if taken prior to age 59 1/2. Withdrawals may be subject to a 10 percent federal additional tax.

7. What happens if I get sick or die early?

Many annuities offer special provisions if you become terminally ill or are confined to a nursing home. In addition, the death benefit works differently depending upon the type of annuity you purchase, so you’ll want to do your research and discuss this with your agent.

8. What about inflation?

I think it’s safe to say that prices are going up. For many it’s important to have their income increase along with inflation. There are options available with some annuities that allow your income to increase over time, acting as a hedge against inflation. Using an income annuity as part of your retirement income strategy can be a wise choice.

Meet with an annuity agent from Crown Atlantic and learn more about appropriate contracts that can fit your specific requirements. Crown Atlantic agents look forward to showing you how much more income you can make from your retirement nest egg. Go online to CrownAtlantic.com/Protect or give us a call at 855-221-5546.