Current events, commentary, and links to other resources on retirement income and annuities in the news.

Annuity Scams

The Minnesota Department of Commerce has fined an insurance company for selling annuities with exorbitant surrender charges.

High surrender charges are never in the best interests of a client and the annuity product itself must be proven suitable for a specific individual’s needs.

At Annuity Straight Talk, we have put in place a system of checks and balances so a potential investor can easily differentiate between good and bad contracts.

Read the release here.

Annuities and Retirement Income–Education Is Critical!

InvestmentNews.com recently released an article that highlights the findings of a study done to see how much retirees know about retirement income products.

Annuities were cited as the third most popular option even though many consumers had little idea of how these products work.

Education is essential to understanding how best to remove risk and maximize retirement income options.

Read the article here.

Now, to get your self in a position stronger than 95% of other retirees, educate your self on annuities.  Sign up as a free member to Annuity StraightTalk and let us assist you.  We’ll give you the tools to make an informed decision and help you find the best annuity for your unique situation.

Pros and Cons of Variable Annuities

Understand The Pros and Cons of Variable Annuities

No other product in the Annuity business creates as much controversy as Variable Annuities.  Frankly, I’m getting kind of tired of all the loud opinions about the Pros and Cons of Variable Annuities- it’s either a table thumping BUY or a screaming SELL.  It’s  just like watching Jim Cramer on Mad Money.

There’s no middle ground, and if you follow the BUY side (selling agents) every sales office should have a line of people waiting to buy.  Listen to the SELL crowd (journalists and many financial planners) every insurance company would be shut down because of fraud.

I know that sounds extreme but it really does show you the difference in the type of advice you are bound to get.  So if you are familiar with my work, you’ll know that I try to be objective and provide solid evidence as to the pros and cons of annuities of All shapes and sizes.

Frankly, I’ve avoided writing this for a long time, because these are complicated beasts and it’s hard to make any kind of apples to apples comparisons.  But I’ll tackle the variable annuity debate in this article.  Before I go further, let me say that even after my  research and experience in the industry, I am not overwhelmingly for or against variable annuities.  Like a lot of things in life, there are times when they work great and others when they are completely inappropriate.

Also, while we don’t sell variable annuities, this website would not be complete without this  information on how variable annuities work and their pros and cons.  While variable annuities do make up the majority of annual annuity sales, we use safer, more guaranteed methods of creating stable retirement income.  It you have a question about an existing variable annuity or want to consider other alternatives such as Secondary Market Annuities or Index Annuities, please Contact Us.

Pros and Cons of Variable Annuities: Pros

Guaranteed Benefits:

  • Death Benefit This allows the heirs of the contract to inherit the full principal balance in the event that the contract owner passes away while the contract is in force and the account has lost value
  • Income– This allows the contract owner to lock in a predetermined level of future income regardless of account performance.
  • Principal This allows the contract owner to recover the principal investment or the highest contract value achieved regardless of the account value at time of surrender.
  • Tax Deferral:  Taxes are deferred on the growth of assets inside an annuity giving the contract owner the added benefit of greater compounding.  Many critics suggest that excessive fees mitigate tax deferral benefits.  If tax deferral is the sole focus of purchasing an annuity, expensive optional riders can be waived so that total fees will run no higher than the average mutual fund.
  • Unlimited Contributions: Retirement plans have contribution limits.  If you ever come in to a larger sum of money, much of it will not be eligible for allocation in a 401K, IRA, etc.  Annuities have no contribution limits.

Pros and Cons of Variable Annuities: Cons

  • High Fees:  Many annuities have optional riders that push the overall fees to 3% or more.  Plenty of products allow an investor to elect out of the options but some don’t.  If you are purchasing an annuity with high fees, there had better be compelling reasons to do so.
  • Limited Investment Choices: Asset allocation options are limited within an annuity.  Some contracts have predetermined portfolio balances and others will list a limited number of available mutual funds.
  • Surrender Charges: As with all annuities, variable products have surrender charges so your money is tied up for a specified period of time except for the usual 10% annual free withdrawal. Be positive that the surrender schedule works with your investment time horizon.
  • Immobility: The combination of investment limitations and surrender charges means that your money is much less mobile than it would be in an equivalent securities account.

Pros and Cons of Variable Annuities: Summary

As you can see, the analysis is pretty simple.  If you are looking at the prospect of a variable annuity just weigh the pros vs. cons to figure out if it works for you. For most of my customers using the decisions tools we outline in the Annuity Report, available by free download to our members, most of the cons seem to be deal breakers if even if a few components are tolerable.  Overall, for me, the cons outweigh the pros most of the time.

Once you understand the pros and cons, Variable annuities have specific uses for a small class of investors that either works for you or it doesn’t.  Make sure to seek solid advice from an open-minded advisor.

Retirement Planning Psychology

Here is a great article recently released on SmartMoney.com that talks about the psychological hurdles people face while trying to properly plan for retirement.

Of course, annuities are mentioned because of the stability and guarantees offered by the various types of contracts available.

To read this article click here.

Do You Need Lifetime Income

Lifetime pensions from companies are going the way of the dinosaur. Consequently, the thing most people nearing retirement are worried about is outliving their nest egg. People long for the safety a pension provides- monthly income that lasts a lifetime.

Well, there is another way to achieve this and that is through lifetime annuities from insurance companies. Insurance companies provide insurance against risks, be it accidents, flooding, etc. Longevity risk is the risk of outliving your retirement money, and insurers are willing to make policies on this risk factor as well.

Annuities are rising in popularity as the number of Americans who are nearing or in retirement increase.  Lifetime Annuities are a great fit for many, and guarantee a lifetime income regardless of how long you live.

There are many types of annuities that in various ways can offer lifetime income.  One way is to purchase the guarantee of lifetime income with one lump sum premium up front. The amount of your monthly payment will be determined by your age, location of residence, gender and the amount of your lump sum premium.

Lifetime annuities offer the security of income without the risk of eroding your principal base.  There are literally thousands of ways to guarantee income with lifetime annuities, and the selection process can get quite involved.  Before making any purchase decision, you will want to address questions of return on your investment, return of your principal, credit quality of the issuing company, flexibility of premium payments, inflation, and other issues.

We detail these and other decision factors that you should address when seeking lifetime income in The Annuity Report and invite you to Contact Us for more information on this process.

What is a Guaranteed Annuity?

When you are looking for a guaranteed lifetime income in retirement, safety and consistency should be your main concern. In these days of economic distress, employer pensions are of questionable stability and most other investments carry too much risk.  It’s no wonder, then, that quality guaranteed annuities from highly rated insurance companies are rising in popularity.

One of the most important things you can ask for in retirement is a consistent and secure monthly income that you can rely on. A guaranteed annuity can provide you with that consistent monthly income year after year in your retirement. If you have a retirement account, you will need to decide what you will do with the funds as retirement nears.

Typically, the company handling the funds will contact you trying to sell you an annuity. Basically, you are trading in the funds in your retirement account for steady income in retirement. You are not required to convert your retirement to an annuity with the same company who holds the retirement fund. This is a common misconception and can cost thousands of dollars in retirement. You should never take the first deal being offered you, and there are plenty of other products on the market to choose from.

So while a guaranteed annuity may be just the right thing at this point in your retirement planning, it’s critically important to pick the Right guaranteed annuity…  AnnuitystraightTalk can help with that decision. Your options will include fixed annuities, variable annuities, and immediate annuities.    All have benefits and drawbacks that you should be aware of, but all, in their own way, offer some level of guarantee.

The term ‘Guaranteed Annuity’ therefore is often misunderstood-  it’s not a type of annuity, but rather, is a characteristic of most annuities. The length of guarantee, the rate of return guarantee, the income guarantee— all these are variables that you pick between to find the best combination of safety, flexibility, and profitability for your situation. It might take a little work, and Annuity StraightTalk can help, but finding  Guaranteed Lifetime Income is worth the effort!

Please, become a member of AnnuityStraightTalk and get a copy of The Annuity Report.

Why You Should Buy Annuities

So Why Do People Buy Annuities?

Most people have heard varying opinions concerning the reasons for and against the use of annuities for retirement planning. Sometimes it helps to have some facts that show why other people buy annuities and why they have chosen this route in the past.
 

According to LIMRA (Life Insurance Marketing Research Association) there four major reasons why people buy annuities. In order of importance and popularity those are as follows:

 
Safety– Annuities offer an unmatched level of security that attracts people with various objectives. Insurance companies carry very low or non-existent leverage ratios in comparison to their banking counterparts and are required by law to hold substantial reserves that further insulate the conservative investment portfolios from market shock. Throughout history there a very few cases of consumer losses associated with insurance company failure. To further mitigate any potential damage, each state has a guaranty association that provides an ultimate backstop to cover claims when an insurer goes insolvent. Many additional safeguards exist that contribute to overall safety. For a detailed discussion of these safety features, contact our office at 800.438.5121 or make an appointment via the website.
 
Tax Deferral– Most people recognize the importance of planning for the eroding forces of annual taxation on investment. It is also well-known that annuities offer tax deferred growth on investment that makes them preferable to many alternate safe money financial vehicles. Our website has several retirement and annuity calculators that clearly illustrate the differences between taxable and tax deferred growth. Visit AnnuityStraightTalk.com to run some comparisons and see if tax deferred annuities can make a meaningful impact on your retirement savings.
 
Guaranteed Income– Several types of annuities offer a quality source of guaranteed lifetime income. Whether your need for income is immediate or a few years away, it’s worth looking into the incredible benefits annuity contracts can bring. 
Securing a source of guaranteed income is the first step toward optimizing a retirement portfolio. It cannot be done otherwise… period! Look for a more detailed discussion of this in subsequent emails and feel free to call our office (800.438.5121) to discuss how available products and strategies can benefit your retirement income plan.
 
Rate of Return– That seems odd, doesn’t it? But that’s right, rate of return is the fourth leading reason people buy annuities. While it is true that the rates offered with annuity contracts is competitive in any environment, it is actually the safety, tax deferral and guaranteed income benefits that are higher ranked according to consumers. 
 
When it all comes down to it, the previous benefits hold much more value to people who harbor uncertainty after years of mixed results in the market. That may or may not represent your focus so if you’d like to talk about not only the return on your money but also the return of your money, call our office now. 800.438.5121
 
No matter what benefit appeals to you most, this shows reasons why people have seen the advantage of making insured products a vital component of retirement portfolios. If one or more of these sounds like something you can use, perhaps it’s time for a serious discussion.
 
Choosing the right product can be a challenge so we created The Annuity Report to make it easier to understand available contracts and find one that meets your needs. Add to that the fact that your individual situation is unique and you can easily see that an objective suitability is necessary to show how your personal finances will benefit from guaranteed products.
 
When you are ready to buy annuities, please call or set an appointment.

Are Annuities Safe?

This is a common question that puzzles many people, and unfortunately mis-information usually results in sweeping mis- judgments. Investors, of course want to know that their funds are safe and that their income is secure.  Too often, sales people don’t take enough time to understand the underlying strength of the insurance industry and the individual companies that back up annuities.  In many cases, annuities and insurance products may be much safer than bank deposits with FDIC guarantee!.

The FDIC Guarantee gives a lot of security to savers, however in recent press, the FDIC has all but said it is bankrupt.  FDIC insurance rates- the fees the Banks pay to the FDIC for the insurance on the deposits- have increased 6 to 10 times in recent months,   it is quite possible that as an insurance company, the FDIC is so insolvent and is squeezing its ‘customers’ the banks so hard that it may contribute to smaller banks going out of business.  Combine the banks rising cost with their souring loan portfolio, and it’s a tough climate.

So while the FDIC emblem on the bank is a good selling point, the strength behind it is the Government printing press, and that engine may be of questionable worth in the years to come.

Insurance companies are different. They are not part of the FDIC system, but instead have actual, real cash dollars in reserves.  In addition, each state regulates insurance companies and many states have guarantee funds that back the individual investments the insurance companies manage on behalf of their customers.

Too often, misinformation or bad press clouds the fact that insurance companies are very safe, hold huge cash reserves, and offer equal or stronger guarantees than FDIC insured banks.

We can help you answer the question, Are annuities safe? and learn more on how to select the right annuity if it’s appropriate for your retirement income needs, in The Annuity Report.

 

Annuity Rates

Determining Annuity Rates is a daunting task….. For advisers who do not listen intently to their clients.

However for advisers who do their job properly, and for their lucky clients, the process is to clearly define the goals, objectives, and timeline, and only then to find the right tool for the job.

Focusing on rates is but a small portion of the equation for optimizing a retirement income portfolio. More important is to analyze the goals, the assets, the needs, and the risks, facing an individual’s retirement plans. Only then is it appropriate to discuses annuity rates.

Become an educated annuity buyer, and know when it’s appropriate to focus on the annuity rate.

Where Are Annuity Rates Emphasized?

Sure, you can find a high appreciation rate…. but is it coupled with a murderous surrender schedule??

Is a big, bold payout rate masking the fine print, where you realize the payout rate is based on an annuity’s income value, and the actual account value has no guarantee whatsoever?

Beware that which sounds too good to be true… it usually is. Focus on what you need… what provides you the best combination of Safety, Security, and Profitability, in that order.

Focusing on annuity rates only is to focus on one leg of a three legged stool.

Annuity Scams

Annuities are not bad.  But abusive or naïve agents can lead to real trouble.

If you are considering the use of an annuity for retirement, there is nothing to be scared of.  Save your anxiety for the real problems retirees face like the longevity of social security and Medicare benefits. Choosing an annuity as a retirement investment vehicle is a science.

First of all, suitability for the intended purchaser needs to be determined based on a wide variety of factors unique to each individual.

Then comes product selection.  After surviving the suitability process, screening products can seem like a daunting challenge.  And, in a lot of ways, it is. The selection process is where greedy salespeople make their move.  The purchase of any annuity will pay someone a commission, so you need to get over the fact that an agent is looking to make money.  That’s just the way it is.  Concentrate on your needs and you’ll be fine.

Here is a quick list of the things to look for so you can avoid the purchase of an inferior product.

Surrender Charges- Most deferred annuities have no upfront fees so the insurance company protects themselves by charging you for canceling your contract early.  Longer surrender schedules indicate a higher cost to the company.  Most of the time this is linked to upfront bonuses and higher than average agent commissions.  Your best interests are not being represented.  Simply ignore products with surrender schedules that last more than seven years.

Some decent products have longer schedules but there needs to be a compelling reason to extend the contract.  Do your homework! On a side note, make sure you clearly understand any additional restrictions placed on the surrender of a contract.  Some contracts state that you can only surrender early if you take installments over a certain period.  Also, those same contracts will impose those restrictions on your heirs should you pass away before the schedule expires.  Avoid any such contract at all costs.  There is no academic benefit to annuities like this.  It’s your money and you should maintain as much control as possible.

Interest Rates- An individual must learn to analyze the interest rate components of a contract.  Important rates to know about are premium bonuses, guaranteed minimums and the yield to surrender.

Premium Bonuses – Many companies lure investors with lucrative one-time bonuses.  These almost never work out to your benefit.  This raises the cost of placement for the company and leads usually leads to a longer surrender schedule.  Don’t let the sirens lure you in.  Turn around and walk the other way.

Guaranteed Minimums- This rate tells you how much interest you will make in the worst-case scenario.  Don’t settle for less than 3%.  If a company pays less than that, it will indicate one of two things.  Either they are trying to cut costs or they don’t have a clear enough picture of their future financial performance.  You want solid companies that have survived the 2008 financial storm and expect to do business as usual now and in the future.  Your money deserves no less than the best.

Yield to Surrender- This is the cumulative rate of return you can expect when the contract expires.  This is where the useless bonus rate is exposed and a solid minimum guarantee shines through.  Bonus rates likely lose ground over time and a good minimum guarantee will provide you with reasonable expectations.

Credit Ratings- Annuities are supposed to be a safe investment.  It should go without saying that you want to place your money with the most stable company you can find.  Turmoil in any atmosphere will weed out the weakest players and further strengthen the most stable.  Find those companies.  They deserve to be trusted.

To keep things simple, we can stop right there.  Those areas are exactly where you will run into trouble.  Captive agents have little choice but to sell specific products and commission motivated agents will often overlook many potential pitfalls.  Understand the ground rules and learn the basics and you have nothing to worry about.  Remember, it’s just an annuity… there’s nothing to be scared of.

Safe Investments

In today’s economy, you are probably wondering where you can find a high-yield investment that is also safe. Internet searches may not provide the answers you seek.

Your searches may have yielded results such as tax lien and real estate funds claiming to offer returns as high as 12%. If you delve into the details of these offerings, you will see the investors are carrying 100% of the risk. For absolute safe investments, you must turn to the tried and true, such as certificates of deposits and government bonds. However, absolute safety does not provide high yields.

Currently, CD yields are about 3% and Treasury bill five-year yields are lower than 2%. So, the question remains, where does one invest money that will offer security in this rocky economic climate but still provide good returns? In other words, where can you find a high-yield safe investment? A fixed annuity from a highly rated insurance company may be the answer to your dilemma.

An insurance company is very similar to a bank, except insurance companies get preferential corporate tax treatment. Since insurance companies have lower corporate taxes, their rate of returns will be higher than that of commercial banks. Insurance contracts can offer safety, while providing great rates of return and tax deferral. Fixed annuities are insurance contracts.

A highly rated insurance company will have a lower leverage ratio than a bank would. This means their default risk is also lower. Deposits into fixed annuities are also backed up to $100,000 in most states. These factors make fixed annuities a safe choice. The second half of the equation is high yields. Many annuity contracts offer rates of return at 5% or higher. These returns can be tax deferred, allowing you to compound the interest over time. The Annuity vs. CD article section will compare these two products in detail.

As with any government backed note, you will want to invest with a respectable and secure financial institution. Credit ratings are a great place to start your research. Also check press releases for past performance results, particularly 2008 results. Some insurance companies are better equipped to come out ahead in this economic climate. A little research before you invest will help keep you worry-free over the long term.
Annuities are not one-size fits all products.

You need to select the annuity that best matches your investment goals, and time your purchase accordingly. Annuity Straight Talk is a valuable resource to help you make these important investment decisions. Learn all the tools to select only the best companies in The Annuity Report.

Retirement Income

How are you planning for retirement income? What are some of the forces you are up against, and what do you need to be aware of for retirement income when making long term plans? Read more

Annuity Straight Talk, Your Annuity Advisor

Welcome to Annuity Straight Talk.  We understand Annuities and unfortunately, some are Good, some are Bad, and some are down right Ugly.  Here you will find advice and tools free of charge to make an informed decision, unbiased by any particular company or product.  You need these tools and techniques to pick the best annuity for your personal situation.  If you’re working with an advisor, Verify what they tell you with what you learn here.  If you like what you read and need help picking the best annuity, we are at your service .

We give you the knowledge to Verify what you hear about Annuities…

We give you the Straight Talk on Annuities…

An Annuity is nothing more than insurance for your money- a contract between you and a credit worthy insurance company, guaranteeing you a series of cash payments in exchange for premiums.

That’s the simple definition – but the actual contracts, riders, benefits clauses, and a host of other factors make buying an annuity complicated.

We cut through all the static and noise and get you the tools you need to make informed decisions about these high yield safe investments.

You’ll learn to sniff out when an agent is pushing something you don’t need.  You’ll learn how to read annuity contracts to be sure the insurance companies are not taking advantage of you.

Please read through the free resources on this site.  If you like our style, you’ll love the proprietary and straight shooting answers and tools found in ourAnnuity Report and the wide range of premium articles and tools available to you once you’re a Member of Annuity Straight Talk.

For investors considering annuities, our tools are essential reading to make informed decisions.  We live by Ronald Reagan’s memorable motto Trust, but Verify .”

We give you the tools and discernment to independently verify any annuity choice, so YOU pick only what’s best for YOU.

Trust, But Verify

When shopping annuity companies, we take a slightly different approach to Ronald Reagan’s motto.  We believe investors must be critical and learn how to Verify, before Trusting.

There are very few people you can trust with your retirement savings when considering annuities, and it only makes sense to learn a few things first.  Certainly, don’t trust annuity companies or annuity sales people.

Be critical of financial products, and learn to trust yourself. By educating yourself, you can make the best decisions for YOU- and you can learn how to screen all the other competing interests. Only then will you be a Smart Buyer and be ready to make an informed decision.

“Trust, but Verify” is great mantra for any confident person, and we give you the tools to Verify what you read and hear about Annuities.  Annuities, and the advisors who recommend them, must Verify against your knowledge and tools. Only then do these people and products earn your Trust.
Become a Smart Buyer- Empower yourself to Verify before you Trust.

So how do you do that?  It’s pretty easy.

Step #1 is to sign up for our Free Guaranteed Lifetime Withdrawal Benefit report. This free report is available to help you understand these popular products, and you may be surprised to learn some of their pitfalls. Simply fill in your name and email and we’ll send it to you right away.

Get Our Annuity Report Now!

Step #2 is to become a member of Annuity Straight Talk- membership is free and The Annuity Report is available to our members. This report outlines in detail the decision process and critical factors necessary in buying an Annuity.

Step #3 is a strategy session, available to our members. These simple questions help us see if an Annuity is right for you, and help us to design an Annuity solution for your needs.

When you have the tools to make an informed decision, allow us to recommend annuities that meet your specific needs. You will find our recommended products and companies come with the best combination of Safety, Flexibility, and Profitability for your situation.

Buying An Annuity: 5 Critical Decision Tools

Any investor buying annuities must contend with a barrage of sales pitches, glossy brochures of happy couples walking on beaches, fearful Wall Street Journal articles about Ponzi Schemes and defrauded investors, and worst of all, ill informed friends, neighbors, and other Schmexperts who offer unsolicited and generally uninformed advice when you least expect- or want it. But fundamentally, for investors seeking security, appreciation, guarantees, and simplicity, buying an Annuity can be like finding an island of calm in the storm. Here are the critical factors that you will need to understand to make an informed decision on an annuity.  If you understand your needs, and if the Suitability Quiz indicates that an annuity may be a good option for you, then screen products with the information outlined below, and detailed throughout The Annuity Report and this Website.

Surrender Schedules
Interest Rates
Guaranteed
Current Yield
Yield to Surrender
Renewal Rate History
Free Withdrawals
Bonus Rates
Issuing Company Credit Rating

These are the critical components that you must use to judge and throw out competing offerings.  There is a lot of garbage in the Annuity universe, so if, after all your research and learning, you’d like a to speak with an Annuity Expert, please Contact Us

Annuity Surrender Schedule

We think the Annuity Surrender Schedule is the single most important component of an Annuity, and want you to know why. Pay close attention.

The annuity surrender schedule tells you how much of your money you can have at any given time.  Why do we think this is important?

Companies that offer shorter surrender schedules indicate a respect for your capital. This fundamental integrity flows through to the myriad other contractual terms we look at, and indicate the overall quality of the people at the issuing company.

We like to work with good people and companies.  Companies that are up front and honest don’t try and lock up customers unnecessarily.  They don’t tempt agents to steer their clients into inappropriate products with high fees.  Many good terms and conditions stem from something as simple as a surrender schedule.

Why have surrender schedules at all?

Most annuities have no upfront fee to customers who purchase annuities.  But in selling an annuity contract, the insurance company incurs costs, so they attach a contingent deferred sales charge, or surrender charge, to make sure the company gets its money back in case the customer cancels the contract early.

The surrender charge is a direct indicator of the fees associated with placement (sale) of the annuity.  The major costs to the company are one-time bonus rates for the customer, and agent commissions.  Minor expenses include administrative costs linked to shuffling papers and managing money within the company.

You can’t get away from administrative expenses but you do need to be careful that you are not on the hook for a 15 years surrender schedule while the agent made off with a big payday.

As a corollary to this topic, there is another very important detail often left out.  We call this the “Negative Inheritance.”

In the unfortunate event you pass away during the period the surrender schedule of your annuity, your heirs may be liable for that surrender cost.  Many high quality annuity contracts will waive the surrender charge to your beneficiaries in this unfortunate event.

Of course, as you do your homework, you will find many companies that do NOT waive this surrender penalty upon your death, leaving your heirs with a large penalty and thus the Negative Inheritance.

It’s pretty obvious that you’ll want to work with only the best companies- like the surrender schedule, this waiver of surrender charge upon death is a key indicator of the integrity of the offering company, and adds an important item to the list of reasons why certain companies do and do not deserve your business.

Action Items:

Seek annuities with the lowest surrender charges and the shortest surrender schedule.  Seven years is a good ballpark.
These annuities will have the lowest agent commissions, so most likely your agent won’t tell you about these products.
Whenever possible, make sure the surrender charge is waived to your heirs.

Annuity Interest Rates

Want to know why we think the Annuity Interest Rate is the most important component of an Annuity, after the Surrender Schedule? There are many annuity rates in contracts.  As Annuity contracts are long term, you need to understand what each rate means, and how you can use the various rates published by an Insurance Company to make an informed Annuity decision. It can be confusing, even for professionals. The critical rates are:

Minimum guaranteed rate;

The lowest rate of return you could possibly earn.

Current rate;

The actual current rate of return for investments in the Insurance Company Portfolio .

Renewal rate history;

The actual rate of return over several prior years.

Yield to surrender;

The investment yield over the life of the product.

Remember the Ground Rules – Financial Institutions want your money as a tool to invest and make more money with, and they want to pay as little as possible for the privilege of controlling your money. Think of your annuity purchase premium as a loan to the insurance company- You want to be paid for your loan to the insurance company, don’t you? The various interest rates quoted in a contract tell you a lot about the company and how serious they are about earning your business and your trust.

The Smart Buyer understands the rates, and quizzes the agent or advisor.  You might be surprised at what they DON’T know!

Minimum Guaranteed Rate – Like it sounds, this is the minimum guaranteed rate a company will pay you per contract, regardless of the performance of the company’s investments.  This is their risk and minimum cost of capital.This is a good indicator of financial strength of the company and/or quality of the financial product. Don’t ever buy an annuity product, fixed or variable, with a guaranteed rate of less than 3%.  That will be about as high as the guarantee goes and there are plenty of very strong companies that will promise a minimum return of 3% so don’t bother with a company that pays less. For us, low guarantees represent a lack of confidence in long-range investment planning for the issuing company.  We also believe it is a sneaky way for some companies to recapture the expense of offering a big bonus rate or paying the agent a large commission.
Current Rate This is the current rate of return for the Company’s investments. These rates are an excellent indicator of the current strength and competitiveness of a company as well as a good basis to evaluate a company’s historical performance. The current rate can be easily compared to other annuity contracts.  Pick the best one.  Be critical of annuities that offer a locked rate for the first few years because they often reset to the lower base guarantee. Again, like the teaser bonus rate, do not be fooled by big payments up front when your real concern should be long-term performance.
Renewal Rate – Much more important than the current rate, a history of the company’s rates at renewal will tell you more about how the company in question treats their investors and about their profitability over a number of years. An excellent company will actually volunteer this information while some companies will have a hard time finding it.  Be wary.
Yield to Surrender This is your projected annualized return when the annuity contract expires.  When the surrender schedule has lapsed, how much money do you actually have?  This can also be expressed as an Internal Rate of Return.As you analyze all the interest rate components, this rate is where you should direct your attention.  Large upfront bonuses that give way to lower guaranteed rates, lower current, and lower renewal rates will most likely fall short when you compare the product’s yield to surrender.

Everyone remembers the story of the tortoise and the hare.  The hare jumps out to a quick lead but is surprised in the end by the perseverance of the tortoise. Annuities work along those same lines.  Teaser bonuses do not stack up against solid companies offering good current rates and a solid history of strong renewal rates.  This will give you the information you need to validate the feasibility of the yield to surrender.

Action Items:

Pick at least a 3% minimum Guaranteed Yield;
To Compare the same product among different companies, use Current Yield as your measuring stick;
Compare the past performance of companies with their Renewal Rate;
Most importantly, think like the Tortoise and focus on the Yield to Surrender- you’ll see that slow and steady wins the race!

Using Free Withdrawals In Annuity Contracts

The Free Withdrawal from your annuity is a critical element in your decision process, and any Annuity buyer must carefully consider how they would use free withdrawals, and when.

Every annuity contract contains a clause allowing the free withdrawal of a certain percentage of the initial premium each year without a surrender charge. Individual states have laws that dictate a minimum percentage.

Typically, the amount of free withdrawal is around 10% and some annuities allow for a 15% free withdrawal.  On the flip side, there are products that limit the withdrawal to 5%.

High Quality companies offer more than the state mandated minimum.  Like most of the factors we discuss, this fundamental integrity and respect for customers permeates their contracts and earns your trust and your business.

Conversely, many annuity agents and companies will use bonus rates and higher minimum guaranteed yields to entice you into lower minimum withdrawal allowances. Is this in YOUR best interest?

Remember the Ground Rules ! It should go without saying that the bigger free withdrawals are good for the customer and the smaller ones are good for the insurance company.  Which would you choose?

Action Items:

If liquidity and control of your capital is important, be sure that your free withdrawals are as large as possible
Quality companies are not afraid of you withdrawing your money, and consequently don’t sink to the lowest levels allowed by law for your withdrawal allowance.
Remember, it’s YOUR money.

Annuity Vs CD

Annuity Vs CD: Which is Best?

Annuity or CD? That answer depends entirely on what you have planned for the money.  There are advantages and disadvantages to both methods of saving.  And of course there are hybrid CD Type Annuities that offer Higher Yield’s than CD’s, with the tax deferred advantages of an Annuity. Read more

Bonus Rates

Want to know the ONLY time to consider a Bonus rate in an Annuity Decision? Many products include attractive bonus interest rates.  Some annuities offer bonuses as high as 10% or more just for signing up.

Companies lose money on this from the start!

To pay for this expensive form of marketing, the insurance company will need to guarantee they can hang on to your money for long enough to recoup the cost and turn a profit. If you buy such a product, you are married to a serious surrender schedule with substantial fees.  Say goodbye to your money for a long time. Bonus rates are just a form of flashy packaging for annuity products and should definitely be ignored nearly every time an annuity is evaluated. When they make sense: Once all other contract provisions are equal, a bonus rate can break a tie between two annuities.   Then, and only then, is a bonus a deciding factor.  Regrettably, we have yet to see an annuity where all the other factors are equal. Action Items:

Bonus rates are carrots that pander to the base human emotion of greed.
Set aside greed and examine your true motivations – if you really don’t need liquidity, or don’t mind a long surrender charge, a bonus rate might be worthwhile
In general, avoid bonus rates until the end of a decision making process, once YOU lay out EXACTLY what you want your annuity to do for your financial future.
  

 

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Annuity Companies: Corporate Credit

Analyzing the financial strength of a financial institution is the final critical component of your annuity investment process. The four major independent ratings agencies are:

  • A.M. Best
  • Standard & Poors
  • Moody’s
  • Fitch

All of these agencies are online and you can find the strength rating they have assigned to each insurance company.  It is recommended to look at information from all four agencies to make sure there is a consensus in relation to the company you are researching.  If there is not, you need to find out why! The credit rating of a financial institution is just like a credit score for an individual.  If you want a loan from a bank, they will assess your ability to repay that loan.  In regards to annuities, you are loaning your money to the company so you should assess their ability to meet the terms they agree to. The approach to insurance company analysis used by these agencies is similar but no two agencies are alike.  Therefore, finding ratings from multiple agencies and not simply taking the one supplied by the Insurance company itself is critical. Since this is not the most exciting section, let’s keep it simple and just focus on the ratings from Standard & Poors.  Before we continue I will stress one more time the importance of getting information from as many agencies as possible. S & P divides all classifications into two major categories. The highest tier of B rated companies and all A rated companies are considered ‘investment grade’.  The middle and lower tiers of B rated companies all the way down to D rated companies are considered to be ‘speculative grade’.  The entire list of S & P ratings is as follows:

AAA :Superior ability to meet obligations
AA :Very strong ability to meet obligations
A :Strong ability to meet obligations
BBB :Adequate ability to meet obligations
BBB -:Lowest rated investment grade companies
BB+ :Highest speculative grade companies
BB :Not vulnerable in the short-term but faces long-term challenges
B :More vulnerable to adverse business and economic conditions
CCC :Currently vulnerable and dependant on favorable business and economic conditions
CC :Highly vulnerable currently
C :Some form of bankruptcy action has been taken but current obligations have been met
D :Defaulted on payment of obligations

Investment grade companies are preferred since they will offer the highest levels of safety. Because of the quality of these companies, they expect to get a better deal when they borrow money. What’s that mean? You should expect lower investment returns from these companies in exchange for the higher levels of safety their superior credit offers. Now, that’s not all bad news from the perspective of yields.  The most stable companies do offer some of the lower interest rates on fixed annuities, but good research can still uncover your goal:

A Strong Company AND A Good Interest Rate.

As these rates and corporate credit ratings are always changing, be sure to Contact Us for an Annuity Expert to help you find the best of the best Speculative grade companies should be avoided during annuity consideration.  The chances are good that even speculative grade companies can meet their obligations, but they offer practically no benefits in terms of rate for the increased risk you assume Why gamble for a minimal increase with your nest egg? Consider your safety and cast these companies aside. 

If you wish to dig deeper into the analysis of credit ratings, you must look at any recent changes to the rating assigned to a company.  With the financial catastrophe that has hit the global credit markets over the past year, many companies have seen a change in the ratings assigned by the various agencies.  The ratings agencies will offer free information on whether a company has been upgraded, downgraded or left unchanged.

The ratings agency will also give their opinion on the future outlook of the company.  This is usually listed as positive, stable or negative.  Any information related to a negative outlook deserves closer scrutiny. Companies with significant exposure to real estate and sub-prime credit markets have been damaged.  These weak or non-performing assets have caused many companies to pledge cash reserves to back the bad assets or seek new loans that load the company with more debt.  Non-performing assets mean less profit to the company.  More debt brings on more obligations to the company.

Even with less profit and more debt, many battered companies may be safe in the long run.  Companies like AIG saw a great deal of stress on their portfolios of assets due to bad bets.  Many advisors churned clients out of AIG annuities and into new products.  This is rarely in the YOUR best interest, however. Even with our current financial crisis, however, there are plenty of good companies that have avoided the risk altogether and are sitting in a very stable position. Identify the stable companies and you find the ones most deserving of your business.

At Annuity Straight Talk, we can connect you with an Annuity Expert to help you select the best companies and products, and do the heavy lifting to research the best credit rating.  Please Contact Us .

Action Items:

Investigate the Credit Rating of the Insurance Company you are considering from Multiple agencies
Don’t blindly accept the rating supplied by the Company as ratings vary between rating agencies
Pick the highest possible rating you can find without compromising your interest rate or other critical factors