2012 Barron’s Top 50 Annuities
The following are selections from a Barron’s article titled, “Top 50 Annuities,” by Karen Hube. The article contains quotes from AnnuityAdvantage’s own Senior Annuity Analyst, Debi Dieterich.
Annuities, which are insurance contracts, come in many shapes and sizes. They include fixed-rate, in which the principal compounds at a pre-set rate; variable, in which the principal appreciates based on the performance of an underlying mix of stocks and bonds; deferred, which require an upfront investment with payouts down the road, and immediate, which turn a lump sum, upon purchase, into guaranteed monthly payments for life. One attractive feature of annuities is that, as with most individual retirement accounts, or IRAs, balances grow tax-deferred until withdrawals begin. Even more important these days, annuities help remove investors’ worst fears: losing principal and running out of money in retirement.
THE MOST BARE-BONES KIND OF ANNUITY is an immediate annuity, and it is the type most favored by financial advisors to address investors’ concerns about outliving their money. Quite simply, you give an insurance company a lump sum, and based on formulas that crunch life-expectancy data, interest rates, insurance fees, and other factors, the insurer guarantees you a certain income, usually for life.
If you die before your principal is paid out, the insurance company keeps your assets. But there are a number of variations on this simple annuity to appeal to investor concerns. For example, you can arrange the annuity to cover the lives of both spouses, adjust for inflation, or be guaranteed to pay for a certain period even if you die within that period.
The variation that’s best for you comes down to your income needs and how long you think you will live. For example, an inflation rider could make sense for an investor with expectations of a very long life. But the embedded costs of the inflation rider will result in lower initial payments. “It can take 12 to 15 years before the payment grows to what the initial amount would be without the inflation rider,” says Debi Dieterich, senior annuity analyst at AnnuityAdvantage.com. If you have a long life, eventually your total payout will be greater with the inflation rider, but in the first decade or more “you lose the use of that money,” Dieterich says.
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