Annuities 101

Annuities 101, now I know a lot of you when you hear the word annuity, you kind of cringe. Well don’t go turning the channel on me right now because we’re just going to talk about and kind of educate you on all things annuities. So there’s lots of different annuity products out there, probably thousands with hundreds of different companies. But when you look at each and every one, they all boil down to four different types. Okay and those types are variable annuities, immediate annuities, fixed indexed annuities and then fixed annuities. So let’s go through each one, just talk about the pros and cons and maybe how they operate. Okay, so variable annuities, these ones probably have given the insurance company or the annuity space the worst wrap or the worst reputation. Because oftentimes they’re very complex and confusing. But quite simply how they operate is you invest in sub-accounts within these various variable annuities and they’re tied to different mutual funds. So they go up and down with the market. Now typically they also do have some substantial fees that are associated with them. And then you can add different riders that also increase the cost of those annuity products. And so that’s why you want to make sure that if you have a variable annuity or you’re thinking about getting a variable annuity, you understand those costs that are associated with them. The next one is called an immediate annuity. Basically these are great for people who they don’t have a pension and they want that peace of mind that comes from a guaranteed monthly income stream for the rest of their life. How they work, you give the insurance company a lump sum of money and immediately they pay you an income stream for the rest of your life. Draw backs are, well sometimes they don’t quite keep up with inflation, right? Because 20 years from now that $1K a month that you’re getting right now might not be the same come 20 years from now, right, if bread and milk are costing more. But it also, it does work for a lot of people because it offers that peace of mind. Then we’ve got fixed indexed annuities. These ones there’s usually zero cost with these unless you add some sort of rider to them. But they offer you some participation in the market and then principal protection. So like the best one of the market right now gives you 9% of the up of the S&P 500. So over a year if the S&P is up higher than 9%, well you’re only going to make 9% on that product. But let’s say like we had a year last year where the market was down. Well in a fixed indexed annuity, you wouldn’t make any money for that year, but you also wouldn’t lose any more that year as well. And then the last one which is the most simple of all the annuity products in my mind that’s out there is called a fixed annuity. Essentially what it is, is it’s a CD with an insurance company. So for a period of time, whether it’s three, five, seven years, whatever it might be, you have to leave your money there with the insurance company. And they pay you a flat rate. The best one on the market right now that is a three year that pays 5.35%. No other moving parts. There’s no fee associated with it. However, if you said hey, I want my money back in that three year period, there would be a surrender penalty for that. So obviously lots of different annuity products out there. Make sure if you have any questions on your annuities please don’t hesitate to reach out, give us a call. We’d love to just educate you on all things that are annuities.