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Ask the Right Questions About Fixed Annuities


Fixed annuities aren’t quite as flashy as some of the other annuity products out there, but they have their place in financial portfolios.  Think Advisor recently published an article about the “5 Fixed Annuity Questions You Should Be Asking.”  In the article, Chris Bartolotta says that these 5 things can really help to determine if a fixed annuity is right for you, or your client if you are an advisor.

The first thing to research is exactly how your free withdrawal provision will work.  People are worried that their money is inaccessible when they purchase a deferred annuity, but almost all deferred annuities offer annual access to a portion of your account value.  The most common provision offered is 10% of the account value or the interest that you have earned in the current year.  A cumulative withdrawal provision offers an added benefit because you can take a larger withdrawal if you have not taken one for a few years.  If you haven’t taken money out in 3 three years and your withdrawal percentage is 10%, you can withdraw 30% of your account value free of penalty.  Determine if your percentage can be taken on the account value or only the original premium as well, because that can make a big difference in your withdrawal amount too.

If your fixed indexed annuity comes with a bonus, you need to be clear exactly what you are giving up to receive that bonus.  This is an extra amount credited to your premium upon the purchase of your indexed annuity contract.  When you are given a bonus in your annuity, there is always a trade-off for another feature.  You might only have a 5% withdrawal rate in exchange for your initial bonus, or maybe no free withdrawals at all.  Some people see great value from bonuses, especially when they are combined with an income rider.  You might get the most value from an annuity with a bonus, but your situation might also find more value with a different annuity option.  Make sure you know what you are sacrificing to receive that bonus.

The withdrawal percentage related to your fixed annuity is very important.  Advisors often focus on high rollup rates and big bonuses, but you need a good withdrawal percentage as well.  A 5% withdrawal percentage on a $200,000 income rider will pay you $10,000 per year in retirement.  But an 8% withdrawal percentage on a $150,000 income rider will actually pay you $12,000 per year.  A huge amount of income in an annuity is not quite as flashy when you can only take out a very small percentage at a time.  Even though withdrawal percentages are not typically the first thing marketed, they are important and must be considered when looking at your fixed annuity choices.

Some deferred annuity products allow you to make more than one premium deposit.  When that is the case, there are some things to consider with these so-called flexible premium accounts. Although rolling surrenders are rare to find anymore, you want to make sure that your fixed annuity does not have one.  This will start a whole new surrender period every time you deposit additional premium into your annuity.  Bonuses can also be affected with flexible premium accounts as well.  Some annuities only offer a bonus on the premium deposited in the first year.  With income annuity rates changing frequently, you won’t be able to accurately determine your monthly income payment until you have deposited all of your premium funds.  Although these issues may seem small now, when you stretch the effect over a couple of decades, something small like this can make a large impact on your annuity.

Finally, the article says to check if your fixed annuity has an ROP or a “bailout” cap.  Many people are worried that they will be locked into a fixed annuity at a lower rate and they’ll miss out when rates dramatically increase.  This isn’t exactly likely, but it keeps a fair amount of people away from fixed annuities during low interest rate times.  A return of premium (ROP) feature ensures that you will never receive less than what you put into your fixed annuity product if you surrender the annuity.  You still have to follow any surrender schedule in your contract, but you will be able to exit the contract when allowed without a net loss.  Fixed annuities with bailout caps typically set a cap at 50 to 100 basis points below the current cap.  If the annual cap ever gets renewed below your bailout cap level, you can leave your contract and keep any interest that you have earned without being penalized.

Each and every annuity product sold has its own nuances that have to be researched and fully understood before you make a purchase.  By knowing the answers to these 5 fixed annuity questions, you have a better chance to purchase a fixed annuity that is right for your individual financial plan.  An expert at Annuity FYI would be happy to answer any of your fixed annuity questions.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

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