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Shopping for an Annuity? Ask These Questions First


Annuity products have a bad reputation mostly due to their complexities and misconceptions. It doesn’t help that some financial professionals aggressively sell them, leading to many consumers purchasing without really understanding exactly what it is they are buying. Unfortunately, this has many people believing that annuities are not a wise retirement tool, when for some, nothing could be further from the truth. When it comes to financial planning, knowledge is power, and understanding annuity products could be the key to funding your retirement. The following are several questions, from a recent Denver Post article,  to ask if you’re considering adding an annuity to your portfolio.

  • Who is selling the annuity to you? How did you come to work with them and what do you know about them? Do some research about the financial professional you are working with. What is their background? Are they a fiduciary? What licensing do they hold? A simple online search can give you some important information. Trust is everything when choosing a financial advisor.
  • What are the fees you’ll be responsible for? There are several layers of cost built into an annuity. Once you understand each one, you can make a better decision about whether it’s a good fit for you and your financial goals, or whether a less expensive alternative is more appropriate.
  • How much liquidity is available with the product you are interested in? How much of your money can you get back without paying a surrender charge if you should need to? What is the surrender period? This information is very important to know before signing on the dotted line.
  • There are risks associated with every investment. What are the risks associated with the one you’re interested in?
  • What kind of protection is provided to you with this product? How much are you paying for this protection, and is it optional? It may be via a “living benefit rider” which is typically available with an additional fee.
  • Don’t be afraid to ask how much commission your advisor will collect with the sale.
  • Consider getting  second opinion to make sure the purchase is right for you.
  • It is also crucial that you understand the difference between the “account value” and the “income base.” It is not unusual for the income base to grow several percentage points every year until withdrawals begin, but this number isn’t helpful to you if you decide to withdraw a large portion or the entire account in the future.
  • If you’re considering replacing one annuity with another, be sure to do a side-by-side comparison to learn what you may be giving up (i.e. a new surrender period may apply).

If understood and used correctly, annuities can be a great addition to a broader financial plan. While they aren’t appropriate for everyone, many can benefit from the guaranteed lifetime income provided by an annuity product. If you’re informed and working with a trusted advisor, an annuity may be just what your portfolio needs to ensure a well-funded retirement.

Written by Rachel Summit

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

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