What are Banks, Broker Dealers and local friendly insurance salesman selling to retirees and those near retirement? The answer is Annuities.
The stock market has plummeted and people are worried about losing more. Insurance salesman (could be in a bank, or at a broker dealer) can take advantage of that fear and use it to sell the apparent benefits of an annuity.
An annuity is a contact from an insurance company to pay back the principle with interest. However the devil is in the details. Remember, if it sounds too good to be true, it probably is. Before you buy an annuity think about these tips!
1. Always know what the interest rate will be for the entire duration of the surrender period. Do not buy one where you know the first year rate and the following years are left to the discretion of the company.
2. In a low interest rate environment (such as what we have now) it is not wise to purchase an annuity with a long lock on the rate. When interest rates rise, you are locked in to the low sub market rate.
3. The preferable time to purchase an annuity is in a high interest rate market. If rates fall in the future you locked in the higher rate.
4. Get annuity quotes from 3 separate sales people. The reason is that some annuities have high commission that hurt the client either with long surrender periods or reduced interest. Some salesman are more motivated by the higher commission than doing what is best for the client. By talking to 3 different salesmen you are more likely to be offered a better contract.
5. Index Linked Annuities are very complex. New rules are being put into place to create more regulation for their sale. These are sold primarily because the agents make bigger commissions than fixed annuities.
6. Be very skeptical of an annuity salesman who recommends an annuity as a means to access Medicaid if a nursing home may be needed. There have been changes in the law in this area and further change can occur.
7. Depending on the age of the client (and other factors), make sure there is no surrender charges should the funds be needed for a nursing home.
8. Avoid those annuities that have a “bonus up front”. They either have long surrender periods, lower interest in later years or limit how much you can withdraw.
9. Be sure to specify the correct beneficiaries. Should you pass away you need to be certain to whom the money will pass. This should include both primary and secondary beneficiaries.
10. It goes with out saying that you want a highly rated company. The best list of all the rating services of all the companies is The Insurance Forum that publishes a list each year and is available for a small fee. http://www.theinsuranceforum.com/pages/ratings.html
If you are thinking of an annuity, talk to an expert that is not trying to sell you one.
Michael Chamberlain CFP®
CA Registered Investment Advisor
Send your questions to firstname.lastname@example.org or call 800-347-1340
This article is for informational purposes and should not be taken as legal, tax or investment advice