There are several items to consider when shopping for annuity policies. These safe and secure contracts offer several benefits, but their features can vary significantly.
Purchasing the right annuity at the right time will provide years of reliable growth and income. But most importantly, you also get peace of mind. It’s comforting to own an investment you don’t have to worry about. In this post, we discuss the most important features to look for when buying an annuity.
Company Strength & Verified Ratings
When buying an annuity, you’re usually investing for a few years or more. While some contracts are only one year long, many have longer terms. It’s not unusual for our clients to purchase policies with terms of five to ten years… especially when interest rates are high.
That’s why it’s essential to choose a strong insurance company. Almost all annuity companies are rated by independent firms. AM Best is the most well-known company, but there are several others specializing in this area. These rating agencies audit the books, rank their investments, and publish their findings on a regular basis.
You can also request financial reports to ensure you’re dealing with a financially strong company. Beyond that, you can dig into their financials as well. All insurance companies publish annual reports detailing their investments, reserves, capital surplus, and much more. You can also learn about how long they’ve been in business and any affiliations they might have.
Many well-rated insurance companies specializing in annuities have been around for decades. Some have been around for over a hundred years. They’ve weathered all types of market cycles. There is a wealth of public information available. Just ask us and we’ll send it to you.
Common Annuity Liquidity Features
Beyond company strength, we are asked most often about liquidity. Our clients want to know if they can access their funds (principal and interest) penalty-free.
Most annuities offer liquidity options. Many contracts offer free interest withdrawals after one month. Others will offer 5-10% principal withdrawals after 12 months. These features satisfy most of our clients. Annuities work great for those who want regular income.
It’s important to know, however, not all policies offer free liquidity. Some contracts might offer a higher rate, but charge a penalty for withdrawals before the annuity is out of surrender. In these cases, you might see a rate reduction if you want access to your principal or interest.
What About The Death Benefit?
This is a very important annuity feature. You should always ask if your annuity is free of surrender penalties at death. You would not want your beneficiaries to pay a penalty if you passed away in year five of a ten-year term.
Most contracts include this benefit at no cost, but some do not. We do see some of our younger, married clients go without this feature if they can lock in a higher rate. When set up correctly, a spouse can continue an annuity at first passing and avoid any surrender penalties.
How About Crisis Waivers?
Insurance companies understand policyholders’ needs and concerns. Some annuity owners may need additional policy liquidity for healthcare needs or a terminal illness.
Many carriers offer policies offer with special liquidity provisions if the owner is confined to a hospital or a Long-Term Care facility. This includes waiving any surrender charges and/or Market Value Adjustments if one of these situations occurs. Be sure to ask if you want this benefit to be part of your policy as not all companies include it.
Understanding Tax Implications
First, please know we are not accountants. Our independent annuity brokerage has been specializing in annuities for over 25 years, but we don’t give tax advice.
That being said, annuities offer great tax advantages. With a non-qualified annuity policy, you can defer taxes your entire life. And at passing, your beneficiaries can even stretch out accumulated taxes over several years using non-qualified stretch provisions.
Additionally, 1035 Tax-Free Exchange rules allow owners to move from one annuity to another without incurring any income taxes. Please be advised that the 1035 Exchange process must be done through proper paperwork, so make sure you are working with a broker who understands this process.
Pre-Tax, Qualified Accounts
Qualified accounts like IRA, 403(b) and other pre-tax annuities work similarly to non-qualified policies. When invested in an annuity, these funds also grow tax-deferred until Required Minimum Distributions are required or the owner passes. The principal is always taxed, however. That’s the primary difference.
Corporately Owned & Business Entity Policies
Corporately owned annuities have unique tax implications. They can only be non-qualified policies, but unlike the policies mentioned above, they do not grow tax-deferred. Even if you do not withdraw your interest, it’s still considered taxable income by the IRS. Thus, you will receive a 1099 each year on your policy gains.
That’s no reason not to consider an annuity that’s owned by a corporation or other business entity. If you’re worried about the safety of bank deposits or simply want higher rates of return, then a corporate annuity policy can protect and preserve your company dollars.
It’s All About Timing
It goes without saying that the best time to buy a fixed or indexed annuity is when interest rates are high. However, it’s important to know what factors drive fixed annuity rates higher.
The mistake some people make is watching the Federal Reserve too closely. Yes, their words and actions influence bank and lending rates, but annuities are not bank instruments. They are offered only by insurance companies.
Insurance company portfolios primarily consist of bonds. And bond rates power annuity yields. These are investments like US treasury bonds, mortgage securities, and high-grade corporate debt. And these yields move in real time with the economy. So even though the Federal Reserve might be raising or lowering rates, yields on treasuries and bonds can be moving in different directions.
In other words, don’t put too much emphasis on the Fed. You need to watch US treasury rates to have a better idea of which direction annuity interest rates are going. If bond rates are decreasing, then so will annuity rates.
Applying This Knowledge To Other Annuities
Beyond interest rates, you want to look for policies that fit your time horizon and investment goals. If rates are high and you think they’ve peaked, then it’s wise to purchase a longer term annuity if that fits your goals.
You might consider investing in a 5, 7, 0r 10 year annuity when you can lock in high rates. Why? Because interest rates will likely be lower in the future. Many of our clients are locking in rates close to 5.50% right now because they know this opportunity in 2023 won’t last long.
Indexed Annuities
This same logic applies to the best indexed annuity accounts. When interest rates are high, then spreads, caps, and participation rates will be higher too. Locking in higher indexing metrics will translate to above-average growth when the markets inevitably move higher.
Hybrid Long Term Care Policies
Most hybrid annuities are also based on fixed interest rates. If you’re thinking of saving for long term care expenses with a LTC hybrid annuity, then buy one when interest rates are up. Your policy growth will be operating off a higher base going forward. This translates to increased LTC benefits as the policy itself grows.
Deferred Income and Immediate Contracts
These types of policies are perfectly suited for generating guaranteed income. This could be for your life or for a set number of years. You’ll get the largest income streams when you time up your initial purchase. This is why working with an experienced, independent broker is so important.
Finding The Best Annuity Policies
There’s a lot to think about when shopping for any type of annuity plan. There are nuances to each contract that can affect the safety, growth, and access to your investment in the future.
It’s smart to work with an experienced independent annuity brokerage like ours. We’ve been specializing in annuities for over 25 years, We will educate you on all of your most suitable options.