Annuity Essentials

In its most basic form, annuities are insurance that provides an income stream either for a fixed period of time or for the rest of your life. Sounds pretty straightforward, right?

The trouble is that annuities are often sold and not bought. Consumers are pushed into ill-fitting products because that's what the broker is selling that month. When shopping for an annuity it is essential to be an educated consumer.

The Fiduciary Rule

The financial industry was put on notice in 2015 that the landscape was going to change. A major overhaul was proposed by President Obama on Feb. 23, 2015: "Today, I'm calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests. It's a very simple principle: You want to give financial advice, you've got to put your client's interests first."

The DOL’s definition of fiduciary demands that retirement advisors act in the best interests of their clients and put their clients' interests above their own. It leaves no room for advisors to conceal any potential conflict of interest and states that all fees and commissions for retirement plans and retirement planning advice must be clearly disclosed in dollar form to clients. Without this rule in place, we're back to the "wild, wild west" in the annuity world, which can lead some salespeople to make unsuitable recommendations and use high-pressure sales tactics.

The number of letters the DOL received that opposed a delay to enact the new Fiduciary rulings.

The Department of Labor (DOL) fiduciary rule, was originally scheduled to be phased in from April 10, 2017, to Jan. 1, 2018.

It never came to be ...

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The Simple Money Point

With all that said, an annuity can sometimes have a place in a retirement plan. But the definitive answer comes down to your particular circumstance. To figure out if you need one, we recommend reaching out to discuss your personal goals. Mike Caffey, our Certified CPWA® follows the fiduciary standard - making recommendations that are always in your best interest, not our own.

Do You Know What An An Annuity Actually Does?

Most potential clients we encounter do not understand what annuities are, and those who believe they know what an annuity is are typically still confused. The public misunderstands due to the media's perpetual distribution of inaccurate information and marketing initiatives. Marketing of annuities comes in several different forms that vary by type of annuity.

No loss of principle
Guaranteed income for life
As safe as a CD, but greater returns

Be Smart With Annuities

One must ensure that an annuity is not only attractive and suitable but meets their goals, objectives, and risk profile. It's essential to consider the most critical element of an annuity: the right to receive a lifetime stream of income. Annuitizing your annuity holdings can make them a more valuable tool in your retirement planning.

Here are 6 things you need to know about annuities:

Understanding that anyone's annuity contract may be described accurately by several different labels is essential to understanding how it works. It is possible to divide all annuity contracts into other types using four different parameters:

How is the annuity purchased? (Single premium vs. Flexible premium)
When do regular annuity payments commence? (Immediate vs. Deferred)
How are contract values and premiums invested? (Fixed vs. Variable)
How is the contract taxed? (Qualified vs. Nonqualified)

There are two types of annuities: immediate annuities and deferred annuities.

Immediate annuities are best for retirees who want to receive payouts right away.

A deferred annuity provides an initial waiting period before the contract can be annuitized (usually between one and five years). The contract's cash value generally remains liquid and available (albeit potentially subject to surrender charges).

Beyond the initial waiting period, the contract may be annuitized. However, the choice remains in the hands of the annuity policy owner, at least until the contract's maximum maturity age (at which point it must be annuitized).

Besides Social Security and pensions, only annuities guarantee a stream of income that you can't outlive.

Because you can't predict the markets, you can't be sure that you won't outlive your investment portfolio. With an annuity, however, you enter into a contract with an insurance company that will pay you a certain amount for the rest of your life, giving you the peace of mind that comes from knowing that this specific income stream is guaranteed to never run out during your lifetime.

Bottom Line

Annuities can offer flexibility in how you save for and receive money in retirement. It all comes down to understanding that there are several different types of annuity products designed to address a specific need or life stage. And remember, the best way to explore how they might complement your investment strategy is to work with your trusted financial consultant.