For the Baby Boomers and Midlifers, this October – the Month of The Harvest Moon!: The focus is on Planning for Retirement. We’re talking about finance, and lifestyle choices. Planning for those days when after all your hard work you can “harvest” the rewards – whether that means travel, time, golf, or doing just what you want with your life. Annuities are just one of the many investment vehicles you can choose to help build up your retirement fund.
Guest author Scott McQuarrie shares some advice
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Annuities – Worth Another Look
Annuities – Worth Another Look
Guest Author: Scott McQuarrie
Use the words “insurance” and “investment” in the same sentence these days and most people will think of some pretty negative things, like the government bailout of the huge insurance firm, AIG. Despite the bad publicity, however, insurance is still one of modern life’s basic needs. And insurance companies still offer interesting ways to protect your money as well as your life, health and auto. Annuities are a perfect example.
Annuities are very interesting financial instruments, and one of the main products of insurance companies. Essentially they are “future repayment” contracts between you and an insurance company, which you fund with either a single lump-sum payment or scheduled remittances in advance of the first payout date. The insurance company agrees to make periodic payments of a certain calculated amount, according to an agreed-upon schedule.
Annuities usually feature tax-deferred earnings and might also contain death benefits. Since it is not a replacement for life insurance, the amount that it will pay the beneficiary is some guaranteed minimum amount, often the total of your initial pay-in amount.
Kinds of annuities Generally speaking, there are two types of annuities, fixed and variable. Fixed annuities earn a specified minimum rate of interest while your account is maturing toward its payout date. The insurance company will then guarantee that the periodic payments will be a specified amount for each dollar in the account, payments that could last for either a defined period (15 or 20 years) or for indefinite periods like your lifetime or your spouse’s.
When you opt for a variable annuity, you can select from among various different investing options, mostly mutual funds. The amount you eventually receive will depend on the returns earned from the investments you selected.
Equity-indexed annuities are where the insurance company credits you with a rate of return based on changes in an equity index like the S&P 500 Composite Stock Price Index. Most insurance companies will guarantee a certain minimum return, which rates vary greatly from firm to firm. Following the accumulation period, you will receive periodic payments according to your contract terms, unless you prefer a lump sum payment.
The legal distinctions Each annuity product is a different kind of financial instrument. Fixed annuities are not considered securities and therefore are not regulated by the Securities and Exchange Commission (SEC). On the other hand, variable annuities are securities, so the SEC does exert some oversight of those products. Equity-indexed annuities combine features of other, more traditional insurance products (like a specified minimum rate of return) as well as standard securities (return pegged to the markets).
Because they are constructed in different ways, even within the same company, equity-indexed annuities may or may not be considered securities. It is all according to their particular design. Most equity-indexed annuities marketed today, as a matter of fact, are not registered with the SEC. This means it is more important to check the company, its history and its own financial health if you are going to risk your money on its products.
Fitting into the plan
You can learn more about all the kinds of annuities by doing online research, as well as ordering information from the various insurance companies that deal in the products. A good financial planner, especially one who is also a licensed insurance agent, will be able to help you determine just how you can work an annuity into your financial formula. Again, it is up to you to determine the amount of risk you can stand, and the way you want to structure the deal, because there are no concrete guarantees in any financial instrument, truth be told. The history of annuities, however, should give one sufficient confidence to proceed if everything – the company, the people, the deal, etc. – checks out.
One primary challenge in creating a comprehensive financial plan is making the best use of your funds and limiting the amount of overlap in benefits. That is, if you have other income-producing investments, you don’t need to use annuities for the majority of your future living expenses. Instead, if you anticipate paying for college for a kid or two, you could set up an annuity for that purpose, or according to some other plan that you develop. You can use annuities as a component of various, very effective financial plans, so don’t overlook them.
By Scott McQuarrie, representing the EZWatch Pro brand, a leading provider of computer based video security systems for business, commercial and government applications.
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