Annuities are a financial contract with an insurance company that make a series of income payments to you at regular intervals in return for a premium and premiums previously paid. The value in an annuity contract is the amount in premiums you have paid, minus any applicable charges, plus any interest your premiums have earned. There are two types of annuity products: deferred annuities and fixed deferred annuities.
Types of Annuities
- Deferred Annuity
A Deferred Annuity is an annuity payment to be made as a single payment or a series of installments to begin at some future date, such as in a specified number of years or at a specified age.
- Fixed Deferred Annuity
Money in a fixed deferred annuity earns interest at a rate the insurer sets. The rate is fixed (won't change) for some period, usually a year. After that rate period ends, the insurance company will set another fixed interest rate for the next rate period. That rate could be higher or lower than the earlier rate.
Fixed deferred annuities do have a guaranteed minimum interest rate—the lowest rate the annuity can earn. It's stated in your contract and disclosure and can't change as long as you own the annuity. Ask about:
- The initial interest rate – What is the rate? How long until it will change?
- The renewal interest rate – When will it be announced? How will the insurance company tell you what the new rate will be?
What You Should Know Before Buying
Read the fine print. Look carefully at the annuity you are considering. Check the interest rate, find out
how quickly the annuity will grow in value, and when you can reap its benefits. Some annuity rates can
change over time, so make sure that you understand the difference between the guaranteed minimum
rate, the current rate, and any first-year or so-called “bonus” rates. Also make sure you know whether
the annuity is tax-deferred, meaning that you will not have to pay taxes until you receive payments
from the annuity.
Try before you buy. Many states have “free look” laws that give you a set number of days — typically 30
to 60 days — to review an annuity contract after you buy it. You can back out of the contract at any time
within the “free-look” period; a refund is required to be issued within an allotted time period, as stated
in your contract. Take advantage of this review period to make sure you understand what you are
Don’t get caught by surrender charges. Withdrawing your money from an annuity before it has
matured might subject you to fees, known as surrender charges, as well as other administrative fees
and acquisition costs. There could be high penalties if you make a withdrawal prior to the maturation
date provided in the policy. Be sure you are aware of these provisions so that you don’t inadvertently
incur such costs.
Don’t judge a financial professional by title alone. Designations such as “certified senior adviser,”
“certified retirement financial adviser,” “chartered senior financial planner” and “certified financial
gerontologist” might seem to imply expertise in providing investment advice to senior citizens.
However, such titles don’t always guarantee that the financial professional actually has specialized
knowledge or education in that area. Ask them what the designations mean to them and what they had
to do to earn them. Ask them if they have ever lost or given up a designation and, if so, why.
Ask for help. Many people have been harmed by annuity scams. If you are concerned that you might
have been misled by a fake company or fraudulently sold a misrepresented product, call your state
insurance department to get assistance and/or file a complaint. You can file a complaint directly with
your state insurance department via the NAIC’s Web site at www.naic.org/cis/fileComplaintMap.do.
Check the insurance company’s credit rating. Through resources such as Standard & Poor’s, A.M. Best
Co. or Moody’s Investors Services, you can see whether the annuity company you are considering has
a solid credit rating. An “A+++” or “AAA” rating is a sign of strong financial stability.
Check the NAIC’s Consumer Information Source (CIS). The NAIC provides a database for consumers to research an insurance company’s financial information and complaint data. The information in the CIS
is supplied voluntarily by state insurance departments. Not all states provide the data, nor are all
companies listed within the directory.