Comparing annuities can be difficult because there are so many different variations and there are literally thousands of different companies selling them and equally as many annuity rates for you to sift through. Here are a few key pieces to an annuity, and what you should look to compare when talking to different companies.
Liquidity: Being able to exit an annuity is just as important as being able to buy one. This is what annuity brokers like to call a “surrender”. “No-surrender” annuities usually offer a greater return on your investment, but also come with a clause that allows you to only withdraw as much as 15% of your annuity investment per year. Those who withdraw more than 15% or make an early withdrawal will be charged a fee, or see a decrease in their annuity’s performance.
Compare the Surrender Fee: One common fee among almost any annuity is the surrender fee. This withdrawal fee will usually decrease over time, but can be as high as 10% of the amount you wish to withdraw. Imagine, you just signed the papers and you break a leg. The medical bills pile up and you need to pay them off. Well, that medical bill just became 10% more expensive, because you’re going to have to use your annuity to pay it off. That’s no good at all.
Bonus: No matter who you’re buying it from, they’re not in the business of giving you a free lunch, no matter what they tell you. Bonus annuities are a salesman’s best friend. They’ll tell you that for every $100 you contribute that they’ll match it with $1-5 for free. Well, it isn’t exactly free, and you’ll pay for it in higher fees or require a no-surrender clause. No deal, Howie.
Cost of Living Protection: This is something that varies by investor. Cost of living protection is just another way that you can protect yourself from risk, though it will cost you. When you buy cost of living protection, the company writing the policy will increase your returns based on the change in inflation as calculated by the Consumer Price Index. You’ll have to decide for yourself whether this is a good fit, or whether other inflation-indexing investments will give you enough appreciation to cover cost of living.
Disability or Long Term Care: This rider surged in popularity among annuity brokers as a way to up-sell their clients. That doesn’t mean it is a bad deal, though. Disability or long term care riders guarantee a minimum payment in case you become disabled and cannot work, or if you enter a nursing home. Investors with a life insurance policy probably already have this protection.
Mortality, Expense and Management Fees: Mortality and expense fees cover the cost of selling the annuity and making payments, as well as a little bit of profit for the broker. The management fees are just like a mutual fund, in that the fee is assessed for managing your money and is usually tacked on to variable annuities that are tied to stock indexes. Absolutely compare these fees to other companies, and seek out the lowest possible fee schedule without giving up desired riders or surrender clauses.