Annuities are financial products offered by insurance companies designed to provide a steady income stream, typically for retirees. Understanding the various types of annuities, how they function, and their suitability for different financial goals is crucial for effective retirement planning.
Annuity Definitions
An annuity is a contract between an individual and an insurance company where the individual makes a lump-sum payment or a series of payments in exchange for regular disbursements, starting either immediately or at some future date. The primary purpose of an annuity is to provide a reliable source of income for a specified period of time.
How Money is Invested
The money you invest can be allocated to various investment options within the contract. For instance, a fixed product provides guaranteed minimum returns based on a fixed interest rate, while a variable product allows investment in sub-accounts similar to mutual funds, whose value fluctuates based on market performance. An indexed product links returns to the performance of an index such as the S&P 500.
Annuities offer flexibility in managing your investments. During the accumulation phase, you can add money to increase the base value of the product. However, withdrawing funds before the contractually agreed period might incur surrender charges, which are fees imposed for early withdrawals.
Key parties involved in a contract include the owner, the annuitant, and the beneficiary. The owner is the individual who purchases the product, the annuitant is the person whose life expectancy determines the annuity payments, and the beneficiary is the person who receives the remaining benefits upon the annuitant’s death.
The Contract and Contract Terms 
The contract itself outlines the terms and conditions, including the amount of premium payments, the duration of the accumulation phase, the starting date for any payments, and any applicable surrender charges. It’s essential to understand these terms to ensure the annuity aligns with your financial goals.
The annuitant is crucial as the payment schedule is based on their life expectancy. The beneficiary, on the other hand, stands to receive the remaining value of the annuity if the annuitant passes away before the contract ends.
Annuities come in different types, including fixed annuities and variable annuities. A fixed annuity guarantees a minimum rate of return, providing stability and predictable income. In contrast, a variable annuity offers investment options that can potentially yield higher returns, though they come with increased risk.
Obligations of a Financial Advisor Recommending an Annuity
Financial advisors recommending annuities must ensure the product is suitable for the client’s financial situation, needs, and objectives. They are obligated to provide clear explanations of the annuity’s features, benefits, and risks.
Annuities are not one-size-fits-all financial products. Assessing the suitability involves considering factors such as your retirement income needs, investment risk tolerance, and long-term financial goals. It’s crucial to determine if the annuity aligns with your overall retirement planning strategy.
Surrender fees can significantly impact the value of an annuity if funds are withdrawn early. Understanding these charges and their implications is vital when considering purchasing an annuity.
What to Do When an Annuity Is Not Suitable for You
If an variable, fixed or indexed product is not suitable for your financial goals or situation, it’s important to explore alternative investment options. Consulting with a knowledgeable financial advisor can help you find products better aligned with your retirement planning needs.
At Bakhtiari & Harrison, we focus on assisting clients with complex financial products like annuities. We represent investors in litigation and FINRA arbitration with annuity or insurance related issues. If you have any questions or need guidance, please contact us. We are here to help you make informed decisions for a secure financial future.