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9 Things You Should Know About Annuities

"Guaranteed income for life".  The ads for lifetime income annuities for retirees are so beguiling especially in today's economy.  Predictable, guaranteed income sounds like the perfect answer now that your retirement fund is worth a lot less and the interest your money is earning is abysmal. 

But before you write that check for an annuity, be aware of what you are buying.  You may end up with less than you expect.

1.  An annuity is NOT a savings account with a guaranteed interest rate or a savings account with guaranteed periodic payment for life.  An annuity is NOT a FDIC insured bank account.  An annuity is an insurance plan.

2.   When you buy an annuity you are paying a one-time premium for an insurance plan that, in return, will pay you a fixed amount of money for a period of time.

3. If the insurance company that issues your annuity goes out of business, you are likely to be out of luck--and out of your money.  Be sure to check the rating for the insurance company at the A.M. Best website before you commit to a specific annuity.  Then shop around.  Compare offers from different companies.

4.  Even if you purchase it through a banker or stock broker, an annuity is still an insurance plan.   The banker or broker is functioning as an insurance agent and, as such, is entitled to a commission for selling the annuity to you.  And the commissions can be very steep.  So part of your money right off the top pays for that commission.

5.  Some annuities guarantee the payments for your entire life, no matter how much longer you live.  Insurance companies have plenty of actuaries on staff to estimate your remaining lifespan based on historical averages.  That, plus their estimate of interest rates, is how they figure how much to pay you every month or every quarter.

6. Other annuities guarantee payments for a fixed period of time, for example, five years or eight years or twenty years.

7.  Some annuities have clauses that allow you to get your money back in case of an emergency, BUT it is unlikely you will get it all back.  They will deduct some money to pay the commission, other money to offset what they have already paid you, and there are cancellation and other fees.  Always ask about this.

8. Other annuities do NOT allow you to get any money back even if you experience an emergency.   And your heirs may not receive any money at all from the annuity when you pass away.

9.  Some annuities offer a variable payment based on current interest rates.  With these plans there is usually a minimum guarantee.

So before you write that check for what the salesman  is claiming as "guaranteed income for life" be sure to get answers in writing about all these important factors.  Read the brochures.  Ask questions.  Don't simply rely on what someone tells you.

NOTE:  All names on this site have been changed to protect individual privacy.  
The stories are real, the names are not. 

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