Annuities may give you less than you hope

The ads for lifetime income annuities for retirees are so beguiling. After the financial swings and the up-and-down interest rates during recent years finally having predictable, guaranteed income for as long as you live sounds like a dream come true.

But before jump into investing in an annuity and writing that check, be aware of what you are buying. You may end up with far less than you expect.

1.  For starters, 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. And this income may be taxable. Be sure to ask about this.

3.  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–as much as 8%. So ask to know what part of your money right off the top pays for that big commission.

4.  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.

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

6.  You cannot just withdraw money from an annuity — even if you bought it at your bank. 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.

7. If you cash in an annuity you bought with pre-tax dollars you may find yourself facing paying taxes on the entire amount all at once which could be a real shock to your budget. Again, ask for a clarification about your future tax liability.

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.

10. 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.

So before you write that check for what the salesman is claiming as a simple way to get “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. Your future income depends on it.

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