Retirement: 8 Rules for Savvy Annuity Buyers

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By Andrew Murdoch March 12, 2015

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Baby boomers are buying a record number of annuities — insurance products that offer guaranteed lifetime income — and in so doing are taking a wise step toward mitigating the fear of running out of money in retirement.

Most aren't careful buyers, however, and that means they are not purchasing annuities that best fit their needs even though many are making one of the biggest investments of their lives.

Most annuities are sold, not bought. And they are most commonly sold at sales presentations at which a broker promotes only one or two annuities. These one-size-fits-all products are only right for a very small percentage of the audience. And annuities not sold at sales presentations are usually proffered by financial advisers with whom the customer already has a relationship. Similarly, advisers in these situations typically offer only one or two choices.

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I contacted Immediate to buy one of my immediate annuities. They were prompt, very responsive, paid attention to detail, understood my objectives, and were superb when it came to staying on top of seeing the funds transfer and issue of new policy documents through to completion.
Dr. David Babbel Professor Wharton School
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Appreciate the necessity of being a savvy annuity shopper? Here are eight tips to weigh before consummating a purchase:

1. Know why you are buying an annuity

Annuities are meant to be a safety net to supplement your traditional portfolio. If the stock market tanks while you are in your golden years, you'll be glad you own an annuity. The trade-off is that annuities don't have the liquidity of stocks and bonds.

2. Make sure benefits meet needs

If you are married, for example, you probably want a joint annuity, which means if one spouse dies, the other still receives lifetime income. Many couples, however, are sold single annuities, which means if one spouse dies, the survivor gets only the residual cash value of the annuity as the lifetime income generally ceases. Single annuities are often sold to couples without discussion because the payments are higher and seemingly more attractive.

3. Shop around

Shop for annuities with at least three financial planning firms and make sure one of them is independent. That means they are not “captive” to an insurance company and the limited selection of products that the insurance company or the broker/dealer sells. Captive players simply don’t offer as many choices to investors.

4. Seek a full-service adviser

To determine if an adviser is an independent, full-service adviser, ask if he sells securities — specifically, stocks and bonds, mutual funds and variable annuities. If he does, he is associated with a broker/dealer or is a registered investment adviser.

5. Benefit from experience

Make sure any adviser you deal with has at least 10 years of experience. The least experienced annuity salesmen may just have a life and health insurance license, which can be obtained with only 40 hours of work and means he can’t offer the full spectrum of products.

6. Compare all major types of annuities

Variable annuities, Index annuities, fixed annuities and Immediate annuities. Once you decide which one you want, compare several choices in that subcategory. Make sure the salesman fully understands the annuity and backs up what he says with illustrations showing how the product works, as well as written documents. If the salesman is dismissive, that is a noticeable red flag.

7. Thoroughly review fees — all of them

Make sure you thoroughly understand the annuity fees. On a variable annuity, for example, a salesman will probably show you mortality and expense and so-called rider fees covering your fees for death benefits and income benefit — but not mention the fees you pay for the management of your sub accounts (mutual funds) within the annuity.

8. Know the cost of surrender

Know the surrender fees you would face if you had to liquidate your annuity prematurely. Surrender fees range from 1% to 20 %. (Some annuities offer zero surrender fees, but they charge higher fees for that.).

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