The following is a guest post. Enjoy!
Annuities are a form of insurance contract. You give them a lump sum of money to manage, and you receive a guaranteed return on the investment. These sums are generally paid annually, hence the word annuities. But these investment products are often confusing, especially when you’re liable to get a sales pitch from a commissioned salesperson. Here are a few tips on how to buy and how not to buy an annuity online.
Do Understand the Options
There are two main types of annuities: fixed and variable rate annuities. The fixed-rate annuity pays a set rate of return on the money. Unlike stocks, you have a guarantee you’ll get some money back. The question is how much. Avoid variable annuities. They have high management fees that eat into the returns.
Don’t Forget to Shop Around
Don’t just sign up for an annuity with your insurance company or the first broker you meet. Do your research regarding the options. That’s why you should consider shopping online for annuities. Determine what the market will pay in terms of returns. Understand what the standard fees are, so you don’t get ripped off.
Furthermore, you need to do your research regarding specific annuity firms. Verify that they pay the rate of return they promise and make sure you’re dealing with a legitimate company before you promise to give them your 401K rollover.
Do Take Time to Understand the Rules
Annuities are legally considered insurance contracts, not investments. Understand the rules before you sign up for the annuity. For example, you don’t want to sign up for an annuity with a steep surrender charge if you have to take money out of the annuity. This is less of an issue if you have a significant emergency fund. Never give someone all of your money. Don’t make the mistake of borrowing against your annuity to pay for emergencies, because you will pay dearly for it just as you lose money when you borrow against a whole life insurance policy.
Are you concerned about your money being taken by creditors? Some annuities are protected from creditors, but not all. Know whether a given annuity is exempt or protected from creditors under state and/or federal bankruptcy law if that is a concern to you.
Don’t Bother Doubling Up
Annuities are tax-advantaged. That makes them somewhat similar to a 401K or 403B plan. That also makes it unnecessary to sign up for an annuity within these tax-advantaged retirement accounts. Instead, use an annuity to protect cash that you have outside of tax-advantaged accounts. The money in the annuity will grow tax-deferred just like your 401K or traditional IRA.
Do Include the Annuity in Your Estate Plan
Don’t forget to name a beneficiary for the annuity upon your death. This is a great way to ensure that an annuity passes outside of probate to your heirs, including a surviving spouse. The money passes directly to the beneficiary. On the other hand, you don’t want to make the mistake of not naming your spouse as a beneficiary in return for higher returns. You run the risk of leaving your spouse without a source of income upon your death. If you do arrange for the annuity to end upon your death, make sure your surviving spouse or other heirs have enough income from other sources. Know that you’ll get less money while you’re alive if the annuity will continue paying out to your estate for some length of time. This may not be necessary if the annuity has a death benefit. That is sometimes equal to the amount you put in.
