How Well do You Understand Your Annuity?
By LouAnn Schulfer, AWMA®, AIF®
Accredited Wealth Management AdvisorSM
Accredited Investment Fiduciary®
Sometimes I get the question, “Are annuities good or are annuities bad?” My answer: it depends. It’s kind of like asking if medication is good or if it is bad. The right amount used in the right circumstance for the right person can be great. If the annuity is not a good fit or if there is not value for the extra expense, then it’s wise to consider other options.
In a nutshell, an annuity is a contract between you and an insurance company. Fixed and variable annuities are suitable for long-term investing, such as retirement. Keep in mind that due to their investment component, variable annuities are subject to market risk and may lose value. Some reasons that people own annuity contracts include tax deferral on non-retirement funds, guarantees of principal, a guaranteed rate of return, or a future guaranteed income stream. Guarantees are based on the claims paying ability of the issuing company. There are numerous variations of riders that can be added to annuity contracts for an additional cost. Generally, after a contract is issued, you can not change, add or drop a rider. You can withdraw your money from an annuity, however, withdrawals prior to age 59 ½, even in non-IRA annuities, are subject to a 10% IRS penalty and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal.
If you own an annuity, it is important to understand your contract, it’s features, benefits and associated expenses to determine if it is still a good fit. I’ve worked with clients who bought into annuities years ago for the future guaranteed income, only to discover later that the costs of the rider outweighed the value it provided. If you own an old fixed annuity contract, you may be able to find better guaranteed rates of return. If you purchased a joint life rider and are no longer married, you are continuing an expense for two lives instead of one. Then again, I’ve also worked with a client who had a single life income rider whose health suddenly changed, causing concern for guaranteed income over his wife’s lifetime, which could be decades longer than his. I had a prospective client visit me awhile back asking me to help her understand her contract. Sadly, she owned the annuity for years but did not understand it so was afraid to use any of her money or make any changes. I’ve also helped a lady who had not maintained a relationship with the advisor that sold her and her husband annuities years before. She had just made a request to her annuity company to withdraw money. Luckily, we were able to change her request just in time, as a withdrawal of contract value would have messed up the guaranteed income that the annuity would provide.
Understanding your annuity will help you determine how and when to use the money, and if the contract you are in is still the best fit for you. After all, our lives never stop changing, and the same can be said for the world of investment options available.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. You should discuss your specific situation with the appropriate professional before making any decision.
LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Financial Professionals and can be reached at (715) 343-9600 or [email protected] www.SchulferAndAssociates.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.