It’s easy to see that annuities are still the black box of the insurance industry … what a shame. Did you know that the top fear of Americans is outliving their retirement income? (Death comes in as the second top fear.) What an awesome opportunity for our industry to educate, right?
I know most of my colleagues would agree that more Americans need to know about annuities. As a result of the many questions fielded by Wink, Inc., I was inspired to draft a quick 100 pertinent annuity facts. Here we go!
1. Most people do not know what annuities are.
2. Those that believe they know what an annuity is, usually do not.
3. The greatest reason annuities are misunderstood by the public is the media’s perpetual distribution of inaccurate information about annuities.
4. Annuities have existed since 1700 – 1100 B.C.
5. Annuities are a type of life insurance product.
6. Life insurance guards against the risk of dying too soon, while annuities guard against the risk of living too long.
7. Annuities are vehicles that are used to accumulate retirement money and insure you receive an income you cannot outlive once in retirement.
8. An annuity is the only financial instrument that can guarantee you a paycheck for the rest of your life, no matter how long you may live.
9. Another benefit of annuities is that they accumulate earnings on a tax-deferred basis — you don’t pay taxes on the annuity funds until you withdraw them.
10. Most annuities are funded with qualified money, meaning the money has yet to be taxed.
11. The guarantees on an annuity are only as good as the claims-paying ability of the insurance company.
12. An annuity purchaser should feel confident of the financials and ratings of the insurance company they do business with to ensure due diligence in regards to the insurer’s claims-paying ability.
13. The most recognized firms that provide ratings of insurance companies are Standard and Poor’s and A.M. Best.
14. One must insure that an annuity is not only attractive and suitable, but meets their goals, objectives and risk profile.
15. The salesperson that sells you mutual funds most likely does not sell fixed or indexed annuities.
16. The salesperson that sells you homeowners insurance most likely does not sell annuities either.
17. You can purchase annuities directly from life insurance companies, in some banks, through some broker-dealers, or through certain career insurance agents and independent insurance agents.
18. There are two main types of annuities: deferred annuities and immediate annuities.
19. Deferred annuities allow you to defer taking an income until you have accumulated additional earnings.
20. Immediate annuities allow you to commence income payments within the first year of the annuity purchase.
21. Every deferred annuity offers the purchaser the choice of annuitization.
22. Annuitization allows an annuity purchaser to change all or a portion of the annuity contract from a cash accumulation period to a periodic distribution of funds.
23. Most deferred annuities will allow the purchaser to annuitize the contract without paying surrender charges after year one.
24. Annuitization functions similarly to an immediate annuity.
25. Most companies offer several types of income options for annuitization and immediate annuities.
26. Although a life-only income option results in the greatest payment for annuitization/immediate annuities, it also earns if the purchaser dies the day after the annuity purchase, the insurer gets to keep the annuity’s value.
27. In addition to life only income options, there are period certain income options, which guarantee income will be distributed for a minimum specified period (such as 10, 15 or 20 years).
28. Many income options allow for a spouse to continue receiving income payments should the annuity purchaser die.
29. There are two subtypes of annuities: fixed and variable.
30. There are also two subtypes of fixed annuities: traditional fixed and indexed.
31. Fixed and indexed annuities are insurance products, while variable annuities are investments.
32. There is a direct inverse relationship between possible risk and possible reward, which holds for annuities: to realize greater reward, one must generally accept a greater risk and vice versa.
33. Generally, financially conservative individuals are better-suited to fixed annuities.
34. Generally, financially aggressive individuals are better-suited to variable annuities.
35. Generally, financially moderate individuals are better-suited to indexed annuities.
36. You cannot lose money as a result of market performance with fixed and indexed annuities.
37. Fixed annuities earn interest at a stated rate, which is declared by the insurance company.
38. Fixed annuities may offer an interest rate that is guaranteed for more than one year: These are referred to as “multi-year guaranteed” annuities.
39. Indexed annuities earn limited interest, based on the performance of a stock market index.
40. The most common stock market index to be used as a benchmark of indexed interest on indexed annuities is the S&P’s 500 Index.
41. Indexed annuities generally limit the amount of indexed interest earned via the use of a participation rate, cap rate or spread rate.
42. Indexed annuities do not allow the purchaser to invest directly in the index.
43. Indexed annuities are not a “hybrid” of fixed and indexed annuities.
44. The index-linked interest on indexed annuities is provided through an instrument the insurance company purchases, called an “option.”
45. Dividends on the S&P 500 (and other indices) are not included in indexed annuities’ crediting calculations because the purchaser isn’t actually invested in the index.
46. Fixed annuities are currently averaging credited rates of 2.78 percent.
47. Interest on indexed annuities is ALWAYS limited in one form or another, even if the product is “uncapped.”
48. Indexed annuities’ caps are currently averaging 3.73 percent.
49. Variable annuities allow purchasers to invest directly in stock market indices, mutual funds and more.
50. Variable annuities have unlimited potential for interest earnings but also unlimited potential for losses.
51. Fixed and indexed annuities are issued via an “annuity contract” while variable annuities are offered via a “prospectus.”