Right Time for Online Annuities?




by Don Silver

People are worried about outliving their money.

That's why many investors are taking another look at the security and predictability offered by annuities. And, many are taking that look via the Internet.

You're only a click away from a wealth of information about annuities (including rates, features and financial safety ratings). It's even possible to complete one online annuity application and have several insurance companies compete for your business.


What's an annuity?

An annuity is a special kind of contract you make with an insurance company. Many people think an annuity is just where you trade money with an insurance company-in return for your premium, the insurance company starts making payments to you for the rest of your life. However, many people don't take immediate withdrawals. Instead, they use an annuity as another retirement vehicle to increase the size of their investment portfolio and also to defer income tax on the growth. Later on, they decide whether to take income payments for life or just withdrawals as needed.


The appeal of annuities

Annuities have long been a part of many diversified portfolios. The logic behind having annuities and their bottom line appeal is having the option to elect a payout plan that may be guaranteed to last as long as you live. It can be comforting (and financially wise) to have at least one investment with future guarantees built into it, especially with increased longevity. With the recent roller coaster rides in the stock market, annuities that lock in guaranteed returns are looking more interesting to some investors. Others are looking to hybrid annuities where the return is tied to stock market performance but it's cushioned by a guaranteed minimum return regardless of market results.

Although there are many choices within each annuity type, all of them have the following in common. You won't outlive a lifetime annuity-the guaranteed portion of benefits will last as long as you do and in some cases, your beneficiaries and heirs can enjoy the benefits as well. You can invest as much as you want in an annuity regardless of your income level. Until the earnings are distributed, they grow income tax-deferred so more of your money is working for you. Unlike most other types of income, tax-deferred earnings on annuities won't count against you when it comes to income taxes on Social Security benefits. Finally, with properly completed beneficiary designations, annuity benefits can avoid probate.


How annuities have changed

Annuities have evolved. You now have a wider choice of annuity types, investment options and guarantees to match up with your investment and income goals. Annuities can have guaranteed interest rates for just the first year or two of performance or guaranteed returns for the entire life of the contract. Some annuities guarantee your beneficiaries the return of your principal if you pass away and your annuity stock market investments have gone down in value.

Annuities are usually significant, long-term investments so you better have the right information in hand to make an informed choice. This is where the Internet can come into play.


How the Internet can help you with annuities

By going to sites geared to helping consumers, you can save money and avoid mistakes. Not only can you become knowledgeable about the various types of annuities and the companies issuing them, you can do comparison-shopping right from your computer.

Depending upon your knowledge, sophistication and comfort level, you may also decide to use Internet resources as an alternative to working face-to-face with insurance agents and brokers.

With the Internet you can read information and digest it at your own speed. You can also avoid high-pressure sales techniques that might push you into buying an annuity that may offer a higher commission to the insurance agent but a lower rate of return for you. You may also see a wider variety of choices so you can find the right fit.

Web sites can help you understand fixed vs. variable rates of return, guaranteed vs. non-guaranteed returns, investment choices, penalties, fees, income taxes and the financial health of the companies issuing these long-term investments. They can also offer you comparison-shopping. A good example is AnnuityBid.com.

And, you can be even more in the driver's seat by completing an online application and having several companies compete for your business just as some lenders are doing on real estate loans.

Where knowledge, information and access all equal power, the Internet is continually finding ways to improve the consumer's position in the annuity marketplace.


The ABCs of annuities

Bottom line, you want to be a knowledgeable consumer when it comes to annuities.

Annuities come in more than one flavor. What's right for you depends upon your goals, overall portfolio, investment style, income level and needs and your risk comfort level.

Below is an overview of annuity options. The one-sentence explanation is that annuities offer payment amounts that are fixed or variable, guaranteed or non-guaranteed and that are paid out right away or delayed until a future date. All annuities aren't created equal. Some are better than others and you need to be able to distinguish which ones are more favorable to you. A good Web site will provide the information for you to do this.


Fixed annuities

If you want your annuity money put in an investment that's similar to a CD, then a fixed annuity with fixed returns during the life of the annuity may be what you're looking for. With a fixed annuity, you have two choices as to when payments begin. A fixed immediate annuity allows payments to begin within one year of a premium payment. If, however, you don't need the distributions right away, a fixed deferred annuity allows additional interest to accumulate income tax-deferred.

As an investor, make sure you know what you're purchasing. Some fixed annuities offer a high rate of interest but the rate is only guaranteed for the first year. Others lock in a guaranteed interest rate as long as the annuity is in existence.

Although fixed annuities are similar to CDs, they're not identical. There isn't FDIC insurance on annuities-instead, you're looking to the creditworthiness of the insurance company issuing the annuity. That's why you always want to know an insurance company's financial safety rating as determined by rating companies such as A.M. Best, S&P and Duff and Phelps.

Annuities also aren't typically as liquid as CDs so plan ahead. It's not that you can't get your money out from an annuity. It's that just like a CD may charge an early withdrawal penalty, annuities can have their own "surrender" penalty if you take out more than a specified amount during the initial years of the annuity.

Before you sign any annuity contract, find out the details of any surrender penalty including how long the withdrawal restrictions last and the size of the penalty. You may be willing to accept a surrender penalty over a longer period of time because it often comes with a higher interest rate. However, think twice before buying an annuity that has a surrender penalty unless it either has a competitive, guaranteed interest rate throughout the contract period or it includes a "bail out" provision. A bail out provision allows you to walk away from the annuity contract without any penalty if the interest rate drops below a stated interest rate known as the "bail-out rate."

Annuities are long-term investments. You don't want to be locked into a poor investment that can last decades.

And, remember that while earnings within annuities are tax-deferred, income tax is paid on the earnings as they are withdrawn. In addition, if you withdraw from an annuity prior to age 59 1/2, you may be subject to a 10% federal penalty as well as a state penalty.


Variable annuities

If you don't want your annuity locked in at a fixed rate of interest but prefer it to be tied to the performance of investments such as the stock market, a variable annuity may be the right choice for you.

With variable annuities, the payments to you will vary over time depending upon the performance of the variable investment selected. The payments can go up or they can go down.

An example of a variable annuity is a deferred index annuity. These annuities are like a cross between a CD and an investment in a large number of stocks. You're guaranteed a minimum return but it may go higher depending upon the performance of the stock market index. That guaranteed return is typically lower than the rate paid on a fixed annuity but you also have the potential of a higher rate of return depending upon how the stock market index performs.

Keep in mind that index annuities usually don't pass through to you 100% of the stock market increases. Instead, you'd receive a specified portion of any increase and that would also usually be subject to an overall limit or cap. There may also be additional fees with this type of annuity that can end up reducing your bottom line.


The future of annuities

Annuities will continue to evolve to meet the needs of the marketplace. With baby boomers approaching or reaching retirement age and boomers and their parents living longer in retirement than any other generation in history, new annuity products will be developed to meet new challenges. Use resources such as the Internet to stay up-to-date with developments and to become a savvy consumer to meet your future financial needs.


Copyright © 2002 by Don Silver. Don Silver is the author of seven books including Baby Boomer Retirement: 65 Simple Ways to Protect Your Future ( available at http://www.adams-hall.com )