Mistake #1: Lack of Concern for Quality of Company
Many annuity investors fail to properly research the ratings of the insurance company issuing their annuity contract. Annuity owners commonly fail to keep updated on the company after they have made an investment. This is especially important with a fixed annuity because the insurance company has your money invested in their general account and guarantee both the principal and interest. In a variable annuity it is not nearly as important since the money is in separate accounts invested according to the stated objective of the sub-account (i.e. growth, balanced, international, bonds, etc.)
A.M. Best can no longer be relied upon as the number one authority in rating insurance companies. We rely more on Standard & Poors, Moody, Duff & Phelps and Weiss rating services in addition to analyzing the companies' investment portfolio. Our recommendation is to buy only from top-rated insurers.
If you would like a review of the ratings and ranking of your annuity company, please call us.
Mistake #2: Annuitizing the Contract
In most older annuity contracts, when it comes time to start receiving income you are forced into making a decision on what terms you want to annuitize under. Some options can be very unfavorable to the investor. For example, if you choose a life annuity that pays you a monthly check as long as you live and you die prematurely, the insurance company gets to keep the remainder of the funds, and your heirs get nothing.
Another drawback of annuitization is that you lose control of your money. Once you annuitize you cannot go back and increase or decrease the amount of your monthly check. This could be a serious problem if your annuity income does not keep pace with inflation.
Newer annuities offer an option called systematic withdrawal. This means you can set up your own schedule of monthly income that can be adjusted at any time. The remainder of your funds will continue to earn interest and when you die the funds go to your beneficiary, without the cost of delay or probate.
Mistake #3: Falling for High First Year Rates and Not Being Concerned with Renewal Rates
Many insurance companies will try to entice you into purchasing their annuity by offering a first year rate that is much higher than the going rate. After the first year the renewal rate will typically be much lower, but you will still have several years of surrender charges before you can move your money to another annuity. Approach unusually high rates with caution. Many high interest rate annuities have surrender charges that are no longer than the normal 5 to 7 years and in some cases the surrender charges never go away. Avoid these annuities and any other that restrict your withdrawals by giving you a lower rate if you move your money or don't annuitize with them.
Before you buy, look at the interest rate protection features and consider an annuity where you have the option to lock rates in for more than one year. Also, if you already own an annuity, make it a point to have your renewal rate reviewed each year by an unbiased annuity professional. Your annuity may have a bailout feature that allows you to move your money if the rate drops below a specific level. The annuity company will not notify you that the bailout feature has been triggered. We can research this for you so you can make an intelligent decision.
Mistake #4: Purchasing an Annuity with Limited Investment Options
The days of annuities only offering a one-year rate, or a handful of variable accounts from a single investment manager, are long gone. Today's annuities offer rate guarantee periods from one to ten years, and up to 30 different investment portfolios from as many as 14 fund managers. With the newer types of tax deferred annuities you can adjust your asset allocations as markets change and interest rates change. This type of investment program can meet your investment needs as your age and your investment objective change.
Mistake #5: Failing to Properly Designate Ownership, Annuitants and Beneficiaries
Unless you are well versed in IRS rules concerning ownership, annuitant designation or beneficiary designation, you could cause needless problems in transfer, unnecessary taxable income, and failure to continue income tax deferral and excess payment of estate taxes. For example, many people do not realize that once you name an annuitant, the IRS will not allow you to change that designation. This could result in a 10% tax penalty on the income if the annuitant were to need income, and was under age 59 1/2. Another common mistake is to name a trust as the beneficiary. This would cause the proceeds to become immediately taxable, rather than allowing your spouse continuous tax deferral for up to an additional five years.
Mistake #6: Not Using A Full Time Annuity Specialist
Most annuity investments are purchased from captive insurance agents who offer limited fixed annuities, or from banks with little investment and planning expertise. We offer a wide range of annuity investments from a long list of the top companies in the industry. We will work with you to find the investment that suits you and your financial needs. We also continually monitor the market and provide you with up to date information. We would be glad to assist you, whether you are considering an investment at this time, or if you already own an annuity and simply need someone to answer your questions. We are also qualified to help you look at the big picture, ensuring that any annuity purchase makes sense from a taxation, planning and investment standpoint.