Dear Annuity Guys®,

I asked my broker about annuities and he is recommending a variable annuity^# from @%#^#. What is your opinion of this annuity?

Larry T.

Watch as the Annuity Guys® discuss who should choose or even consider a variable annuity^#?

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Typically, we try and provide an answer that highlights the pros and cons about the specific annuity in question. However, there are some aspects regarding variable annuities^# in particular that need to be made clear prior to even considering variable annuity^#.

Here are fourteen questions to consider prior to selecting a variable annuity^#.

1. Is any annuity really the right choice for you?
2. Are you comfortable with your principal being at risk?
3. Is your reason for buying a variable annuity^# for growth and/or tax-deferral?
4. Are you planning on using this annuity for lifetime income?
5. Is your advisor/broker an annuity specialist? (Did they offer and discuss various types of annuities?)
6. What are the fees – including the hidden fees, that do not appear on the statements?
7. Do you understand the pros and cons associated with living benefit riders?
8. Will you have adequate liquidity?
9. How many ways and how soon can you access your money?
10. What is the surrender period and the associated charges?
11. What are the costs associated with the investment accounts?
12. Who is responsible for selecting the investment accounts?
13. What is the minimum **guarantee?
14. What is the death benefit?

These are a few of the topics we would recommend discussing prior to finalizing a variable annuity^#. Due to the popularity of these annuities, they are frequently highlighted in the media – for both their positives and mostly negatives, for the way in which they are abused. If you are in the market for or have been proposed a variable annuity^#, please be sure to read this article from the Securities and Exchange Commission on variable annuities^#.

Variable Annuities: What You Should Know

Variable annuities have become a part of the retirement and investment plans of many Americans. Before you buy a variable annuity^#, you should know some of the basics – and be prepared to ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether a variable annuity^# is right for you.

This is a general description of variable annuities^# – what they are, how they work, and the charges you will pay. Before buying any variable annuity^#, however, you should find out about the particular annuity you are considering. Request a prospectus from the insurance company or from your financial professional, and read it carefully. The prospectus contains important information about the annuity contract, including fees and charges, investment options, death benefits, and annuity payout options. You should compare the benefits and costs of the annuity to other variable annuities^# and to other types of investments, such as mutual fund^{^}s.

What Is a Variable Annuity?

A variable annuity^# is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity^# contract by making either a single purchase payment or a series of purchase payments.

A variable annuity^# offers a range of investment options. The value of your investment as a variable annuity^# owner will vary depending on the performance of the investment options you choose. The investment options for a variable annuity^# are typically mutual fund^{^}s that invest in stocks, bonds, money market instruments, or some combination of the three.

Although variable annuities^# are typically invested in mutual fund^{^}s, variable annuities^# differ from mutual fund^{^}s in several important ways:

First, variable annuities^# let you receive periodic payments for the rest of your life (or the life of your spouse or any other person you designate). This feature offers protection against the possibility that, after you retire, you will outlive your assets.

Second, variable annuities^# have a death benefit. If you die before the insurer has started making payments to you, your beneficiary is **guaranteed to receive a specified amount – typically at least the amount of your purchase payments. Your beneficiary will get a benefit from this feature if, at the time of your death, your account value is less than the **guaranteed amount.

Third, variable annuities^# are tax-deferred. That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money. You may also transfer your money from one investment option to another within a variable annuity^# without paying tax at the time of the transfer. When you take your money out of a variable annuity^#, however, you will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates. In general, the benefits of tax deferral will outweigh the costs of a variable annuity^# only if you hold it as a long-term investment to meet retirement and other long-range goals.[…Read the rest of the article from the SEC]

The post Should You Choose a Variable Annuity? appeared first on Annuity Guys®.

Eric and Dick examine comparing annuities to investments in this weeks video review.

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Three annuity mistakes to avoid

What not to do when evaluating annuities for retirement

By Andrea Coombes

If you’re comparing annuities to other investment products, you’re making a classic mistake—and it’s just one of three major errors that consumers and financial experts make when evaluating annuities, according to a panel of experts at a recent MarketWatch Retirement Adviser event in New York that focused on income strategies.

“Both immediate and deferred annuities have been shown to have a very positive role in an overall retirement-income strategy, but the deployment of these instruments is often hampered by some very fundamental misunderstandings,” said John Olsen, president of Olsen Financial Group, and author of a number of books on annuities, including “Index Annuities: A Suitable Approach.”
The panel, moderated by MarketWatch senior columnist Robert Powell, also featured Farrell Dolan, principal with Farrell Dolan Associates, and David Blanchett, head of retirement research at Morningstar Investment Management.
Mistake No. 1: Unfair comparisons

One such misunderstanding—and it’s often made by financial experts, Olsen said—is to assess the value of a variable deferred annuity as though all of its costs “are nothing but pure overhead.” That can lead consumers to view such annuities as unreasonably expensive. [Read More…]

Annuity Guys® Video Transcript:

Eric: Today we are going to talk about whether it is unfair or fair to compare annuities to investments.

Dick: Eric, I think that it’s the hardest thing in the world for all of us to stay off of comparing annuities to investments, and I think it is unrealistic to think that we would do any comparison; however, I think that’s where we get in trouble.

Eric: It’s the expectations game. So often when people come to us, they’ve been conditioned to talk about return, whether it be from a mutual fund^{^}, savings account, whatever. Everything’s about return. What’s the return?

Dick: They spent their whole life accumulating this money so their focus has always been on that.

Eric: They are trying to figure out how can I get the biggest return rather than mitigating the risk necessarily with an annuity to get the biggest return in dollars, rather than return in rate.

Dick: What inspired us this week, reading this article by Andrea Combs that really gets into some of the things that we talk about on a regular basis; and that is why do we buy? Why do we choose annuities? There’s contractual **guarantees, there is cash flow, and that is what she really gets into, that there’s this transition that we go through that cash flow becomes king. Longevity of knowing that we’ve got money, no matter how long we live, and there is a third aspect which is maybe a little bit more parallel to investment, that is where you require secure level of growth, contractual **guarantees.

Eric: I like the idea of just saying it transfers the risk from me, as the investor or individual, to the insurance company. They are going to take care of doling out my allowance each month, hopefully, and that’s the income stream that I have confidence in. They’re insuring my future income stream, is how I look at it.

Dick: Past wisdom from the investment world has been that if we draw our portfolio down by a certain level, say 4%, 4½, 3½%, everybody’s got their own view of it, that somehow we can continue to do that and be invested. The last decade has shown us that that really can’t be relied upon.

Eric: In an era of 5% CDs, it’s easy to say, “I can pull of my 5% and never touch my principle.” If you looked today, if you can find a 5% CD . . .

Dick: It’s not there.

Eric: I could sell a few of those, if I could find a 5% CD. That world no longer exists, that safety, security aspect of getting those returns, necessarily. This is where if you need those returns that are a larger withdrawal than just pulling out your principle, and a lot of people do today, this is where annuity comes into play.

Dick: I was just going to say, again, talking about not being focused on the return. Unfortunately so many times folks, annuities are sold based on comparing them to investments, and especially the indexed annuity or the hybrid annuity where it’s stated that you’ve got upside potential to a downside risk; there is truth to that. The upside potential is pretty minimal, and the idea that it has outperformed certain investments, certain indexes, S&P 500 over certain time periods in history, it was ever intended to do that.

Eric: It’s not what they’re geared for. We’ve talked about it in the previous videos, in order for you to be happy, you look at the **guarantees. If you can be happy with what the **guarantees are offered through an annuity, then anything that you get above that . . .

Dick: It’s a pleasant surprise. It’s good news. You’ll never be surprised by an annuity by it going the wrong way. I have to qualify that a little bit. We’re talking more about fixed annuities here and not as much about variable annuity^#. Because a variable annuity^# is an investment, and yet, it does have some **guarantees.

Eric: It can have some **guarantees.

Dick: It can have, so there is some aspect about that that you have to say, “Maybe for some people, a variable annuity^# may fit,” but again that’s a whole different discussion.

Eric: Sure. In her last point, she talks about annuitization, which is a really interesting aspect. We’ve talked a lot about hybrid annuities and the fact that you don’t have to annuitize necessarily, to get the same benefit that you would from annuitization. Her focus is on the stream that’s provided from an annuity.

Dick: For all practical purposes, we’ll just assume that her annuitization would also mean turning on income for life; a different terminology. We do find that with clients that . . . what would I call it, Eric? The depression mentality, where we can live off less so we’re going to, and yet, they’ve set this annuity up so that we can turn it on and turn on this income at a certain point of time and relax, enjoy what we have, and know we will never outlive our money. Yet we have these clients who have a tendency to hold back from that.

Eric: I think nobody wants to give up their principle. You worked hard and earned these dollars, nobody likes the idea of just . . .

Dick: Spending it.

Eric: You give it all to the insurance company and you get that allowance. That’s what really annuitization really is; it protects you on the income side. The income rider on these hybrid annuities does something very similar in a sense: Guaranteed income for life, but still allows you to get access. If anything is leftover, that can go on to your heirs. That’s, I think, the aspect about that type of annuity that’s really popular.

Dick: I think it helps people who wouldn’t normally annuitize to go ahead and take their income stream, because they know that they still have some access to the account value.

Eric: I think it’s really one of the things that we are finding really attractive right now because it does allow that flexibility. For people that are used to this return mentality that we’ve talked about, they still have that opportunity to hold on to those dollars a little bit. Not necessarily get the best return, but to get that income stream, have that safety/security.

Dick: Eric, when we talk about comparing annuities to investments, what’s the balance?

Eric: You have to look at the diversification. For me, when you’re looking at those two things, you have to look at protecting the foundation, and that’s where an annuity comes in. After that, hopefully investments can play a part in controlling for inflation and being out there.

Dick: Maybe a healthy way to compare annuities to investments would be in your own portfolio, in terms of what proportion of your portfolio do you want in security and safety for that income foundation or death benefit-type foundation as compared to what portion are you willing to put at risk?

Eric: Exactly. It’s to protect the foundation. How do you want to protect it? Are you comfortable protecting it in the headwinds that we have going on, or would you rather protect it with a rock-solid foundation?

Dick: I agree. Thank you, folks.

Eric: Thanks for tuning in today.

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