What to Look Out for in Annuity Contracts

Annuity sellers promise a lot – but do they deliver? Fixed annuities seem to provide secure income that many seniors seek. However, there are several important considerations to think about before investing in an annuity.

  1. Lock-in period. Most annuities have a period where the purchaser pays into the annuity but cannot withdraw from it. The standard time is 7 years. Depending on your age or financial situation, the timing of when an annuity pays out can be extremely important. Predicting the best time for an annuity to come due in an individual’s financial situation is a key consideration in choosing an annuity.
    Contracts (Photo credit: NobMouse)
  1. Fixed Versus Variable Rate Annuities. Fixed rate annuities provide a set annual return on investment. Variable return annuities are similar to investing in a mutual fund – the account can sustain losses. If the annuity is intended to provide a certain level of future income, a variable annuity is unlikely to suit the conservative investor.
  1. Ask Questions about Commissions and Fees. Annuities are one of the most profitable instruments for financial advisors to recommend. For that reason, it is important to understand what the “take” or commission is for the annuity you are considering. Advisors that charge an annual fee are typically more objective than advisors that operate on commission. Annuities may also come with fees that are not apparent from the marketing literature. Consumers should read the annuity contract carefully before purchasing.
  1. Estate Planning. The value of an annuity contract is determined at death and added to the holder’s gross estate. Annuities will generally have a designated beneficiary to receive remainder funds. Factoring in the value of an annuity is important if the gross estate is close to the federal estate tax limit, currently just over $5 million.

For help in determining whether an annuity or other financial instrument is appropriate in your situations, feel free to contact us at (626) 696-3145.

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