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Planning & Economy


August 16th, 2022

Are Annuities Good for Me??

The answer is annuities are good for very specific needs and can be great for those who need them and not great for those who don’t.  In this newsletter I want to explain what types of annuities there are and the typical needs that are common among these annuity owners.  I also want to point out some of the drawbacks of each annuity, so you know the gives & takes of each type of annuity.

The Variable Annuity (one of the most common)

Although less than 5% of our total business is from annuities, the most common annuity that we recommend to clients is the variable annuity.  Why?  These annuities are well known for their guaranteed income benefits which can be very attractive for retirees or soon-to-be retirees.  The majority of variable annuities that have this type of benefit typically guarantees the income benefit from ever going down and potentially going up for as long as the guarantee is in place (to be determined by the contract).  We think that for some clients having a portion of their retirement assets in an insurance contract that guarantees income is comforting and can be necessary.

What could potentially be some of the drawbacks for a variable annuity?  First is cost.  There is a cost for this rider, and it can be between 1%-2% in addition to the other fees of the annuity.  Something we do for every new annuity purchase is what we call a “net-to-net” spreadsheet showing the breakdown of costs and the costs of other annuities so the client knows exactly the cost and how it compares to other highly-rated insurance companies.

Another drawback, surrender periods.  This is by far the largest drawback of annuities in my opinion.  A surrender period means there is a period of time that you cannot make a withdrawal from your annuity that is over and above your income benefit.  If you do, then you will pay a significant fee to get your money.  Some surrender periods can be as long as 15 years!  Surrender periods are put in place so that the annuity company can pay the financial advisor selling this product a commission at the time of the sale.  If the client sells the annuity, then the insurance company can’t recoup the commission costs to the financial advisor which means the insurance company has lost money on the contract.  Is this good for clients?  In most cases, no.  Several years ago, many insurance companies came out with “advisory” annuities which means there are no upfront commissions to financial advisors which in turn means no surrender periods.  Instead, the advisor charges an advisory fee, and the annuity is completely liquid.  This is the most common annuity we will recommend to our clients to avoid a surrender period.


  Index Annuities (very common but not around here)

To be honest when I hear “index annuity” I cringe.  They do have a place in this industry with some investors, but a very small silo of investors.  Index annuities are the most confusing annuities that I’ve ever tried to understand.  I’ve been a CFP Professional since 2008 and when an annuity contract is this confusing it usually doesn’t mean it’s good for the client.  In a nutshell, most index annuities tie their performance to an index with a cap rate.  So, if your annuity is tied to the S&P 500 you may have a cap at 6% which means if the S&P 500 does 26% (which it did in a recent year) then your annuity would go up 6%.  If the S&P 500 does -26% then your annuity does 0%.  Pretty nice on the downside, you don’t lose money, but you lose a lot of money on the upside.  When presented with this type of investment, knowing statistics is important.  How often is the stock market or investments in the market up on average?  Our friends at Capital Group or better known, American Funds says that the S&P 500 has been down 27% of the time over the last 91 years.  So, that means investors were up 73% of the time in the last 91 years.  What are these annuities protecting you from?  The 27% chance you may be down?  In my opinion, this type of annuity is riskier than a simple dividend paying portfolio that will fluctuate with the market.  Missing out on full returns on up years is a high price to pay just so your annuity doesn’t fluctuate down 27% of the time you own it.  How do these annuities get sold so easily?  “You won’t lose any money and the product is free – no charges to the annuity owners.”  How can an insurance company not charge for a product?  Because they keep all of the profit you should get from having a cap rate on your return.


Fixed Annuities (Not as popular right now)

These products have been popular in the past and can be when interest rates are higher.  Fixed annuities are investments that pay a fixed rate of interest.  Once it’s time to annuitize the product, the annuity holder will receive annuity payments over a period of time.  Some fixed annuity products will keep the balance of the annuity if the annuity holder dies before all of the payments being made so it’s important to review the details of this type of annuity.

Annuities certainly have their place in the investment industry but finding the right one for a specific need is very important.  We have clients that have annuities and significantly benefited from them.  Our favorite annuity is the variable advisory annuity; they provide options for guaranteed income benefits and have no surrender period.  It’s always important to have access to your retirement assets if needed.  If you have any questions about your annuity or any other annuities you have seen in the past please let us know.



Christina Jones
Financial Planner
Windsor Wealth

Sources:  https://www.capitalgroup.com/individual/planning/investing-fundamentals/time-not-timing-is-what-matters.html


The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Christina Jones and not necessarily those of Raymond James.

Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index.

With variable annuities, any withdrawals may be subject to income taxes and, prior to age 59 1/2, a 10% federal penalty tax may apply. Withdrawals from annuities will affect both the account value and the death benefit. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. An annual contingent deferred sales charge (CDSC) may apply.

A fixed annuity is a long-term, tax-deferred insurance contract designed for retirement. It allows you to create a fixed stream of income through a process called annuitization and also provides a fixed rate of return based on the terms of the contract. Fixed annuities have limitations. If you decide to take your money out early, you may face fees called surrender charges. Plus, if you’re not yet 59½, you may also have to pay an additional 10% tax penalty on top of ordinary income taxes. You should also know that a fixed annuity contains guarantees and protections that are subject to the issuing insurance company’s ability to pay for them.

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