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What You Should Know About Annuities

One of my goals as a financial advisor is to help my clients understand their investments. I think it is extremely important that you know exactly how you are investing your hard-earned money. One of the most complex investments, and one I get many questions about, is an annuity. You may have heard of annuities and possibly already own one. In my experience, when I have helped clients "get a peek under the hood" of an annuity they have already purchased, it has been an eye-opening moment for them. They sometimes realize that they were either misled or deceived about what they were purchasing and often are surprised about the amount of fees they are paying for the annuity. A thorough education on annuities would take many pages of writing (see references at the bottom of the page for more information), but I would like to give you some good general information about annuities.

The Basics

An annuity is a contract between you and an insurance company in which the company promises to make a series of payments to you either immediately or at some point in the future. These payouts can last for a certain time period or for the rest of your life. You pay the premium for an annuity in either a single payment or multiple payments. You don't have to pay income taxes on the money you invest in an annuity or on the gains, but the payments you receive will be taxed as ordinary income. Essentially, by purchasing an annuity, you are making a bet with an insurance company that you will live longer than they think you will live. And, for some people who are especially concerned that they will outlive their retirement fund, an annuity might make sense.

However, annuities come with several drawbacks:


If You Already Have an Annuity

If you were not entirely certain about what you purchased when you bought an annuity, a financial advisor can help you figure it out. If you decide the annuity is not a good investment, there may be some options for transferring it to another kind of investment or withdrawing the premium. It is important to carefully unload your annuity, taking into consideration any tax implications, penalties or surrender charges.

If You Think an Annuity Is Right For You

Before investing in an annuity, make sure you have maxed out your contributions to other tax-deferred accounts (401(k) or IRA) as they offer the same tax breaks and likely lower risks and fees. At that point, if you are convinced you still need an annuity, purchase a "direct-sold annuity". That means an annuity purchased directly from an investment company rather than an insurance salesperson. You can save a lot of money that way by not paying commissions. Do not purchase an annuity until you understand it 100%. Take your time — annuities are not going anywhere. You should never feel pressured into making a decision to purchase an annuity. Even if a particular annuity product is soon to be discontinued by a company, it will most likely be replaced by a product with similar features. Lastly, purchase an annuity from an extremely stable company with high credit ratings.

Before investing in anything, I encourage you to understand it and to ask questions if you don't. As always, I am here to help you with all of your investments, from simple savings accounts to complex annuity products.

If you have any questions about annuities or investing in general, I would be happy to meet with you for a no-cost consultation. You can e-mail me at gleest@wtwealthmanagement.com or call (928) 225-2474.

Sincerely,

Gleen Leest

Glenn Leest


References:

Arizona Department of Insurance
Consumer Guide to Annuities for Seniors.

CNN Money
How do I Know if Buying an Annuity is Right for Me?

Connick, Wendy. The Motley Fool
Should You Buy an Annuity?

Financial Industry Regulatory Authority (FINRA)
Fixed Annuities

Maurer, Tom. CNBC.com
Everything you need to know about getting out of an annuity.


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