How to Buy An Annuity and Still Sleep Well At Night

So your financial advisor is recommending you buy an annuity? Don’t get caught up in the hype. Here are 3 rules to follow if you want to buy an annuity and still sleep well at night.

Ever since the financial meltdown of 2008, many investors have been seeking safer investments to ease the pain of their volatile portfolios. Many retirees and pre-retirees have been turning to annuities to protect their portfolios from financial uncertainty.

But many financial celebrities and financial publications have been very critical of annuities claiming annuities are a poor choice for your retirement.

Some financial experts have gone as far to say “Annuities Are The Greatest Rip-Off!” But are annuities really as poor of a choice for retirement that many financial celebrities make them out to be? While in some cases these claims about annuities may be worthy of attention, many times these criticisms have been sensationalized by the media.

The media loves a good story about someone getting scammed by an annuity company or an annuity salesperson – and there are plenty of those stories to go around – but when you look a little closer at the narrative, you usually find that someone bought the wrong product at the wrong time for the all the wrong reasons.

Consider this; annuities are nothing more than another financial product. And like most financial products, annuities have pros and cons that may be positive for one person but negative for another. Used incorrectly, annuities can cost you BIG money! But used correctly, an annuity can add real value to your retirement plan.

Here are some rules to follow if you are thinking of buying an annuity

Rule #1: Be Careful Where You Buy Your Annuity

Your banker, your stockbroker or even your accountant are probably NOT the best places to buy an annuity.

These folks usually have limited annuity offerings. They are what we in the industry call, “captive agents.” Their sales motives are perfectly aligned with the goals of the firms they work for. These firms generally search for and make selling agreements with annuity companies that pay the highest commissions and the highest bonuses.

Yes, the person you buy an annuity from gets paid a commission and the company they work for gets a bonus or override too. If the payouts are high, there is less money for you, meaning a lower interest rate. It’s simple math. There is only so much money to go around and with more hands in the pot, there is usually someone who gets burned and it is typically the consumer.

How do you know if your annuity salesperson is making a high commission? Shop around. Look for similar annuities that are paying higher interest rates for a longer period of time. Red flag: High first year bonus rate and lower rate in subsequent years.

Rule #2: Don’t Be Seduced By First Year Annuity Teaser Rates

With interest rates being so low for the past 8 years, many people are desperate to find higher yielding opportunities. So when some folks hear about an annuity company that offers a first year rate as high as 5 or 6 or even 10%, they are seduced into make an emotional decision and not an educated one.

Don’t fall for this trap! Those rates may sound great for the first year, but then you could find yourself locked in for several more years at the minimum guaranteed interest rate of only 1%.

The first year’s high rate may seem enticing, but it’s probably not good for you. There are some annuity companies that will allow you to lock in their best rates for the full term of your contract. Look for an annuity contract that has competitive interest rates for the entire length of your contract and don’t fall for first year teaser rates.

Rule #3: Check The Financial Ratings of Your Annuity Company

If you really want sleep well at night after you buy an annuity, purchase your annuity from a highly rated insurance company.

Many annuity salespeople will show you the financial ratings from only one rating service such as A.M. Best and tell you not to worry about the financial strength of the company. They will show you that “x” annuity company has an A or A+ rating. But that is only half of the story.

While A.M. Best is a very reputable rating service, their ratings are “the opinion of an issuer’s ability to meet its ongoing financial obligations to security holders when due.” But what about other financial stability factors regarding your insurance company? How about the credit of the investments they purchase or the long term financial outlook of the company?

Remember, you are entering into a contract with an annuity company for several years, so you want to make sure the company is a good long term investment. I am not saying A.M. Best is not a good indication of the financial stability of your annuity company. All I am saying is you should check the other credit rating services as well. Such as; Moody’s, Standard and Poors and Fitch.

Wouldn’t it be better if you got 4 financial opinions about the stability of your annuity company? Do your homework before you buy an annuity or ask the annuity salesperson to show you how stable the insurance company is he or she is recommending. You will definitely sleep better at night knowing that all the financial reporting services agree that your annuity company is a sound investment.