With all of the recent uncertainties in the market, people are looking for safe places to invest their money. Annuities provide a long-term investment that is a secure and stable form of income for retirees. This will be increasingly important to the baby boomers whose golden years are almost here. There are some annuity risks investors should be aware of before investing in annuities.
Annuity Risk
- Fees
- Costs of withdrawing prematurely
- Flexibility of interest rates
- Minimum guaranteed interest rates.
Annuities Fees
Whenever investing money, there will be costs. For annuities, there are various fees and charges attached, normally structured one of two ways. Fees tend to either be “front loaded” where costs are mostly charged initially or “back loaded” where charges are incurred over time as the annuity matures. There are penalty charges for removing the money early, as Annuities are made to be long-term investments and thus, “…not liquid…and have ‘formidable’ surrender charges”. However, small portions are allowed to be removed without encountering these charges. “Generally a 10% withdrawal,” or less can be taken without being charged a surrender penalty.
Premium charges, called a ‘load’ charges are fees that will be, “…deducted from each premium before any interest is added.” This amount may eventually, “…reduce after the contract has been in force…or after the total premiums paid have reached a certain level.” There are also contract fees that are charged, “…once at the time of issue or charged once each year.” Transactions fees are also charged for every premium payment or any other transaction.
The interest earned on an annuity is often variable. While the rate will not drop below the minimum interest rate, all beginning rates are decided by the insurance company. The money is compounded over the time period at these various rates after the applicable charges are applied.
The minimum guaranteed rate is the lowest rate your annuity will earn, and is stated in the contract. There is no universal minimum for all annuities, because interest is at the mercy of the insurance company you purchase the annuity from, the number in the contract is important to know.
By – Domenic Gabriella for RetirementSecurity.com