Why You Should Purchase An Annuity: 5 Real Life Reasons
There are many financial advisors who believe they are doing all of their clients a big favor when they tell them that they will never have them invest in annuity. That isn’t very surprising given all of the negative media attention that annuities receive.
There are numerous reasons why some people shouldn’t purchase an annuity. You are probably already aware of some of them if you have ever researched the topic. However, you also need to understand that there are very specific purposes that annuities serve, and an annuity can truly be a game-changer for you if one of those specific purposes applies to your life situation.
WHEN TO PURCHASE AN ANNUITY
Usually, you will only want to consider purchasing an annuity after you have maximized all other types of tax-advantaged retirement accounts, like IRAs and 401(k) plans. Beyond that, however, there are 5 other situations at least where it can be a very good idea to purchase an annuity:
- You are freaked out by the stock market
- You need to know the amount of interest you are going to earn
- You want to have a predictable and guaranteed income
- You are unable to get life insurance
- You would like to have long term protection
1. You are freaked out by the stock market
Usually you need to be very wary anytime a guarantee is offered to you by a financial advisor. If simply watching the stock market on television raises your blood pressure, then an annuity may be ideal for you.
Equity-based investments have a tendency to go up and down in value quite a lot. However, with an annuity your principal value is protected, which ensures that your investment remains completely intact to be able to earn income now and into the future as well.
If you are retired or getting close to retirement age that can be particularly important. Annuities offer an immediate income and you don’t have to worry about having to make up for potential losses.
2. You need to know the amount of interest you are going to earn
Annuities – fixed annuities mostly – offer a guaranteed return. So if your main motivation for an investment is to earn a steady income, then that is something that an annuity can provide you with.
There are some annuities that offer a variable return, which allows you to invest in higher yielding/higher risk options, however they still have a guaranteed minimum return assigned to them. That may be exactly what you are searching for.
Usually fixed annuity rates are higher than a bank CD, although your money will be locked up for 3-5 years in order to earn it. I had a client last year who wanted to have a guaranteed return and not have anything to do with the market. CDs were paying close to nothing. The best rate that I could find was a 5 year fixed annuity that paid 3%.
I tried talking him out of it but it was the only thing he and his wife felt safe with (in the past he had a bad experience with a different advisor). So if you are looking for a guaranteed return, an annuity might be your best option.
3. You want to have a predictable and guaranteed income
Annuities are a kind of investment contract, and including guaranteed income is one of the most important provisions that can be included. This can be done with a fixed index annuity that includes an income rider or with an immediate annuity.
You can purchase an annuity that immediately starts to pay an income. There are also some deferred annuities that have an income rider that increase every year until you start to take an income (similar to how social security benefits continue to increase each year that you don’t start taking them).
With annuities offering an income stream, you know exactly the amount you are going to receive and for how long, after you have decided to invest in it.
It is a great option for retirement since it works similar to a standard pension. However, the big difference is that the remaining funds pass onto your family, unlike a pension.
4. You are unable to get life insurance (and want to be able to leave something more to your heirs)
An annuity can be used to provide many of the same benefits that a life insurance policy offers. However, since an annuity is a type of investment contract, you aren’t required to qualify for it in the same ways you do with life insurance.
For example, if you have any health-related issues that makes it nearly impossible to get life insurance, or makes it prohibitively expensive, then a really good alternative might be an annuity.
Your spouse can be named as a beneficiary and then your contact would pass to her or him automatically after your death.
There are also some annuities where death benefit riders are offered that may pay out somewhat more than others do. Annuities don’t get as high of a death benefit as life insurance policies offer, but you can get some at least.
5. You would like to have long term protection, but do not want to have to pay out of pocket
These days people are living longer than they ever have before, which has increased the concerns and demands for long-term care. Regular long-term care insurance policies are very expensive, especially as you grow older.
A majority of my clients who invested in a long term care policy did so due to having personally experienced a loved one (a parent usually) who had been in a nursing home. It was a no brainer for them to purchase this insurance. However, for others, finding out how much the monthly premium costs are was enough for them to decide against it.
There is another solution that is available to you: purchase an annuity. The following are two for your consideration:
1. Insurance Product or Hybrid Annuity with Long Term Care Benefit
There are certain products that are available that offer either a guaranteed return (a small one) or insurance benefit for your heirs as the main function. aid In the event you should need nursing home care, the policy then converts into a Long Term Care (LTC) policy and pays part of your costs for a certain pre-determined period of time. The time and amount will depend on your age and how much you paid up front. Many clients are attracted to this option since there is no sunk cost of having to pay LTC premiums every month and there is some flexibility for getting money back should you need it.
2. Long Term Care Double Benefit From An Income Rider
On annuities where a guaranteed income stream is offered as an income benefit, there are some carriers that offer what is called an “LTC doubler” benefit. The way this work is, say your income benefit has been determined to be at $20,000 a year from your annuity, but you need to have Long Term Care. In this situation, instead of your benefit being $20,000 per year, it would double to $40,000 per year for the time you are in a nursing home. That benefit would last for a period of 5 years and then it would revert back to its original $20,000 annual benefit for lifetime income. Each carrier is different, so it is very important that you understand all of the details.
Neither one of these options are intended to pay 100% of all of your LTC costs, however they do help with paying a portion of them.
You can either contact us by phone at (425) 246-4222 or fill out our contact form below and one of our highly trained annuity agents will get back to you within 24 hours or in many cases even sooner.
We would love to answer any questions you have!