I was searching the interest rate for something and came across an annuity advertisement that caught my eye. Here were the bullet points:
Up to 10.5% Annual Return Capture market-linked gains and protection against market volatility and downturns.
Guaranteed Retirement Income Receive a monthly paycheck for life that lasts as long as you do, regardless of how long you live!
Highest Upfront Cash Bonus See which annuities will provide you with the highest upfront cash bonus applied to your principal.
Insurance companies are in the business of annuities to make money and offer guarantees. If they offer guarantees of some type, you as the consumer are going to give up something in return. A side note here – this applies to fixed indexed annuities and not simple fixed annuities where the guarantees are very simple like a CD.
The way this reads you are going to get an annual return of up to 10.5%, income for life, and the highest bonus paid up-front on the market. If only it were that easy... Here are some realities regarding annuities:
Reality 1 – Potential Growth Rates
The insurance company is not in the business of giving high annual growth rates along with guarantees against loss. The reality is that the insurance company controls what you can potentially earn each year. There is a good chance they are offering up to 10.5% this year and drastically drop that number after they have you in a contract.
Reality 2 – Guaranteed Income for Life
It is important to check and make sure you are getting the best-guaranteed income projection on the market. These income rates are competitive and it pays to shop around. You might say – Bob, my advisor is showing me projections of higher income than the guarantees. I would always be happy with the guarantees rather than assume you are going to get these best-case assumptions. Those hypothetical illustrations have a low probability of working out in your favor, however; they do look great. There’s nothing wrong with looking at all of the possibilities. It is just important to have your expectations appropriately set.
Reality 3 - Up-Front Cash will Really Restrict the Benefits to the Consumer
If the insurance company is showing you a big up-front bonus, you can rest assured that your overall benefits are going to be reduced.
Let me leave you something worth considering.
Do you think an insurance company can give you up to 10% in annual returns, large income checks for life, and an up-front bonus... and still make money?
Remember annuities have their place and can be an excellent investment. Having said that, make sure you work with an advisor who shows you the ins and the outs and sets your expectations.
If you have further questions for Bob, please visit the Ask A Question page on the website and Bob will get back to you.
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