Choosing an annuity is made out to be the most difficult decision in the world but it really doesn’t have to be. There is a logical progression to be made when making a choice. In this post I will go over the steps that need to be taken to make the right choice.
Before getting into the steps, I would like to point out a few key points that will help you along the way. The first is that there is not a “best” annuity for every thing or a company that has the “best” annuity for all situations. Insurance companies jockey back and forth to offer the best product for a certain situation. They do not try to have the best product for every situation. Also, they do not keep their product competitive for long. Usually an insurance company will offer a very competitive or the most competitive product for only 6 to 18 months and then they will lower rates.
The other important point is not to simply go by a company name. Insurance companies lean on their reputation heavily to get a prospects business. They will use the name as a way to offer a less than competitive product to the public and it works. People will blindly buy an insurance companies product simply because of the company offering it. This is a sure fire way to make sure you are not getting the best in class product.
The first and most important step when picking an annuity is to determine what you want it for. This sounds simple and silly but it is the most important part of the entire process and the most common mistake people make. I cant count the number of times I have talked to someone who is about to purchase an annuity because of some incredible feature it has. The problem is that the feature usually will do little or nothing to help them with what they need the annuity for. You need to figure out what you are trying to accomplish. There are a limited number of things people want to accomplish with money and a limited number of areas where an annuity will work. Here are the most common ones. It is critical to determine which you fit into.
- You want to be able to draw a future income stream at some future date
- You need to draw income immediately
- You want to grow a lump sum of money to leave to heirs
- You want to grow a lump sum of money to use for a known future expense or purpose
- You want to grow a lump sum of money that you may or may not need for future income
Once you determine what you are trying to accomplish, it becomes much easier to find the best product to accomplish the goal. For example, if you want future income, the best way currently is to use an annuity with an income rider or if you need immediate income your best bet is to use an annuity for that purpose called a SPIA. If you want to leave the most money to heirs possible, you would use an annuity with a high death benefit roll up feature and so on…..
By determining your need, you can identify the right type of annuity to use to get the job done. Once you determine the type of product needed, you then need to find out which company has the best “highest paying or earning” product of that type. For example, if you need an immediate income, you would use a SPIA. The highest paying SPIA’s are currently offered by Symetra, Great American, Guggenheim and NY Life. This will change over time but they are at the top currently because they will pay out the most money immediately. If you need income 5 years from now, you would use an indexed annuity with an income rider and the highest paying company would be Security Benefit SIA Annuity. Again, how long will they be able to say they pay the most? No one knows for sure but right now they pay the most.
I had a person call my office and he was told Met Life would work the best to generate income off of $320,000 7 years from now. (he was 58 years old) The represenative he spoke with said Met was the best. At the the time, Forethought was paying out the most income of any carrier for a person that age. I ran the guaranteed income payout for Forethought in 7 years vs. the Met life payout and the forethought income beat the Met Life Income by $5,000 a year for the rest of his life and his spouses life. There is a 70% chance either he or his wife will live to at least age 90 based on current life expectancy. At a difference of $5,000 a year, this would add up to a $125,000 mistake had they gone with the lower paying product. (25 years multiplied by $5,000)
It can be a chore finding the highest paying company at a given point of time for a specific product type. To accomplish this, make sure you work with an independent agency that holds all contracts.