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5 Components Of Annuities Common To All Policies
Certain segments of investors find investing in rental properties is like buying annuities. You collect a regular recurring payment for the amount you put in. On top of that you get coverage for protection.
While there is nothing wrong with that frame of thought, most people will be able to clearly differentiate the 2. And annuities are certainly less risky too.
There are so many options available to you that you can sometimes feel like a boy at the candy store.
This is the way it is with insurance products. They don’t come stock and loaded with a standard set for everyone. They are able to suit the needs for anyone precisely because they are customizable to fit your needs.
All annuities have a few common components. The details on these components could vary from one another. It will be choosing between the terms of these elements where you will make you decision on one.
Don’t assume that these terms are set in stone.
When you don’t like what you see, always ask for changes. The elements consist of guarantees, a death benefit, surrender periods, options for annuitization, and a free-look period.
The number 1 reason why people buy annuities is the guarantees. It is like a contract and it is what makes them so attractive.
If this component does not exist, there are many alternatives that an individual can choose from that have better returns or insurance coverage.
It is just like why consumers would buy smart televisions when all they use it for is to watch free-to-air channels on analog. It would be such a waste of the many useful features and functions available.
The biggest guarantee that people buy annuities for is often recurring income.
The 4 types of guarantees offered are:
- Recurring income on retirement
- Protection from loss of principle amount
- Rate of return
- Beneficiaries will be financially protect on the policy owner’s death
2) Death benefit
Beneficiaries will receive a death benefit if the owner dies.
This feature makes it look like a life policy. But coverage is usually lesser compared to a life policy. Again, if your main concern is a death benefit being left for your family, maybe a life policy can serve your specific needs better.
This benefit will be in the form of the value of investments in the policy, or the amount of the initial investment, depending on which is the higher in value.
The terms of the payout can be complicating and often requires deep comprehension.
Remember to read it meticulously and get your agent or broker to explain jargon in a layman manner if you are confused by them.
Be wary of agents who are unable to explain things in detail in a way that you can understand. It is a sign that they are incompetent or unsure of the product themselves.
For example, there are owner-driven and annuitant-driven contracts. And there are death benefits or value of the contracts that a beneficiary receives.
3) Surrender periods
Not all annuity contracts have a surrender period. But most of them do.
A surrender period is a period of time where the insurer have the rights to impose a contingent deferred sales charge (CDSC) when there are too much withdrawals from the account too soon.
Because if you are not aware, insurance companies are finance companies. They need to keep your money with them in order to make them grow and eventually pay you with that money. Withdrawing your money means an opportunity cost to them.
However, this is more like a deterrent rather than a penalty.
Insurers will very much prefer not to charge you a fee and keep you money untouched so as not to disrupt their operations.
If you had bought your policy from a commission-based salesman instead of direct from an issuer, there will be CDSC.
You should be able to tell why. As commissions have already been paid the the sales staff, an insurer could be looking at a loss should you move your money about. This charge is meant to be an offset.
You might agree with such terms or you might not. But it will be tough to get this term changed just because you feel it as being unfair. CDSC is present in all deferred fixed annuities.
The drawbacks of the surrender period also have it’s little details. This means that you might not be called out on it if some criteria are met.
For example, withdrawals might have to hit a certain percentage of the total value for CDSC to be triggered. Or withdrawals are in line with guidelines that government agencies requirements.
These details are best explained to you by your own agent. His job is not just to squeeze as much as possible into your budget.
4) Options for annuitization
When you convert the current value of investments to a guaranteed stream of income on a deferred policy, you are annuitizing it. The period can be set for the rest of your life, for the rest of your spouse’s life, or a specified number of years.
This can be confusing to some as many people do not see why others would do conversions in the first place.
Surely they would have thought through on what they way before signing up on the contracts.
The thing is that circumstances change. Policy owners might have initial objective and later find out that they have to change them as their personal circumstances have changed.
5) Free look period
Because annuities can be a big financial purchase or commitment, there is a time frame where you can back out even after you have signed the papers. This is also partly because term and conditions of such contracts can be complex and confusing.
In the event that buyers only realize what they are getting into after agreement and do not like it, they can still call off the contract.
Even most banking facilities have free look periods. You can expect a crafty salesman to only mention it briefly while going through the terms of a contract.
The existence of a free look period could very well be the best tip you can get in this article.
If you have just signed up for a plan and already started to regret your decision, go through the contract again to pinpoint whether you are still in this grace period.
If not, call up your agent to inquire about it. They are not supposed to hide it or mislead a client.