Annuity Advice

Jim is an unhappy man. This 58-year-old bank executive had made a couple of investments last year. Most of the investment decisions taken by him were based on the glitzy advertisements that appeared in the media. So, if an advertisement promised an assured return of 10%, Jim made sure that the particular investment featured in his portfolio. But, unfortunately for Jim, most of the investment turned out to be a dud, leaving him on the verge of bankruptcy.

When it comes to investment, most of us tend to behave like Jim. We are so enamored by the tall claims made by companies that we forget to do the basic groundwork. And this is where most of us go wrong. While making investment, it is essential that we answer a few basic questions like what is the purpose of our investment, what is our risk appetite etc. This will help us to select an investment tool that is tailored to meet a bulk of our requirements.

Even investments in annuities require a good amount of groundwork. Annuity is a contract between you and an insurance company. The contract requires you to pay premium or a series of premiums to the company in lieu of an assured income.

Annuity Advice: What are the important points to be borne before investing in annuities?

Types of annuities: As an investor, you should be aware that there are many different types of annuities offered by insurance companies. You should try to understand the features of each type of annuity. For instance, if you are on a verge of retirement or are in immediate need of an income, then immediate annuity can be a good option for you. However, if you are young and there are a couple of years left for your retirement, then going in for a deferred annuity can prove to be a smart choice.
Nature of interest: Annuities offer fixed as well as variable rate of interest. The decision of going in for a fixed annuity or a variable annuity should be based on your financial health. For instance, if you are in receipt of a sufficient income and are of the opinion that negative returns will not dent your financial stability, then you can think about going in for a variable annuity. However, people who are interested in getting an assured income generally choose a fixed annuity.
Frequency of payments: You can choose to receive the payments on a monthly, quarterly or on an annual basis. While choosing between the three options, you should try to compare your monthly expenses against your monthly income. Remember, it is always better to have excess of cash in your hand rather than facing a cash crunch. In case of most annuities, the annuitant starts receiving the payment only after he is retired. Retirement means stoppage of regular flow of income and hence for most retirees the option of receiving income on a monthly basis can prove to be a correct choice.
Financial health of the insurance company: In case of annuities, the safety of the amount invested by you depends upon the financial health of the insurance company. Hence, you should do a thorough research on the various insurance companies before purchasing annuities. You can check out the ratings given by third party companies like Moody’s, Standard & Poor’s or A.M. Best, which will give you an indication of the financial health of the insurance company.

So, if you are thinking about investing in annuities, then you should do the same amount of research as you would normally do before investing in other instruments.

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