Annuities

Scott Hovden on the definition of an annuity: "An Annuity is a contract between an individual and an insurance company that's designed to create and accumulate wealth, protect that wealth, and distribute that wealth in the most efficient way possible."

Annuities can be very confusing and often times misunderstood. To simplify things, there are two basic reasons for purchasing an annuity: income and growth. Basically, if you are well into retirement, purchasing a fixed annuity in the form of a single deposit immediate annuity (SPIA) may make the most sense. It provides immediate income and, in some cases, can be passed on to future generations.

If you’re in a pre-retirement phase of your life, a fixed indexed annuity (FIA) features both growth and wealth protection. What makes these annuities so popular is their investment method. An FIA works in tandem with market indexes such as the S&P 500 and the Nasdaq 100, but does not invest directly in the market. Thus, one can never lose money when the market is down, but can enjoy some gains in uptick markets. Depending on the FIA product, several index crediting strategies are available, including a fixed rate feature.

For the more conservative investor, the traditional fixed annuity is a good choice. Fixed annuities typically have rate minimums established by state law and are ideal choices for replacing low-interest-bearing instruments such as CD’s and money markets.

For less risk-averse individuals, variable annuities (VA’s) are an option. VA invests directly in the stock market, hence one may enjoy market gains. That’s the good news. The bad news is that VAs can also lose money in down markets. Thus, they may not be a good option for persons in retirement or closely approaching retirement. This type of annuity saw a surge in sales from 2011 to early 2012, primarily due to high interest rates, in some cases 7 percent.  However, these rates proved to be unsustainable for insurance companies, and they quickly fell.

It is often said that annuities are not for everyone, and this rings true with any investment. However, with the decline of labor unions in the United States, pensions became a thing of the past; annuities represent a viable alternative. They have built-in growth features and safely protect one’s retirement. As with any other type of investment, a person should do their due diligence on the company they're purchasing from. Early withdrawal beyond what is allowed under the contract carries penalties and may have tax consequences.

That’s why the financial strength of an insurance company should be considered when purchasing an annuity. Scott represents several A-rated companies and can provide you with a well-thought-out retirement plan. Call him today at 715-204-8375 or email scotthovden58@gmail.com.