Written By: Keith L. Collins in Holden, MA, Founder of Keith Collins Inc.
With a multitude of factors involved, indexed-annuity products can be rather complex for many people. While many specialists offer great advice, they rarely tell them about the pitfalls they can face with indexed-annuity products. That is why I intend to educate you with information about the top 5 pitfalls you may face when selecting indexed-annuity products.
1 – Investing in a Single Index
As the name suggests, indexed annuity products allow you to link your account to a particular index. More often than not, many index annuity products offer a unique index that may seem vividly lucrative. With anticipated high returns and mixed with a seemingly safe combination of multiple indexes, many people place all their savings into a single index. While this can be a highly profitable decision, it may not be the safest.
To avoid this pitfall, simply select an indexed-annuity product that offers a dividable index, or more than one index option. Place a generous portion of your savings in the ‘lucrative’ index and place a small yet sizable amount in the second index, more often the S&P 500 index. In case of market fluctuations, this division acts as a cushion while still ensuring a return.
2 – Choosing High Surrender Fees
Indexed-annuity products require you to lock your savings into an account and sit back and receive a steady stream of income. At times, I understand that you may require access to the entirety of your savings. While you can easily do so, there is a catch; surrender fees. At times, surrender fees can be as low as 10% or as high as up to 20%.
While inevitable, you can avoid the pitfall of selecting a high surrender fee by simply selecting an indexed-annuity product with a lower surrender fee. Moreover, some even offer surrender deductions from interest rather than principal. Bottom line, make sure you know how surrenders affect your account and the overall purpose of the annuity.
3 – Not Lowering the Complexity
Despite their best efforts, I understand how many indexed-annuity products can be complex for most people. Regardless of how much they read the fine print, they may nor be able to understand how indexed-annuity products work, the fees involved and how much they can expect to earn. Fortunately, there are 2 easy ways out of this pitfall.
The first is rather simple and involves simply reading about the fundamentals of indexed-annuity products and the many factors they involve. Since there are several options or riders or moving parts, be sure that you choose only what you need or is most suitable for you. In other words, make sure you are not paying a fee for a feature or rider that is of no use to you. The second involves hiring a specialist in indexed-annuity products who works outside of the financial institution offering it. Ask your representative to show you Indexed products from more than one company to get a sense of what is out there. Regardless of the choice, both aim to offer information and educate you in order to make the products simpler to understand.
4 – Disregarding the Effects of Easy Withdrawals
Indexed-annuity products always contain withdrawal charges. Some indexed-annuity products provide you with easy withdrawals options such as 10% penalty free withdrawal per year.
While this is a great convenience to many, always ensure you know the details behind the withdrawals. For example, some products with an income rider attached are not ‘friendly’ to the 10% withdrawal and you may find the guaranteed amount you expect to receive is dramatically reduced by such a withdrawal.
To avoid this pitfall, simply ensure that you know what your withdrawal limits are and how much is charged after each withdrawal. Moreover, ensure you know the effect of the withdrawal on your indexed-annuity product as well. While you may be able to withdraw penalty free, your returns may take a significant toll as well.
5 – Choosing the Wrong Death Benefit
What I find interesting about indexed-annuity products is that most do well to highlight what happens to your money in the event you die. In many cases, a lump sum is offered while in others, the amount is converted into an income stream. In fact, there are many variables involved in beneficiary details of the deceased and is precisely why you need to ensure you have not selected the wrong benefits.
If you believe that your family will need a large sum of money on your death, ensure they receive it in the form of a lump sum. In case you have relatively young children, you may choose to have your savings in the product converted into an income stream. Always view the different options and benefits available and choose the benefits that are right for your family or beneficiary.
To learn more from this educator, click here (Keith Collins).
About the Author
Keith Collins is the President and founder of Keith Collins, Inc., which is an independent firm specializing in retirement income planning and Estate planning. For over 20 years, Keith Collins, Inc. helped clients protect their assets and maximize their retirement income in the Central Massachusetts area.
For more information, visit the website at www.keithcollinsinc.com or contact Keith toll free at 888-508-3736.
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