The Good, The Bad, and The Ugly
The word Annuity is a very familiar term in the retirement planning space, however the general understanding of them is pretty limited. Part of that is because the term Annuity isn’t designated for one specific product, but rather several different products with a wide variety of growth and payment options. Long Term Care Alternative Insurance comes in the form of a Fixed Annuity with a Long Term Care Benefits Rider, so it's important that we cover some of the basics of annuities. In this article I will explain the different types of annuities as well as highlight some of the misconceptions as not all products are created equal.
Starting with the basics, annuities are simply insurance based investment products offered by life insurance companies rather than bank based investments like CD’s, but in a lot of ways they are pretty similar. Annuities typically have minimum guarantees, making them safe investments for retirees because they are protected from the volatility of the stock market. They also typically have a set amount of time where you are committing your money in exchange for growth, or in this case Long Term Care Insurance.
One type of Annuity is called a Deferred Annuity, which is what the Long Term Care Alternative Insurance product is. This type of product is very similar to a CD in that you commit to investing your money for a certain amount of time in return for growth, typically 5 – 7 years, and the Long Term Care product is for 9 years. A Fixed annuity will provide you a guaranteed fixed interest rate while an Index Annuity gives you the opportunity for larger growth associated with the stock market, but not invested in the stock market. So if the market has a crash you will be protected with your minimum guarantees. And if the Market does really well, you will receive some of that growth rate but not the full growth rate of the market because you're paying for that protection. Lastly there are Variable Annuities which are in fact invested in the Stock Market. You can achieve the most growth from the market in good years, but your balance will also drop in bad years. You’ll still have minimum guarantees, but this is a higher risk investment.
Another type of Annuity that people are most familiar with is called an Income Annuity. The concept being that you give the insurance company a lump sum of money, and the insurance company agrees to pay you a certain amount of money every month or year for a certain amount of time, using your principle investment to grow interest over time. One way to do this is with an Annuity Pay Life, which means they will make payments to you for the rest of your life. If you live to an old age, this can work well in your favor, but if you were to die early then you may not do so well as there are no beneficiaries to receive your remaining balance. Another way to receive payments is to select a term such as Annuity pay 20. The insurance company agrees to make payments to you for 20 years, and if you were to die in year 15, the remaining 5 years of payments would be made to your beneficiaries.
Over the past 10 years or so, I've heard Annuities come up in conversations around retirement and investing, and it’s apparent that most consumers aren’t particularly informed. Some people are very comfortable with the guarantees that annuities offer while others have experienced high fees and low rates of return. This is because over the years insurance companies have tried all kinds of sales tactics to drive interest in these products. An older and unpopular sales tactic was to offer large signing bonuses to both the insurance agent as well as the consumer. The agent would receive a 10% bonus, and the client would receive 10% return the first year of the contract. The insurance company had to make up these expenses, and they would by significantly lowering the interest rate the remaining years and charge steep surrender charges for ending the contract early. Contract periods were as long as 14 years, and people were quickly wanting to get out of these products. The motivation of the sales reps may have caused some to withhold this information in order to get the deal done, and ultimately left their clients frustrated a year later when their interest rates dropped. This caused resentful feelings towards annuities by consumers that were not properly informed in the variety of products available to them. For these sour group of consumers, it's easy for them to generalize all annuities as bad from their one unfortunate experience.
Other annuities are known to have expensive fees associated with them. The variable annuities tend to be the culprits here because they're guaranteeing that minimum balance in case the floor of the market completely drops out, but in the big picture the market always recovers and these fees are how insurance companies make money. At the end of the day, annuities are designed for people to grow their money faster than just having it sit in the bank, but not all products off the same benefits.
Agents and financial planners that work for a specific carrier are motivated to push certain annuity products offered by their company simply because they pay out the most, which is usually going to be that variable annuity, so it’s important to work with an independent advisor that has access to a wide variety of both annuity products and security investment products, and can pick and choose the ones that are best for their clients instead of which ones pay them the most. Make sure you understand the fees associated with a product so you can determine if you’re getting a fair deal.
Long Term Care Alternative Insurance actually comes in the form of a Fixed Annuity, and includes a Long Term Care Rider. So instead of getting a typical 2.8% rate of return on a fixed annuity, you're getting closer to 1%, and that remaining interest goes to cover the cost of the Long Term Care Insurance. It's better than having it sit in the bank, and it offers that insurance coverage benefit if you need it, so it's an option that's fair and makes sense.
To see if you qualify, contact us to schedule a brief phone appointment today.