Annuity can be good long-term financial option

By PHIL MULKINS World Action Line Editor - 10/1/2009


Dear Action Line: I'm interested in starting a retirement account and thinking of putting money in annuities rather than CDs or other investments. What are the ins and outs of annuities? — S.L., Tulsa

An annuity is an insurance product intended for long-term financial objectives, says the Insurance Information Institute Web site. Annuities provide powerful benefits, including tax advantages, but they have liquidity limitations.

Several types are available. Some guarantee principal and minimum interest rates, plus the possibility of additional interest. Others invest in the stock market and provide variable returns.

In Oklahoma, annuities are regulated by the Oklahoma Insurance Department ( tulsaworld.com/OID ).

Risk tolerance: Annuities involve several kinds of risks. Variable annuities are often invested in pools of common stock and can lose value quickly and sharply, but stocks also hold the most potential for gaining value.

If you're not comfortable with the possibility of shrinking value, don't buy variable annuities.

Fixed annuities pay a steady, but lower, rate of return, making them better choices for investors wanting safety and stability. People close to retirement should shelter their assets from stock market volatility.

Early withdrawal: Everyone needs emergency cash from time to time, but annuities are meant to be kept untouched for the long term. So don't put all your discretionary money in annuities.

When you take money out of an annuity, there is usually a penalty called a "surrender fee" or a withdrawal charge. Some annuity contracts permit taking up to 10 percent of the funds annually without surrender fees, so shop around for a flexible "early withdrawal" clause and be aware that even different annuities from the same company can have different conditions and different early withdrawal charges.

As financial and personal circumstances change, you might want to withdraw money from the annuity early. The shorter and less restrictive the provisions, the more flexibility you'll have.

At death: When buying annuities, you put a lot of money into them. Do you want heirs to get this money when you die during the term of the annuity? There are several options. Some continue paying out to beneficiaries, while others don't.

Need horizon: Annuities are for people with long-term financial plans of at least seven years. If your health, age and financial situation don't suggest a time horizon this distant, annuities are not for you. Discuss your situation with a trusted financial adviser.

Financially sound: The company should be financially sound and licensed to do business in Oklahoma. See OID's "Choosing your annuity" at tulsaworld.com/OIDannuities .

Check with independent rating agencies A.M. Best Company at tulsaworld.com/AMBest and Moody's Investors Service at tulsaworld.com/MoodysInvestors to learn the financial health of the insurance company wanting to sell you annuities.

Few annuity companies get into financial trouble, but this doesn't mean their track records are perfect. Look before you leap.





Submit Action Line questions by calling 699-8888 or by e-mailing phil.mulkins@TulsaWorld.com or by mailing it to Tulsa World Action Line, PO Box 1770, Tulsa OK 74102-1770.




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