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Got an Annuity? Here’s your Checklist.

Got an Annuity? Here’s your Checklist.

We often work with clients who own a variable annuity. They can be good investments although it’s rare that we advise clients to use anything but the cheapest, no-load, no commission annuities. If you have an annuity, try this quick checklist.

1.     How much is the annual M&E[i]?

This is the annual insurance cost for the annuity. It can range from 0.2% to 1.8% depending on the amount of coverage. You need to look at all the expenses of the riders and determine if you still (or ever) need them. These can add up and they're on top of the fund expenses. So your annuity may cost you as much as 2.5%...a year, every year. 

2.     Is this a no-load annuity? And is it a fixed or variable annuity?

A fixed annuity will pay a fixed rate, like a long dated bond. A variable annuity will typically invest in insurance separate accounts, which work very much like mutual funds. Check that the investment options are low cost and have a good track record. Many of the investment options should be index funds. 

3.     What is the penalty for any early withdrawals? Are there any contingent deferred sales charges for this annuity?

Some annuities, particularly fixed annuities, have penalties and charges if they are cashed out or changed. These are to recoup commissions or early “teaser[ii]” rates. You should check the costs of these.

4.     What is the current death benefit[iii] on the annuity?

Sometimes these are simple “premiums less withdrawals” but there are others with more complex “step up” benefits. Find out what they are. Also check your beneficiaries. It doesn't matter what your will says. An insurance company will pay the beneficiary. 

5.     Are there any circumstances when I can access the value of or withdraw from my annuity without any penalties?

Some annuities have riders allowing access to the annuity balance for hospitalization, illnesses etc. The more you have, the better.

6.     Are there any Market Value Adjustments (MVAs[iv])?

You need to know if there are any adjustments to the account value you see on your statement. You can expect them to reduce the value of your account.  

7.     Does the annuity have any protected withdrawal values?

This is the value of the account for withdrawal purposes. It’s usually higher than the account value and is the amount from which the withdrawal allowance is calculated.

8.     Are there any highest daily/monthly/anniversary benefits on the annuity?

Again, some annuities guarantee an amount from which you can annuitize. It’s not the same as a cash value and is not available as a lump sum. But you should know what it is.

9.     What annuitization benefits do I have?

Prepare for a long list. An annuity may have minimum guarantees for “annuitizing” the annuity. This means simply converting the lump sum into an income. We can go over these later.

10.  What are the annuitization benefits for a 50% Joint and Survivor[v] annuity for me right now?

The reason we want to know these is that it’s the benchmark for a common form of annuity benefits. It’s also the default option for qualified plans. Once we know this, we can review other options.

11.  Is there a guaranteed crediting rate for the annuity?

Find out the number and whether it is for the lifetime of the annuity or a stated period.

12.  What is the surrender value of the annuity?

Find out how much it is worth now.

There are other questions to really understand any annuity. We have deliberately not asked about credit ratings or commissions. So, think of this as a starter.



[i] Mortality and Expense.

[ii] Teaser rates can be high short-term crediting rates for early years, which then reduce in later years of the annuity.

[iii] Death Benefit: the benefit, in dollars, that your named beneficiary receives when you die.

[iv] MVAs may apply to fixed annuities and certain crediting accounts in variable annuities. It’s an adjustment to the underlying general account’s fixed income assets.

[v] 50% Joint and Survivor pays a monthly amount to the annuity owner; when the annuitant dies, 50% of that amount is paid to the surviving spouse.

Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice.  We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security.  The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended.  Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data.  Past performance is no indication of future results.

All charts from Factset unless otherwise noted.