As a Certified Financial Planner™, I'm often asked, "should I keep this old annuity?" Annuities are complex financial products and many require periodic reviews to make sure the policyholder understands the costs, benefits, and to make adjustments, if necessary. Here are a few of the factors that should be considered as part of the review process:
Why did you buy the annuity?
Income and principal protection are the two main reasons annuities are purchased. Has your need for either changed since you bought your annuity? Hint: If you're not sure why you bought the annuity other than the agent recommended it, that could be a red flag.
What type of annuity do you own?
Annuities come in many different "flavors". Some common types of annuities include: variable annuities, fixed annuities, structured or "buffered" annuities, single premium immediate or "SPIA", and fixed indexed annuities.
What will it cost you to get rid of the annuity?
Most annuities assess a surrender charge for terminating the contract early. Common surrender charge periods can range from 5-years to as much as 15-years. This surrender charge usually starts at a high percentage, such as 10%, and declines each year until the end of the surrender period; at which time there is no longer a surrender charge.
How financially stable is the company that issued the annuity?
As stated previously, purchasers of annuities are typically interested in guarantees with respect to principal or income. Those guarantees are backed by the claims paying ability of the insurance company. Annuities are NOT FDIC insured or backed by the Federal government. The stronger the financial rating of the annuity issuer, the better.
What "guarantees" would you be giving up?
It is common for there to be a spread between the surrender value and any "guaranteed" values. The surrender value is the amount you can walk away with (after any applicable surrender charges are applied). "Guaranteed" values on the other hand are not the value you will receive if you terminate your contract. Instead, guaranteed values are usually used to determine how much income you'll receive if you choose to exercise that feature.
In conclusion...
If it has been a few years since you last heard from your agent, now might be a good time for a second opinion. A fee-based financial planner may be able to give you an unbiased appraisal in exchange for a modest fee. To schedule a phone consultation, please visit www.davidiobst.com.
About the author: David A. Iobst is a fee-based Certified Financial Planner™ with more than 20-years of industry experience. He is based in Bear, DE and is accepting clients in DE, PA, and MD.