What Differentiates A Good Annuity From A Bad Annuity?
An annuity is essentially a contract to convert a single lump sum or equated contributions with an insurer into lifelong income after maturity
. Thus an annuity is really an investment. Here are some simple ways to assess a good annuity independently based on certain criteria.
A reliable provider is a safe option
A good annuity choice is one that fits into your financial plan and meets your financial goals. Annuities are generally regarded as a safe option in comparison to other options by most financial experts. A good reliable annuity provider is the first thing to look for. Then, avoid variable annuities as they have a troubled track record with respect to providing a safety net to their investors. In comparison, a fixed annuity always provides better guarantees to the investor as their capital and interest rates are guaranteed and fixed.
Go for high accumulation rate
It's a well known fact that annuities provide moderate returns. However, good annuities reward their investors with accumulation rates that are better than returns from other options such as Mutual Funds etc. So certainly look for accumulation rates while deciding.
Look for high annuitization or payout rates
Also make sure to check the payout rates of various annuities. Insurers generally use a rate as per the cash-value of dollar while determining the payout for an annuity. A good annuity will bears competitive if not higher payout rates thus ensuring that at maturity, for your invested cash value you end up getting a higher annuity income.
Read the fine print for hidden fees, charges and penalties
Decent annuities in the market don't have any hidden fees, high upfront demands or backend charges. It's mostly the variable annuities that have separate charges for managing your fund. Usually they also have high withdrawal and surrender charges. All annuities charge some amount to cover the provider's expenses; however, good annuities cap them to a minimal.
Liquidity
Annuities being medium-to-long-term financial instruments are technically liquid by their nature. But if an annuity operates in an 'all-or-nothing' mode - where you have to hold the annuity or you surrender it entirely usually with heavy penalties then you should avoid it. A good annuity will give you the option to withdraw a portion of the entire fund for a small or negligible penalty. This therefore becomes an important contingency backup for tight financial situations.
Look for flexible premiums
Avoid annuities that favour the providers more than you. A good annuity gives you the slack of flexible premiums or even misses certain premiums during their accumulation phase. This is especially good for you because that extra space is a good breather during fluctuating financial times.