The belief that annuities are completely “risk-free” is mistaken. They may be very low risk, but they are certainly not without any risk at all.
The company can go bankrupt or it could lose much of the value in its annuity portfolio. Most annuities are based on a portfolio of government and corporate bonds, but so-called variable annuities are based on stock market index funds. The latter generally have a guaranteed minimum return; the lower-risk annuities also guarantee a return, but a company’s guarantee is only as valuable as its level of solvency.
The interest rates on deferred annuity policies are one of the most important aspects of comparing different annuity policies that might be available to you, but it’s not the only thing that a decision should be based on. As mentioned earlier, the safety and security of the company that you do business with in these matters is of crucial importance. To minimize your risk, contract with insurance companies that report about the health of their balance sheet openly and that have demonstrated history of paying out their long-term contracts.
Additional important factors to evaluate when choosing between deferred annuity policies is the length of the free-look period on the contract. This period enables the customer to look over the contract for a certain period of time after first signing it and to then cancel out of it if he wishes to without any penalties. The industry standard is about 10 days, but some less than scrupulous companies do not even have such a period. In a similar vein, look out for deferred annuity policies that charge egregiously high penalties for early withdrawals from the policy. You may need to access the money in your annuity in case of an emergency.
Ask about additional fees when shopping between different annuities. Higher rates on a deferred annuity policy do not always tell the whole story–you may end up paying more in fees of various kinds than you make back from the additional rates. In addition, the company’s openness about the way it invests their annuities is also important. Even fixed-rate, tax-deferred annuities can be invested in corporate bonds that may not hold their value over the long course of your annuity. If you would like to make sure that you protect yourself from risk as much as possible, ask more about where your annuity premium will be invested.
Shopping between different annuity policies is the most sure-fire way to ensure that you get both the best returns, most convenient service and most secure policy. Annuities properly managed can be a fantastic additional tool for people either planning for retirement or to provide a secure additional fixed income for their future. Using them properly requires a commitment to a financial plan, as it’s impossible to take money out of it early without paying penalties.