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What to Expect When Buying an Annuity

Annuities are popular among investors who want to add some predictability and stability to their investment portfolio. The guarantees included in annuities provide investors with a level of comfort that, whether than investing for savings accumulation or income security, they can expect a minimum level of performance. Still, there are many moving parts within annuities that investors need to understand so there are no surprises somewhere down the line.

Expect a Learning Curve

The first thing you should expect when buying an annuity is to encounter a vast array of annuity products that differ in their features, options and expenses. It can be a paralyzing experience once you discover the sheer number of annuity products that are available. The recommended approach is to be fully certain of your own specific objectives, needs, concerns and risk tolerance. Armed with your financial profile, you can quickly narrow down your choices to the most suitable types of annuity products.

Expect to See the Details

The next thing you should expect is a complete explanation of the product and full disclosure of all of its expenses. All of the features, options and expenses of annuities are detailed in the contract specifications or prospectuses that can be obtained prior to their purchase. These should be thoroughly studied and understood before any investment is made. Contract specifications and prospectuses can be obtained by requesting them over the phone or online from the annuity provider.

Expect to See Expenses

As you dissect the contract specifications booklet or prospectus, you can expect to uncover an array of charges and expenses that you might not expect. All annuities include insurance charges for covering the mortality costs, administrative expenses, and distribution costs. These are broken down individually and are expressed as an annual percentage of the annuity account balance. In some cases, there is a flat fee charged for administrative expenses, and some insurers include a flat annual contract fee of $30 to $50. If you plan on adding any additional options or guarantees you can expect to pay additional charges.

Variable annuities include an extra fee for investment management. This fee compensates the professional managers of your separate account portfolios and is based on the assets under management. It is expressed as a percent which is applied annually to your account balance. Depending on the type of account, the fee can range from .5% to 1.5%. Generally, the more actively managed the account is, the higher the management fee. If you have more than one separate account, say a bond account and a stock account, each will have a separate management fee.

Finally, you can expect to see surrender fees which are applied to withdrawals made in a given year that exceed 10% of the account value. The fees are applied based on a schedule, called the surrender period which can last from five to 15 years. Typically, the fee starts out high and then is reduced by a point each year until it reached zero, which coincides with the end of the surrender period. Different classes of variable annuities may or may not have surrender periods, however, they will generally make up those charges in other ways, such as a sales charge or higher annual mortality charges.
With some variable annuities, you can expect to find a sales charge, also referred to as a front-end sales load. These will vary depending on the type of variable annuity you buy.

For instance, a B-Share variable annuity has no sales charge, but instead has a schedule of surrender fees. A-Share annuities have a sales charge but not surrender period. Some types have neither a sales charge nor a surrender period, but, you could expect to pay higher annual mortality fees. So, look carefully, and compare all expenses.
Expect a Sales Pitch

You can also expect to receive a sales pitch from an eager sales rep. Even if you do your own product research online, when you request information or application for purchase, you are likely to receive a call from a sales rep. Whether you are approached as a result of an online inquiry, or you seek out an annuity specialist on your own, if you follow the prescribed steps above, you will be armed with the information, about yourself, and about the annuity product of your choice, so you will be in control. If you sense that the sales rep is leading you down the wrong road, you will be in position to ask the right questions and the sales rep will realize that you are in control.

Expect Superior Customer Service

Finally, you should expect superior customer service from your annuity provider. Annuities are serious, long term investments and are a commitment on the part of investors and life insurers alike. From the moment you commit your funds, you should expect a high level of communications that keep you informed of the status of your transaction. Your provider should have an actively managed care line with knowledgeable representatives who can answer any question you have. If you buy a variable annuity, your provider should provide you with at least quarterly updates on your accounts, and have the ability to help you manage transfers between accounts.

If you expect the best from your annuity provider, then you should probably work with the best companies – the ones that have an established record of performance and solid customer service. Generally, the most highly rated companies have the financial strength and stability to be able to invest the resources needed to operate a reliable and responsive customer service department. The best indication of this would be to see how well the annuity provider can meet your expectations from the beginning. See how they respond to your early requests for contract specifications and information, and how willing they are to answer all of your questions before trying to sell you something.