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What Senior Citizens Need to Know When Considering an Annuity

Ten questions seniors should ask themselves before the purchase

Aug. 15, 2005 – Senior citizens are besieged by sales efforts pushing annuities, which often make them leery, but many financial experts do suggest an annuity as a beneficial option for many older Americans. The National Association for Variable Annuities (NAVA) has released a list of ten questions senior citizens should ask themselves if they are considering purchasing an annuity as a retirement vehicle. “An annuity,” they say, “is a flexible financial retirement vehicle combining guaranteed lifetime income payments, other insurance benefits and tax-deferred savings.”

"Today's annuity products offer greater liquidity, flexibility and a broader range of features than in the past, and are uniquely designed to address longer life expectancies, increasing retirement horizons and other new retirement realities," said Mark Mackey, president and CEO of NAVA.

"Annuities can be used in a variety of situations for older Americans, including individuals who require a paycheck for life, and those who wish to take advantage of the traditionally higher returns of the equity market while having protection of their investment against downside market risk,” he added.

Age is only one of the important factors that should be considered when determining the appropriateness of an annuity. Of equal importance are the number of years an individual expects to live in retirement, the nature of his or her retirement lifestyle, other sources of income that the individual may have, and life expectancy, according to NAVA.

Like any investment, an annuity is not appropriate for everyone. According to NAVA, the first step is to consider the following important questions, and then consult with a financial advisor:

 1. What are my retirement goals and objectives?

    It is important that you understand your stage of retirement and
    define your personal retirement goals (e.g., travel, live
    comfortably at home, leave money to heirs, start a second career).

    Your needs will be very different if you are entering retirement
    at age 65, as opposed to living in retirement at age 80.

2. When do I expect to retire?

    Estimating when you expect to retire is a critical step in
    structuring a financial retirement plan. Many Americans today are
    retiring earlier than previous generations. For example, a recent
    study revealed that 34 percent of Americans expect to retire
    between age 50 and 64(NAVA 2005 Retirement Horizon Study).

3. How long do I expect to live in retirement?

    Today Americans are living longer, and it is more common for them
    to spend 25 or more years in retirement. Projecting your life
    expectancy will help ensure your savings will sustain your
    envisioned retirement lifestyle. Estimate your own life expectancy
    considering such factors as your current health, the life spans of
    immediate family members, your current lifestyle, and your outlook
    on life.

 4. Do I need supplemental retirement income?

    An annuity can be used to supplement your other retirement income
    sources by providing payments that cannot be outlived to help
    cover expected living expenses. Calculating the "gap" between
    available retirement income (Social Security, a pension and
    savings) and your essential living expenses (housing, insurance,
    etc.) can help determine how an annuity can be of value.

5. Do I want my retirement savings to continue to grow?

    As Americans spend more time in retirement, many are in a position
    to keep a portion of their assets invested in equity-based
    products, where the highest returns have traditionally been,
    rather than in more conservative investments, such as CDs and
    bonds. Deferred annuities allow assets to grow tax-deferred, offer
    protection against downside market risk and offer the option of
    guaranteed lifetime income payments at some point in the future.

 6. How can an annuity help meet my retirement needs?

    An annuity is the only personal retirement product that provides a
    guaranteed paycheck that cannot be outlived. In addition, deferred
    variable annuities allow you to take advantage of tax-deferred
    investment growth, while providing "living benefits" offering
    insurance protection against downside market risk and a variety of
    options to access your money. Annuity death benefits offer
    additional protection of your assets. (See Annuity Definitions
    below for detail.)

 7. Is there a surrender period associated with the annuity?
    There may be charges to withdraw some or all of the funds in the
    annuity during the early years of the contract, generally five to
    seven years. While most annuity contracts have surrender periods,
    many newer products have short or no surrender periods. (See
    Understanding the Cost of Variable Annuities below for detail.)

8. When will I need access to the money in my annuity?

    One feature offered by many deferred annuities is the ability to
    withdraw a portion (e.g., 10-15 percent) of the initial investment
    each year without surrender charges. Many annuities also provide
    you with full access to your money -- also free of surrender
    charges -- in situations of serious illness.

9. What do I need to know about annuity fees and the companies
    offering annuities?

    All financial products have fees, including all "no-load"
    investments. While fee structures vary, it is essential that you
    understand what you will be charged and when. In addition, annuity
    buyers need to consider the insurance company's financial
    strength, ratings and reputation. It is important to know that the
    company backing the annuity guarantees will be there in the
    long-run. (See Understanding the Cost of Variable Annuities
    below for detail.)

10. Does my financial advisor understand my retirement goals?

    It is important to seek advice from an advisor who is
    knowledgeable about retirement-related issues and current annuity
    features and benefits. Prepare a list of objectives before meeting
    with your advisor so that together you can develop the best plan
    to meet your financial retirement goals.

"The insurance industry is committed to helping all consumers make more informed retirement planning decisions," continued Mackey. "Our hope is that these questions will help seniors better understand how annuities work and the tremendous value they provide."

Understanding the Cost of Variable Annuities

By the National Association for Variable Annuities (NAVA)

All financial products have fees, including all "no-load" investments. While fee structures vary, it is essential that the prospective investor understand what they will be charged and when.

An annuity transfers the risk of outliving your retirement savings from you to the insurance company. It is a flexible financial retirement vehicle combining guaranteed lifetime income payments, other insurance benefits and tax-deferred savings. Annuity fee structures are based on the value of the investment and the insurance features and benefits provided. Typical variable annuity fees include:

Investment Management Fee -- Similar to fees charged by mutual funds, these fees cover the management of the different funds in a variable annuity's investment portfolio. The average investment management fee for a variable annuity is 0.96% of the amount invested in the underlying funds.

Insurance Charge -- Insurance charges include mortality and expense risk charges (M&E fees), which are typically 1.25% of the average value of the investment, and support the annuity's guaranteed lifetime income payout option, the death benefit and the guarantee that the annual insurance charges will not increase. Other elected insurance benefits (e.g., guaranteed minimum accumulation benefit, guaranteed minimum income benefit, guaranteed minimum withdrawal benefit) will have additional fees. Most contracts also impose administrative fees, which are typically around $30 per year.

Surrender Charge -- Surrender charges are the fees charged for the early withdrawal of funds. They generally range from 5-7% of the amount withdrawn and usually decline to zero over a period of time, typically in five to seven years. However, many annuities offered today have shorter or no surrender periods.

In addition to these fees, brokers often receive a commission for their time, expertise and professional guidance, which is similar to the commission brokers earn for equities, mutual funds and other financial products. Usually the commission is paid to the broker by the company issuing the annuity, and does not reduce the annuity's contract value. The company recoups the commission costs over time through the various contract fees and charges listed above.

About the National Association for Variable Annuities (NAVA)

NAVA is a non-profit trade association located in suburban Washington, D.C. NAVA provides a variety of services to the industry including educational forums, research and conferences aimed at furthering the development and understanding of fixed and variable annuities, income annuities and variable life insurance. NAVA also maintains and supports an educational website for consumers at www.RetireOnYourTerms.com.

About Annuities

By U.S. Securities and Exchange Commission

An annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date. Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a guaranteed minimum amount, such as your total purchase payments.

There are generally two types of annuities—fixed and variable. In a fixed annuity, the insurance company guarantees that you will earn a minimum rate of interest during the time that your account is growing. The insurance company also guarantees that the periodic payments will be a guaranteed amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.

In a variable annuity, by contrast, you can choose to invest your purchase payments from among a range of different investment options, typically mutual funds. The rate of return on your purchase payments, and the amount of the periodic payments you will eventually receive, will vary depending on the performance of the investment options you have selected.

An equity-indexed annuity is a special type of annuity. During the accumulation period – when you make either a lump sum payment or a series of payments – the insurance company credits you with a return that is based on changes in an equity index, such as the S&P 500 Composite Stock Price Index. The insurance company typically guarantees a minimum return. Guaranteed minimum return rates vary. After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum.

Variable annuities are securities regulated by the SEC. Fixed annuities are not securities and are not regulated by the SEC. Equity-indexed annuities combine features of traditional insurance products (guaranteed minimum return) and traditional securities (return linked to equity markets). Depending on the mix of features, an equity-indexed annuity may or may not be a security. The typical equity-indexed annuity is not registered with the SEC.

You can learn more about variable annuities by reading our publication, Variable Annuities: What You Should Know. You can learn more about equity-indexed annuities by reading our online brochure, which explains equity-indexed annuities and provides resources for obtaining additional information.

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