The Simplest Annuity Explainer We Could Write
From: www.nytimes.com
We define immediate annuities, fixed annuities, variable annuities and index annuities, plus give you questions to ask salespeople.
Annuities can be complicated. This column will not be.
After I wrote two weeks ago about getting tossed out of the office of an annuity salesman, there was a surprising clamor for more information about this room-clearing topic. One group of readers just wanted a basic explainer on how annuities work. For that, read on.
Another group of readers worried that those hearing of my experience might assume that all annuities are bad, and that all people who sell them use subterfuge to do so. Neither of those is true: Next week, I’ll introduce you to some reasonable people who are trying to use certain annuities in new and improved ways.
Insurance, Not Investments
The insurance companies that create annuities often make them seem like investments. But really they’re more like insurance.
At their simplest, annuities offer a guarantee. If you turn over some money, you’ll be guaranteed to get all that money back — plus usually a certain amount more. Or you turn over some money and you’ll be guaranteed a regular check for a certain period.
Like insurance to stave off financial disaster, an annuity is something you purchase to guarantee that you won’t run out of money if you live a long time. Such financial guarantees are attractive. After all, we don’t know how our investments will perform: This year may be the first in a while that your stock and bond index funds both lose money.
Still, annuities are not a mainstream product. This is partly the fault of the annuity companies, since they have long outsourced the sales process to people who do not always have customers’ best interests at heart. Word is out about how annuities are sometimes sold, and it’s not good.
Another problem: The annuity product lineup has become so filled with complex offerings trying to solve every problem and answer any objection that the word “annuity” itself can mean lots of different things. I’ll divide them into four categories.
