An annuity is a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid. Annuities are most often bought for future retirement income and can pay an income that can be guaranteed to last as long as you live.
There are several types of annuities, all of which carry varying levels of risk and guarantees. To get the most out of an annuity, it is important to know the different options available to you, as well as the benefits each type provides.
- Single premium annuity - an annuity in which you pay the insurance company only one premium payment.
- Multiple premium annuity - an annuity in which you pay the insurance company multiple premium payments.
- Immediate annuity - an annuity in which you begin to receive income payments no later than one payment period after you pay the premium.
- Deferred annuity - an annuity in which you begin to receive income payments some years later.
- Fixed annuity - an annuity in which your money, less any applicable charges, earns interest at rates set by the insurance company or in a way specified in the annuity contract.
- Variable annuity - an annuity in which the insurance company invests your money, less any applicable charges, into a separate account based upon the risk you want to take. The money can be invested in stocks, bonds or other investments. If the fund does not do well, you may lose some or all of your investment.
- Equity-indexed annuity - a variation of a fixed annuity in which the interest rate is based on an outside index, such as a stock market index. The annuity pays a base return but it may be higher if the index increases.
To find out if an annuity is right for you, consider what your financial goals are for the future. Analyze the amount of money you are willing to invest in an annuity, as well as how much of a monetary risk you are willing to take. An annuity may not be an appropriate vehicle to reach short-term financial goals. When determining whether an annuity would benefit you, ask yourself the following questions:
- How much retirement income will I need in addition to what I will receive from Social Security and my pension plan?
- Will I need supplementary income for others in addition to myself?
- How long do I plan on leaving money in the annuity?
- When do I plan on needing income payments?
- Will the annuity allow me to gain access to the money when I need it?
- Do I want a fixed annuity with a guaranteed interest rate and little or no risk of losing the principal?
- Do I want a variable annuity with the potential for higher earnings that aren't guaranteed and the possibility that I may lose principal?
- Am I somewhere in between and willing to take some risks with an equity-indexed annuity?
When it comes to annuities, inappropriate sales practices can occur in many ways and come from a variety of sources. Anyone can be a victim, but senior citizens remain a prime target. Here are a few ways to protect yourself:
- Always review the contract before you decide to buy an annuity. Terms and conditions of each annuity contract will vary.
- You should understand the long-term nature of your purchase. Be sure you plan to keep an annuity long enough so the charges don't take too much of the money you invest.
- Compare information for similar contracts from several companies. Comparing products may help you make a better decision.
- Ask your agent and/or the company for an explanation of anything you don't understand.
- Remember that the quality of service you can expect from the company and the agent should be an important factor in your decision.
- Verify that the company and agent are licensed. In order to sell insurance in North Dakota, companies and agents must be licensed. To confirm the credibility of a company or agent, contact the North Dakota Insurance Department.
- Check the company's credit rating. Legitimate insurers have their "creditworthiness" rated by independent agencies such as Standard & Poor's, A.M. Best Co. or Moody's Investors Services. An "A+++" or "AAA" rating is a sign of a company's strong financial stability.
- As you complete your research and decide to purchase a particular policy, it's important to keep detailed records. Get all rate quotes and key information in writing. Once you've made a purchase, keep a copy of all paperwork you complete and sign, as well as any correspondence, special offers and payment receipts.
Watch for the following red flags, which serve as warnings of possible deceptive sales practices:
- A high-pressure sales pitch - if a particular group or agent has contacted you repeatedly, offering a "limited-time" deal that makes you uncomfortable or aggravated, trust your instincts and steer clear.
- Quick-change tactics -skilled scam artists will try to prey on your "time fears". They may try to convince you to change coverage quickly without giving you the opportunity to do adequate research.
- Unwilling or unable to prove credibility - a licensed agent will be more than willing to show adequate credentials.
Remember, if it seems too good to be true, it probably is. If you suspect you've been a victim of deceptive sales practices or you have a specific question and can't get the answers you need from an agent or an insurance company, contact the North Dakota Insurance Department.