Since the financial meltdown of 2008, deferred annuity sales have surged to new highs led by variable annuities, followed by indexed annuities. Even fixed annuity sales, which have trailed the other two due to low fixed yields, have seen resurgence. All three types of deferred annuities are recipients of the huge outflows of money from mutual funds, stocks, and, more recently, bonds looking for more growth and income guarantees. The massive inflows into annuities has spurred the growth of new and more competitive products making it even more challenging to find the best deferred annuities.
What’s the Big Attraction?
For several decades, deferred annuities have always held great appeal for investors looking for ways to minimize their taxes while accumulating for long term needs such as retirement. The returns on deferred annuities are not currently taxed which allows them to grow more quickly than if they were taxed each year. For variable annuities with their potential for market type returns that can mean a significant increase in accumulated funds over the long term. The tax deferral available with fixed annuities provides CD investors with a way to earn safe returns without the encumbrance of taxes.
Perhaps the larger attraction these days are the minimum guarantees available in deferred annuities. Shell shocked investors who saw their retirement savings account decimated in the last market crash are increasingly more concerned with the return of their capital than the return on their capital. Deferred annuities with minimum guaranteed return features or options provide investors with a measure of both. Fixed and indexed annuities include a floor rate that is credited no matter how low yields or market returns fall. More and more variable annuity products offer a minimum return option that, although it comes with an additional cost, gives investors the peace-of-mind knowing that they will always generate a positive return even in down markets.
Forward thinking investors look to the minimum income guarantees that deferred annuities offer when the time comes to convert their account values into a stream of income. The distribution phase of deferred annuities give investors the option of taking their payments over a specific period of time, or for their lifetime. If the lifetime option is chosen, the payments are guaranteed to continue even if investors live beyond their normal life expectancy. With the fear of outliving their income sources increasing along with their expanding life expectancies, retirees are looking at deferred annuities as “longevity insurance”.
Narrowing the Choices
With these key feature common to all deferred annuities, the task of finding the best can be all the more daunting. However, by applying some essential criteria, there are a few ways to separate the best from the rest.
Find Your Type
We’ve discussed three primary types of deferred annuities: variable, indexed and fixed. The key differentiator between the three is the way the rate of return is determined.
Variable annuities generate returns based on investment performance of separate accounts consisting of stock or bond portfolios. Similar to mutual funds, these accounts enable investors to invest for greater returns through professionally managed portfolios. As with mutual funds, the rewards are generally commensurate with the risks. So, variable annuities are more suited for investors who understand mutual funds investing and the risks associated with them.
Indexed annuities generate their returns through participation in the percentage gain of a major stock index, such as the S & P 500. If the index gains 20%, a portion of that return, after a participation rate and a rate cap is applied, is credited to the annuity account. Participation rates vary as do cap rates, so the higher each of these rates are, the higher the yield that is credited. Indexed annuity investors are willing to give up a portion of the index gain in return for protection against a decline in the index. Even in market declines, indexed annuity accounts are credited with a minimum rate of return. Because of this added protection, indexed annuities are suitable for investors of all risk tolerances.
Fixed annuities generate a fixed yield, often guaranteed for a certain period of time. The yields are based on the yields generated from the investment account of the life insurance company, so they tend to be higher than the yields on equivalent investments such as CDs. Fixed annuities are best suited for investors who seek the greatest amount of stability and predictability.
Choosing the best deferred annuity from among the three primary types is really a function of your own investment preferences and tolerance for risk. The best deferred annuity strategy might be to create a portfolio consisting of all three which would provide upside potential with optimum stability over the long term.
Comparing the Best
Once you’ve determined which type of deferred annuity is most suited for you, it would be important to narrow your choices even further in order so that you can make some straight across comparisons between the products. When prospective annuity buyers learn that there are dozens of life insurance companies offering hundreds of annuity products, through many different distribution channels, they often become discouraged and frustrated. It’s nearly impossible to conduct an effective comparison in a timely manner.
Finding the best deferred annuity can be made much simpler by narrowing the field of annuity providers to the very best companies. In the case of annuities, the best companies are defined by their financial condition, which, when rated by the independent rating firms, indicate their ability to fulfill their financial obligations in the worst of economies.
Companies rated “A” or higher are considered the best in that respect. With several dozen companies rated “A” you still have a range of competition that will produce the best rate of return, the most reasonable expenses, and the highest rate guarantees. But, more importantly, they provide the assurance that your funds are backed by best companies in the industry.