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What Do People Need to Know About Annuities?

August 18, 2015 by Sheryl J. Moore

June marked the second annual commencement of National Annuity Awareness Month- a month dedicated to educating consumers about annuities, their benefits, and features.  Since I was out on maternity leave last June, this was my first opportunity to be involved in the festivities. In fact, I was able to obtain the Iowa governor’s Proclamation, identifying the indexed annuity capital of the world as the first state for formally recognize “Annuity Awareness Month” just a couple of months ago.

Over the course of June’s 30 days, my annuity research firm received dozens of calls and emails with questions about annuities from prospective annuity purchasers. It was easy to see that annuities are still the black box of the insurance industry…what a shame.

Did you know that that the #1 fear of Americans is outliving their retirement income? (Death comes-in as the second top fear.) What an awesome opportunity for our industry to educate, right?

I know that most of my colleagues would agree that more Americans need to know about annuities. As a result of the many questions fielded by Wink, I was inspired to draft a quick 100 pertinent annuity facts. Here we go!

  1. Most people do not know what an annuities is;
  2. Those that believe that they know what an annuities is, usually do not;
  3. The greatest reason annuities are misunderstood by the public is the media’s perpetual distribution of inaccurate information about annuities;
  4. Annuities have existed since 1100 – 1700 B.C.;
  5. Annuities are a type of life insurance product;
  6. Life insurance guards against the risk of dying too soon, while annuities guard against the risk of living too long;
  7. Annuities are vehicles that are used to accumulate retirement money and ensure that you receive an income you cannot outlive, once in retirement;
  8. An annuity is the only financial instrument that can guarantee you a paycheck for the rest of your life, no matter how long you may life;
  9. Another benefit of annuities is that they accumulate earnings on a tax-deferred basis- you don’t pay taxes on the annuity funds until you withdraw them;
  10. Most annuities are funded with qualified money, meaning the money has yet to be taxed;
  11. The guarantees on an annuity are only as good as the claims-paying ability of the insurance company;
  12. An annuity purchaser should feel confident of the financials and ratings of the insurance company that they do business with, to ensure due diligence in regards to the insurer’s claims-paying ability;
  13. The most recognized firms that provide ratings of insurance companies are Standard and Poor’s and A.M. Best;
  14. One must ensure that an annuity is not only attractive and suitable, but meets their goals, objectives, and risk profile;
  15. The salesperson that sells you mutual funds most likely does not sell fixed or indexed annuities;
  16. The salesperson that sells you homeowners insurance most likely does not sell annuities either;
  17. You can purchase annuities directly from life insurance companies, in some banks, through some Broker Dealers, or through certain career insurance agents and independent insurance agents;
  18. There are two main types of annuities: deferred annuities and immediate annuities;
  19. Deferred annuities allow you to defer taking an income until you have accumulated additional earnings;
  20. Immediate annuities allow you to commence income payments within the first year of the annuity purchase;
  21. Every deferred annuity offers the purchaser the choice of annuitization;
  22. Annuitization allows an annuity purchaser to change all or a portion of the annuity contract from a cash accumulation period to a periodic distribution of funds;
  23. Most deferred annuities will allow the purchaser to annuitize the contract, without paying surrender charges, after year one;
  24. Annuitization functions similar to an immediate annuity;
  25. Most companies offer several types of income options for annuitization and immediate annuities;
  26. Although a life only income option results in the greatest payment for annuitization/immediate annuities, it also means that if the purchaser dies the day after the annuity purchase, the insurer gets to keep the annuity’s value;
  27. In addition to life only income options, there are period certain income options, which guarantee that income will be distributed for a minimum specified period (such as 10, 15, or 20 years);
  28. Many income options allow for a spouse to continue receiving income payments, should the annuity purchaser die;
  29. There are two sub-types of annuities: fixed and variable;
  30. There are also two sub-types of fixed annuities: traditional fixed and indexed;
  31. Fixed and indexed annuities are insurance products, where variable annuities are investments;
  32. There is a direct inverse relationship between possible risk and possible reward, which holds for annuities: to realize greater reward, one must generally accept a greater risk, and vice versa;
  33. Generally, financially conservative individuals are better-suited to fixed annuities;
  34. Generally, financially aggressive individuals are better-suited to variable annuities;
  35. Generally, financially moderate individuals are better-suited to indexed annuities;
  36. You cannot lose money as a result of market performance with fixed and indexed annuities;
  37. Fixed annuities earn interest at a stated rate, which is declared by the insurance company;
  38. Fixed annuities may offer an interest rate that is guaranteed for more than one year- these are referred to as ‘multi-year guaranteed’ annuities;
  39. Indexed annuities earn limited interest, based on the performance of a stock market index;
  40. The most common stock market index to be used as a benchmark of indexed interest on indexed annuities is the Standard and Poor’s 500 Index;
  41. Indexed annuities generally limit the amount of indexed interest earned via the use of a participation rate, cap rate, or spread rate;
  42. Indexed annuities do not allow the purchaser to invest directly in the index;
  43. Indexed annuities are not a ‘hybrid’ of fixed and indexed annuities;
  44. The index-linked interest on indexed annuities is provided through an instrument the insurance company purchases, called an ‘option’;
  45. Dividends on the S&P 500 (and other indices) are not included in indexed annuities’ crediting calculations because the purchaser isn’t actually invested in the index;
  46. Fixed annuities are currently averaging credited rates of 2.78%;
  47. Interest on indexed annuities is ALWAYS limited in one form or another, even if the product is “uncapped”;
  48. Indexed annuities’ caps are currently averaging 3.73%;
  49. Variable annuities allow purchasers to invest directly in stock market indices, mutual funds, and more;
  50. Variable annuities have unlimited potential for interest earnings, but also unlimited potential for losses;
  51. Fixed and indexed annuities are issued via an ‘annuity contract’ while variable annuities are offered via a ‘prospectus’;
  52. Although fixed annuities have existed for eons, variable annuities were not developed until 1952;
  53. Although variable annuities have existed for over 60 years, indexed annuities have only existed for 20 years;
  54. Indexed annuities are not intended to provide market-like performance;
  55. Indexed annuities do not compete against variable annuities;
  56. Indexed annuities most closely compete with fixed annuities;
  57. Indexed annuities are intended to outpace fixed annuity earnings by 1% – 2%;
  58. Surrender charges on deferred annuities protect the insurance company from unanticipated claims;
  59. Although deferred annuities have surrender charges, most contracts allow the purchaser to take as much as 10% of the annuity’s value out annually, without application of these charges;
  60. Most deferred annuities waive the annuity’s surrender charges in the event of either disability, nursing home confinement, and/or terminal illness;
  61. You can purchase an annuity with a single lump-sum premium, or a series of premium payments;
  62. Single premium deferred annuities only allow for a single annuity payment;
  63. Flexible premium deferred annuities allow more than one annuity payment;
  64. Fixed annuities generally guarantee at least 1.00% interest annually;
  65. Indexed annuities guarantee at least 0.00% interest annually;
  66. The fixed allocation option of indexed annuities generally guarantee at least 1.00% interest annually;
  67. Only the fixed allocation options of variable annuities guarantee interest each year;
  68. The fixed allocation option of variable annuities generally guarantee at least 1.00% interest annually;
  69. Indexed annuities feature a secondary guarantee that promises interest on a portion of the premiums paid, in the event of surrender, death, or non-performance of the index;
  70. Annuities must benefit three parties- the purchaser, the salesperson, and the manufacturer;
  71. Annuity purchasers benefit from annuities’ credited interest rates;
  72. Annuity salespeople benefit from annuities via a commission that they are paid by the manufacturer;
  73. Annuity manufacturers benefit from annuities via a spread, a.k.a. profit;
  74. It is because the guarantees on fixed annuities are relatively rich that credited rates on fixed annuities are low;
  75. The primary determinant of indexed annuity rates is the price of options that are sold to the insurance company;
  76. Bond rates and market volatility also have an impact on indexed annuity rates;
  77. Indexed annuities offer 12 different methods of calculating the indexed interest that is credited to the contract;
  78. The many different options for indexed interest crediting on indexed annuities is a result of the independent agent distribution model that the products are typically distributed through;
  79. All things being equal, an indexed annuity with averaging in the indexed interest calculation (crediting method) will offer a more attractive rate than a similar option without averaging;
  80. All things being equal, an annuity with a Market Value Adjustment (MVA) will offer more attractive rates than an annuity without one;
  81. All things being equal, an annuity with a premium bonus will have less attractive rates than an annuity without a premium bonus;
  82. Although variable annuity sales outnumber their non-variable brethren by 4:1, indexed annuity sales are equivalent to fixed annuity’s sales levels;
  83. While just a couple dozen insurance companies sell variable annuities, 56 different insurance companies offer indexed annuities;
  84. Although more companies offer indexed annuities than variable annuities, nearly 100 insurance companies sell fixed annuities;
  85. Annuities frequently offer the purchaser the opportunity to take advantage of extra features via a rider, or endorsement that offer additional benefits such as a return-of-premiums paid upon surrender;
  86. Variable annuities offer the most diverse offering of riders of any type of annuities;
  87. Guaranteed Lifetime Withdrawal Benefit (GLWB) rider guarantees annual withdrawals of the annuity’s value, at a specified level, regardless if the contract’s Account Value falls to zero;
  88. Guaranteed Minimum Accumulation Benefit (GMAB) rider guarantees that the Account Value of the annuity will grow by a minimum specified percentage over a period of time;
  89. Guaranteed Minimum Death Benefit (GMDB) rider guarantees that the annuity Death Benefit payable will be no less than a specified amount;
  90. Guaranteed Minimum Income Benefit (GMIB) rider guarantees that the annuity’s income payments will be at least a specified amount, when taken over a specified time period;
  91. An annuity owners can typically exchange one annuity for another, via a 1035 exchange, without causing a taxable event;
  92. One can purchase an annuity for an Individual Retirement Account (IRA), particularly if they are concerned about guaranteeing an income in retirement;
  93. The maturity date on an annuity is the latest point at which the purchaser MUST take income from the contract, and can no longer accumulate earnings;
  94. Annuities offer their purchasers a type of insurance, similar to that provided via the Federal Deposit Insurance Corporation’s coverage on bank products, through their state’s ‘guarantee fund association’;
  95. The insurance companies that sell insurance in any given state are responsible for funding claims though the guarantee fund association for failed insurance companies within that state;
  96. The amount of coverage provided through guarantee fund associations varies in each state, but is generally $250,000 as of the date of this article’s publication;
  97. Just because a company sells a lot of annuities does not mean that they offer the best annuities;
  98. The best-selling annuities are not necessarily the BEST annuities;
  99. Although I am a licensed insurance agent, and frequently cited as an annuity expert, I have never sold an annuity;
  100. Neither myself, nor my companies, endorse any insurance company or annuity product.




Sheryl Moore is President of the Society for Annuity Facts and Education (SAFE), a non-profit organization. She is also President and CEO of Moore Market Intelligence, an indexed product resource in Des Moines, Iowa. She has over a decade of experience working with indexed products and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at sjm@indexedrockstar.com.

Categories: Sheryl's Articles
  • John Olsen

    Very nice job, Sheryl! One may hope that some of the financial journalists who write articles about annuities without a shred of understanding of how they work might.. just might… read your list of facts. Way to Go!

  • pgmcgillivray

    This is really excellent work, Sheryl, some of your best perhaps. Not many can whip off something like this–you have to have lived this business and product to do this. Thank you much.

    • Insurance_Rockstar

      Wow! Who knew such a simple piece could garner so much praise?!? Thank you, dear Paul. I appreciate you and your positive feedback!