Annuities in general are difficult for the average baby boomer to fully understand. It doesn’t help that different stakeholders in the annuity industry have different stories to tell about the features, benefits, and costs.
I have more interest in fixed annuities because of their potential for providing “pension-like” retirement income for life. Therefore, I read a lot about immediate and deferred fixed annuities, including newer products intended to address some of the cost and liquidity concerns.
Recently the Best Life column in the U.S. News and World Report Money section ran a short series titled “What You Need to Know About Annuities.”
The National Association of Fixed Annuities (NAFA) read the U.S. News piece and published a “reply” article. The reply document focused on clarifying the important differences between variable and fixed annuities. Obviously, these clarifications were intended to project fixed annuities in a more favorable light.
In summary, these are some of the points I found important as told in both stories:
- An annuity – fixed or variable – is not a true investment. Rather, it is a contract between you and the insurance company that issues the annuity.
- Fixed annuities protect against market declines whereas conventional variable annuities do not. This explains why retirees with fixed annuities fared better during the recession compared to owners of variable annuities.
- Although conventional fixed annuities carry a risk of principal loss from an early death, there are income riders and optional policy terms that can reduce this risk, for a price.
- Mutual insurance companies (owned by policy holders) may have better financial stability than stock insurance companies.
I encourage you to read more about fixed annuities yourself, rather than relying on a sales person to educate you.
The reply paper from NAFA can be downloaded here.