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Annuities: How They Can Impact Your Financial Health and Several Rules For Investing In Annuities

Kim Gardey founded Gardey Financial Advisors over 33 years ago.  One of his goals in founding the company was to educate his clients so they would be able to make better financial decisions for themselves.  While he no longer leads Gardey Financial Advisors, he continues to work toward his original goal of educating our clients. He has authored the following piece regarding Annuities that I am sure you will find interesting.

There was a little girl,

     Who had a little curl,

Right in the middle of her forehead.

When she was good, She was very good indeed,

But when she was bad she was horrid.

- Henry Wadsworth Longfellow

Like the little girl in Longfellow’s poem, annuities are excellent at achieving certain financial planning goals, but they may also have negative features that may more than offset any benefits they provide.

Where Annuities Are “Very Good”

  • Tax deferral
  • No limit to the amount that can be invested
  • Lifetime Income
  • Protection against probate
  • Need not be included in student aid application

Where Annuities Can Be “Horrid"

  • High commissions
  • High annual fees
  • High penalties for early withdrawal
  • Complexity
  • Confusing variety
  • Principal may not be accessible
  • Protection in event of the insolvency of the insurance company varies from state to state

In order to protect yourself when purchasing an annuity, you should apply the following rules:

Rule 1:  Determine if there is an alternative way of achieving your financial planning goal that does not involve the purchase of an annuity

Rule 2:  Determine the penalty (if any) for early redemption of the annuity

Rule 3:  Ask the salesperson what commission they will receive from the sale of the annuity.  Have them put their response in writing.

Rule 4:  Determine whether a commission-free annuity is available with similar features.

Rule 5:  Be aware of the financial strength of the insurance company issuing the annuity.

Rule 6:  Be sure that you understand the cost of each of the features that are available with the annuity.  As with optional equipment on a new car, you want to balance the cost of each option with the benefits each option provides.

Rule 7:  If you are purchasing an annuity from a financial advisor who will receive a commission from the sale, obtain a second opinion from a disinterested advisor.