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Do you know the 5 common mistakes made when investing in annuities? Well, investing in annuities can sometimes be tricky and you need to know how the contracts work so you don’t make a bad financial decision.
However, once you understand these 5 common mistakes you will be able to make a better decision on whether or not an annuity is right for you.
A lot of these mistakes could be avoided if clients were educated on annuities’ pros AND cons. You really need to know the drawbacks of any financial instrument you decide to purchase BEFORE you purchase it.
Before making any final decision you need to answer the question, “Is an annuity a good investment?” And the answer to that question is going to be different for everyone.
In this video I’m going to help you answer that question by showing you some of the common annuity investing mistakes. It really comes down to understanding what annuities are designed to do, and then determining if an annuity would accomplish your goals.
I will give you a basic review of the 5 common mistakes made when investing in annuities here:
1. Not Being Aware of Annuity Fees – Not all annuities have fees. But some annuities, like variable annuities, typically have fees. Some of these fees include Mortality & Expense fees, Management fees, and Administrative fees. Also, you can add riders to variable annuities (and fixed index annuities) for an additional fee. You need to understand what these fees are paying for so you can determine whether or not you should buy an annuity.
2. Not understanding Surrender Charges – Most annuities, whether variable or fixed, will have surrender charges for early withdrawal of funds. Annuities are typically longer term contracts, maybe even up to 10 years. Don’t get one if you are not comfortable with letting your money work for a couple of years. This does not necessarily make all annuities a bad financial product. It just means you need to be aware of surrender charges and make sure the benefits from the annuity contract are worth it.
3. Ignoring Interest Rate Risk – You may not know what the phrase interest rate risk means. But you’ve probably thought about it before purchasing a bond, annuity, or even a bank CD. In a nutshell, interest rate risk occurs when you commit your money for specified time period, let’s say 5 years. You can lock in your interest rate for that 5-year period, but if interest rates rise during that period you would miss out on the higher rate because your funds are committed to a 5-year investment. Interest rate risk occurs with bonds, annuities, and even CD’s at your bank. When you lock in an interest rate for a specified time period, you always run the risk that better interest rates may come along that you aren’t ready to take advantage of since your funds have already been committed to another investment.
4. Not Fully Understanding What The Annuity Is For – Sadly, sometimes people purchase financial products without fully understanding the purpose of the product. And it’s no different with annuities. Before purchasing an annuity make sure you know what your goals are. Then you need to understand if the annuity can meet those goals. There are some things annuities can do very well. And there are some things they don’t do very well. So understand the purpose of your annuity purchase.
5. Not Taking Advantage of Fixed Index Annuity Allocation Options – Fixed index annuities allow you to allocate your funds across different interest crediting options. Typically you will have an index option, such as the S&P 500. You will also typically have a fixed rate option, such as a guaranteed interest rate for the year. Usually the index options give you the potential to earn a higher rate of interest if the market does well. If you allocate all your funds to the fixed rate option you will not have the potential to earn higher interest.
Finally, make sure you understand what you are getting with any annuity. Understand the benefits and if those benefits are going to help you meet your retirement goals.