The fixed annuity is one of the most misunderstood investment products on the market. Most people have heard of them, but few really understand what they really are. The fact of the matter is that the fixed annuity has been over-complicated and over-sold in recent years, causing a great deal of skepticism of the product.

One of the best ways to determine if a fixed annuity is right for you is to begin to understand how the product works. It is like any other financial product, it is designed to benefit more than just you in the transaction. The goal of this sort of product should be a mutually beneficial situation where you are pleased with your return and the company offering the product is pleased with their return.

The basis of the contract is that you agree to pay the insurance company either a lump sum payment or a series of premium payments in exchanged for a future monthly or yearly benefit. The insurance company agrees to take your money, provide you with a predetermined interest or growth rate, and then distribute your money back to your in the future. These distributions are typically spread out over a number of years, and may even be set up to continue for the lifetime of the annuitant.

When it comes down to it, this is one of the major fixed annuity advantages. This insurance product is a quite safe way to ensure that you receive a monthly income payment for the remainder of your lifetime, providing you an opportunity to not outlive your income. Granted, you money will likely have diminishing value as time progresses, so this is not a meet all end all type of arrangement. When you couple this investment with other financial products, you can begin to place together an effective, safe, and beneficial financial plan for retirement.

First, buy and hold because by 2009 the global economic downturn had evaporated over ten years worth of gains.  Keeping investments long term used to be a one way ticket to huge losses.  People who held their investments from ‘07 through ‘09 lost, on average, fifty percent.  So is this the end of buy and hold?

Definitely not.  In all reality, history, over and over, has proven the market’s ability to recover.  The market has recovered from failures from the Great Depression to Dark Thursday to the tech bubble burst in early 2000.  If we learn anything, it is that the market recovers.  Assuming your investment portfolio  is relatively solid waiting to recover can be worth it in the end.  The fact is a down market is prime opportunity to pick up new stocks at prematurely deflated rates, so don’t opt for an annuity cash out.

Know your personal taste for risk.  In the downfall of a recession it may be an opportunity for some self reflection.  You may want to ask yourself this question: When the market turned did you buy, or sell your stocks to lock the loss?  Reviewing past behavior is a much better indicator of future behavior than any advice you think you may benefit from.  Take a look at where the recent markets has left you, do you need to be more aggressive to meet your goals or are you simply accepting a less luxurious retirement?

Diversify to survive.  While the markets seemed to head in one direction not all moves went in with the same vigor.  So while it is not smart to leave diversification as a replacement for solid investment attention, it can stave off large losses.  So just because the markets have turned it doesn’t mean the old ways have left the building.  Keep in mind there are more options than just stock investing – another way to hedge risk is to buy structured settlements online.

Steps To Buying An Annuity

1. What is the annuity for? First, you need to consider what you need the annuity for.  Most annuities are set up to help protect someone of the financial issues of living to long.  However, there may be other reasons such as rolling over a 401k or setting one up for a grandchild’s college education.
2. How are you going setup the annuity? When first setting up your annuity you have a couple of ways to do this.  You could set it up as an IRA, Roth IRA, or even just as a traditional annuity.  I personally like the Roth IRA because it gives you the best tax benefits.
3. What riders are you going to add? The great thing about annuities is that you can add riders to them to do everything from guaranteeing a particular cash value to helping you earn extra interest on your account.
4. What are the fees? How much does it cost to own an annuity.  The fees can range on everything from the annual cost of the policy, the cost of the riders you add on, to sales fees.  Fixed annuities tend to have higher fees than variable policies.
5. What are the surrender policies? All annuities have surrender fees; they can range from as little as 4 years to 15 years.  The fees typically start out high and lower as years pass.  For example if you have a 4 year annuity the surrender fees might start at 8% in year one, and in year two drop to 6% and in year three drop to 4% and in your four drop to 2% and in year 5 it drops to 0%.

Things You Should Watch Out For

Now that you know what kind of options are available there are some things you should watch out for.  First off, when your surrender fees drop off on your annuity the sales agent may ask you to sign a new contract.  The reason they do this is because they will get paid a big commission for signing you back on.  Whatever they tell you don’t do it.

Finally, if you’ve owned your annuity for some time and have started taking payments on it some companies may approach you about selling your annuity payments.  This is where a company will buy your annuity payments from you and pay you a lump sum.  However the downside to this is that when you sell annuity payment you will have to take a discount and what you get back is nothing what you originally paid into it.

In Closing…

Follow the steps I’ve laid out for you, you should have no problem buying your next annuity.  Also you may want to consider talking to your local insurance agent to learn more about annuities and what would be best suited for your situation.