How to Find the Right Annuity for You

Annuity companies had their own scandals long before the mutual fund sleaze grabbed the headlines. Yet even now, annuities aren’t in the clear. There are reports that variable annuity issuers also allowed select investors to make guaranteed-profit trades just as some mutual funds did.

Annuities can be valuable financial tools for the right investors. To buy the right annuity for you, use the same rules I recommend for mutual funds. Look for annuities that are no-load, have low expenses, and have low or no surrender fees. Fixed-rate annuities can be particularly helpful to investors. Studies show that adding a fixed annuity to a portfolio can ensure that the portfolio will last longer under most market conditions. (More details were in the April 2002 issue and are available in the Annuity Watch section of the web site Archive.)

Fortunately, there are some good choices that meet my standards for investors considering fixed-rate deferred or immediate annuities.

TIAA-CREF is an organization that provided annuities to teachers and university professors for years before offering mutual funds and other products to the general public. The firm always charges very low expenses and has no commissions. It offers a fixed-rate deferred annuity that currently carries a 3.15% minimum rate guaranteed for five years. After five years, there are no surrender charges. You can take up to 10% of the initial contribution each year with no surrender charge. Additional withdrawals have a surrender charge of 6% the first year, which declines each year and is eliminated after year five. TIAA-CREF also offers an immediate annuity with similar terms.

TIAA-CREF has consultants available to discuss their different annuities, provide illustrations, and help determine if an annuity is appropriate for you (800-223-1200). More details are on the web site at www.tiaa-cref.org

Vanguard also offers both a deferred annuity and immediate annuity, offered through Jefferson Pilot LifeAmerica. The fixed annuity locks in a 3.60% interest rate for five years. Up to 10% of the annuity’s value can be withdrawn each year without penalty. Additional withdrawals will be subject to surrender fees on the same schedule as the TIAA-CREF annuity.  Vanguard annuity specialists are available at 800-522-5555. More details are on their web site at www.vanguard.com

Annuities also can be purchased through Fidelity Investments. Fidelity works with several insurers and can make an annuity available to you through one or more of them. The insurance companies Fidelity currently uses are GE Capital Assurance Company, John Hancock, Principal, and Travelers.

Because several insurance companies are used and some offer more than one annuity, the interest rates vary, as do the guarantee periods. The yields also can vary by state to state. Surrender charges are not uniform and might last seven years instead of the five years for TIAA-CREF and Vanguard annuities. Most of the annuities allow up to 10% of the annuity’s value to be withdrawn annually. For more information, call 800-544-4702 or go to the web site at www.fidelity.com.

You probably will find higher yields offered on annuities from some other insurers. Some sources to check are annuityzone.com, topannuities.com, and annuityshop-per.com. Or you can call Annuity & Life Insurance Shopper at 800-872-6684 and Quotesmith at 800-556-9393. Some other sources are listed on the web site archive Annuity Watch section.

If you find a more attractive yield, be sure it is a real yield, known as the “net yield” you will be paid after all charges are subtracted. Also, check the guarantee period and how the rate will be adjusted after the guarantee ends. Finally, be suspicious of “bonus rates” and other gimmicks. These often are not guaranteed and can disappear without notice. Treat these yield boosters as something extra. If the annuity doesn’t make sense without them, I’d look at another annuity.

All the annuities featured here offer various payout options at distribution time. That is another feature you want to check when shopping. Some insurers limit your payout options or make it difficult for you to transfer the annuity to another insurance company.

If you own an annuity you aren’t happy with, each of these firms can arrange a tax-free transfer of your current annuity into one of theirs. Finally, always check the financial safety rating of an insurer before buying an annuity. A little bit extra yield is not worth the risk of losing your source of lifetime income.