An annuity can be a complicated financial product. Before purchasing or replacing an existing annuity one should carefully review the contract details, terms, and contract period known as a conditional surrender charge period.
Used correctly, an annuity can be a great tool to produce a reliable stream of income over many years. I have numerous clients that are drawing just the interest off fixed annuities purchased in the 2006-2010 time period. The guaranteed interest rates were pretty good at 3% -4.5% during that time frame. These clients are preserving their principal for other goals.
However, my focus today is on the Contract Maturity Date. The Contract Maturity date can usually be found on the policy declaration page located in the first few pages of an annuity contract.
Why is the Contract Maturity Date important? Many annuities are sold without much thought given to the maturity date. The date just does not get the attention it needs most likely due to the inexperience of the agent and / or the purchaser. In many cases an arbitrary date is chosen such as age 80, or 85 etc. The insurance company though will usually accept a date of age 95 or longer if the annuity is with a quality insurance company.
However, let’s say you have a contract that guarantees a minimum rate of interest of 4% (much better than a CD today), and the annuity owner age 79 is nearing the maturity date of age 80. The annuity owner is very happy with the current income while preserving the principal? Will the company keep paying the minimum guaranteed interest rate at age 80 or beyond? Or, will they require a distribution or annuitization* of the principal? This is very important, as some contracts will not allow an annuity owner to request an extension of the Maturity Date if the current calendar date is within 30-60 days of the current maturity date.
Why would an insurance company not want to extend the maturity date, you might be asking? Well, if they have guaranteed to pay you 3%-4% on your principal, they (insurance co) need to be able to earn more than that on their general account investments so as not to have a loss. This may be a struggle in low interest rate environments. This, along with many good reasons, is why you should have your existing annuity professionally reviewed, and consider the contract maturity options on any annuity purchase.
For more information, call Stan Hawkins at (828) 274-1200.
* Annuitization is a term used in the insurance industry. It simply means that you give a portion or all of your principal to the insurance company in exchange for a guaranteed stream of income. This feature is effected by your age, current interest rates, and how competitive the insurance company is. In most cases this is an irreversible decision.