Annuities What Seniors Need to Know

September 2, 2021

If you are a senior, the odds are high that someone has tried or will try to sell you an annuity. While these financial products are useful, they are complex and can come with risk, especially if you don’t understand what you’re signing. We’re here to explain what seniors need to know about annuities. 

How to Protect Yourself 

Understand what an annuity is before your sign a contract. Understand the terms and conditions of the contract. You have the right to seek legal advice.

Never sign an annuity contract under duress. If they are pressuring you to do so, the answer is no. In fact, it is illegal for the insurance agent to pressure you to buy it. Beware of scams such as being told to take out a reverse mortgage to have money to put in the annuity. 

Determine If an Annuity Is Right for You Before You Start Shopping 

There are several questions you can ask yourself to determine if an annuity is right for you.

1. Can I afford to tie up my money for years?

You can’t borrow against an annuity like a 401K, and you can’t cash it out like an IRA without steep penalties. 

2. Do I have an emergency fund that can cover large, unexpected expenses? 

This prevents you from having nothing to live on after you’ve paid for a roof repair or car repairs.

 3. Will I have money to pay for long-term care and healthcare? 

An annuity generally guarantees an income. That income isn’t going to go up because you’ve moved into a nursing home. You may want to take out a long-term care insurance policy before buying an annuity. Then make sure the annuity payments can cover your insurance premiums with enough left over to live on. 

4. Can I cover my living expenses until I start getting payments? 

Immediate annuities make their first payment immediately, hence the name. Other types of annuities delay the payments. You’ll get more money each pay period if you wait, but there is no point buying an annuity if you go into debt waiting for the contract to be activated. 

5. Can I manage on a stable income?

Fixed annuities will pay a set return every year. You can learn more about fixed annuities here. Variable annuities potentially offer higher returns, but you risk receiving less money than you would from a fixed rate annuity when the market is down. If you include inflation protection in the annuity, then you’ll receive less money each year to offset the cost-of-living adjustments. 

If the answer to any of these questions is no, then you shouldn’t buy an annuity. 

What Are the Benefits of Annuities? 

First and foremost is the guaranteed rate of return. Simplicity is another reason. You’ll increase the returns if you contribute more to the annuity and if you defer the date you start collecting money. You don’t have to start collecting money from the annuity unless the contract specifies that. Annuities grow tax-free. Unlike 401Ks and IRAs, there are no contribution limits. The annuity can be part of your estate, but it will pass outside of probate. You choose the beneficiary, and you can set it up so that they receive the payments after you die. 

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