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Before you buy an income annuity check out the insurer’s financial strength ratings. Just as important, carefully consider your financial situation since once you buy you generally can’t take back the lump sum you paid. Here’s what you need to know.
When you buy a fixed income annuity or invest in a fixed income account within a variable income annuity, your premiums go into the insurance company’s general account. Therefore, you’re not insulated from potential losses if the company has financial problems.
That’s why it’s essential to review a company’s financial strength ratings. Professional rating services, including A.M. Best Company, Fitch Ratings, Inc., Standard & Poor’s, and Weiss Ratings rank insurance companies for financial strength.
When you buy a variable income annuity your money in variable investment funds goes into separate accounts, which are shielded from the claims of the general creditors of the insurance company in the event of insolvency.
Nonetheless, since you’re relying on the company to pay you lifetime income, it’s still important to check its financial strength ratings before buying a variable income annuity. Especially if you invest in the fixed income option, which is part of the company’s general account.
In general, if you do decide to buy an income annuity, only use a fraction of your savings. That’s because once you buy most income annuities you generally can’t make withdrawals or take back the lump sum you paid.
And once you choose how your money is paid out, you generally can’t change the payment amount or frequency. So you won’t have that money available for emergencies, medical or long-term care needs, discretionary spending, or unexpected expenses.
For an additional fee or reduced income payment, some income annuities allow you to make full or partial withdrawals. However, only some contracts offer this option and only under specified circumstances.
For example, some contracts only allow withdrawals for limited amounts, during a specified time period, or only from variable investments. And some only allow withdrawals if you buy the annuity with money from your IRA or employer-sponsored retirement plan.
Moreover, taking withdrawals reduces your future income payments and may shorten the length of time you’ll receive payments. So you may end up short of income later, which is exactly the predicament you were trying to avoid by buying an annuity. Therefore, rather than counting on a withdrawal option, plan ahead carefully and only put a part of your savings into an annuity.
Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.
Representatives are registered, securities are sold, and investment advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (800) 369-2862. Nondeposit investment and insurance products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the financial institution. CBSI is under contract with the financial institution, through the financial services program, to make securities available to members. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America. The Representative may also be a credit union employee that accepts deposits on behalf of the financial institution.
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