10 Tips to Finding the Best Annuities

If you're looking for a great way to protect your money and to earn a consistent return, then annuities are definitely a financial instrument that you should be interested in. Annuities are generally provided by life insurance companies. You can pay money to them, let it grow on a tax-deferred basis, and then receive it back incrementally. Before you choose an annuity, there are several things you should keep in mind. Here are the top ten tips for finding the right annuity for you.

1. Check the Annual Cost

According to Morningstar Inc, the average management and insurance fees on an annuity is 2.27%. This compares to the average mutual fund fee of 1.44%. Although 2.27% may not seem like much, it can really add up if you have a large sum of money and you leave it in an annuity for a long period of time. It's definitely possible to find an annuity with low fees, so it pays to shop around.

2. Fixed Annuities

If you are looking for a consistent income payment, then fixed annuities are the way to go. Whatever the amount you deposit, you might expect to get around 3% back per year.

3. Variable Annuities

If you have a more moderate tolerance for risk, then you might choose a variable annuity instead. The rate of payout will fluctuate with the prevailing market interest rate. Sometimes you'll get more, and sometimes you'll get less. Typically, though, your principle is always safe.

4.Equity Indexed Annuities

This is for the investor who has a higher risk tolerance. Your annual payout may be based on something like the S&P 500 index. This has the potential for the greatest returns, but you also risk losing some of your principal.

5. Check the Surrender Charges

Annuities can sometimes pay steep penalties for withdrawing your money early. Sometimes, this can be as high as 5 or 7% in the first few years. If you think you might need access to your cash at some point, then you might want to look around for annuities with lower penalties. On the other hand, steep penalties can be a great deterrent to withdrawing your money if you think you need some extra incentive to stay disciplined.

6. Be Leery of High Rates

Often, you might be tempted to choose the annuity with the highest payout. However, sometimes these high payouts might be too good to be true. The insurance company may be investing the money in risky assets which might one day collapse.

7. Check the Tax Benefits

Typically, Annuities are protected from taxes unless the principal is withdrawn. These tax benefits can vary greatly depending upon your tax bracket. If you are in the highest tax bracket, then you will have a different set of decisions to face than if you are in one of the lowest.

8. Lawsuit and Bankruptcy Protection

You should check to make sure that the annuity you choose is protected in case you are sued or if you must file for bankruptcy at some point in the future. This is especially important if you are a doctor, since a single malpractice suit could completely wipe out your savings and put you out of business. This is one of the most attractive elements of annuities for some people.

9. Pay Attention to Your Age

Depending on your age, certain annuities may make more sense than others. For example, if you are nearing retirement age, then you might want to go for a fixed rate annuity. This will protect you from any unexpected short term market swings. On the other hand, younger people might want an annuity that has a higher probability of growth.

10. Check Your Other Options

Finally, before you put your money in an annuity, you might want to make sure that you have maxed out your other tax-deferred options like your 401(k) and IRAs. These sometimes have more attractive terms and serve much the same function.

Keep these tips in mind when looking at annuities, and you're sure to make a great choice.