Fit Financial Consulting LLC is a Colorado domiciled registered investment advisor.
Annuity analysis is provided for $1,000.00. Please see my menu of services for a reduced pricing schedule for this service.
Fixed annuities are typically the simplest annuities available today. For the most part, a stated interest rate is quoted with a minimum guarantee, below which that interest rate is guaranteed not to fall. This guarantee, like all annuity guarantees is back by the claims and paying ability of the annuity company you are invested with. For this reason, the financial strength of the annuity company is often one of the most important factors when comparing fixed annuities. Essentially the annuity company is bundling a group of fixed income investment vehicles like bonds, and reselling them to you at a lower rate than what they are receiving. The spread between the interest rate they receive, and the interest rate they pay you, is how they make their money.
If you are looking at investing in a fixed annuity, or have an existing fixed annuity, I can help you evaluate that fixed annuity relative to other investment options, and provide a better picture of the how financially stable the insurance company is.
Fixed index annuities (FIAs) can be far more complicated than the more traditional fixed annuity they often get lumped together with. These annuities are first tied to an index, like the S&P 500 or DJIA. Then the annuity company institutes a cap or participation rate on that index. Finally, the annuity company provides a minimum guarantee for the growth of the account to make it more secure to the investor. At the end of each period, typically a month, the annuity company looks at what the index did and then applies the cap or participation rate to determine what you will get as the investor. For example, if the index was up 5% and you had a cap of 4% or an 80% participation rate, your account would be credited 4%. Unfortunately, it does not stop there, as many company apply these caps and participation rates to the upside but not the downside. Therefore a loss of 12% in one month, could wipe out 3 months’ worth of 4% gains. Once it finally comes time for you to withdraw your money, the annuity company will look at what you were able to lock in through your participation in the index, and the minimum guarantee (say 2-3% annually) and give you the greater of the two values. Here the annuity company is making their money off of the spread between what the index actually did and what you were credited with due to the cap or participation rate.
When evaluating an FIA, the cap or participation rate is often the most important factor to consider. A gain of 15% really does you very little good if you have a cap of 3-5%. The obvious secondary factors are the index to which your investments are tied and the minimum guaranteed the annuity company is promising. That minimum guarantee also brings us back to the question of the issuing company’s financial strength. These are all things that I can help you evaluate relative to other investment options, other FIAs, or on a standalone basis.
Variable annuities (VAs) range from the very simple, to the overly complicated. In fact, most variable annuities tend to fall on the complicated side of the scale. When evaluating a VA, you have to understand the underlying investments, any allocation restrictions, the cost structure, and any and all guarantees. First VAs are just that, variable. Your investment performance in tied to the underlying sub-accounts you choose, or are forced, to invest in. Some annuity companies offer a very limited array of investment selections, while others provide a daunting expanse of investment selections. Some will even force you into set allocations based on the guarantees that you have elected, preventing you from making the selection that may be best for your situation, or using models that will move you in and out of the market to protect the annuity company from large losses. Second, you need to understand all of the costs associated with a VA. VAs typically start with Mortality, Expense, and Administrative (ME&A) fees. These fees will frequently range from .9%-1.7%. Then you will have the expenses associated with any living or death benefits you elect, frequently ranging from .3%-1.5%. Finally you have the internal expenses of the underlying sub accounts ranging from .15%-2.5% (these internal expenses are already accounted for when viewing the performance of the sub accounts). Thirdly, you must understand the guarantees that you are buying. Be it a living benefit designed to guarantee you a certain level of growth in the account as well as a set level of lifetime income, or a death benefit designed to lock in your market gains to provide a payout to your beneficiaries, all of these benefit have their own special quirks, and all of them come at a cost.
Ultimately the annuity company is making their money off of the fees listed above which can range from a total of 1.05% to 5.7%. These are the very same fees you have to overcome in order to take advantage of the variable investments you have elected inside of the VA. Overcoming 1% on a simple VA contract is not overly challenging. However, overcoming 2.5% plus a guaranteed step up of 5% requires that your underlying investments exceed 7.5% just for your account to recognize a market based step up as opposed to simply realizing the minimum guarantee the annuity company is providing.
The description above has likely generated even more questions than you originally had, simply because you may not have known what to ask. From the simple, to the complex, I’m happy to help with any and all VA questions you may have. I can also help you delve deeper into any VAs you are currently considering, or already own.
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