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In The Money August 6th, 2009

Articles that discuss the earning of money, the investment of money, the saving of money.


Mike Brandone

Now he’s gone and done it! Yes, we are going to discuss the worst investment in the world as told to you by the television and radio pop planners out there: annuities. My very first question to you is, "If you could get an investment today where you would never out live the income stream would you buy it?" If you answered yes you just purchased an annuity. In its purest form this is what an annuity is, an income stream for life. Another reason for an annuity is that during the accumulation phase your investment is tax deferred until you access your funds. So an investment you cannot out live while taxes are deferred until you access said funds. Why not invest?

As we do here in America we have to jazz up our annuities for the consumer. Who would ever purchase such a boring product? Well, a lot of Americans purchase this product every day. Our greatest challenge is understanding what we purchase and how it actually fits into our plan. I've seen hundreds of clients who have no clue as to why they purchased certain investments. Annuity sales in California rank right at the top. Promises made by sales people make this product sound too good to be true and if it sounds that way it probably is, but wait! It's not the Annuity's fault! It's the fault of the person selling a product they are either unfamiliar with or just don't understand.

I'd like to address the basic types of annuities today to help clear up the confusion. First we'll take the product from the most conservative to the more aggressive type annuity and finally I'll address the riders you can purchase.

Annuities come in three offerings:

Fixed Annuities - this product is just like it sounds. You invest funds into a fixed annuity and receive a fixed rate of interest, basic stuff right? Well there is a little more to it because you have an option to choose your rate and term, but all in all, you get paid a fixed rate of return for your investment.

Equity Indexed Annuities - these products are classified as fixed annuities but the investor has the right to purchase options in an index such as the S&P 500, the Russell 2000 or a number of other indexes offered. Remember you are not investing directly into the market, the insurance company is buying an option, if the index increases you share in the profits, if the index stays flat or decreases the insurance company lets the index expire leaving you without loss. There is really more to it than those two sentences but I don't have the column space to detail the entire process. Basically, you receive a very small fixed return for the opportunity to share in potential market returns with little downside.

Variable Annuities - these are just what they sound like, annuity contracts wrapped around market investments, sometimes mutual funds and other times called sub accounts. This product allows you to invest into the market and take advantage of tax deferral. But you accept all the risk if the underlying investments increase or decrease in value.

Here comes the sexy part. Not that choosing from one of these three products was difficult enough, the insurance companies have added a number of benefit riders to the product. Cash bonus to invest has been added (they generally add cost and length to any charges you might receive when you want these funds). Guaranteed Income Benefits (guaranteed income rate 5 or 6 % during retirement), Guaranteed Withdrawal Benefits (5,6, or 7 % annual withdrawal without invading your principle) Guaranteed Death Benefits (Helps pay the taxes by giving you a percentage more than the account value at death) and Long Term Care riders are all available benefits added to these products. Using any or all of these riders with any of the three forms of annuities should be used for you completing your financial goals, not just purchased as a standalone investment. If that has happened to you we can help. Contact us and we will help identify your product and help you determine if it's right for you and your financial plan.


Michael Brandone, CLU, ChFC, CFP is a financial Services professional with over 25 years experience in financial planning. Mr. Brandone owns Horizon Financial Services a full service financial planning agency in Del Mar CA, He also owns Vue Insurance Services an Insurance brokerage firm in Del Mar, CA. To contact Mr. Brandone e-mail him at or call 858-259-0131, ext 313. Securities and Advisory Services offered through Torrey Pines Securities, Inc a member of FINRA.









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