Look Before You Leap Into Fixed Annuities

By Kristen McNamara and Shelly Banjo February 10, 2009

This article appears at the following website: wsj.com

For retirees seeking a safe place to stash cash and a quick, steady income stream, one type of fixed annuity has a lot of appeal these days: fixed immediate annuities.

Fixed immediate annuities, also called income or payout annuities, are purchased with a lump sum and begin making payments within a short period -- as soon as a month after the contract purchase.

They differ from other fixed annuities that defer the start of payments, often for years. Annuity holders pay taxes on the interest they earn when they begin receiving payments.

Payout rates for fixed immediate annuities vary with factors including your age, gender and contract terms.

For example, a 60-year-old woman who pays an insurer $100,000 could receive monthly payments between $590 and $623 for her lifetime, depending on the insurer and beneficiary options she chooses, according to ImmediateAnnuities.com.

You can use online calculators such as ImmediateAnnuities.com or FixedAnnuityDirect.com to compare payment options.

Cost-Benefit Analysis

As with all annuities, investors need to examine the details of these contracts, which can be complicated and lock up money for many years.

You need a clear idea of your life expectancy, financial goals and needs for accessible cash. Consider the insurer's financial health, the payments it offers and specific contract terms.

A financial adviser can help individuals analyze and compare annuity contracts.

"You've really got to scrub the contract," said James Holtzman, a certified financial planner and certified public accountant at Legend Financial Advisors Inc.

Investors can choose to receive payments that carry an inflation adjustment or to secure lifetime payments to a surviving spouse.

Keep in mind that additional perks can lower the amount of the fixed payments you receive.

Critics say annuities can be costly and difficult to comparison-shop, since they vary from one insurance carrier to the next.

Ask the insurance agent about costs that can affect your payment rate, such as administrative costs and commissions paid to the agent. Additionally, request the calculations or assumptions the insurance company used to come up with the payout rates.

Depending on your state of residence, you could have 10 days to a month after receiving a contract to decide whether to purchase it, said Gary Cotter, a certified financial planner in Sun City Center, Fla.

Insurer's Health

Annuities are issued by insurance companies and also sold at broker-dealers and banks. Ultimately, they are backed by an insurance company's assets. As protection against insolvency, states have guaranty funds that the insurers contribute to.

The guaranty associations continue making payments to annuity holders of insolvent companies while working to move the contracts to a financially sound insurer, according to the National Organization of Life and Health Insurance Guaranty Associations.

Maximum coverage limits vary by state but most cover at least $100,000 in present value for annuities.

If the value of your policy exceeds your state's benefit limit, you won't necessarily lose the difference, according to the NOLHGA.

Policyholder claims have priority in claims against the estate of an insolvent insurer. Insurance companies don't file for bankruptcy protection. Instead, state insurance commissioners oversee the company's liquidation.

You can check on the financial health of insurance companies through ratings agencies, such as Moody's Investors Service and Standard & Poor's, and independent sources, such as TheStreetRatings.com. Look for companies with the highest ratings.