Annuities are Legal Contracts
Yes, they are.
And that is a good thing, and much better than a
Handshakes can fade, but the letter of the law sits
potent in your safety deposit box where you may review
your policy from time to time.
Now, it is kind of strange in our society that a written contract would be sold to you by a non-attorney,
don't you think?
But that is what happened for most of you out there, even though you can bet an attorney wrote it.
Sometimes, however, your agent may have not covered all the details in your contract. Hopefully, the things he or she left out were immaterial to your satisfaction.
But typically, in an annuity contract what you as the policy owner are probably most interested in is the minimum amount of money that you will be receiving, either annually, or at the end of the term, or if you ever took a lifetime income through interest, annuitization, or an income rider.
Remember, most annuities, at least the fixed or equity indexed version, were meant to compete against the banks, so very often the contractual guarantees written will be structured to beat the banks at their own game (at least at the time of the policy's issuance anyway) and make the policy attractive enough to buy in the first place.
The good thing about a contract, of course, is that it becomes enforcable by and through law.
For this reason, annuity contracts are often chosen by our legal system, ie, the Courts, as the best way to administer an award or verdict of the court.
Imagine if you won a lawsuit against a drunk driver for $250,000. You would be compensated in the form of an annuity contract, from an insurance company, for a specific payment over a specified period of time.
Or if you were fortunate enough to win a lottery. By taking your payments over 20 years for example, you would generally receive a larger amount than if you took a lump sum. And those payments for 20 years would come in the form of an annuity from an insurance company.
Such is the reliability society bestows upon insurance companies that write annuity contracts.
But individuals rely on these legal contracts also.
Imagine if your money was in the stock market and there was a serious drop in value, what kind of remedy would you have then? Would there be any type of legal document promising you a minimum guarantee such as found in every annuity contract?
Probably not. Your only remedy at this point would be time.
Which happens to be the same remedy for a hangover, a bad credit rating and a soured relationship.
You just have to wait until the pain finally goes away.
At least with an annuity contract you have a minimum level of security in your policy based on the claims paying ability of your insurance company. (Always choose a highly rated insurer, just to be safe).
So that regardless of that market freefall, your minimum guarantees are going to start working in your favor when you really need it.
And if you think about it, most of us in our working lives
choose contracts with minimum guarantees to enjoin
ourselves to in salary negotiations with our
(unless of course you live strictly by
commission - only based model which would be the
equivalent of a pay-for-performance system - offering
the highest potential wage, combined with the highest
risk as well ).
For example, how do professional athletes, like NFL
football players, typically get paid?
Strictly by the number of tackles they make or touch
downs they get?
Nope, they sign contracts guaranteeing them a
minimum amount of compensation.
And then they get performance incentives on top of that.
The same contractual example can be applied to many
Most of us choose to work for a specific wage, for a specific time, for a specific vacation, for a specific protocol, a specific job function, etc, etc....Other than a year end bonus if we are fortunate, that is typically the way the work world works.
The same model can be applied to that portion of our monies that we do not ever want to see go down. By purchasing an annuity contract we are guaranteeing to ourselves over the course of time a minimum value in case of economic circumstances going seriously south.
And the minimum levels of security in an annuity contract are just that - only the minimums, and it is my hope - as well as the insurers hope - that you can earn annually, through fixed interest or indexing credits, significantly more than the contractual minimum.
And this does happen !
In fact, it makes insurance companies look good when their clients can pocket above average returns in their policies. So more power to you !
Always ask your agent to see some examples of returns in the contracts that he is is proposing to you.
But know what your contract says !
In Your Contract You Should be Cognizant of:
Minimum Interest Rate Offered Annually
Crediting Methodologies Offered Annually
Crediting Caps, Spreads, Participation Rates Offered Annually
Liquidity Provisions Offered Annually
Nursing Home / Waiver of Surrender Provisions
Income Rider Benefits and Fees, if Available
Death Benefit Riders Benefits and Fees, if Available
Benefits for Long Term Care, if any.
You own a contract, not so much as an investment !
Relax, it's truly all in stone from this point on out.