Andrew Rosen: Annuity Basics

Welcome to the Annuity.org podcast, your path to financial freedom through better understanding annuities, selling structured settlements, personal finance and retirement planning.

I’m Terry Turner. And in this episode, we begin a three-part series explaining the basics of annuities. If you’ve heard about annuities but don’t know much about them, we’re here to get you started and up to speed.

Joining us to do that is our guest, certified financial planner and certified estate planner, Andrew Rosen. He’s also published articles on Kiplinger and Forbes.com among other places. And he’s also president of Diversified LLC, which provides financial planning and investment management services through its offices in Delaware, Pennsylvania, Alabama and Massachusetts. Mr. Rosen, thanks for being here.

Thanks for having me, Terry.

Just in simple terms, for someone who has heard of annuities but doesn’t know what they really are, can you tell us what an annuity is?

Yeah, Terry. So, at its basic, basic level, an annuity is a type of investment vehicle backed by an insurance company. So, any annuity out there always has a big insurance company backing, unlike a just individual mutual fund, or stock, or bond, or things of that nature.

How do annuities work? You put money into them. How does it generate money that you take out later?

Yeah. It’s a great question, Terry. So annuities come in different shapes and sizes. There’s immediate annuities, there’s deferred annuities, there’s variable fixed annuities. So, one of the core tenants of most annuities is you’re paying for some form of predictable something, whether that’s an interest rate, an income stream. That’s generally how they work. The other core tenant of most annuities is they come under a special tax code, and the growth in them as it’s growing is generally grows tax sheltered.

Can you tell us a little bit about the difference between, let’s just focus on fixed and variable annuities, what’s the difference between those two?

Pretty straightforward. A fixed annuity is much like a CD. You put your money in, the insurance company promises you a fixed rate of generally lower return and generally slightly higher than a CD. The longer you lock the money in, the higher the rate will be. And a variable annuity comes in many shapes and sizes as well. But at its core tenant, the way they work is there is not a fixed rate of return on your investment. You’ll invest in what’s called sub-accounts, which virtually mirror mutual funds. So, they go up/down with the market.

Annuities are sometimes billed as guaranteed income for life. And looking at the fixed annuity, the variable annuities, what does that guaranteed income realistically mean for someone?

What it means is that the insurance company is taking on the responsibility of giving you essentially a pension. So you give them money, and based on the terms of the contract, the contracts that you purchase when you buy annuities, they have specific triggers and income thresholds that they will pay you. And so, you put your money in, you follow the guidelines of what the contract says, and then the insurance company is taking on the risk of providing you a sustainable income generally for life, much like a pension.

We’ve established annuities are an insurance company product. How are they different from a life insurance policy when it comes to, say, retirement planning?

Yeah. So, life insurance policies generally are exactly that. Their whole purpose for being around is to pay you at death at its core. There’s some advanced planning things that people use life insurance products for. But for the average, general person who’s reading this or listening to this, a life insurance policy protects you at death or provides dollars when you are no longer here.

An annuity is the opposite, generally speaking. The annuity is while you are here, to provide some sort of benefit, whether that be a fixed, predictable income, whether that be a fixed, predictable rate of return on your money.

So, annuities really are more investment focused, where life insurance is more legacy planning or protection at death for your heirs. Most people need some form of life insurance because they don’t have enough assets saved that if they no longer are here prematurely, they need to leave something behind to take care of their loved one. Annuities is different. I would say it’s very risk dependent. One of the things you’re paying for in an annuity is you’re paying an insurance company to give you something predictable.

Is there a best age for buying an annuity?

Best age? No. Generally speaking, you want to be on the older side. Annuities are not generally recommended for people who are in their 20s or 30s, or even the 40s. I think when you start getting to your 50s or 60s at this point, and you’re look to downshift or change the purpose of your investments, that’s where more commonly you’ll see maybe mid 50s, even later, you’ll start to see annuities more prevalent and more viable, I should even say, for investors.

Thank you, Andrew.

Terry, the pleasure is mine.

Andrew Rosen, president of Diversified LLC in Delaware, Pennsylvania, Alabama and Massachusetts. And thank you for joining us on the Annuity.org podcast. On our next episode, we’ll continue our introduction to the basics of annuities with Mr. Rosen.

In the meantime, for more information about annuities, personal finance, anything else we talk about here, check out Annuity.org, your path to financial freedom. You can subscribe to the Annuity.org podcast for free. It’s available wherever fine podcasts are found. Our theme music, Feeling Good, was produced by White Hot, available at Freebeats.io. I’m Terry Turner for Annuity.org.