Time was when the financial world was neatly compartmentalized and access into and between the different compartments was strictly limited. If you wanted to buy insurance, you called up a particular insurance company and made an appointment with a representative, who came to your home. You were provided a limited range of choices. The result depended on the rapport between you and the representative. In order to sample the market, you had to repeat this process several times – a time-consuming, tedious procedure. In addition to the price you paid for the insurance, you also paid a commission to the representative, although you may not have been informed of that fact.
If the subject area was investment, the process was similar, although the venue might have been an office or a restaurant rather than your home. The notion of a link between insurance and investments – and the necessity for crafting a coherent plan melding the two – probably never arose.
In the last two decades, all that has changed dramatically. The repercussions of that change affect how you arrange your finances. Most of the changes have been for the better. One area affected has been the purchase of annuities.
Buy an Annuity Through an Insurance-Company Representative
You still have the option of buying an annuity in accordance with insurance-industry tradition – by meeting with a company representative and discussing the purchase prior to consummating the transaction. Today, however, there is a good chance that the representative will sport a title of some sort, ranging from Chartered Financial Consultant (ChFC) to something equally impressive-sounding but less substantive. The discussion is likely to revolve around financial planning, with attention paid to both insurance and investments and time spent gathering information about your age, income, assets, preferences, and plans for the future – with special focus on retirement.
This is all to the good, even if you should end up not purchasing the annuity from this representative. Learning how to think systematically about economics and finance and calculate future values cannot help but benefit you. Annuities are issued by insurance companies. The best possible source of specific, detailed information about particular annuity products is a company representative. When all is said and done, however, you will still have to grapple with one issue. The insurance-company representative has an incentive to sell you a product from his company. Will you be able to disentangle the legitimate, disinterested information provided from the self-interested information geared purely at making a sale?
One way to enhance the value you obtain from the meeting is to supplement the rep’s presentation with information you gather yourself from outside sources. Fortunately, the time has never been better for gathering outside information.
Buy an Annuity Through an Independent, Fee-Only Financial Planner
Increasingly, financial planners are operating independently, earning income from fees charged directly to the customer rather than from commissions or salaries paid by financial-products companies. Two compensation schemes for fee-only planners are hourly fees and an annual fee consisting of a percentage of the assets under management. Obviously, the latter method gives the financial planner a special incentive to see your investments gain in value.
As part of their service, fee-only planners will usually handle the logistics of asset purchases and sales, although they will pass along any transactions costs to you. The planner can certainly arrange to help you review annuity products and select an appropriate one. It is the job of the planner to make sure that your selection fits in with your comprehensive financial plan. The well-known and respected financial-planning designations, such as Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP), as well as the ChFC designation that is common within the insurance industry, impose a fiduciary obligation upon the holder to put the financial interest of the client above all else. Violation of this obligation exposes the holder to legal and professional sanctions.
Working with a fee-only planner should eliminate the conflict of interest created when working with a company representative. It should also provide the best possible financial-planning service. The tradeoff comes in the area of product knowledge; there are dozens of insurance companies and no single financial planner can possess expert knowledge of all of them. That is where the company rep comes in handy.
Buy an Annuity Yourself By Going Online
Technological advance has made it possible for the financial consumer to bypass the broker stage and buy directly from the issuing company. Insurance companies have websites that describe their products in detail, up to and including prospectuses and insurance contracts. Other websites enable the consumer to plug in necessary parameters – annual contributions and time remaining before retirement, for example – and discover annual annuity distributions provided by particular companies. The guarantee of lifelong payments made by the annuity contract is only as good as the guarantor, the issuing insurance company. Websites can also provide up-to-date evaluations of issuing insurance-company financial strength by the major rating agencies.
Buy an Annuity By Combining These Methods
A thorough investor may want to maximize the chances of success by combining chances. First, collect as much information as possible by visiting the do-it-yourself online sites that allow plug-in computations. Second, acquire a comprehensive financial plan from a fee-only planner. Third, economize on transactions costs by doing the buying and selling in the cheapest way possible. If questions arise about desirable products, consult a company rep for answers.
The time has never been better for buying insurance and investment-related financial products such as annuities. Not only is the amount of information and level of expertise available at an all-time high, but yesteryear’s conflicts of interest can be avoided today. Company representatives, fee-only financial planners, and the limitless resources of the Internet can be tapped to find an annuity that will reward you for the rest of your days.