Annuities are legal contracts, and that is a good thing. It is much better than a handshake. 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.
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 enforceable 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 (https://en.wikipedia.org/wiki/Structured_settlement).
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. And, 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. The only remedy you'd have at this point would be time. This 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.
Regardless of that market free fall, your minimum guarantees are going to start working in your favor when you really need it. 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 employer (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).
The minimum levels of security in an annuity contract are just that —
only the minimums, and it is my hope as well as the insurer's 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
So...Congratulations! You own a contract, not so much an investment. You can relax, it's truly all in stone from this point on out.
