ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, August 5, 1996 TAG: 9608060030
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
ANNUITIES are promoted, even by banks, as alternatives to today's low-paying certificates of deposit. But there are vast differences between the two investments.
Charles Holland, senior vice president of NationsSecurities, an affiliate of NationsBank in Charlotte, N.C., said annuities should be purchased by "a person who is thinking long term, planning retirement and interested in deferring tax."
Kevin Glasgow, manager of annuities and individual claims at Shenandoah Life Insurance Co., agreed. Shenandoah Life, he said, has sold annuities to "young people, old people; they go across the board." But he said there is a common thread: The buyers view their investment as a long-term savings program.
Annuities have two separate and distinct lives. The first is the accumulation phase; and the second, which usually follows retirement, is the payout.
Holland warned that people investing in annuities should, before they buy, first investigate the insurance company selling the product. NationsSecurities deals with three companies: Transamerica, Aegon and Hartford.
The promise of a payout sometime in the future is only as good as the insurance company is financially strong. That means a buyer must ask the sales person for a copy of its ratings by A.M. Best, Standard & Poors, Duff & Phelps, or Weiss. You should see at least two ratings and be told what they mean.
One of the primary advantages of an annuity is that taxes on the earnings are postponed throughout the accumulation period. When the annuity matures and begins paying out money, you will be taxed on the earnings but not on your contributions over the years.
Glasgow said you can invest in an annuity in two ways. One is a single-premium annuity in which you invest a lump sum all at once, commonly from a maturing bank certificate. People who follow this course, he said, have usually already saved up for their retirement and are looking for a means of payout.
The second method is a flexible-premium annuity. Glasgow said this is the most popular type because it allows subsequent investments. Even people who start with a lump sum, he explained, want the option of adding more money from time to time.
NationsSecurities offers investors two choices for handling their money, while Shenandoah Life has only one type of investment.
Glasgow said Shenandoah Life has annuities only with a fixed interest-rate payment. The interest rate can change quarterly, monthly or as often as the company decides to make a change.
Shenandoah Life has an introductory rate of 7 percent for buyers of annuities, but purchasers must ask the going rate for people who have been in the program for a long time. At Shenandoah Life, this rate last week was 5.65 percent, which compares favorably with bank certificates.
NationsSecurities offers the fixed option, but Holland said its annuities also have a variable option. This type invests in mutual funds with choices such as a growth fund or a balanced fund.
Which you choose, Holland said, depends on your age, risk tolerance, goals and other factors. The bank tries to suit the investment to the buyer, Holland said, because investments with the greatest potential for growth also carry the risk of loss of principal.
Another factor to watch is liquidity, or the ability to get to your money when you need it. Annuities typically have steep surrender charges for several years following purchase. Glasgow said Shenandoah Life has a five-year penalty period, with a charge of 5 percent of the principal if the policy is given up in the first year.
Glasgow said he has seen policies of other companies with surrender penalty periods of 12 years or more with a first-year penalty of 12 percent. Companies paying the highest interest rates often have the longest penalty periods, he said.
Investors should also be aware that salesmen often push annuities because of the relatively high commission compared with other products. Glasgow declined to give the commissions that his company pays its agents because it varies with the product. A few companies that market solely to fee-only financial planners carry no commissions, he said.
Buyers face still more choices when it comes time for the payout, typically at retirement. The amount of the payout is based on the choice then, and it cannot be changed.
Shenandoah Life offers eight options, which Glasgow said is the maximum. Some other companies have fewer options. Here are the eight:
Fixed period. This provides four payments over a fixed number of years, which you choose. You can opt for any number of years between 5 and 20, but not exceeding your life expectancy. If you die before the end of the period, the money is paid to your beneficiary. Payments cease at the end of the fixed period.
Straight life. This provides the annuitant with a fixed monthly payment as long as he is alive. All payments cease when the annuitant dies.
Life with a period certain. This combines the features of the first two options. The annuitant receives payments as long as he lives. But if he dies before a fixed period, the money is paid to a beneficiary for the balance of that period.
Joint and 100 percent survivor. This provides payments to a couple as long as either is alive. Payments are not reduced on the first death.
Joint and percent survivor. This is like the former, but the payments are reduced at the death of the first spouse. You select the amount of the reduction. If you select 75 percent and the initial payment is $1,000 a month, the survivor will receive $750 a month, for example.
ERISA joint and survivor. This option provides benefits to the primary annuitant as long as he or she is alive. If the primary annuitant dies before the joint annuitant does, the payments will decline by a selected amount. But if the joint annuitant dies first, payments to the primary annuitant will continue at the original level.
Joint and period certain. This option is available for only some funds. Payments are made to the primary and joint annuitant as long as both are alive. Payments are made for at least the number of years specified when the annuity was established. If both die within the guarantee period, payments are made to a beneficiary.
Money on deposit contract. This is like a savings account. Instead of receiving monthly payments based on the amount in the contract, annuitants can takes funds as they need the money.
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