What is an Annuity?

Several people ask me about their retirement goals and what I can do to help. Some people have asked me this question out of pure curiosity. Medini Financial in Ephrata would like to share its knowledge of what an annuity is and go into a little detail of the different types of annuities out there.

Annuities are products that are sold by licensed insurance agents that pays income out to its annuitant.

Annuities come in several varieties.

A fixed annuity pays out a fixed amount of income to its annuitant and grows at a fixed rate.

A variable annuity on the other hand is similar to an investment in a 401k where you can choose the subaccounts where your funds are invested.

People often choose annuities for two reasons one it offers another vehicle for tax deferred growth, and the second reason is because to ensure a steady stream of income in retirement.

Here is an example of how annuities have helped people in retirement.

Harry is a 65 year old man who is retired he has 800,000 dollars he has saved up for retirement, lets say he needs 50,000 dollars a year to survive. He can elect to leave the funds in an investment vehicle like a CDS, stocks, bonds, money market accounts, or a savings account depending on risk tolerance. Now if Harry's investments make a 0% return on investment the money will last 16 years, longer if the the investments do well and obviously shorter if the investments go south.

An annuity may help him guarantee a stream of income for as long he lives in exchange for either a one time payment, or a series of payments into the annuity. In case of options he can take out the money immediately known as an immediate annuity or he take out the money later what is known as a deferred annuity.

Now in this case is Harry would like to have guaranteed income the annuity can be the perfect vehicle. In this case an annuity is appropriate because income is more important than liquidity. If Harry were to live to be 100 and if he started taking out payments at age 70. He would have had a guaranteed stream of income all those years.

Annuities may or may not come with riders and additional benefits at various costs usually a few basis points. This topic has confused a lot of people with all the options out there.

Often times Fixed annuities are more suitable than CD's but sometimes CDS are more suitable than fixedannuities. The main attraction with an Annuity is often times the insurance companies pay higher rates than a CD.

Payouts on annuities can be for various options,including lifetime, or a for certain period of time i.e 20 years. For more information you can check out this great article

http://money.cnn.com/retirement/guide/annuities_basics.moneymag/index.html

or you can contact Medini Financial at 717-419-6347 or via email medinifinancial@gmail.com Every person's financial situation is different. Let Medini Financial take a look at your individual situation and you can see if what options are best for you and make your own decision.

Medini Financial is committed to share its expertise with the local community. Should the need arise for you or your family Medini Financial looks forward to getting you the best rates and world class service.

What is the difference between the insurance policy with only a few questions and no exam versus the policy that requires an exam?

Recently, I have received an email from someone in Lancaster looking for insurance who asked what is the difference between companies who just ask few medical questions with no exams versus going through underwriting and possibly an exam.

You may have gotten in the mail or have heard commercials both on the TV and the Radio about life insurance with no exams just answer a few medical questions and mail back in your check and you get life insurance. Some of these companies even offer guaranteed policies. What they don't want you to know is that you may be guaranteed insurance but only if you have an accidental death and there may be several caveats where you are not covered under a guaranteed issue policy that may or may not have medical questions.

The next type of policy discussed earlier is the one that all you have to do is answer some questions and you may or may not be offered coverage while these are often times more appropriate for a client there is a price you for the convenience of not having a medical exam. Here the main difference when you forgo the medical exam and blood work the life insurance companies are taking a larger risk on an individual who may be in poor health and who is a higher risk. So in order to leverage against the risk what they do is charge often charge 4-6 times the normal rate you may have paid had you gone through underwriting. By charging more you receive a policy relatively quick and easy, however in the eyes of the insurance company a person they must assume that you are a bigger risk even if you are not. What these companies often do is offer lower amounts of insurance with no exam as not to expose themselves to a high risk. It is also beneficial because 25,000 dollars worth of insurance at 4 times the going rate may come out to 20 dollars a month versus listing 100,000 dollars worth of insurance at 4 times the going rates can easily cost over a $100 dollars a month with no exam.

Often times people will actually opt for the smaller amount of insurance to save them self the time with an exam. What you are really doing is similar to eating out versus cooking at home. You are paying more money each month in exchange for convenience however on a large scale. Depending on your situation it may be beneficial to just answer the questions and pay more to get that peace of mind right away. on the other hand you may want to go forward with a policy that requires an exam. Financial the policy with the exam cost several times less. You get a free exam that will let you know your cholesterol if you are pre-diabetic etc. The main thing here is that you can get a lot more insurance for your money going through underwriting. Similar to how car insurance companies charge people more for having bad driving records they also charge smokers and people in poor health more for their insurance. If you have a clean bill of health you pay less the same way you would for car insurance with a clean driving record. The main difference here is that when you answer the questions without the exam you are often paying for one size fits all underwriting which often the same as paying the same car insurance premium as someone with a bad record. In some cases having a blanket premium may be cost effective if your health is not the best it could be. However if you are young and healthy; underwriting and exams may be the way to go.

Next post will answer another popular question I have been asked which is "What does the exam entail?



Medini Financial recommends each person evaluate their individual circumstances and to speak with an insurance or financial professional before making any decisions for or against a policy. This information is for educational purposes. Medini Financial is licensed with the Pennsylvania Dept of insurance.