18 Jul Is it better to buy an annuity from a bank or insurance company?

Q. Is it better to buy an annuity from a bank or an insurance company? I was told by someone that she received a signing bonus. Which pays the largest signing bonus? A bank or insurance company?
— Retired

A. Let’s start with the different options you have for the purchase of an annuity.

All annuities are sold by life insurance companies, whether you buy yours from the bank, a brokerage house or a local advisor. The only difference is the number of choices that are available to you.

“If you walk into your local bank to discuss annuities, they will be limited to one, maybe two life insurance companies,” said Michael Cohen, a retirement specialist with Certainty Retirement Advisors in Belvidere. “Consulting with an independent advisor locally will allow that advisor to go out and find the best possible product to meet your goals.”

Cohen said there are more than 800 life insurance companies in the United States, each with their own unique products, so make sure you can review all the products that can meet your goals.

As you said, some annuities offer a signing bonus. This could be credited to your accumulation value or to your income value.

These two values are not the same, he said.

“The accumulation value is real money that is 100 percent yours,” Cohen said. “The income value is what the life insurance company will use to determine your lifetime income.”

He said annuities are easier to understand if you look at them as life insurance upside down.

“With life insurance, we pay in small amounts and when we die, someone gets a large amount,” he said. “With an annuity, we pay the life insurance company a large amount, and they pay us small amounts for as long as we live. It’s a safe way to ensure you never run out of income.”

Cohen said when the life insurance company is going to pay you a lifetime income, it’s going to calculate your first payment based on your income value, so the higher the income value, the better. If you invested $100,000 and got a 20 percent income value bonus, you’d have $100,000 in real money and $120,000 in your income value.

“If the life insurance company says your first payout will be 5 percent, you would much rather have 5 percent of $120,000, or $6,000, than you would 5 percent of $100,000, or $5,000,” he said.

There’s a lot to consider when you buy an annuity.

Cohen said you should consider the strength of the insurance company. To help, you can find ratings by agencies such as Moody’s, Standard & Poor’s or A.M. Best.

Then you need to consider the timeline for when you’ll need to begin taking the income, what the investment options are, the costs associated with owning the account, the amount of risk the annuity has and other features, including some that may offer assistance with nursing home costs, he said.

You also need to think about the fees.

The commissions that agents earn vary greatly by product.

Cohen said if you’re purchasing a variable annuity, commissions are part of your fees and are continuously paid to your agent for the life of the contract. Variable annuities pay your agent similarly to a brokerage account.

If you’re looking to protect your assets with a fixed or fixed indexed annuity, commissions are paid to the agent by the life insurance company with their own dollars, and they are paid one time, he said.

“For example, if you put $100,000 into an account, the agent gets their commission from the company, and you still have $100,000,” he said. “You are not responsible for paying the agent anything, whereas with a variable annuity, your ongoing fees directly help compensate your agent.”

Cohen said when you are making a decision to invest in an annuity, make sure the agent discloses all of the fees in writing.

“If you are looking to invest with risk into a variable annuity, those fees will be buried in the prospectus,” he said. “You can always call the company directly and ask them to disclose to you over the phone their mortality and administration fees, rider fees and sub account fees.”

Cohen said you won’t see most of these fees on your statement. He said if you’re a variable annuity owner, you are probably paying fees in the range of 3 to 5 percent.

If you are purchasing a fixed or fixed indexed annuity, those fees should be told to you directly by the agent and they should be in the disclosure statements you sign when making the purchase, Cohen said. Fees on these types of products usually range anywhere from 0.00 to 1.5 percent annually, he said.

“The No. 1 selling annuity in the country for the last four years has a 0.00 percent fee, so those options are out there,” he said.

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This story was originally published on July 18, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.