Annuities Pros And Cons

Annuities pros and cons might not be immediately evident when you first look at annuities as an investment. Annuities are a means of money accumulation for future needs and goals or a source of an immediate income.

In fact, annuities offer considerable benefits over other kinds of retirement products. This is especially important for people not able or willing to risk losing a portion of their retirement savings.

Given this is true, what are the associated annuities pros and cons? First, if a person is looking for a lifetime income, an immediate annuity contract is their ticket to that income. Immediate annuities guarantee periodic payments to the annuitant for as long as they live.
This transfers your longevity risk to the insurance company. Once they accept your premium payment and guarantee to pay you for your life, they are on the hook for as long as you live.

Of course, the size of your periodic annuity payment is dependent upon the amount of money you now have to purchase the annuity. The larger the premium, the larger the payout. A young annuity buyer’s monthly check will be less than that of an older annuity buyer’s check given the same amount of invested premium.

Some annuities do not offer inflation protection. This means your monthly payment may be insufficient to cover the need(s) for which you first bought it. However, most of the contracts on the market today include an inflation protection rider. This rider tracks with inflation meaning as inflation goes up, so does your monthly payment.

Annuities also provide a guarantee called principal protection. This means the value of the annuity is guaranteed to be at or above the amount invested. You can also guarantee that you or your heirs will receive back at least as much money as you originally invested.

Annuities can save you money on taxes over taking a lump sum payment because you can roll over 401k or IRA funds into an annuity and not pay taxes until you begin to withdraw money from the account.

Variable annuities are a form of security that provides the owner the opportunity to invest in various core investments. With a variable annuity you accept all the risk. If the core investment(s) go up, your gain may be substantial. On the other hand, if the core investment(s) go down, your loss can also be substantial.

Sometimes people compare returns on an annuity to various stock market investment returns. Since the stock market can go up like a rocket, the returns will go up. However, there is no guarantee the stock market will go up.

By the same token, the stock market can go down. When it does, so do the returns. This is the side of the market that makes annuity returns look attractive. Generally speaking, annuity returns are higher than CDs and savings accounts so they are attractive given their tax deferral feature.

Annuities are almost always less flexible than other retirement options because once you purchase an annuity contract your capital is tied up. In other words, unless you completely surrender your contract, you do not have access to that amount of money.

Annuities offer two other great features. Because they are life insurance contracts, if the owner states a beneficiary, probate is avoided. The other feature that makes annuities attractive is the bankruptcy exclusion. Annuities most often are excluded from bankruptcy proceedings.

If you are entering into a complex estate or financial situation, always consult your tax and/or legal counsel. You don’t want to be caught in an argument with the IRS or state government taxing agency.

Annuities provide an advantage most other investments don’t. They have a state guarantee fund standing behind them. If the company cannot meet its payment obligations, the state guarantee funds take over.

This almost totally eliminates insurer insolvency risk. In fact, this benefit by itself makes annuities a great product. Keep in mind annuities pros and cons vary by policy. Make sure you completely understand the product before you buy.

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