What Are the Pros and Cons of Annuities?
Annuities have both positive and negative aspects as any financial or non-financial product does. Timing is a crucial factor in deciding whether to buy an annuity, so let's take it for granted that you are an investor. People who are in the market for annuities are typically close to retirement age, and want to keep the cash they currently have while making some additional money in the meantime.
Its simple to comprehend the positive reasons behind owning annuities, and these reasons are why annuities are attainable for nearly all investors.
I feel the PROS are:
Earnings Are Tax Deferred: As with an IRA, you do not pay annual taxes. This is one big advantage annuities have over other safe cash alternatives such as CDs or money market funds.
Safety of Capital: Insurance companies are required to keep a certain level of reserves on hand to ensure your money is safe. Some of the industry leaders are more reliable than ever, which makes investing in them very solid choices. In addition, each state has a guaranty fund to back up deposits with insurers. For the most part, that coverage is limited to $100,000 but each state is different so it's best to look in to the laws of your state.
Part of Your Money Is Liquid: You can withdraw 10 to 15 percent of your annuity account's value annually without paying a penalty.
Rate of Return: Historically, annuities fall on the conservative side in respect of yield. Think about the alternatives. Today, CDs are posting average yields of 2%(taxable) in comparison to annuities at around 4%(tax deferred). Also, as the markets normalize, look for the yields on annuities to increase along with everything else. In many areas, you will discover that annuities are a secure and dependable way to endure the market ups and downs.
Maximize Your Income: The Wharton Business School and New York Life worked together to discover the best method for maximizing retirement income. They found that a fixed annuity that changes into a lifetime income stream is one of the most effective choices. After the first year of the contract, all or nearly all annuities can be converted into a monthly income that will continue for the rest of your life. Immediate annuities allow you to begin receiving a monthly income right away.
One of the negative aspects of annuities is that investment representatives often suggest investment programs that are not good matches for their clients. Education is essential in recognizing these negative attributes so you can tell if you are getting reasonable advice.
I feel the CONS are:
Short Term Money: Annuities are not the right place to put money if you need all of it back in one lump sum within a year or two. Keep all annuity purchases reserved for funds with a time horizon of five years or more.
Surrender Schedule: There is no upfront sales charge associated with annuity purchases. In exchange for that, the company will impose a surrender charge on you if you take the money out before the contract matures. This is a standard practice, and some contracts have surrender schedules in excess of ten years. That will give you less control over your money in the future.
Sales Commissions: Someone will make money when you buy an annuity and there is no way to avoid that. I highlight this point because this is where conflicts of interest arise. It is very important to learn as much as you can about annuities so you can recognize a bad annuity when you see one. Many agents let themselves be influenced by commissions, so they may not let you see all the products available.
Liquidity Is a Disadvantage: Okay, I can see you getting confused. Didn't I say availability was a positive of annuities? Yes it was. This can be an advantage or a disadvantage, and it relates to what I said about short term money. What is the cash going toward? How soon will you have to have it? How much will you need? Answer those questions and the rest of the article should give you an idea if liquidity is a pro or a con for you.
That is the easiest way I can explain it. You do need to know that some ambiguity overall does exist. Your independent financial circumstances will help clear up any ambiguities regarding annuities that still remain, and will help you select the correct investment option for your personal needs.
Its simple to comprehend the positive reasons behind owning annuities, and these reasons are why annuities are attainable for nearly all investors.
I feel the PROS are:
Earnings Are Tax Deferred: As with an IRA, you do not pay annual taxes. This is one big advantage annuities have over other safe cash alternatives such as CDs or money market funds.
Safety of Capital: Insurance companies are required to keep a certain level of reserves on hand to ensure your money is safe. Some of the industry leaders are more reliable than ever, which makes investing in them very solid choices. In addition, each state has a guaranty fund to back up deposits with insurers. For the most part, that coverage is limited to $100,000 but each state is different so it's best to look in to the laws of your state.
Part of Your Money Is Liquid: You can withdraw 10 to 15 percent of your annuity account's value annually without paying a penalty.
Rate of Return: Historically, annuities fall on the conservative side in respect of yield. Think about the alternatives. Today, CDs are posting average yields of 2%(taxable) in comparison to annuities at around 4%(tax deferred). Also, as the markets normalize, look for the yields on annuities to increase along with everything else. In many areas, you will discover that annuities are a secure and dependable way to endure the market ups and downs.
Maximize Your Income: The Wharton Business School and New York Life worked together to discover the best method for maximizing retirement income. They found that a fixed annuity that changes into a lifetime income stream is one of the most effective choices. After the first year of the contract, all or nearly all annuities can be converted into a monthly income that will continue for the rest of your life. Immediate annuities allow you to begin receiving a monthly income right away.
One of the negative aspects of annuities is that investment representatives often suggest investment programs that are not good matches for their clients. Education is essential in recognizing these negative attributes so you can tell if you are getting reasonable advice.
I feel the CONS are:
Short Term Money: Annuities are not the right place to put money if you need all of it back in one lump sum within a year or two. Keep all annuity purchases reserved for funds with a time horizon of five years or more.
Surrender Schedule: There is no upfront sales charge associated with annuity purchases. In exchange for that, the company will impose a surrender charge on you if you take the money out before the contract matures. This is a standard practice, and some contracts have surrender schedules in excess of ten years. That will give you less control over your money in the future.
Sales Commissions: Someone will make money when you buy an annuity and there is no way to avoid that. I highlight this point because this is where conflicts of interest arise. It is very important to learn as much as you can about annuities so you can recognize a bad annuity when you see one. Many agents let themselves be influenced by commissions, so they may not let you see all the products available.
Liquidity Is a Disadvantage: Okay, I can see you getting confused. Didn't I say availability was a positive of annuities? Yes it was. This can be an advantage or a disadvantage, and it relates to what I said about short term money. What is the cash going toward? How soon will you have to have it? How much will you need? Answer those questions and the rest of the article should give you an idea if liquidity is a pro or a con for you.
That is the easiest way I can explain it. You do need to know that some ambiguity overall does exist. Your independent financial circumstances will help clear up any ambiguities regarding annuities that still remain, and will help you select the correct investment option for your personal needs.
