Annuities: The Pros and Cons

Most people will eventually spend a third of their lifetime in retirement. It is a good plan to invest in insurance to have a steady source of income after your working years. Annuities are becoming popular because of their benefits, but there are also disadvantages that should be considered.

Annuities: The Pros and Cons

Annuities typically provide a higher amount than you originally invest, and they distribute that amount over time.

With annuities you can potentially be guaranteed income for the rest of your life.[1] One of the biggest factors is the amount of premium with which you fund the annuity. The amount you invest into annuities will typically be the minimum amount of money that you receive, but in all likelihood, the amount returned to you will be higher.[2]

Inflation protection is an added feature which comes with an additional cost. The amount you pay today might not be enough to support you in the future as prices continually soar high.  Inflation protection increases the annuity payments to you in order to help you in the future.

One of the pros of a fixed or indexed annuity is that you are typically guaranteed the exact amount or an amount higher than the principal cost. In fact, this type of annuity is viewed by analysts as a very secure plan as it guarantees a minimum of the amount of money you invest.

Variable annuities are different in that they are subject to market risk.  Variable annuities can be used not only for your own retirement, but also by your heirs, such as your wife or your children, depending on your contract. If you die while receiving income from the annuity, your beneficiary may get the rest of the payments you would have received.

There are several options when investing in annuity. You can pay at your own accord, plus, you can add features to your annuity to make it more stable and help protect you from sudden inflation.

Fixed and indexed annuities can be a viable option for more safely investing your money and helping to protect it from the ever-fluctuating stock market.

While annuities seem to be a great option, there can be drawbacks to this insurance product.

Some types of annuities are not as secure; you have the option to give up the security of fixed annuities in exchange for the chance at higher returns with variable annuities. However, the payout from a variable annuity depends on the performance of the market. Your income will grow fast if the market is doing well, but when it crashes, your investment will crash too.

Annuities may not be flexible enough for some because you aren’t always able to get a hold of your investment and simply walk away with it. It is advisable that you save for those circumstances as annuities typically pay out over certain periods of time and can have significant penalties for early withdrawal.

These are just some of the pros and cons that anyone who is planning for their retirement should take into careful consideration.  As always, it is wise to consult an educated financial planner to help with your situation.

[1]Guarantees are subject to the claims paying abilities of the underlying insurance company. Annuities are best suited for long term investors.  Any withdrawal prior to age 59 ½ is subject to a 10% tax penalty as well as regular income tax.  Annuities often also have a surrender schedule, meaning that withdrawals may be subject to a penalty by the insurance company if not left in for a predetermined amount of time. 

[2]This statement is referring to fixed and indexed annuities. Variable annuities are subject to market risk, and account may lose value.