Are Annuities Safe?

Investors nearing retirement, or those who at least are planning retirement, see annuities as effective measures to with which to invest their monetary assets. Nonetheless, recent financial crises have shown that annuities are not as safe as previously thought to be. While annuities assure that the investor receives the benefits of the annuity, such benefits depend on the insurance company or the insurer. If such company dwindles or fails, the investor may very well lose a very important part of his or her portfolio that he or she thought was protected. Does this mean that annuities are safe? Should retirement investors still consider putting a portion of his or her assets in an annuity?

 Fortunately, the answer is yes. The exceptional features, namely the immediate annuity’s ability to transform savings into regular lifetime payments, make annuities a potentially valuable part of retirement. As seen earlier, a lot of risk exists today, and it is still important to take note of the important steps to take when searching for the right annuity.

Understanding the Annuity

Apparently and unfortunately, a lot of annuity investors have a very unclear understanding of the annuities they own. For instance, investors may think that a regular return or monthly payment is secure and guaranteed, yet do not know how this works. It is important to know the mechanics of an investment option, before diving into it. A lot of annuities publicize guaranteed growth rates to range between 4 percent and even higher than that. However, what many investors do not recognize is that the guaranteed return does not credit his or her account value but rather to the benefit base, or income base.  In other words, some of the financial benefits of an annuity may be lost if the annuity is withdrawn or transferred.  The benefit base is a “phantom” account of the annuity that grows at a guaranteed rate of return, and the value of this account can be used to trigger lifetime income payments.  When lifetime income is started, a percentage of the benefit base is withdrawn, and guaranteed to be withdrawn for life. Before an investor entrusts his or her assets to an annuity, he or she is advised to consult with a financial advisor so that they can get a proper explanation of how the annuity works.  It is important to have a financial advisor assist in determining what annuity is best for each different situation.

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.  Any guarantees on principal invested is based upon the claims paying ability of the underlying insurance company.