Pros and cons of annuities investments


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Pros and cons of annuities investments

  1. 1. Pros and Cons ofAnnuities Investments by The Annuity Report 2011 Pros and Cons of Annuities Investments
  2. 2. Annuities, like any product, financial or otherwise, havepositive and negative attributes. Timing is a big factor inmaking the decision to invest in an annuity so lets assumethat you are in the market.The benefits of owning an annuity are easy to understandand make the product a real possibility for almost everyoneat some point in life. Remember, this is a general list andeach product type will have a slightly different set of prosand cons. Refer to the website for product specific benefitsand disadvantages.The PROS as I see them: • 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 best companies in the industry are stronger than ever today, which makes an investment in those companies a very solid bet. 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 New York and Florida expand the coverage to $500,000 and states are continually increasing the protection to keep in line with the growth of accounts. Each state is different so its best to look in to the laws of your state. • Tax Deferral: Earnings are sheltered from annual taxation just like an IRA. This is one big advantage Pros and Cons of Annuities Investments
  3. 3. annuities have over other safe cash alternatives such as CDs or money market funds. • Guaranteed Income: New York Life and the Wharton Business School collaborated on a study to find the most effective way to maximize retirement income. Immediate annuities were found to be the best source of a guaranteed lifetime stream of income. Most annuity contracts can be converted into monthly income that will last as long as you do with many index and variable annuities offering highly beneficial future income guarantees. • Rate of Return: Historically, annuities fall on the conservative side in regard to yield. Insurance companies receive higher institutional rates on bonds than you can get in the open market which usually translates to a competitive return that easily outpaces rates on CDs and money market funds. In most markets, youll find annuities to be a safe, consistent alternative to market fluctuations. • Liquidity: Annuity contracts have an annual free withdrawal provision giving the account holder access to 10-15% of the account value annually without penalty.The CONS as I see them: • Not Good For Short Term Money: Annuities are not Pros and Cons of Annuities Investments
  4. 4. 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 within your appropriate time horizon. Short term money should be kept in the bank. • Surrender Schedule: There is no upfront sales charge associated with annuity purchases and the insurance company incurs certain costs in placement and ongoing management of contracts. 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 standard but be sure that these terms are understood and a full explanation of this provision is justified. • Liquidity: Okay, I know what youre thinking. Wasnt liquidity listed as a Pro? Yes it was. This can work for or against you and it goes along the same lines as the point I made with short term money. What will the money be used for? When will you need 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 about as black and white as I can make it. Before yougo too far, realize that there are a lot of gray areas. Certaindetails about your individual financial situation will clear thatup and make it very obvious as to whether an annuity is theright choice and which specific product is best. Pros and Cons of Annuities Investments