Concerned Man - Annuity Pros & Cons

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The Pros and Cons of Annuities

 

Annuity Pros and Cons

While its convenient for investments to be thought of as good or bad, it’s more accurate to think of annuities or any investment opportunity as suitable or unsuitable for your goals, objectives and circumstances. Here is a listing and brief explanation of annuities pros and cons.

Fixed Annuity Pros and Cons

Illiquidity—fixed annuities typically have surrender charges (really withdrawal penalties) making annuities illiquid and only suitable for long term investors.  However, we have occasionally seen one year fixed annuities offered.

Low rate—Fixed annuities, considered a conservative and safe investment option typically pay low rates, maybe 1% more than 5-year CDs at the bank.

Very safe—we have never heard of anyone losing money in a fixed annuity.  Life insurance companies are the most stable of financial institutions and even when these have failed, the annuity owners’ money has been protected by a State guaranty fund or more commonly, another life insurance company assuming the failed company’s obligations.

Annual Withdrawal Feature—a feature among fixed annuities pros and cons that is rarely considered is the annual withdrawal feature.  In most annuity contracts, 10% of the balance can be withdrawn each year without penalty.  In some contacts this is a cumulative feature. So if the investor selects the fixed annuity as a long term wealth accumulation vehicle, the ample annual withdrawal feature is a plus.

Tax deferral—all annuities offer tax deferral of gains and interest

Variable annuities pros and cons

The pros and cons of annuities warrant attention to safety. With fixed annuities, your principal is guaranteed by the issuing insurance company.  With variable annuities, this is not the case.

Fees—variable annuities often have significant mortality and expense fees which eat into your return

Investment Choice—some variable annuities offer over 100 investment options

Other annuity pros cons would take into account benefits to heirs (variable annuities offer a minor death benefit), the offset to tax deferral which is the fact that taxes are eventually paid at ordinary income rates (not capital gains rates) and the various riders which provide protection of principal and income guarantees in modern variable annuities.

Learn more about annuity pros and cons.

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