One of the biggest attractions to annuities comes from the promise of guaranteed lifetime income. However annuities, just like every other financial and investment tool, has its drawbacks. Being well informed is the first step to determining if annuity financing would benefit you.
Annuities are investment contracts set up through insurance companies meant to provide a steady stream of income while in retirement. You can contribute to an annuity in one lump sum or monthly in steady, consistent payments. When it comes time to annuitize the plan, receive payments back, there are an array of options based on your contract.
But that’s not all that goes into annuities. Here are some pros and cons to consider when thinking about adding annuities to your portfolio.
Annuities are expensive. While the base price of the annuity may be ideal, adding anything to the policy comes at a high expense. Everything that makes an annuity a great option is extra—riders, changes, certain payout options—they are all extra expenses.
Once your money is in the annuity, it’s hard to get it out. If you absolutely have to, or want to, withdraw your money you will face surrender charges. With most annuity contracts you able to withdraw 10% of the initial premium each year and if the withdrawal is for qualified reasons (e.g., medical, education, etc) you may not face surrender charges or tax penalties.
One last major concern is the sales aspect associated with annuity financing. Annuities tend to be sold by agents or representatives who make a commission on annuity sales. Because annuities are notoriously difficult to get out of once the contract is signed, it’s important to make sure you’re signing up with someone you trust that works for a vetted and reputable company.
Lifetime income. It’s the best and most attractive aspect of annuities. You are guaranteed income for however long stated in the contract. Annuities also allow you to decide who receives your payments after you. You can arrange to have joint lifetime payments, which would go to a spouse if you died before the end of your payout term or you could choose to have your payments sent to a beneficiary of your choosing.
Annuities also give you the option of ‘when’. Most retirement vehicles require owners to be of a certain age prior to withdrawing money, but with annuities you control when payments start. You can receive immediate annuitization, when the policy pays out within a year or purchase or deferred aunnitization, payments after a predetermined time.
Contract holders also have the ability to choose their risk levels. With a fixed annuity, contract holders are guaranteed a stated interest rate and return amount. The rate may change over the years, but it is stable and protected by floor interest rate. Indexed annuities allow contract holders to experience some of the benefits of market rate increases while limiting the downside risk. Any annuity that guarantees ‘no risk’ should be thoroughly evaluated.
Be sure to read the terms cautiously and ask your financial advisor any questions that you may have in regards to the contract or any other concerns. With all financial investments, risk is inevitable and it’s important to make sure annuity financing is what’s best for you before signing any paperwork.