What are the The Pros and Cons of Annuities?
By Contributor • Oct 8th, 2009 • Category: Personal Finance
People typically assume that I tend to gloss over the negative aspects of annuities, since I am a financial advisor and annuity agent. It’s not an unreasonable assumption, since so many other agents do this.
Yet, every so often, you’ll locate a great agent who will give you complete disclosure and the entire truth. Annuities definitely have disadvantages- the downsides of these products will change depending on the type of product chosen.
Annuities in and of themselves are not good or bad- each has certain characteristics that makes them either appropriate or inappropriate for a given individual. And yes, there are some bad annuity companies that I chose not to work with.
So, what are the downsides? I will analyze each product category and explain the main drawback of every one of them. Currently, there are definitely situations - A LOT of situations - where there are more benefits than negative things, yet that is not this article’s topic.
Immediate Annuities offer the highest payout of any income product and are attractive for that reason. The negative aspect: complete account value is given up to the business in return for income for a lifetime. That leaves your heirs high and dry. IF you surpass your life’s expectancy, you’ve succeeded. The company comes out ahead if you do not. If you pass away sooner than anticipated it can be a really raw deal.
Fixed Annuities are not a short-term cash investment. There is no apples to apples comparison with CDs. Parking your money in Certificates of Deposit would be excellent for small intervals. Fixed annuities do have advantages but need only be considered when the surrender schedule fits within your time horizon.
Variable Annuities add another layer of complexity. The fees can get fairly high, an increase of up to 3% or higher, so it’s up to the investor to consider if these extras are worht it. You won’t have the same flexibility as you would with an IRA because variable annuities usually have fewer investment options. Perhaps the most troubling provision sold with variable annuities is the income guarantees. In many instances, bigger earnings and more active market involvement can be found in other places. It’s critical that your advisor understands the all of the details of the contract, because explanations of guaranteed income riders are so often incorrect.
Equity Indexed Annuities are even more difficult to interpret. If I were to make an educated guess, I would say that no more than 10% of the 325 products currently available are quality contracts. Due to the participation rates involved, an investor only gets a portion of the index return and the caps on rates limits your total possible return. Additionally, the contract fees may be pricey, similarly to variable annuities. Many companies make up for the upside market potential with miserably low guaranteed minimum rates or simply a principal guarantee with no growth potential. Be cautious, and do the necessary research. Another way around it does not exist.
Every product category suits the requirement of specific set of customers. You need to meet with an advisor who will thoroughly explain all the advantages and disadvantages of the contract you are considering.
Sad to say, far too many agents consider the commission first, rather than finding out what the client really needs.
I want you to have all the tools and knowledge possible before making a big financial decision. Check out the resources at www.AnnuityStraightTalk.com - annuities pros and cons
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