Pros and Cons of Annuities


Annuities have earned a stable reputation as solid savings vehicle for seasoned investors who are looking for a safe place to put their money. As a whole, annuities provide two main benefits: they offer predictable levels of investment growth and they defer any taxes on that growth until a withdrawal is made at a later date, at which point the investor would pay taxes only on that growth and not the principal, if the purchases were made with after tax dollars.

Annuities can also provide a level of control that other investments are not able to. For example, with variable annuities, the investor is able to place his or her funds into several mutual funds that may be appealing based on his or her own aversion to risk and investments needs. For example, an investor can place 30% of his funds in a fixed mutual fund, which would grow 3-4% annually. He may also place a percentage of his funds in an index fund, which would generally grow at the market level. The overall performance of the annuity would be based on the cumulative performance of each of these funds based on the percentage that is given to them.

As mentioned, there are several types of annuities, including fixed rate, variable, and indexed. These annuities each have key features which provide the investor some unique opportunities to grow his or her investment and defer taxes based on the individual financial need. For example, a younger investor may be less concerned about the market risk, and invest in a variable annuity which may offer a higher risk and higher growth mutual fund. The higher growth and higher risk would leverage the investor’s young age to increase his investments overtime. On the other hand, a more senior investor in his late 50’s may not be able be a little more cautious and averse to risk. In this case, he might consider putting his money in a solid and predictable fixed fund. An index funds would be tied to the performance of the market place.

There may be a few “cons” for investments in annuities that should be considered. Annuities are not as “liquid” as money placed in certificates of deposit accounts or money placed in similar money market accounts. Once the Annuities are purchased they need to stay in that annuity or a similar account (if a transfer is made) and remain there until the owner is at least 59.5 years of age. If an early withdraw is necessary, a 10% penalty would be required.

In addition, annuities are not backed up by the FDIC like other traditional banking instruments, such as checking or savings accounts. Nevertheless annuities, remain a solid choice among investors as individual states have created annuity groups to help the individual investor should a company become insolvent. In addition, to maintain industry health, other insurance companies would also step in to buy the insolvent company’s contract – though at a much lower rate. It is wise for the investor to stay involved with his investments by reading the prospectus and quarterly statements the insurance company delivers. Annuities provide a stable, steady, and predictable income streams for either a predetermined amount of time. Purchasing an annuity can therefore deliver an immediate or delayed check, whichever is most beneficial for the investor at the time.