Are Annuities Good Investments?

Annuities are favored by some financial experts as investment products and not by others. In contemplating what to do with their money many people ask the question- are annuities good investments? Whether or not you should invest your savings in annuities is dependent upon what your needs are as well as your preferences. Let us take a closer look at annuities.

Annuities are favored by some financial experts as investment products and not by others. In contemplating what to do with their money many people ask the question- are annuities good investments? Whether or not you should invest your savings in annuities is dependent upon what your needs are as well as your preferences. Let us take a closer look at annuities.

Annuities are defined as “investment products that have an insurance component to them and are backed by the financial strength of the insurance company that structures the investment.” Annuities allow the investor to take the investment and turn it into a stream of periodic income payments (known as annuities) for a set duration of years or over the lifetime of the annuitant (the name given to the person who invested in the annuity). Investors who are conservative with their money often like the concept of an annuity because it offers certainty of cash flow for the life expectancy of the investor.

Many people who believe that their savings are not great enough that they feel comfortable or safe investing in one particular area over another also find the idea of annuities a good option for their money. Those who yearn for a quiet retirement plan that is, as previously mentioned, conservative in nature and design are more likely to warm to the idea of an annuity.

Annuities have plenty of positive points. They offer protection when the market takes a downturn. They provide a guaranteed return on investment. You don’t have to pay tax on an annuity until you begin to withdraw money from it. However on the other hand, they are rarely the ideal choice for tax-advantaged retirement accounts. Examples of these include IRA accounts and 401K plans.

Annuities are further subdivided into fixed annuities and variable annuities. The return on a fixed annuity is contractual both during the accumulation phase (which is when you are contributing to the account) as well as the annuitization phase (which is when you start using the money from the annuity account). It is called a fixed annuity because the rate does not change over the passage of time.

A variable annuity is such that you invest in sub-accounts while the accumulation phase is taking place. The return you get on your investment is dependent upon the performance of the sub-accounts you have chosen. In general variable annuities are often very expensive to buy. You must pay for the insurance element which is known as the mortality and expense risk charge (M& E). The average M&E charge on a yearly basis is approximately 1.15 percent. The sub-accounts connected to variable annuities also come with administration expenses.

The main drawback of annuities is the high fees (not to mention many fees) that come with it. For example, annuities have surrender charges. What this means is that if you take out your money from the annuity account in the first six to eight years after opening the account you will be charged a fee. In the first few years the charges are in the area of six to eight percent. Over time they become less until they reach zero percent.