Contemplating An Annuity Investment?

Were you to take a poll, you would likely discover that many people define an “ideal investment” is one with significant potential for growth that also comes with a guarantee stating it will not go below the original purchase price. This is even more impressive if you are promised a yearly percentage increase that will be equal to (or greater than) what you could earn from a CD.  Certain types of annuity investments (known as equity-indexed annuities) make promises like these, and they succeed to a certain extent (although there is no free ride).

These are the kinds of promises the public has been told about investment annuities, and given the right circumstances, an annuity investment can be a suitable one—but they should always be approached with caution. They are difficult to evaluate and compare because insurance companies have made them available in a vast array of features, rates, and benefits.

The Basics

Every annuity entails a contract between an insurance company and the buyer. With a fixed annuity, you are assured that the value of the principal will never decline, and if you opt for one that is variable, you can choose from a list of investment options, which can result in either a gain or loss of your original investment. While the assets in a fixed annuity are subject to the insurer’s creditors, those placed in a variable annuity are sheltered in separate accounts and unaffected by the insurer’s financial status.

If an annuity is immediate, it pays benefits when the contract is released, and when it is deferred, the assets are left within the contract for several years, and all earnings are tax deferred until the owner of the account begins making withdrawals.

The Costs Of Annuity Investments

Insurers use expense and mortality charges to compensate for selling and administrative expenses—and a variable contract also comes with management fees. As an investor, you may discover that these factors have a significant affect on your net return.

As a rule, there is a direct connection between the penalty you will pay for surrendering your annuity contract ahead of time and the commission the salesperson receives. If an agent suggests switching annuities, make sure that the benefit to you will be worth making the change.

If you decide to go this route, you will want to purchase your annuity from a solid, reputable insurance company. To verify the rating of the insurer you are considering, visit www.ambest.com. Also, if you have problems in the future, you can get in touch with your state’s insurance department.