Should You Purchase Annuities?

Consumers today are concerned about finding investments that are safe and promise a decent return. Although rising, the stock market is still volatile, and while there’s the opportunity for good returns for the right investments, the same opportunity exists to lose all of one’s principal, whether invested in individual stocks, mutual funds, or any of the myriad of variations now available.  Purchasing annuities is one such option gaining popularity.

The popularity of various types of annuities has grown by leaps and bounds the last several years.  Annuities are financial vehicles that guarantee income for life, based on the size of the initial investment and the age of the person receiving the payments (the “annuitant”). Officially classified as insurance products, annuities are available only from insurance companies. In the case of deferred annuities, they’re purchased and allowed to grow in value for many years before being converted to the lifetime income stream (“annuitized”).  There is also such a thing as an immediate annuity, which is the most common form of annuity and is basically a fixed annuity that begins paying immediately.  Of the two types – fixed and variable – we’re only considering fixed annuities, because there’s significant risk of loss of principal in variable annuities.

Some consumers consider certificates of deposit (CD’s) to be excellent savings vehicles because of the safety afforded by the FDIC Insurance carried by banks. However, CD’s generally offer interest rates that are equal to, or below, the rate paid by most annuities. In addition, the interest earned by CD’s is taxed in the year it’s earned, so that even if the CD offers an interest rate comparable to an annuity, the actual interest earned, after taxes, is significantly less, which also diminishes the power of compounding the interest. Annuities, on the other hand, earn interest tax-free until it’s actually paid out – that is, it’s tax deferred. And annuities are guaranteed not only by the insurance companies that issue them, they’re also guaranteed by special funds in every state. Indeed, nobody has ever lost a penny in a fixed annuity in the entire history of annuities!

Three features – a competitive interest rate, deferral of all taxes due and the ability to convert an annuity to a guaranteed lifetime income – are the main reasons consumers should purchase annuities and include them in their nest eggs as part of their retirement planning portfolios.

So, should you purchase an annuity?  Annuities are not short-term savings plans, and consumers shouldn’t invade their daily operating funds or their emergency funds to purchase annuities. Not only is that a short-sighted strategy, no responsible insurance agent will permit a client to jeopardize assets that way. Annuities can offer higher rates only because of their long-term nature, and while a certain amount can be withdrawn from an annuity annually, there’s usually a penalty (a “surrender charge”) for exceeding that amount, and the penalty can be significant in the annuity’s early years. It’s universal – liquidity is paid for, whether through penalty charges in annuities and CD’s, or the shockingly low interest rates offered by savings accounts and money market funds.

Since their inception, annuities have been a popular, reliable and secure form of saving and providing for the future, and they continue to give consumers financial security and peace of mind.