If you’re searching for a great investment opportunity that will allow you to receive a series of yearly sums, you’ll find that annuities really fit the bill. However, as with all forms of financial investments, annuities have their advantages and disadvantages.
In order to help you familiarize yourself with this unique investment type, we’ve created a practical quick guide. By offering you the inside scoop on annuities pros and cons, we give you the power to make a truly wise decision about whether or not this type of financial investments is right for you.
Annuities – Mastering the Fundamentals
Before examining the benefits and drawbacks of annuities, let’s talk a little more about exactly what they are. Annuities are contracts between investors and insurance firms. They are meant to help investors attain their retirement goals or other, long-range life goals. When you choose to invest in an annuity, you’ll make one payment or a bunch of payments. Then, your insurer will agree to make scheduled payments to you, starting right away (or at a pre-determined date in the future).
Advantages of Annuities
Why does an investor select an annuity? Well, the key benefit of this form of investment is the tax advantage that it provides. Since earnings derived from annuities are usually tax-deferred, they make it possible to “grow” an investment without taking an immediate tax hit. If you like the idea of investing and earning each year, without needing to pay Uncle Sam at tax time, you’ll appreciate the tax-deferred status of this type of investment.
Usually, investors choose annuities as part of their retirement savings plans. For example, they may be used alongside social security and pension plans, in order to cultivate extra income sources upon retirement.
In addition, many types of annuities offer death benefits to the beneficiaries of investors. This means that these beneficiaries will receive funds when the owners of the annuities pass away. Since these death benefits offer additional financial security to beneficiaries (in the form of scheduled payments over a defined time period), they are smart investment strategies for those who wish to ensure that their loved one will be cared for when they are gone.
Annuities offer guaranteed rates of return. In this sense, they are risk-free investments. If you want to enjoy a steady rate of return, without risking your precious capital, this conservative form of financial investment may be just right for you.
Disadvantages of Annuities
While you’ll gain tax advantages from keeping growth earnings within your annuity, you’ll take a tax hit if you try to withdraw funds ahead of time. Taking out funds early will mean dealing with a significant tax penalty. As well, if you wish to extract funds from your annuity, you’ll need to cough up cash (in the form of a “surrender” charge). This surrender charge will go to the insurance company that you’re working with.
In addition, be aware that annuities sometimes get a bad rap, due to the high fees that investors need to pay in order to purchase them from insurance companies. When you buy an annuity, your sales representative will earn a tidy commission, which will ultimately come directly from you. In other words, the insurance company will add charges to your annuity account in order to cover the cost of the commission.
So, you’ll be paying a salesperson a pretty fair sum of money when he or she arranges your annuity investment. In certain cases, fees may be double or triple what you’d need to pay if you bought another type of financial investment, such as a mutual fund.
Lastly, if you want a guaranteed return on your investment, an annuity will deliver. However, it may not deliver at the rate that you want it to. In many instances, rates of return for annuities are quite minimal. If you’re comfortable with a rate of return that may average around three percent, then this won’t be a disadvantage. If you want more from your financial investments, it may be wiser to go for a different investment type.
Are Annuities Right for You?
Now that you know more about annuities and their pros and cons, you’ll be ready to decide if these types of investments fit with your long-term financial goals. Whether you’re saving for retirement or looking for ways to provide for loved ones in the event of your death, you’ll find that tax-deferred annuities (which include death benefits) are smart investment choices. However, in order to make a wise decision about buying an annuity, you will need to consider the “cons” of these forms of investments, such as high commissions to salespeople, relatively low rates of return, and so on.
By giving you the inside scoop on annuities and their good and bad points, we’ve made it possible for you to weigh all of the advantages and disadvantages.