Annuities are designed
for the specific needs of a small group of investors. Many consumers invest
in annuities without knowledge of how their chosen investment vehicle
works or what sort of returns to expect. For the majority of people, money
is better contributed to other investment vehicle where there is the potential
for better returns.
How annuities work
To Annuities are an
insurance product.
Investor makes lump
sum payments or installments.
Money grows tax-deferred
on a fixed or variable rate.
Money can't be withdrawn
until the investor turns 59 ½.
The insurer makes periodic
payments for the rest of the investor's life.
When the investor dies,
his/her beneficiary gets the current value of the annuity or a preset
minimum, whichever is greater.
Types
Fixed - An investment
vehicle offered by and insurance company that guarantees fixed payments
over the life of the annuity. The insurer, not the insured, takes
the risk. Fixed annuities are safer than other types but offer less
opportunity for growth. If an investor wants to invest for more than
ten (10) years but is uncomfortable with the risk entailed in the
stock market, fixed annuities offer better interest rates than a savings
account or money market account (around 7%).
Variable - A life insurance
annuity contract that provides future payments to the holder (the
annuitant) usually at retirement. The size of the payment depends
upon how well the portfolios perform.
Equity-Indexed - An annuity
whose returns are based upon the performance of an equity market index,
such as the S & P 500 or NASDAQ. The principal investment is protected
from losses in the equity market, while gains add to the annuity's
returns.
Fees
Fees are factored in and deducted for fixed and equity returns. Variable
fees are charged in a lump payment at a later time. The fees are about
2.3% of an investment, one percent more than a mutual fund.
Advantages
Guaranteed income for
the rest of the investor's life.
No need to worry about
another person being in charge of investments.
The longer the life
expectancy the more adventitious an annuity becomes. A person may
live for a period at the expense of the insurance company.
Comfort of knowing capital
will last you for the rest of your life.
Disadvantages
If the investor dies
earlier than expected, the insurance company keeps a large portion
of his/her money.
Annuities are not protected
against inflation.
Who should invest in
an annuity?
Consumers who have most of their money in other retirement plans (i.e.
IRA or 401(k)); consumers who don't need the money until they are at least
59 ½ years old; and consumers who are concerned about outliving
their retirement payments, because there are constant payouts.
