Annuities - Pros And Cons
Assessing the validity of any financial product you are evaluating is an important step in the purchase process. One of the best ways to determine if an annuity is right for you is to carefully assess the annuities pros and cons. Your agent may be eager to share with you the advantages of the contract and less interested in sharing the disadvantages. Make sure that you get the entire picture before you commit to the contract.When you look at the pros and cons of annuities in general, the most obvious advantage that is consistent among all the different types is the ability to annuitize the account. It almost seems absurd to define the definition of the product as an advantage, but it is the very functionality of the contract that makes the annuity appealing. Breaking up a significant amount of money into periodic payments has a number of benefits to the annuitant.
Other universal advantages of annuities are tax-deferred growth inside the account, lifetime payout provisions, and insurance company backings.
The most complaint of general annuity contract is the illiquidity problems. Annuities are notorious for being difficult to get your money out of. Because the value to the insurance company comes in spreading out the length of the contract, steep surrender charges are often associated with these accounts.
Other universal cons include complicated contracts, income received is tax as ordinary income, and higher fees and commission on the sale of the original product.
Fixed Annuities Pros And Cons
Of the different types of annuities, the fixed annuity is by far the oldest and most common type of annuity. The primary advantage of fixed annuities is their ability to provide a safe, reliable stream of income to the beneficiary. Their interest rates are generally fixed and are not dependent upon fluctuations in the market. Fixed contracts of this type are most often compared to CDs or other fixed rate investments.
The main disadvantages of fixed annuity contracts is that they typically have low rates of returns, offer poor hyperinflation protection, and are difficult to liquidate if an immediate cash need arises.
For more information on the various fixed annuity pros and cons see our articles:
Variable Annuities Pros And Cons
The biggest advantage of variable annuities is also its biggest weakness. The contract is appealing in the fact that it is tied to market performance. For this reason, many planners feel this type of annuity allows you to better combat inflationary pressures, and allows participation in the markets without the same risk as a traditional stock portfolio.
Because the annuity is tied to market performance, it also has the potential of significant loss to account values. The biggest con of a variable annuity is its ability to lose principal in the account. In the past (perhaps even still today), variable annuities have been oversold by agents looking to make big commission off of the product.
Indexed Annuities Pros And Cons
Indexed annuities have the unique advantage of combining the best of both fixed and variable annuity worlds. The pros of indexed annuities comes from the ability of the annuity to tie account values to participation in market upswings. During periods of market decline, the annuity reverts to fixed annuity status and maintains the principal of the account. In market increase, the annuity grows to a portion of the associated index's growth.
Most of the disadvantages of index annuity contracts are similar to the cons of annuities in general.
Summary
When looking at annuity pros and cons, it is important to carefully analyze the particular annuity contract you are evaluating. Each company will treat their contracts differently than their competitors. Understanding one product does not immediately give you understanding of a parallel product.