What are annuities?
Annuities are basically income generated from capital investment. If you buy an annuity then you either need to pay a lump sum or make a series of payments to the insurance company. In return the company agrees to make periodic payments beginning immediately or at some future date. Annuities can be of various types like fixed, variable, immediate, deferred etc.
Why should you consider annuities?
- Most annuities are lifetime contracts which mean you would receive paychecks as long as you live. This will give you peace of mind because you need not fear that you will outlive your income.
- Inflation can have a devastating effect on your finances. Fixed annuities protect you from inflation. The money you receive will keep up with the cost of living. This assurance of safety comes for a price though. Either your starting payments will be low or the initial investment cost will be higher.
- One of the best features of annuities is principal protection. It is guaranteed that you or your successor will get back at least the amount of money which you invested in the annuity. To ensure this it is obligatory for the companies to keep cash reserves. Many states have a guarantee fund of $100,000 in case the company becomes insolvent.
- IRS code 403(b) states that if you are an employee of an educational institution, non-profit institution or self employed minister then you can use your wage to contribute to supplemental retirement accounts called tax deferred annuities. Most annuities are tax deferred in nature. This means that you don’t have to pay taxes when you invest in a tax-deferred annuity. You will
be charged only when you start receiving payments from it.
- Annuities are virtually life insurance policies. So you can nominate beneficiaries. Also, probate can be avoided when beneficiaries are declared.
What are the disadvantages of annuities?
- Annuities trap your money for a long period of time without offering any choice of withdrawal. Forcible early withdrawal will result in a 10% penalty being charged by the IRS. So if you are a young man then deferred annuities might not be the best investment option for you.
- The safety offered by the annuities comes at the price of low returns. Annuities are surely not the right choice for you if you are dreaming to become rich quite quickly. By investing your money in fixed annuities you forgo the opportunity to earn more by investing in assets that fluctuate in value. This is where bonds and mutual funds have an advantage over annuities.
- Many financial experts opine that annuities are not flexible as investment vehicles. If you have some extra money to invest then you have to purchase a separate annuity. It cannot be added to the existing annuity.
- Annuities are extremely intricate things and it is very important for you to understand them really well. Otherwise, you might end up purchasing the wrong annuity which will not at all serve the intended purpose.
- Annuities can be costlier than other similar investment options owing to the fact that they are insurance products sold by insurance companies.
Annuities are often effective as a supplemental retirement program. They can be a quite reliable investment option for old people. However, they have some serious drawbacks and are not very suitable for young investors. So keep in mind the above points and consult a financial advisor before you try your luck with annuities.
About the Author
This guest post was written by "David Brown". If you are interested in writing a guest post, please contact PF Stock at the Email address listed in the sidebar.
Disclaimer: The information provided here is not meant as tax or investment advice. I encourages readers to consult with a tax or financial adviser if they have specific questions about investing or annuities.
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Yes we can definitely invest our amount in annuities because it will be helpful in rest of your life.ReplyDelete