Some Risks and Benefits of Annuities

in Annuities

In addition to working with a trusted professional when deciding whether to purchase an annuity there are other things to look for.

Benefits to Investing in Annuities

  • Attractive because they seem to be low-risk.
  • Fixed annuity payouts can either be tax-deferred or immediate.
  • Immediate annuities are those where you are guaranteed a check a month for some initial deposit. These are most attractive to retirees who want a steady income.

Risks with Investing in Annuities

  • Annuities are not FDIC insured: Banks are a major dealer of annuities and some people may be confused and think annuities are FDIC insured. Some states may back annuities up to a certain amount but generally speaking claims are paid depending how healthy the company is. This is why research of a company is vital before taking out an annuity.
  • Beware of a surrender charge: A fixed annuity can charge you for withdrawing money for a specified period of time before the maturity date. These charges can be quite high and heavily reduce payout. Annuities shouldn’t be used as an “emergency fund”
  • Age restrictions: Withdrawals made before age 59 1/2 are subject to a 10% tax penalty.
  • Interest rates:  Immediate annuities will lock you into payments at the current interest rate but might not keep up with inflation rates in the future.
  • You must do thorough research: Check companies with A.M. Best or Moody’s to check ratings and ensure legitimacy. High rated companies must have a strong capital backing which is essential for annuity holders.

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