What are the The Pros and Cons of Annuities?
As a financial planner and annuity agent, some think I look over annuities’ negative aspects. As too many other agents do this, it’s a reasonable assumption to make.
However, now and then, you might discover a broker who would help you with complete disclosure and enlighten you thoroughly. All annuities have disadvantages, but not all annuities have the same problems – the specifics vary among products.
Annuities in and of themselves are not good or bad- each has certain characteristics that makes them either appropriate or inappropriate for a given individual. I chose the annuity company to work with very carefully as some companies do not have a good reputation.
Then what are the negative aspects? I’ll discuss each class of product and explain the major shortcomings of each one. Though there are many situations where the benefits outweigh the drawbacks, this article will not focus on those.
Immediate Annuities are attractive because they will offer the highest payout of any other income product. Disadvantage: Entire account worth is ceded to the company in exchange for lifelong revenue. This leaves nothing for your heirs. In case you exceed anticipated life span, you triumph. The company comes out ahead if you do not. This can be a losing concept if you die prior to when you expected.
Fixed Annuities are not a short-term cash investment. It is impossible to specifically compare and contrast CDs. Parking your money in Certificates of Deposit would be excellent for small intervals. Fixed annuities do have advantages but need only be considered when the surrender schedule fits within your time horizon.
Variable Annuities become a little more complex. The fees can get pretty high so investors must consider the value of all the extras that can increase fees to 3% or more. You won’t have the same flexibility as you would with an IRA because variable annuities usually have fewer investment options. Perhaps the most troubling provision sold with variable annuities is the income guarantees. In many instances, bigger earnings and more active market involvement can be found in other places. Additionally, guaranteed income riders are not often explained correctly so it’s vital to locate an advisor who completely understands the contract.
Equity Indexed Annuities happen to be quite complicated to understand. Of the 325 products on the market, I’ll make an educated guess and say that 10% or fewer are actually decent contracts. Participation rates only give an investor a portion of the index return annually and cap rates limit the total possible return. In addition, the contract fees can be as high as those in variable annuities. A lot of companies make up for the upside market possibility with pitifully low guaranteed minimum rates or basically a principal guarantee without potential for growth. Take careful steps and keep gathering information. Another way around it does not exist.
Each product class fits the need for a select group of consumers. You need to meet with an advisor who will thoroughly explain all the advantages and disadvantages of the contract you are considering.
Unfortunately, a lot of agents find a high commission product and work backward instead of gathering a client’s information and working forward to properly address an individual situation.
I want you to have all the tools and knowledge possible before making a big financial decision. Check out the resources at www.AnnuityStraightTalk.com – annuities pros and cons
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