Pros and Cons of Annuities
An annuity is a type of investment product. It can prove to be a valuable retirement tool. In this article, we will examine the pros and cons of annuities so you can determine if one is right for you.
To best understand the pros and cons of annuities, you need to understand the basics of how they work. When you engage with an annuity company you provide the company with single or multiple premiums. In exchange, the annuity company may or may not guarantee a certain percentage of return and future return payouts. The three most common types of annuities are variable, fixed, and indexed. This is a long-term investment that has the main purpose of providing guaranteed income for the investors.
Advantages of Annuities
The type of advantages an annuity can provide will depend on your financial goals and situation. Below you will find a list of annuity advantages that may be of interest to you.
- Regular Income Payments
Depending on your policy and the payout options you chose, you may receive payments monthly, quarterly, or annually.
- Guaranteed Income
Most people purchase annuities with the goal of creating supplemental retirement income that you can count on. Depending on your needs you can start this income right away or at a later date.
- Fixed Interest Rates
Some annuities allow you to lock in an interest rate you can earn on your initial deposit. This may be somewhere between 3 and 5%.
- Tax Deferred Contributions
Taxes on the contribution amounts and gain do not need to be paid until you begin receiving payments.
- Risk Protection
If you purchase a fixed annuity, you can find comfort knowing that your account value cannot go down. You will also have a guaranteed interest rate by which your account will grow annually.
- Death Benefits
Depending on the type of annuity you choose; you can provide for loved ones by the means of a death benefit. This can take the form of a lump sum or income payments made to name beneficiaries.
Disadvantages of Annuities
As with all financial decisions, you should be aware of potential disadvantages.
- Surrender Charges
A surrender charge is a percentage fee that you will be charged if you make a withdrawal before the end of your surrender period. For most annuities, this period is from 2-8 years. However, you can take out up to 10% without being subject to a surrender charge.
- Cost of Riders
A rider is an additional feature you can tack on to your annuity. These can provide helpful benefits such as additional income or long-term care benefits. But these add-ons have additional costs, and you should carefully analyze if the benefits outweigh the costs.
- Restrictions on Funds
Annuities restrict your access to funds. Until you begin your income payments you are only able to access 10% of your funds without having to pay surrender charges. Additionally, if you make a withdrawal before you are 59 ½ you will be subject to a 10% IRS penalty. This is true of most retirement accounts.
Who Can Benefit
Who can benefit from an annuity? It is a powerful tool for those nearing retirement who are looking for reliable income replacement. Before purchasing, is it important you weigh the pros and cons of annuities. A qualified insurance agent can help you do this with your unique set of circumstances.
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