Its simple to comprehend the positive reasons behind owning annuities, and these reasons are why annuities are attainable for nearly all investors.
I feel the PROS are:
Tax Deferral: Earnings are sheltered from annual taxation just like an IRA. This is one big advantage annuities have over other safe cash alternatives such as CDs or money market funds.
Capital Is Secure: Your money is safe because the insurance company must have adequate reserves at all times. A lot of investment companies with great reputations are even healthier than they used to be, so you can feel comfortable putting your money with them. In addition, each state has a guaranty fund to back up deposits with insurers. Usually that coverage is capped at $100,000, but you should find out what your state law requires.
Liquidity: Annuity contracts have a annual free withdrawal provision giving the account holder access to 10-15% of the account value annually without penalty.
Your Yield Is Moderate: Historically, annuities yield a conservative rate of return. Think about your other choices. Right now, CDs are growing at rates of 2%, which can be taxed, while annuities are growing at approximately 4%, which can't be taxed until later. Also, as the markets normalize, look for the yields on annuities to increase along with everything else. In most markets, you'll find annuities to be a safe, consistent alternative to market fluctuations.
Constant income: The Wharton School of Business and New York Life worked together to research the best method of getting the most out of retirement funds. They found that a fixed annuity that changes into a lifetime income stream is one of the most effective choices. After the first year of the contract, all or nearly all annuities can be converted into a monthly income that will continue for the rest of your life. An immediate annuity also has that option, but you begin to get the money now.
Conversely, the problem with annuities is that agents sell people products they don't want or need. Education is essential in recognizing these negative attributes so you can tell if you are getting reasonable advice.
The CONS as I see them:
Short Term Money: Annuities are not the right place to put money if you need all of it back in one lump sum within a year or two. Keep all annuity purchases reserved for funds with a time horizon of five years or more.
Surrender Schedule: There is no upfront sales charge associated with annuity purchases. But, the investment company will charge you an early withdrawal penalty if you withdraw your cash before the account comes to term. Such fees are normal, however be aware that some annuities have early withdrawal penalties that continue for a decade or longer. Such terms will limit your choices for quite a while.
Someone Earns a Commission: You cannot avoid paying someone a commission when you purchase an annuity. I mention this as a con since brokers will benefit more from certain products over others. This is why it is essential for you to have great knowledge about annuities so you are able to pinpoint poor products when they are presented to you. Many agents let the thought of a big paycheck dictate which products you see and which ones you don't.
Liquidity: Okay, I know what you're thinking. Wasn't liquidity listed as a Pro? Yes it was. This can be an advantage or a disadvantage, and it relates to what I said about short term money. What is the cash going toward? How many years do you intend to keep it invested? What part of it will you need? Answer those questions and the rest of the article should give you an idea if liquidity is a pro or a con for you.
That is about as black and white as I can make it. Before you get going on your research, realize that not everything is black or white. Certain details about your individual financial situation will clear that up and make it very obvious as to whether an annuity is the right choice and which specific product is best.
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