The truth is that annuities can be a very good investment for the average person. The advantages to investing in annuities definitely outweigh the risks.
Many people think that annuities are a bad investment because they think that annuities only pay a fixed return. This is only true if a person buys a fixed annuity. There are a wide variety of annuity products that offer a variable return comparable that on mutual funds. These include variable annuities and indexed annuities.
Others think that annuities are a bad investment for average people because they have to be purchased immediately in one lump sum. That is not true because there are many deferred annuities that can be purchased gradually like other investments. A person can make payments into an annuity just like any other retirement investment. If you decide to go with a fixed annuity, lock in your fixed annuity rates early as rates tend to fluctuate.
Another common mistake is the idea that annuities are insurance policies. Annuities are not insurance policies, annuities are an insured investment. This makes annuities a really good investment for a working person because the funds placed in the annuity are insured. A person who purchases an annuity will get the funds placed in it back. Almost no other investment available today will guarantee that.
Others think annuities are bad because the insurance companies that issue them can go out of business. There is some truth to this but most people don’t realize that annuities are guaranteed by state governments. Most state governments insure annuities for up to $100,000 and some states insure annuities for up to $500,000. That means the average investor should be reimbursed even if the annuity company goes out of business.
It should also be pointed out that when AIG, a huge company that issued a lot of annuities; got into trouble it was bailed out by the federal government. This means that there is little possibility that funds in annuities can be completely lost the way funds in some investments can be.
Annuities and Taxes
From a tax point of view annuities are not a bad form of investment. Any funds that are placed in an annuity are tax deferred this means that they are not taxed.
Annuities that are used as retirement savings vehicles are subject to the same IRS regulations as other retirement plans. This means that a person will probably pay a 10% tax penalty if he or she takes the funds out before age 59½. As long as the funds are left in the annuity until retirement there should be tax complications.
Many people think that annuities are bad investments because of the fees. Any investment can come with high fees attached. The reason investors end up paying high fees is that they don’t read the paperwork before buying an investment.
Annuities are just like any other investment they come with a contract. The fees charged on the annuity will be laid out in the contract. A person should read the contract and pay close attention to any provision about fees.
It is also a good idea to take the contract and read it away from the person who is trying to sell the investment. Ask if you can take the contract home and read it there. Also try reading the contract over more than once. In many cases a reader can spot hidden provisions in a second or even third reading. A person can even get somebody else that they trust and respect to take a look at the contract. An honest salesperson should have no problem if a customer wants to look over an agreement before you sign it.
Never sign an annuity contract if the fees in it are excessive. Instead ask to see some other annuity products so you can compare the fees.
Annuities are not a bad investment for the average person. There are some annuities that are a bad deal but these can be easily avoided by careful and informed investors.
- Annuities Explained and How to Find Them (2009taxes.org)
- Guidelines on Where to Invest Your Retirement Funds (2011tax.org)