What are Annuities?

An annuity is a long term agreement among you and an insurance firm. And annuities can be paid through multiple payments or lump sum. One might use it to manage his money for the duration of retirement.

When you buy annuities from an insurance firm, you sign a contract that company and make multiple payments. And in return, the company pays you the funds on it’s time to pay.

Interests grossed on your money are also included in these payments. Annuities are a good source of getting your savings back in the form of income or payments regularly.

There are different types of annuities based on the nature of payments and time duration for payment.

• Indexed annuities 
• Fixed annuities 
• Variable annuities 

Pros of Annuities:

Annuities usually come with such advantages that cannot be replicated in any other outlay.

• Regular payments
• Principal protection
• Guaranteed returns
• Lifetime income
• Predictability 
• Tax efficiency
• Death benefit

Regular Payments:

Regular payments are the biggest pro of annuities. You receive monthly payments from the insurance firm that can help you manage your daily expenses, in case you haven’t saved much to cover your regular costs during your retirement period. Regular payments offer additional income during the retirement period.

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Principal Protection:

Principal protection is one of the best pros of fixed annuities. The value of the annuities is assumed to be equal to or above the amount invested. You can guarantee that amount of invested money in the annuities will be received back by you.

Guaranteed Returns:

Fixed annuities offer guaranteed returns. When you put money into annuities, the company will invest it. There is always a specific risk rate involved in it, but when you sign fixed annuities, it should include some assurance to prevent you from losing your money.

These annuities ensure you make a certain amount of your principal investment. This percentage is not so high, but it means that you’ll get more than your investment.

Lifetime Income:

As long as you live, you get periodic payments when you sign a lifetime income annuities contract. Pensions and social security also provide you with money after retirement, but only with limited amounts.

On the other hand, in case of annuities, the only limit to the payment of your annuities is the amount you spent to purchase those annuities. This is even better for various retirees because the older you get, the more payments you will get for the same price. 

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Predictability:

According to some surveys, it has been noted that having assumed retirement income which can cover almost all of your expenses will lead to a happier life.

Lifetime annuities offer us that type of predictability. Conversely, researchers also found that retirees who withdraw money from savings to pay for retirement expenditures had maximum financial anxiety.

Tax Efficiency:

You can save some money on taxes by purchasing annuities. Without suffering any tax penalties, you can rollover your funds in qualified annuities.

Summarizing the above-discussed pros of annuities, we can say that annuities are the best and most efficient way to improve and maintain the quality of your life after retirement. You can purchase your guaranteed income as long as you need, using your retirement assets.

Death Benefit:

A death advantage is compensation that will make by the insurance firm to your heir if you die.

Cons of Annuities:

Besides the pros of annuities, there are also some cons of annuities which should be acknowledged.

• High fees
• Limited access to your money
• Fees and penalties
• Inflexible
• Annuities are not created equal 
• Lower returns

High Fees:

Some of the common complaints about annuities are their management fees and sales commissions. And sometimes even costs are very high. It is recommended that while purchasing annuities, you must know what you are giving for.

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Sometimes they can get way too expensive. So choosing the best annuities contract should be your primary concern while purchasing annuities.

Limited Access to Your Money:

Some annuities have their submission period, during which you can’t draw money without spending bulky fees. And once you start getting annuities payments, many companies would not allow you to withdraw money from your accounts. So you could only access to annuities payments.

Fees and Penalties:

A lot of annuities have charges attached to them. These charges can lessen the amount you earn from your investment. If you withdraw your amount before reaching the age of at least 59.5, you will have to pay the bulk of extra charges for it.

The most common ones are

1. Surrender charges: If money has been withdrawn during the surrender period it costa some charges.
2. Mortality fees
3. Extra charges if you choose any other optional features.
4. Administrative fees 

Inflexible:

Annuities usually are less flexible than other retirement choices. Once you choose to purchase an annuity, you no longer have access to the lump of money.

However, some financial planners recommend that people should reserve 40 per cent of their money for unexpected situations. Because most of the annuities provide us with a steady income, they are not entirely suitable to cover significant expenses.

Annuities are not Created Equal:

The community of financial planning shared their views on annuities – mainly fixed annuities – as this is considered as the ideal or best solution for retiree’s income. These types of annuities retain an excellent reputation.

However, some other annuities products are regarded as “snake oil” – an expensive and unnecessary product. Significantly, you spot the various terms and features that are mainly applied to annuities.

Lower Returns:

Usually, due to certainty provided by annuities such as equity-indexed annuities or fixed annuities, we completely forgot to avail the opportunities which can offer more significant returns by investing your amount in assets whose values fluctuate, like stocks.

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Fixed annuities can be considered as a safe and conservative way of investment, but this means that you will not be able to see the possible outcomes (gains or losses) of uncertain investment—like the stock market.